SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of
earliest event reported): April 3, 2007 (January 18, 2007)
Brown-Forman Corporation
(Exact name of registrant as specified in its charter)
Delaware 002-26821 61-0143150
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
850 Dixie Highway, Louisville, Kentucky 40210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (502) 585-1100
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2.):
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Amendment No. 1
This Amendment No. 1 amends the Current Report on Form 8-K of Brown-Forman
Corporation filed on January 22, 2007, relating to its acquisition of Grupo
Industrial Herradura, S.A. de C.V. This Amendment No. 1 amends the previous
filing to include the financial statements required by Item 9.01 of Form 8-K.
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.
Item 9.01. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
The following consolidated financial statements of Grupo Industrial
Herradura, S.A. de C.V. and Subsidiaries are filed herewith as Exhibit 99.1
to this Current Report on Form 8-K/A:
i. Independent Auditors' Report to the Board of Directors and
Stockholders of Grupo Industrial Herradura, S.A. de C.V.
ii. Consolidated Balance Sheets as of December 31, 2005 and June 30, 2006
(unaudited)
iii. Consolidated Statements of Operations for the year ended December 31,
2005 and the six-month periods ended June 30, 2006 (unaudited) and
June 30, 2005 (unaudited)
iv. Consolidated Statements of Changes in Stockholders' Equity for the
year ended December 31, 2005 and the six-month period ended June 30,
2006 (unaudited)
v. Consolidated Statements of Changes in Financial Position for the year
ended December 31, 2005 and the six-month periods ended June 30, 2006
(unaudited) and June 30, 2005 (unaudited)
vi. Notes to Consolidated Financial Statements for the year ended December
31, 2005 and the six-month periods ended June 30, 2006 (unaudited) and
June 30, 2005 (unaudited)
(b) Pro Forma Financial Information
The following pro forma combined condensed consolidated financial
statements of Brown-Forman Corporation are filed herewith as Exhibit 99.2
to this Current Report on Form 8-K/A:
i. Introduction to Unaudited Pro Forma Combined Condensed Statements of
Operations
ii. Unaudited Pro Forma Combined Condensed Statement of Operations for the
Nine Months Ended January 31, 2007
iii. Unaudited Pro Forma Combined Condensed Statement of Operations for the
Year Ended April 30, 2006
iv. Notes to Unaudited Pro Forma Combined Condensed Statement of
Operations
(c) Not applicable
(d) Exhibits
23 Consent of Independent Auditors
99.1 See Item 9.01(a) above
99.2 See Item 9.01(b) above
SIGNATURE(S)
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 hereunto duly authorized.
Brown-Forman Corporation
(Registrant)
Date: April 3, 2007 By: /s/ Nelea A. Absher
Nelea A. Absher
Vice President and Assistant
Corporate Secretary
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 No. 333-140317 and Form S-8 No. 333-08311, 333-74567,
333-77903, 333-88925, 333-89294, 333-117630 and 333-126988 of Brown-Forman
Corporation of our report dated January 28, 2007 related to the financial
statements of Grupo Industrial Herradura, S.A. de C.V. as of and for the year
ended December 31, 2005, (which report expresses an unqualified opinion and
includes explanatory paragraphs relating to (a) the adoption of Mexican Bulletin
B-7, "Business Acquisitions," (b) the contract termination with
Meltum-Consultadoria e Marketing LDA, and (c) the sale of the Company's assets
to Brown-Forman Corporation) appearing in this Current Report on Form 8-K/A
dated April 3, 2007, of Brown-Forman Corporation.
Galaz, Yamazaki, Ruiz Urquiza, S.C.
Member of Deloitte Touche Tohmatsu
/s/ Marcelino Menendez Jimenez
C. P. C. Marcelino Menendez Jimenez
Guadalajara, Mexico
April 3, 2007
Exhibit 99.1
Grupo Industrial Herradura, S. A. de C. V. (A 74.9% Owned Subsidiary
of Corporativo Herradura, S. A. de C. V.) and Subsidiaries
Independent Auditors' Report 2005
and Consolidated Financial Statements
2005 and 2006
Table of contents Page
Independent Auditors' Report 1
Consolidated Balance Sheets as of December 31, 2005
and June 30, 2006 (unaudited) 3
Consolidated Statements of Operations for the year ended
December 31, 2005 and the six-month periods ended
June 30, 2006 (unaudited) and June 30, 2005 (unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 2005 and the six-month
period ended June 30, 2006 (unaudited) 5
Consolidated Statements of Changes in Financial Position for
the year ended December 31, 2005 and the six-month periods
ended June 30, 2006 (unaudited) and June 30, 2005 (unaudited) 6
Notes to Consolidated Financial Statements 7
Independent Auditors' Report to the Board of Directors and Stockholders of Grupo
Industrial Herradura, S. A. de C. V.
