United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 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
Louisville, Kentucky 40210
(Address of principal executive offices) (Zip Code)
(502) 585-1100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes | | No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: August 31, 2006
Class A Common Stock ($.15 par value, voting) 56,870,114
Class B Common Stock ($.15 par value, nonvoting) 66,121,699
BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Statements of Operations
Three months ended July 31, 2005 and 2006 3
Condensed Consolidated Balance Sheets
April 30, 2006 and July 31, 2006 4
Condensed Consolidated Statements of Cash Flows
Three months ended July 31, 2005 and 2006 5
Notes to the Condensed Consolidated Financial Statements 6 - 11
Item 1A. Risk Factors 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18 - 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits 20
Signatures 21
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended
July 31,
2005 2006
------- -------
Net sales $ 547.5 $ 639.7
Excise taxes 97.7 128.4
Cost of sales 146.8 159.9
------- -------
Gross profit 303.0 351.4
Advertising expenses 72.3 81.2
Selling, general, and administrative expenses 110.3 131.0
Other expense (income), net (13.7) (2.0)
------- -------
Operating income 134.1 141.2
Interest income 1.9 4.7
Interest expense 4.5 5.9
------- -------
Income from continuing operations
before income taxes 131.5 140.0
Income taxes 44.0 46.2
------- -------
Income from continuing operations 87.5 93.8
Loss from discontinued operations,
net of income taxes (74.7) (0.1)
------- -------
Net income $ 12.8 $ 93.7
======= =======
Basic earnings (loss) per share:
Continuing operations $ 0.72 $ 0.76
Discontinued operations (0.62) --
------- -------
Total $ 0.10 $ 0.76
======= =======
Diluted earnings (loss) per share:
Continuing operations $ 0.71 $ 0.76
Discontinued operations (0.61) --
------- -------
Total $ 0.10 $ 0.76
======= =======
Shares (in thousands) used in the
calculation of earnings (loss) per share:
Basic 121,945 122,613
Diluted 123,161 124,066
Cash dividends per common share:
Declared $0.490 $0.560
Paid $0.245 $0.280
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
April 30, July 31,
2006 2006
-------- --------
Assets
- ------
Cash and cash equivalents $ 474.8 $ 219.9
Short-term investments 159.9 186.3
Accounts receivable, net 328.4 331.2
Inventories:
Barreled whiskey 274.2 281.7
Finished goods 99.5 128.0
Work in process 106.8 82.1
Raw materials and supplies 42.5 54.8
-------- --------
Total inventories 523.0 546.6
Current portion of deferred income taxes 81.0 81.0
Current assets held for sale 8.9 7.6
Other current assets 34.1 13.9
-------- --------
Total current assets 1,610.1 1,386.5
Property, plant and equipment, net 428.5 438.5
Prepaid pension cost 146.1 143.1
Trademarks and brand names 324.9 442.1
Goodwill 195.4 324.3
Noncurrent assets held for sale 1.0 0.8
Other assets 22.2 21.3
-------- --------
Total assets $2,728.2 $2,756.6
======== ========
Liabilities
- -----------
Accounts payable and accrued expenses $ 292.9 $ 249.1
Accrued income taxes 48.3 79.1
Dividends payable -- 34.4
Short-term borrowings 225.0 198.1
Current liabilities held for sale 2.9 2.0
-------- --------
Total current liabilities 569.1 562.7
Long-term debt 351.6 353.6
Deferred income taxes 132.8 129.1
Accrued pension and other postretirement benefits 77.9 79.5
Other liabilities 33.7 17.9
-------- --------
Total liabilities 1,165.1 1,142.8
Stockholders' Equity
- --------------------
Common stock:
Class A, voting
(57,000,000 shares authorized;
56,882,000 shares issued) 8.5 8.5
Class B, nonvoting
(100,000,000 shares authorized;
69,188,000 shares issued) 10.4 10.4
Additional paid-in capital 44.8 48.3
Retained earnings 1,609.1 1,639.8
Accumulated other comprehensive income 18.0 21.1
Treasury stock
(3,565,000 and 3,198,000 shares
at April 30 and July 31, respectively) (127.7) (114.3)
-------- --------
Total stockholders' equity 1,563.1 1,613.8
-------- --------
Total liabilities and stockholders' equity $2,728.2 $2,756.6
======== ========
See notes to the condensed consolidated financial statements.