We have audited the accompanying consolidated balance sheet of Grupo Industrial
Herradura, S. A. de C. V., a 74.9% owned subsidiary of Corporativo Herradura, S.
A. de C. V., and subsidiaries (collectively, the "Company") as of December 31,
2005, and the related consolidated statement of operations, changes in
stockholders' equity and changes in financial position for the year then ended,
all expressed in thousands of Mexican pesos of purchasing power of June 30,
2006. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in Mexico and auditing standards generally accepted in the United States of
America. 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 includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As described in Note 15.b., on June 7, 2005, Tequila Herradura, S. A. de C. V.,
subsidiary company ("Herradura"), signed an agreement with Meltum-Consultadoria
e Marketing LDA ("Meltum") under which Herradura granted Meltum an exclusive
option for selling certain of its trademarks to third parties during an
eighteen-month period. On August 18, 2006, Herradura executed a contract
termination option for the aforementioned agreement with Meltum, without
penalties for either of the parties. As discussed in Note 18 to the accompanying
financial statements, on January 18, 2007, the business transaction between the
Company and Brown-Forman Corporation ("BF") was concluded for 778,066,000 U.S.
dollars in cash proceeds. Following the aforementioned sale of assets,
management has not defined the Company's future operations. The accompanying
financial statements do not include adjustments related to the valuation and
classification of assets and the classification and amount of liabilities, which
might be required if the Company is unable to continue operating.
As discussed in Note 3.a., as of January 1, 2005, the Company adopted the
provisions of Bulletin B-7, "Business Acquisitions" ("B-7"). Bulletin B-7
provides rules for the accounting treatment of business acquisitions and
investments in associated entities. It establishes, among others, that goodwill
arising from an acquired entity should not be amortized, but should be subject
to impairment tests, at least on an annual basis in conformity with Bulletin
C-15, "Accounting for Impairment and Disposal of Long-lived Assets". The main
effect in 2005 derived from the application of this Bulletin was that the
Company ceased the amortization of goodwill, which in 2004, was $47,048 thousand
Mexican pesos.
1
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Grupo Industrial Herradura, S. A.
de C. V. and subsidiaries as of December 31, 2005, and the results of their
operations, changes in their stockholders' equity and changes in their financial
position for the year then ended in conformity with Mexican financial reporting
standards.
The accompanying consolidated financial statements have been translated into
English for the convenience of users.
Galaz, Yamazaki, Ruiz Urquiza, S. C.
A Member of Deloitte Touche Tohmatsu
/s/ Marcelino Menendez Jimenez
C.P.C. Marcelino Menendez Jimenez
February 28, 2006
(January 18, 2007 with respect to Note 18)
2
Grupo Industrial Herradura, S. A. de C. V. (A 74.9% Owned Subsidiary
of Corporativo Herradura, S. A. de C. V.) and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2005 and June 30, 2006 (unaudited)
(In thousands of Mexican pesos of purchasing power of June 30, 2006)
2005 June 30, 2006
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 101,413 $ 11,196
Accounts receivable - net 1,595,515 1,254,251
Inventories - net 685,433 889,312
Prepaid expenses 6,685 30,542
---------- ----------
Total current assets 2,389,046 2,185,301
Agave plants to be harvested after one-year 502,111 410,443
Property foreclosed and held for sale 11,594 11,520
Property, plant and equipment - net 739,279 725,159
Goodwill - net 288,416 288,416
Intangible asset for labor obligations 8,649 6,845
Other assets 15,178 13,046
---------- ----------
$3,954,273 $3,640,730
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans and current portion of long-term debt $ 315,430 $ 375,670
Trade accounts payable 268,105 309,376
Accrued expenses and taxes other than income taxes 901,018 610,108
Due to Osborne Distribuidora, S. A., related party 7,982 4,616
Dividends payable 118,469 --
Employee statutory profit sharing 2,814 1,554
---------- ----------
Total current liabilities 1,613,818 1,301,324
---------- ----------
Non-current liabilities:
Bank loans 774,887 780,767
Labor obligations 12,360 11,568
Deferred income taxes 87,812 118,854
---------- ----------
875,059 911,189
---------- ----------
Total liabilities 2,488,877 2,212,513
---------- ----------
Commitments and contingencies (Notes 15 and 18)
Stockholders' equity:
Capital stock 1,872,757 1,872,757
Retained earnings 829,569 785,945
Insufficiency in restated stockholders' equity (1,236,930) (1,230,485)
---------- ----------
Total stockholders' equity 1,465,396 1,428,217
---------- ----------
$3,954,273 $3,640,730
========== ==========
See accompanying notes to consolidated financial statements.