4
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Three Months Ended
July 31,
2005 2006
------- -------
Cash flows from operating activities:
Net income $ 12.8 $ 93.7
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Net loss from discontinued operations 74.7 0.1
Depreciation and amortization 10.8 10.2
Stock-based compensation expense 1.8 2.5
Deferred income taxes (2.6) (3.7)
Changes in assets and liabilities, excluding
the effects of businesses acquired or sold:
Accounts receivable (25.1) (1.8)
Inventories (17.2) (19.8)
Other current assets 7.5 20.5
Accounts payable and accrued expenses (37.1) (47.0)
Accrued income taxes 33.2 30.7
Noncurrent assets and liabilities (9.4) (10.0)
Net cash provided by (used for) operating
activities of discontinued operations (15.7) 0.8
------- -------
Cash provided by operating activities 33.7 76.2
Cash flows from investing activities:
Acquisition of business, net of cash acquired -- (250.1)
Purchase of short-term investments -- (43.1)
Sale of short-term investments -- 16.7
Additions to property, plant, and equipment (8.0) (10.6)
Computer software expenditures -- (0.9)
Net cash used for investing activities
of discontinued operations (1.1) --
------- -------
Cash used for investing activities (9.1) (288.0)
Cash flows from financing activities:
Net repayment of short-term borrowings (30.0) (29.3)
Proceeds from exercise of stock options 4.6 16.9
Excess tax benefits from stock options 1.1 3.3
Dividends paid (29.9) (34.4)
------- -------
Cash used for financing activities (54.2) (43.5)
Effect of exchange rate changes on cash and
cash equivalents -- 0.4
------- -------
Net decrease in cash and cash equivalents (29.6) (254.9)
Cash and cash equivalents, beginning of period 294.9 474.8
------- -------
Cash and cash equivalents, end of period $ 265.3 $ 219.9
======= =======
See notes to the condensed consolidated financial statements.
5
BROWN-FORMAN CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In these notes, "we," "us," and "our" refer to Brown-Forman Corporation.
1. Condensed Consolidated Financial Statements
We prepared these unaudited condensed consolidated statements using our
customary accounting practices as set out in our 2006 annual report on Form 10-K
(the "2006 Annual Report"). We made all of the adjustments (which include only
normal, recurring adjustments) needed for a fair statement of this data.
We condensed or omitted some of the information found in financial statements
prepared according to generally accepted accounting principles ("GAAP"). You
should read these financial statements together with the 2006 Annual Report,
which does conform to GAAP.
2. Inventories
We use the last-in, first-out ("LIFO") method to determine the cost of most of
our inventories. If the LIFO method had not been used, inventories at current
cost would have been $122.4 million higher than reported as of April 30, 2006,
and $123.5 million higher than reported as of July 31, 2006. Changes in the LIFO
valuation reserve for interim periods are based on a proportionate allocation of
the estimated change for the entire fiscal year.
3. Income Taxes
Our consolidated quarterly effective tax rate is based upon our expected annual
operating income, statutory tax rates, and tax laws in the various jurisdictions
in which we operate. Significant or unusual items, including adjustments to
reserves for tax uncertainties, are recognized in the quarter in which the
related event occurs. The effective tax rate of 33.0% for the three months ended
July 31, 2006 is consistent with our expected effective tax rate for the full
fiscal year.
4. Discontinued Operations
We sold our wholly-owned subsidiary Lenox, Inc. ("Lenox") during fiscal 2005. In
connection with the sale, we recognized a non-cash impairment charge of $59.5
million during the quarter ended July 31, 2005. The impairment charge
represented the excess of the carrying value of the net assets sold over the
expected sales proceeds. During the same quarter, we also recorded transaction
costs of $7.5 million, including legal, tax and actuarial expenses, transaction
success payments, and investment banking fees.
Lenox's results of operations and the impairment charge and other transaction
costs have been classified as discontinued operations, net of income taxes, in
the accompanying consolidated statement of operations.
6
After the sale of Lenox, we retained ownership of Brooks & Bentley, a former
subsidiary of Lenox, located in the United Kingdom. We still intend to sell or
liquidate Brooks & Bentley, the assets and liabilities of which are classified
as held for sale in the accompanying consolidated balance sheets, and the
operating results of which are classified as discontinued operations in the
accompanying consolidated statements of operations.
A summary of discontinued operations follows:
(Dollars in millions) Three Months Ended
July 31,
2005 2006
------ ------
Net sales $ 79.4 $ 4.8
Operating expenses (92.7) (4.9)
Impairment charge (59.5) --
Transaction costs (7.5) --
------ ------
Loss before income taxes (80.3) (0.1)
Income tax benefit 5.6 --
------ ------
Net loss from discontinued operations $(74.7) $ (0.1)
====== ======
The net assets held for sale consist of the following:
(Dollars in millions) April 30, July 31,
2006 2006
------ ------
Current assets:
Accounts receivable, net $ 5.4 $ 4.2
Inventories 3.1 2.8
Other 0.4 0.6
------ ------
8.9 7.6
------ ------
Noncurrent assets:
Property, plant and equipment, net 0.2 0.1
Other 0.8 0.7
------ ------
1.0 0.8
------ ------
Current liabilities:
Accounts payable and accrued expenses 2.9 2.0
------ ------
Net assets held for sale $ 7.0 $ 6.4
====== ======
5. Earnings Per Share
Basic earnings per share is based upon the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes the
dilutive effect of stock-based compensation awards, including stock options,
stock-settled stock appreciation rights ("SSARs"), and non-vested restricted
stock.