3
Grupo Industrial Herradura, S. A. de C. V. (A 74.9% Owned Subsidiary
of Corporativo Herradura, S. A. de C. V.) and Subsidiaries
Consolidated Statements of Operations
For the year ended December 31, 2005 and the six-month periods
ended June 30, 2006 (unaudited) and June 30, 2005 (unaudited)
(In thousands of Mexican pesos of purchasing power of June 30, 2006)
2005 June 30, 2006 June 30, 2005
(unaudited) (unaudited)
Net sales $2,197,143 $ 939,692 $ 665,472
Costs and expenses:
Cost of sales (exclusive of inventory
write-downs presented below) (1,144,912) (517,180) (416,735)
Loss derived from decrease in replacement cost
of tequila and agave (170,735) (18,649) (141,532)
Selling, general and administrative expenses (734,523) (370,604) (332,792)
---------- ---------- ----------
(2,050,170) (906,433) (891,059)
---------- ---------- ----------
Income (loss) from operations 146,973 33,259 (225,587)
---------- ---------- ----------
Comprehensive financing cost:
Interest expense and other financial costs (171,486) (77,360) (101,875)
Interest income 4,027 4,776 7,748
Exchange gain (loss) 10,545 (11,324) 8,795
Monetary position gain 28,856 5,886 8,622
---------- ---------- ----------
(128,058) (78,022) (76,710)
---------- ---------- ----------
Other income - net 15,016 5,966 16,745
---------- ---------- ----------
Income (loss) before income taxes and employee
statutory profit sharing 33,931 (38,797) (285,552)
---------- ---------- ----------
Income tax benefit (expense) 29,172 (3,407) 130,296
Employee statutory profit sharing expense (2,755) (1,420) (1,346)
---------- ---------- ----------
26,417 (4,827) 128,950
---------- ---------- ----------
Consolidated net income (loss) $ 60,348 $ (43,624) $ (156,602)
========== ========== ==========
See accompanying notes to consolidated financial statements.
4
Grupo Industrial Herradura, S. A. de C. V. (A 74.9% Owned Subsidiary
of Corporativo Herradura, S. A. de C. V.) and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the year ended December 31, 2005 and the
six-month period ended June 30, 2006 (unaudited)
(In thousands of Mexican pesos of purchasing power of June 30, 2006)
Insufficiency
in Restated Total
Capital Retained Stockholders' Stockholders'
Stock Earnings Equity Equity
Balances as of January 1, 2005 $1,872,757 $769,221 $(1,118,639) $1,523,339
Comprehensive loss -- 60,348 (118,291) (57,943)
---------- -------- ----------- ----------
Balances as of December 31, 2005 1,872,757 829,569 (1,236,930) 1,465,396
Comprehensive loss (unaudited) -- (43,624) 6,445 (37,179)
---------- -------- ----------- ----------
Balances as of June 30, 2006
(unaudited) $1,872,757 $785,945 $(1,230,485) $1,428,217
========== ======== =========== ==========
See accompanying notes to consolidated financial statements.