7
The following table presents information concerning basic and diluted earnings
per share:
Three Months Ended
July 31,
2005 2006
------ ------
(Dollars in millions, except per share amounts)
Basic and diluted net income (loss):
Continuing operations $87.5 $93.8
Discontinued operations (74.7) (0.1)
----- -----
Total $12.8 $93.7
===== =====
Share data (in thousands):
Basic average common shares outstanding 121,945 122,613
Dilutive effect of non-vested
restricted stock 23 47
Dilutive effect of stock options and SSARs 1,193 1,406
------- -------
Diluted average common shares
outstanding 123,161 124,066
======= =======
Basic earnings (loss) per share:
Continuing operations $0.72 $0.76
Discontinued operations (0.62) --
----- -----
Total $0.10 $0.76
===== =====
Diluted earnings (loss) per share:
Continuing operations $0.71 $0.76
Discontinued operations (0.61) --
----- -----
Total $0.10 $0.76
===== =====
6. Dividends Payable
On July 27, 2006, our Board of Directors approved a regular quarterly cash
dividend of $0.28 per share on Class A and Class B Common Stock. Stockholders of
record on September 7, 2006 will receive the cash dividend on October 1, 2006.
7. Goodwill and Other Intangible Assets
The following table shows the changes in the amounts recorded as goodwill during
the three months ended July 31, 2006:
(Dollars in millions)
Balance as of April 30, 2006 $195.4
Acquisition of Chambord (Note 12) 128.0
Foreign currency translation adjustment 0.9
------
Balance as of July 31, 2006 $324.3
======
Our other intangible assets consist of trademarks and brand names. We consider
all of our trademarks and brand names to have indefinite useful lives.
8
8. Environmental Matters
We are subject to environmental regulations in connection with the operation of
our production facilities and in connection with the transportation of products
we manufacture. Violation of these environmental regulations can result in fines
or penalties. As of July 31, 2006, we do not consider the exposure from the
risks of such fines or penalties to be material.
9. 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 we can make a reasonable estimate of the loss, 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. Six of
the suits have been dismissed by trial court and are being appealed. One case
remains pending on a motion to dismiss. Another one was voluntarily dismissed,
and service has not been issued in another. As we cannot yet predict the outcome
of these claims, no amounts have been accrued. However, an unfavorable result in
these or similar class action lawsuits could have a material adverse impact on
our business.
10. Pension and Other Postretirement Benefits
The following table shows the components of the pension and other postretirement
benefit expense recognized during the three months ended July 31:
Pension Benefits Other Benefits
(Dollars in millions) 2005 2006 2005 2006
---- ---- ---- ----
Service cost $ 3.2 $3.2 $0.3 $0.3
Interest cost 5.5 6.0 0.6 0.8
Expected return on plan assets (7.8) (7.9) -- --
Amortization of:
Unrecognized prior service cost 0.1 0.2 -- --
Unrecognized net loss 2.1 2.9 0.1 0.1
----- ---- ---- ----
Net expense $ 3.1 $4.4 $1.0 $1.2
===== ==== ==== ====
9
11. Comprehensive Income
Comprehensive income is a broad measure of the effects of all transactions and
events (other than investments by or distributions to shareholders) that are
recognized in stockholders' equity, regardless of whether those transactions and
events are included in net income. The following table adjusts the Company's net
income for the other items included in comprehensive income:
(Dollars in millions) Three Months Ended
July 31,
2005 2006
------ ------
Continuing operations:
Net income $87.5 $93.8
Other comprehensive income (loss):
Net gain (loss) on cash flow hedges 3.6 (0.1)
Net gain on securities 0.1 --
Foreign currency translation adjustment (12.0) 2.9
------ ------
(8.3) 2.8
------ ------
Comprehensive income 79.2 96.6
------ ------
Discontinued operations:
Net loss (74.7) (0.1)
Other comprehensive income (loss):
Foreign currency translation adjustment (1.0) 0.3
------ ------
Comprehensive income (loss) (75.7) 0.2
------ ------
Total comprehensive income $ 3.5 $96.8
====== ======
Accumulated other comprehensive loss (income) consisted of the following:
(Dollars in millions) April 30, July 31,
2006 2006
------ ------
Pension liability adjustment $ (4.6) $ (4.6)
Cumulative translation adjustment 23.8 27.0
Unrealized loss on cash flow hedge contracts (1.4) (1.5)
Unrealized gain on securities 0.2 0.2
------ ------
$ 18.0 $21.1
====== ======
10
12. Acquisition of Chambord Liqueur
Effective May 31, 2006, we completed the acquisition of Chambord Liqueur and all
related assets from Chatam International Incorporated and its operating
subsidiary, Charles Jacquin et Cie Inc., for $250.1 million, including
transaction costs. Chambord is a unique, super-premium spirit brand in the
fast-growing liqueur segment. We believe that Chambord fits well with our
approach to brand building. With the close of the transaction, we acquired the
Chambord trademark, French manufacturing operations where the brand is produced,
and the services of 20 employees who work at the facility.
The acquisition consists primarily of the Chambord brand name and goodwill, to
which we have preliminarily allocated $116.5 million and $128.0 million of the
purchase price, respectively. The entire amount allocated to goodwill is
deductible for income tax purposes. The initial allocation of the purchase price
was based on preliminary estimates and may be revised as asset valuations are
finalized. The operating results of Chambord have been consolidated with our
financial statements since the acquisition date. Consolidated pro forma
operating results for the three months ended July 31, 2005 and 2006 would not
have been materially different from the actual amounts reported for those
periods.
13. Termination of Glenmorangie Distribution Agreement
During July 2005, we entered into an agreement with LVMH Moet Hennessey Louis
Vuitton for the early termination of our long-term importing and marketing
agreements for Glenmorangie products in the United States, Canada, and certain
countries in Europe and Asia. We received approximately $13.5 million for the
early termination, which is included in "other income" for the three months
ended July 31, 2005, in the accompanying consolidated statement of operations.
14. Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
we recognize in our financial statements the benefit of a tax position if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 become effective as
of the beginning of our 2008 fiscal year, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained
earnings. We are currently evaluating the impact that FIN 48 will have on our
financial statements.
15. Subsequent Events
On August 25, 2006, we entered into an agreement to acquire substantially all of
the assets relating to the tequila business of Grupo Industrial Herradura ("Casa
Herradurs"), including the Herradura and el Jimador tequilas, the New Mix
tequila-based ready-to-drink brand, related production facilities and a sales
and distribution organization in Mexico, for an aggregate purchase price of $876
million in cash and the assumption of selected liabilities. The closing of the
acquisition, which is subject to a number of conditions, is expected to occur in
the fourth calendar quarter of 2006.
On August 30, 2006, we announced that we are exploring strategic alternatives
for our wholly-owned subsidiary, Hartmann, Inc., including a possible sale.
11
Item 1A. Risk Factors
Other than with respect to the revision and addition below, there have been no
changes to "Item 1A: Risk Factors" in our Annual Report on Form 10-K for the
fiscal year ended April 30, 2006 and filed on June 29, 2006. The revision and
addition below should be read together with the risk factors and information
disclosed in our Annual Report on Form 10-K.
The risk factor entitled "Demand for our products may be adversely affected by
changes in consumer preferences and tastes" is amended and restated in its
entirety as follows.
DEMAND FOR OUR PRODUCTS MAY BE ADVERSELY AFFECTED BY CHANGES IN CONSUMER
PREFERENCES AND TASTES.
We operate in a highly competitive marketplace. Maintaining our competitive
position depends on our continued ability to offer products that have a strong
appeal to consumers. Consumer preferences may shift due to a variety of factors,
including changes in demographic and social trends, and changes in dining and
beverage consumption patterns. In addition, sales of a brand might diminish
because of a scare over product contamination or some other negative publicity
regarding the brand. If a product recall becomes necessary, that can affect our
business.
The following risk factor entitled "Termination of our rights to distribute and
market agency brands included in our portfolio could adversely affect our
business" constitutes an addition to the risk factors disclosed in "Item 1A:
Risk Factors" of our Annual Report on Form 10-K.
TERMINATION OF OUR RIGHTS TO DISTRIBUTE AND MARKET AGENCY BRANDS INCLUDED IN OUR
PORTFOLIO COULD ADVERSELY AFFECT OUR BUSINESS.
In addition to the brands our company owns, we also market and distribute
products on behalf of other brand owners in selected markets, including the U.S.
Our rights to sell these agency brands are based on contracts with the various
brand owners, which have varying lengths, renewal terms, termination, and other
provisions. We earn a margin for these sales and also gain distribution cost
efficiencies in some instances. Therefore, the termination of our rights to
distribute agency brands included in our portfolio could adversely affect our
business.
12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion and analysis along with our 2006 Annual
Report. Note that the results of operations for the three months ended July 31,
2006, do not necessarily indicate what our operating results for the full fiscal
year will be. In this Item, "we," "us," and "our" refer to Brown-Forman
Corporation.
Important Note on Forward-Looking Statements:
This report contains statements, estimates, or projections that constitute
"forward-looking statements" as defined under U.S. federal securities laws.