5
Grupo Industrial Herradura, S. A. de C. V. (A 74.9% Owned Subsidiary
of Corporativo Herradura, S. A. de C. V.) and Subsidiaries
Consolidated Statements of Changes in Financial Position
For the year ended December 31, 2005 and the six-month periods
ended June 30, 2006 (unaudited) and June 30, 2005 (unaudited)
(In thousands of Mexican pesos of purchasing power of June 30, 2006)
2005 June 30, 2006 June 30, 2005
(unaudited) (unaudited)
Operating activities:
Consolidated net income (loss) $ 60,348 $(43,624) $(156,602)
Add (less) items that did not require (generate)
resources:
Loss derived from decrease in replacement cost of
tequila and agave 170,735 18,649 141,532
Depreciation and amortization 57,147 32,032 32,199
Net change in labor obligations 1,384 1,012 1,120
Deferred income taxes (110,826) 31,042 (107,577)
-------- -------- --------
178,788 39,111 (89,328)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable - net (41,010) 341,264 404,006
Inventories, including the effect of deferred
income taxes recognized in stockholders' equity
(67,859) (124,341) (139,675)
Prepaid expenses 3 (23,857) (28,828)
Property foreclosed and held for sale (11,594) -- (11,885)
Increase (decrease) in:
Trade accounts payable (56,548) 41,271 (7,343)
Accrued expenses and taxes other than income taxes 85,043 (290,910) (160,283)
Other items (27,242) (4,626) (12,798)
-------- -------- --------
Net resources generated by (used in)
operating activities 59,581 (22,088) (46,134)
-------- -------- --------
Financing activities:
Net change in bank loans, including payments, effects
of inflation and exchange fluctuations 39,655 66,120 28,486
Dividends paid (118,837) (118,469) (60,934)
-------- -------- --------
Net resources used in financing activities (79,182) (52,349) (32,448)
-------- -------- --------
Investing activities:
Acquisition of property, plant and equipment (7,964) (17,912) (9,823)
Other assets 4,636 2,132 2,107
-------- -------- --------
Net resources used in investing activities (3,328) (15,780) (7,716)
-------- -------- --------
Cash and cash equivalents:
Net decrease (22,929) (90,217) (86,298)
Balance at beginning of year 124,342 101,413 124,343
-------- -------- --------
Balance at end of period $101,413 $ 11,196 $ 38,045
======== ======== ========
See accompanying notes to consolidated financial statements.
6
Grupo Industrial Herradura, S. A. de C. V. (A 74.9% Owned Subsidiary
of Corporativo Herradura, S. A. de C. V.) and Subsidiaries
Notes to Consolidated Financial Statements
For the year ended December 31, 2005 and the six-month periods
ended June 30, 2006 (unaudited) and June 30, 2005 (unaudited)
(In thousands of Mexican pesos of purchasing power of June 30, 2006)
1. Nature of business and significant event
Grupo Industrial Herradura, S. A. de C. V. ("GIH") and subsidiaries
(collectively, the "Company") are mainly engaged in the sowing and
cultivation of agave as well as the production and sale of tequila. GIH is
a 74.9% owned subsidiary of Corporativo Herradura, S.A. de C. V.
As in previous periods, the Company wrote down the value of certain agave
inventories to the corresponding estimated replacement costs, as is
required under Mexican financial reporting standards ("MEX NIFs"). These
write-downs resulted in losses of $170,735 for the year ended December 31,
2005, $18,649 and $141,532 for the six-month periods ended June 30, 2006
(unaudited) and June 30, 2005 (unaudited), respectively.
2. Basis of presentation
a. Explanation for translation into English - The accompanying
consolidated financial statements have been translated from Spanish
into English for use outside of Mexico. These consolidated financial
statements are presented in conformity with MEX NIFs. Certain
accounting practices applied by the Company that conform with MEX NIFs
may not conform with accounting principles generally accepted in the
country of use.
b. Unaudited interim financial information - The accompanying interim
financial statements for the six-month periods ended June 30, 2006 and
June 30, 2005 are unaudited. In the opinion of management, these
unaudited interim financial statements have been prepared on the same
basis as the audited financial statements, and include all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of results for the periods.
c. Consolidation of financial statements - The consolidated financial
statements includes those of GIH and the following subsidiaries in
which GIH has a 100% direct or indirect shareholding percentage in
their capital stock.