Generally, the words "expect," "believe," "intend," "estimate," "will,"
"anticipate," and "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 a majority of our profits;
- lower consumer confidence or purchasing in the wake of catastrophic events;
- tax increases, whether at the federal or state level or in major
international markets and/or tariff barriers or other restrictions affecting
beverage alcohol;
- limitations and restrictions on distribution of products and alcohol
marketing, including advertising and promotion, as a result of stricter
governmental policies adopted either in the United States or globally;
- adverse developments in the class action lawsuits filed against Brown-Forman
and other spirits, beer and wine manufacturers alleging that our industry
conspired to promote the consumption of alcohol by those under the legal
drinking age;
- a strengthening U.S. dollar against foreign currencies, especially the
British Pound, Euro, and Australian Dollar;
- reduced bar, restaurant, hotel and travel business, including travel retail,
in the wake of terrorist attacks;
- lower consumer confidence or purchasing associated with rising energy prices;
- longer-term, a change in consumer preferences, social trends or cultural
trends that results in the reduced consumption of our premium spirits brands;
- changes in distribution arrangements in major markets that limit our ability
to market or sell our products;
- increases in the price of energy or raw materials, including grapes, grain,
wood, glass, and plastic;
- excess wine inventories or a world-wide oversupply of grapes;
- termination of our rights to distribute and market agency brands included in
our portfolio;
- adverse developments as a result of state investigations of beverage alcohol
industry trade practices of suppliers, distributors and retailers.
13
Results of Operations:
First Quarter Fiscal 2007 Compared to First Quarter Fiscal 2006
A summary of our operating performance (expressed in millions, except percentage
and per share amounts) is presented below. Continuing Operations consist
primarily of our beverage business. Discontinued Operations consist of Lenox and
Brooks & Bentley.
Three Months Ended
July 31,
CONTINUING OPERATIONS 2005 2006 Change
------ ------ ------
Net sales $547.5 $639.7 17%
Gross profit 303.0 351.4 16%
Advertising expenses 72.3 81.2 12%
Selling, general, and
administrative expenses 110.3 131.0 19%
Other expense (income), net (13.7) (2.0)
Operating income 134.1 141.2 5%
Interest expense, net 2.6 1.2
Income before income taxes 131.5 140.0 6%
Income taxes 44.0 46.2
Net income 87.5 93.8 7%
Gross margin 55.3% 54.9%
Effective tax rate 33.4% 33.0%
Earnings per share:
Basic 0.72 0.76 7%
Diluted 0.71 0.76 6%
Diluted earnings from continuing operations of $0.76 per share for the quarter
ended July 31, 2006, represented an increase of 6% from the $0.71 per share
earned in the prior year period. Prior year earnings benefited from a $0.07 per
share gain related to the termination of distribution rights to third party
agency brands. Excluding this gain and a $0.05 per share quarter-over-quarter
benefit of foreign exchange, earnings per share grew 11%. Volume growth and
margin improvement for our premium global portfolio, led by Jack Daniel's
Tennessee Whiskey, drove results in the period. Nearly every brand in our
portfolio recorded gross profit gains in the quarter, also contributing to
earnings improvement.
Reported diluted EPS growth 6%
Third party termination - consideration received 12%
Foreign exchange benefit (7%)
-----
Adjusted diluted EPS growth 11%
=====
14
Net sales and gross profit increased by 17% and 16%, respectively, in the first
quarter. Comparisons to the prior year were affected by the previously mentioned
foreign exchange benefit and changes in our distribution arrangements in
Australia and Germany, the most significant of which resulted in us now being
responsible for the collection and remittance of excise taxes in these markets.
These changes had the effect of boosting net sales by $33 million, or 6%, while
lowering the gross margin by approximately 2.2 percentage points for these
markets. As shown in the following table, our gross margin on a stripped net
sales basis (gross profit as a percentage of net sales excluding excise tax) was
68.7%, up approximately 1.3 percentage points from the prior year period. We
believe this measure provides a more meaningful metric given the structural
changes in distribution that have occurred.
(Dollars in millions) Three Months Ended
July 31,
2005 2006
------ ------
Net sales $547.5 $639.7
Excise taxes (as reported) (97.7) (128.4)
------ ------
Net sales (stripped of excise taxes) $449.8 $511.3
====== ======
Gross profit (as reported) $303.0 $351.4
change
Gross margin (stripped net sales basis) 67.4% 68.7% 1.3 % pts.
Advertising expenses in the quarter were up $9 million, or 12%, as a result of
additional investments behind our premium global brands. Although foreign
exchange accounted for about two points of the growth in advertising spending in
the quarter, we continued our trend of building and reinvesting behind our
brands. SG&A expenses increased approximately $21 million, or 19%, compared to
the same prior year period due in part to incremental costs associated with
changes in our distribution arrangements in Australia, where we now consolidate
the results after becoming 100% owners in February 2006 of a distribution
structure in the country, and Germany, where we added sales and marketing people
to support the new arrangement. The changes in the arrangements in both of these
countries were accompanied by corresponding increases in gross profit.