Company Activity
Tequila Herradura, S. A. de C. V. Production and sale of tequila, purchase and sale
("Herradura") of wine and liquors and owner of 100% of the shares
of Sociedad Romo, S. A. de C. V. ("Romo")
Comercializadora Herradura, S. A. de C. V. Distribution of tequila
("Comercializadora")
Corporacion de Servicios Herradura,
S. A. de C. V. ("Cosea") Administrative services
Valle de Amatitan, S. A. de C. V. ("Valle") Sowing and cultivation of agave
Romo Subholder of shares, owner of 0.34% of the shares
of Herradura and 50% of the shares of Cosesa and
Destilados de Agave, S. A. de C. V. ("Dasa")
Dasa Substantially inactive
Transportes de Carga Millenium, Transportation services
S. A. de C. V. ("Millenium")
Fabrica de Tequila Hacienda las Norias, Tequila production
S. A. de C. V. ("Norias")
La Moraleda Operadora Comercial, Substantially inactive
S. A. de C. V. ("Moraleda")
7
d. Comprehensive loss - Represents changes in stockholders' equity during
the year, for concepts other than distributions and activity in
contributed common stock, and is comprised of the net income (loss) of
the period, plus other comprehensive income (loss) items of the same
period, which are presented directly in stockholders' equity without
affecting the statements of operations. In 2005 and for the six-month
period ended June 30, 2006 (unaudited), other comprehensive income
(loss) items consist mainly of the insufficiency in restated
stockholders' equity.
e. Reclassifications - Certain amounts in the financial statements as of
and for the year ended December 31, 2005 have been reclassified in
order to conform to the presentation of the consolidated financial
statements as of and for the six-month periods ended June 30, 2006
(unaudited) and June 30, 2005 (unaudited).
3. Summary of significant accounting policies
New financial reporting standards - As of June 1, 2004, the function of
establishing and issuing the MEX NIFs is the responsibility of the Mexican
Board for Research and Development of Financial Reporting Standards
("CINIF"). CINIF changed the terminology referring to the body of Mexican
accounting principles from Accounting Principles Generally Accepted in
Mexico (MEX GAAP), formerly promulgated by the Mexican Institute of Public
Accountants ("IMCP"), to MEX NIFs. Eight Series A MEX NIFs (NIFs A-1 to NIF
A-8), representing the Conceptual Framework of such standards, and MEX NIF
B-1, Accounting Changes and Correction of Errors, have been issued and are
in effect as of January 1, 2006. The application of such MEX NIFs did not
have material effects on the accompanying financial statements or in the
related disclosures.
The accompanying consolidated financial statements have been prepared in
conformity with MEX NIFs, which require that management make certain
estimates and use specific assumptions to value certain elements of the
financial statements and to make the required disclosures therein; however,
actual results may differ from such estimates. The Company's management,
upon applying professional judgment, considers that estimates and
assumptions used were adequate under the circumstances. The significant
accounting policies of the Company are as follows:
a. Changes in accounting policies:
Goodwill - As of January 1, 2005, the Company adopted the provisions
of Bulletin B-7, "Business Acquisitions" ("B-7"). Bulletin B-7
provides rules for the accounting treatment of business acquisitions
and investments in associated entities. It establishes, among others,
that goodwill arising from an acquired entity should not be amortized,
but should be subject to impairment tests at least on an annual basis
in conformity with Bulletin C-15, "Accounting for Impairment and
Disposal of Long-lived Assets". The main effect in 2005 derived from
the application of this Bulletin was that the Company ceased the
amortization of goodwill, which in 2004 was $47,048.
Severance payments at the end of the work relationship - Effective
January 1, 2005, the Company adopted the revised provisions to
Bulletin D-3, "Labor Obligations" ("D-3") related to recognition of
the liability for severance payments at the end of the work
relationship for reasons other than restructuring, which is recorded
using the projected unit credit method, based on calculations by
independent actuaries. D-3 grants the option to immediately recognize,
in current earnings, the resulting transition asset or liability, or
to amortize it over the average remaining labor life of employees.
Through December 31, 2004, severance payments were charged to results
when the liability was determined to be payable. As of January 1,
2005, the accrued liability calculated by independent actuaries was
$12,360. The Company chose to record such amount as a transition
liability to be amortized using the straight-line method over 6.34
years, which represents the average labor life of employees expected
to receive such benefits.
8
b. Recognition of the effects of inflation - The Company restates its
consolidated financial statements to Mexican pesos of purchasing power
of the most recent consolidated balance sheet date presented.
Accordingly, the consolidated financial statements of the prior
periods, that are presented for comparative purposes, have also been
restated to Mexican pesos of the same purchasing power and, therefore,
differ from those originally reported in the prior periods.
Recognition of the effects of inflation results mainly in inflationary
gains or losses on nonmonetary and monetary items that are presented
in the consolidated financial statements under the following two line
items:
Insufficiency in restated stockholders' equity - Insufficiency in
restated stockholders' equity represents the accumulated monetary
position result through the initial restatement of the
consolidated financial statements and the loss from holding
nonmonetary assets which resulted from restating inventories
below inflation.
Monetary position gain - Monetary position result, which
represents the erosion of purchasing power of monetary items
caused by inflation, is calculated by applying National Consumer
Price Index ("NCPI") factors to monthly net monetary position.
Gains result from maintaining a net monetary liability position.
c. Cash equivalents - Cash equivalents correspond to temporary
investments recorded at acquisition cost plus accrued yield.
d. Inventories and cost of sales - Agaves grown by the Company are stated
at cost incurred during the sowing and cultivation period. Agaves
purchased externally (which are ready for production) are recorded at
the lower of cost or replacement costs, based on acquisition cost of
the last purchases.
The agave in process inventories are classified and presented as
current or non-current assets considering the expected harvesting
date.
The inventories of finished goods, production in process and packing
materials are mainly stated at replacement cost at year-end closing
not to exceed their net realizable value. Cost of sales is restated
through the application of replacement costs.
e. Property foreclosed and held for sale - It is recorded at foreclosure
value.
f. Property, plant and equipment - Property, plant and equipment are
initially recorded at acquisition cost and restated using the method
for changes in general price levels, applying factors derived from the
NCPI. The acquisition costs used to restate fixed assets acquired up
to December 31, 1996 were those reported at this date based on the net
replacement values. Depreciation is calculated by the straight-line
method based on the estimated useful lives of the related assets, as
follows:
Average
Years
Buildings and leasehold improvements 50
Industrial machinery and equipment 16
Vehicles 9
Office furniture and equipment 12
9
g. Impairment of long-lived assets in use - The Company reviews the
carrying amounts of long-lived assets in use when an impairment
indicator suggests that such amounts might not be recoverable,
considering the greater of the present value of future net cash flows
or the net sales price upon disposal. Impairment is recorded when the
carrying amounts exceed the greater of the amounts mentioned above.
The impairment indicators considered for these purposes are, among
others, the operating losses or negative cash flows in the period if
they are combined with a history or projection of losses, depreciation
and amortization charged to results, which in percentage terms in
relation to revenues are substantially higher than that of previous
years, obsolescence, reduction in the demand for the products
manufactured, competition and other legal and economic factors.
Evaluations of impairment of long-lived assets conducted as of
December 31, 2005 and June 30, 2006 (unaudited) did not result in any
impairment charges.
h. Derivative financial instruments - The Company states all derivatives
at fair value regardless of the purpose for holding them. When
derivatives are designated as hedging instruments, fair value is
recognized depending on whether it is a fair value hedge or a cash
flow hedge.
Changes in the fair value of derivative instruments designated as
hedging instruments are recognized as follows: (1) for fair value
hedges, changes in both the derivative instrument and the hedged item
are recognized in current earnings, and (2) for cash flow hedges,
changes are temporarily recognized as a component of comprehensive
income and then reclassified to current earnings when affected by the
hedged item.
The Company uses interest rate swaps to manage its exposure to
interest rate fluctuations and does not carry out derivative
transactions of a speculative nature.
In view of the relatively low importance of the swap values with
respect to the consolidated financial statements taken as a whole, the
Company has not recognized the effects resulting from the changes in
their fair value.
i. Goodwill - Goodwill represents the excess of cost over recorded value
as of the date of acquisition. It is restated using the NCPI and at
least once a year, is subject to impairment tests. Through December
31, 2004, goodwill was amortized using the straight-line method over
10 years. Beginning January 1, 2005, goodwill is no longer amortized.
It is restated using the NCPI and at least once a year, is subject to
impairment tests.
j. Labor obligations - Seniority premiums and beginning in 2005,
severance payments at the end of the work relationship, are recognized
as costs over employee years of service and are calculated by
independent actuaries using the projected unit credit method at net
discount rates. Accordingly, the liability is being accrued which, at
present value, will cover the obligation from benefits projected to
the estimated retirement date of the Company's employees.
k. Provisions - Provisions are recognized for current obligations that
(i) result from a past event, (ii) are probable to result in the use
of economic resources, and (iii) can be reasonably estimated.