Additionally, expenses associated with the reorganization and consolidation of
our wine and spirits sales and marketing organizations contributed to the
increase in SG&A spending in the quarter.
Other income declined $12 million in the quarter reflecting the absence of $14
million of income received in last year's first quarter related to the
termination of our distribution and marketing rights to third party agency
brands.
15
Operating income increased $7 million, up 5% over the prior year period, as
gross profit growth more than offset higher SG&A and brand investments.
Adjusting last year's first quarter for the $14 million of income received for
the termination of our distribution and marketing rights to third party agency
brands, and the quarter-over-quarter benefit of nearly $10 million from foreign
exchange, operating income grew approximately 10%.
Reported operating income growth 5%
Third party termination - consideration received 13%
Foreign exchange benefit (8%)
-----
Adjusted operating income growth 10%
=====
Jack Daniel's global depletions grew at a mid-single digit rate in the quarter.
(Depletions are shipments from wholesale distributors to retail customers, and
are commonly regarded in the industry as an approximate measure of consumer
demand.) Outside of the U.S., depletions were up at a double-digit rate, led by
strong growth in Continental Europe and Asia. In the U.S., the brand's volume
growth moderated, increasing at a low-single digit rate for the quarter. Global
depletions for Southern Comfort grew 5% in the quarter, as double-digit gains in
the U.S. more than offset declines internationally. Finlandia depletions
remained solid, fueled by double-digit rate gains in Poland, the brand's largest
market, and a high-single digit growth rate in the U.S.
DISCONTINUED OPERATIONS
The improvement in the results of operations from discontinued operations for
the first quarter ended July 31, 2006, reflects our sale of Lenox, Inc. during
fiscal 2006. The net loss from discontinued operations of $0.1 million for the
first quarter ended July 31, 2006, consists of the operating results of Brooks &
Bentley, which we intend to sell or liquidate by the end of the 2006 calendar
year.
OUTLOOK FOR CONTINUING OPERATIONS
Our full-year earnings outlook remains unchanged at $3.10 to $3.30 per share,
representing growth of 7% to 14% over comparable prior year earnings. Despite
the favorable impact of foreign exchange, we have not changed our outlook for
the remainder of this fiscal year given the uncertainty surrounding the domestic
economic environment, slightly moderating U.S. growth trends for Jack Daniel's,
and the impact of lower volumes and higher costs for our mid-priced wine brands.
This outlook excludes the recently announced agreement to acquire Casa
Herradura. As previously communicated, we project the pending acquisition to be
dilutive to our earnings through fiscal 2009. In fiscal 2007 we estimate the
transaction will dilute earnings in the range of $0.08 to $0.12 per share.
LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents decreased by $254.9 million during the three months
ended July 31, 2006, compared to a decrease of $29.6 million during the same
period last year. Cash provided by operations grew from $33.7 million to $76.2
million, primarily reflecting a $16.5 million decrease in cash used for
discontinued operations in addition to a larger reduction in working capital of
continuing operations. Cash used for investing activities increased by $278.9,
largely reflecting the $250.1 million acquisition of Chambord (discussed below)
and a net investment in short-term securities of $26.4 million. Cash used for
financing activities declined by $10.7 million, primarily reflecting higher
proceeds from the exercise of employee stock options.
16
Effective May 31, 2006, we completed the acquisition of Chambord Liqueur and all
related assets from Chatam International Incorporated and its operating
subsidiary, Charles Jacquin et Cie Inc., for $250.1 million, including
transaction costs. The acquisition consists primarily of the Chambord brand name
and goodwill, to which we have preliminarily allocated $116.5 million and $128.0
million of the purchase price, respectively.
On August 25, 2006, we entered into an agreement to acquire substantially all of
the assets relating to the tequila business of Casa Herradura, including the
Herradura and el Jimador tequilas, the New Mix tequila-based ready-to-drink
brand, related production facilities and a sales and distribution organization
in Mexico, for an aggregate purchase price of $876 million in cash and the
assumption of selected liabilities. The closing of the acquisition, which is
subject to a number of conditions, is expected to occur in the fourth calendar
quarter of 2006. We expect to finance the acquisition with a combination of cash
and debt.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
we recognize in our financial statements the benefit of a tax position if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 become effective as
of the beginning of our 2008 fiscal year, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained
earnings. We are currently evaluating the impact that FIN 48 will have on our
financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We hold debt obligations, foreign currency forward and option contracts, and
commodity futures contracts that are exposed to risk from changes in interest
rates, foreign currency exchange rates, and commodity prices, respectively.
Established procedures and internal processes govern the management of these
market risks. As of July 31, 2006, we do not consider the exposure to these
market risks to be material.
17
Item 4. 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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.
18
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. Brown-Forman and the other defendants have successfully
obtained orders to dismiss six of the pending cases: Kreft (Colorado) in October
2005; Eisenberg (Ohio) in February 2006; Tomberlin (Wisconsin) in March 2006;
Hakki (D.C.) in March 2006; Alston (Michigan) in May 2006; and Bertovich (West
Virginia). Konhauzer (Florida) has voluntarily dismissed that lawsuit. Each
involuntarily dismissal is being appealed by the respective plaintiffs.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held July 27, 2006, the
persons named below were elected to serve as directors until the next annual
election of directors, or until a successor has been elected and qualified:
For Withheld
---------- ---------
Patrick Bousquet-Chavanne 54,889,706 17,948
Barry D. Bramley 49,421,641 5,486,013
Geo. Garvin Brown IV 54,384,996 522,658
Martin S. Brown, Jr. 54,403,698 503,956
Owsley Brown II 49,496,629 5,411,025
Donald G. Calder 49,996,554 4,911,100
Sandra A. Frazier 54,385,752 521,902
Richard P. Mayer 49,326,329 5,581,325
Stephen E. O'Neil 49,328,114 5,579,540
Matthew R. Simmons 54,875,589 32,065
William M. Street 49,545,939 5,361,715
Dace Brown Stubbs 54,396,956 510,698
Paul C. Varga 54,377,566 530,088
19
Item 6. Exhibits
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).
99.1 Amendment to the Brown-Forman 1994 Omnibus Compensation Plan.
99.2 Amendment to the Brown-Forman Non-Employee Directors' Compensation
Plan.
99.3 Amendment to the Brown-Forman 2004 Omnibus Compensation Plan.
20
SIGNATURES
Pursuant to the requirements 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)
Date: September 6, 2006 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as Principal Financial Officer)
21
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Paul C. Varga, certify that:
1. I have reviewed this Quarterly report on Form 10-Q 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: September 6, 2006 By: /s/ Paul C. Varga
Paul C. Varga
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 Quarterly report on Form 10-Q 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: September 6, 2006 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 Quarterly Report of Brown-Forman Corporation ("the
Company") on Form 10-Q for the period ended July 31, 2006, 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.
Date: September 6, 2006 By: /s/ Paul C. Varga
Paul C. Varga
President and Chief Executive Officer
By: /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 Periodic Report.
Exhibit 99.1
AMENDMENT TO THE
BROWN-FORMAN 1994 OMNIBUS COMPENSATION PLAN
EFFECTIVE AUGUST 1, 2006
WHEREAS, Brown-Forman Corporation (the "Company") maintains the Brown-Forman
1994 Omnibus Compensation Plan (the "Plan"); and
WHEREAS, pursuant to Section 12.1(a) of the Plan, the Board of Directors of
the Company (the "Board") may amend the Plan; and
WHEREAS, the Board desires to amend the Plan (i) to revise the provisions
in Section 4.4 of the Plan regarding adjustments in connection with a
recapitalization (or other similar event) to the Shares granted thereunder and
(ii) to revise the provisions in Section 7.4(d)(2) of the Plan to add a
"net-exercise option" to the payment methods permitted upon the exercise of
awards granted thereunder.
NOW, THEREFORE, effective August 1, 2006, the Company hereby amends the Plan
as follows:
1. The last paragraph of Section 4.4 is amended to read as follows:
the Plan Administrator shall then adjust the number and class of
Shares which may be delivered under Sections 4.1 and 4.2 and the
number and class of and/or price of Shares subject to outstanding
Awards granted under the Plan -- but the number of Shares subject to
any Award shall always be a whole number.
2. Section 7.4(d)(2) of the Plan is amended to read as follows:
(2) The Option Price upon exercise of any Option shall be payable to
the Company in full either:
(A) in cash or its equivalent; or
(B) by tendering previously acquired Shares having an
aggregate Fair Market Value at the time of exercise equal
to the total Option Price; or
(C) by withholding from Participant sufficient Shares,
subject to an underlying Award, having an aggregate Fair
Market Value at the time of exercise equal to the total
Option Price of such underlying Award; or
(D) by a combination of (A), (B) or (C).
IN WITNESS WHEREOF, the Board has caused this Amendment to the Brown-Forman
1994 Omnibus Compensation Plan to be executed by its duly authorized
representative on this 27th day of July, 2006, effective August 1, 2006.
Exhibit 99.2
AMENDMENT TO THE BROWN-FORMAN
NON-EMPLOYEE DIRECTORS' COMPENSATION PLAN
EFFECTIVE AUGUST 1, 2006
WHEREAS, Brown-Forman Corporation (the "Company") maintains the Brown-Forman
Non-Employee Directors' Compensation Plan (the "Plan"); and
WHEREAS, pursuant to Section 11.1(a) of the Plan, the Board of Directors of
the Company (the "Board") may amend the Plan; and
WHEREAS, the Board desires to amend the Plan (i) to revise the provisions of
Article 4 of the Plan to add language regarding adjustments in connection with a
recapitalization (or other similar event) to the Shares granted thereunder and
(ii) to revise the provisions in Section 6.3(d)(2) of the Plan to add a
"net-exercise option" to the payment methods permitted upon the exercise of
awards granted thereunder.
NOW, THEREFORE, effective August 1, 2006, the Company hereby amends the Plan
as follows:
1. Article 4 of the Plan is amended to read as follows:
ARTICLE 4 - SHARES SUBJECT TO THE PLAN
4.1 SHARES AVAILABLE FOR GRANT: No Shares are reserved for Plan use.
Shares issued under this Plan will be obtained by purchase on the
open market.
4.2 ADJUSTMENTS. In the event the Plan Administrator determines that
any dividend or other distribution (whether in the form of cash,
Shares, other securities or other property), recapitalization,
stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or
exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other
securities of the Company, or other similar corporate transaction
or event affects the Shares, then the Plan Administrator shall:
(a) adjust any or all of (1) the aggregate number of Shares or
other securities of the Company (or number and kind of other
securities or property) with respect to which Awards may be
granted under the Plan; (2) the number of Shares or other
securities of the Company (or number and kind of other
securities or property) subject to outstanding Awards under
the Plan; and (3) the grant or exercise price with respect
to any Award under the Plan, provided that the number of
Shares subject to any Award shall always be a whole number;
(b) if deemed appropriate, provide for an equivalent award in
respect of securities of the surviving entity of any merger,
consolidation or other transaction or event having a similar
effect; or
(c) if deemed appropriate, make provision for a cash payment to
the holder of an outstanding Award.
2. Section 6.3(d)(2) of the Plan is amended to read as follows:
(2) The Option Price upon exercise of any Option shall be payable to
the Company in full either:
(A) in cash or its equivalent; or
(B) by tendering previously acquired Shares having an aggregate
Fair Market Value at the time of exercise equal to the total
Option Price; or
(C) by withholding from Participant sufficient Shares, subject
to an underlying Award, having an aggregate Fair Market
Value at the time of exercise equal to the total Option
Price of such underlying Award; or
(D) by a combination of (A), (B) or (C).
IN WITNESS WHEREOF, the Board has caused this Amendment to the Brown-Forman
Non-Employee Directors' Compensation Plan to be executed by its duly authorized
representative on this 27th day of July, 2006, effective August 1, 2006.
Exhibit 99.3
AMENDMENT TO THE
BROWN-FORMAN 2004 OMNIBUS COMPENSATION PLAN
EFFECTIVE AUGUST 1, 2006
WHEREAS, Brown-Forman Corporation (the "Company") maintains the Brown-Forman
2004 Omnibus Compensation Plan (the "Plan"); and
WHEREAS, pursuant to Section 12.1(a) of the Plan, the Board of Directors of
the Company (the "Board") may amend the Plan; and
WHEREAS, the Board desires to amend the Plan (i) to revise the provisions
in Section 4.4 of the Plan regarding adjustments in connection with a
recapitalization (or other similar event) to the Shares granted thereunder and
(ii) to revise the provisions in Section 7.4(d)(2) of the Plan to add a
"net-exercise option" to the payment methods permitted upon the exercise of
awards granted thereunder.
NOW, THEREFORE, effective August 1, 2006, the Company hereby amends the Plan
as follows:
1. The first paragraph of Section 4.4 is amended to read as follows:
4.4 ADJUSTMENTS. In the event the Plan Administrator determines that
any dividend or other distribution (whether in the form of cash,
Shares, other securities or other property), recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase, or exchange of Shares
or other securities of the Company, issuance of warrants or other
rights to purchase Shares or other securities of the Company, or
other similar corporate transaction or event affects the Shares,
then the Plan Administrator shall:
2. Section 7.4(d)(2) of the Plan is amended to read as follows:
(2) The Option Price upon exercise of any Option shall be payable to
the Company in full either:
(A) in cash or its equivalent; or
(B) by tendering previously acquired Shares having an aggregate
Fair Market Value at the time of exercise equal to the total
Option Price; or
(C) by withholding from Participant sufficient Shares, subject to
an underlying Award, having an aggregate Fair Market Value at
the time of exercise equal to the total Option Price of such
underlying Award; or
(D) by a combination of (A), (B) or (C).
IN WITNESS WHEREOF, the Board has caused this Amendment to the Brown-Forman
2004 Omnibus Compensation Plan to be executed by its duly authorized
representative on this 27th day of July, 2006, effective August 1, 2006.