10
l. Income taxes, tax on assets and employee statutory profit sharing -
Income taxes ("ISR") and employee statutory profit sharing ("PTU") are
recorded in results of the year in which they are incurred. Deferred
income tax assets and liabilities are recognized for temporary
differences resulting from comparing the accounting and tax bases of
assets and liabilities plus any future benefits from tax loss
carryforwards. Deferred ISR assets are reduced by any benefits about
which there is uncertainty as to their realizability. Deferred PTU is
derived from temporary differences between the accounting result and
income for PTU purposes and is recognized only when it can be
reasonably assumed that such difference will generate a liability or
benefit, and there is no indication that circumstances will change in
such a way that the liabilities will not be paid or benefits will not
be realized.
Tax on assets ("IMPAC") paid that is expected to be recoverable is
recorded as an advance payment of ISR and is presented in the balance
sheet decreasing the deferred ISR liability.
m. Foreign currency balances and transactions - Foreign currency
transactions are recorded at the applicable exchange rate in effect at
the transaction date. Monetary assets and liabilities denominated in
foreign currency are translated into Mexican pesos at the applicable
exchange rate in effect at the balance sheet date. Exchange
fluctuations are recorded as a component of net comprehensive
financing cost in the consolidated statements of operations.
n. Revenue recognition - Revenues are recognized in the period in which
the risks and rewards of ownership of the inventories are transferred
to the customers, which generally coincides with the delivery of
products to customers in satisfaction of orders.
4. Cash and cash equivalents
2005 June 30, 2006
(unaudited)
Cash $ 52,094 $11,196
Temporary investments 49,319 --
-------- -------
$101,413 $11,196
======== =======
5. Accounts receivable
2005 June 30, 2006
(unaudited)
Trade accounts receivable $1,735,463 $1,327,276
Allowance for doubtful accounts (47,777) (53,290)
Allowance for sales discounts
and sales returns (99,974) (43,526)
---------- ----------
1,587,712 1,230,460
Related parties 2,121 2,588
Other 5,682 21,203
---------- ----------
$1,595,515 $1,254,251
========== ==========
11
6. Inventories
2005 June 30, 2006
(unaudited)
Finished goods $ 136,802 $ 150,320
Production in process 236,590 284,167
Agave in process 759,355 791,217
Packing material and others 54,595 74,040
Advances to agave suppliers 17,909 16,238
Allowance for agave damages (17,707) (16,227)
---------- ----------
1,187,544 1,299,755
Plantations of agave to be
harvested after one year (502,111) (410,443)
---------- ----------
$ 685,433 $ 889,312
========== ==========
7. Property, plant and equipment
2005 June 30, 2006
(unaudited)
Buildings and leasehold improvements $ 391,403 $ 368,831
Industrial machinery and equipment 466,313 449,802
Vehicles 152,972 162,285
Office furniture and equipment 71,581 60,359
---------- ----------
1,082,269 1,041,277
Accumulated depreciation
and amortization (442,534) (420,445)
---------- ----------
639,735 620,832
Land 28,672 28,672
Construction in progress 70,872 75,655
---------- ----------
$ 739,279 $ 725,159
========== ==========
During 2006 (unaudited), the Company removed fully-depreciated fixed assets
no longer in use from their records. This resulted in a decrease in
property, plant and equipment within various categories and also resulted
in a decrease in accumulated depreciation and amortization.
The amount of construction in progress mainly corresponds to investments
and advances for the water treatment plant project and to other projects in
process. At December 31, 2005 and June 30, 2006 (unaudited), the investment
commitments were $15,979 and $16,109 (unaudited), respectively.
The Company's key construction projects, plant and equipment are located on
property that is owned by related parties. Rental payments paid by the
Company were $5,418 in 2005; $2,826 and $ 3,055 for the six-month periods
ended June 30, 2006 (unaudited) and June 30, 2005 (unaudited),
respectively. Lease contracts have the following general characteristics:
Monthly
Term Rent
Plant and offices in Amatitan Indefinite $ 94
Land for plant enlargement Ten years ending October 2011 with a
purchase option at maturity agreement 193
Offices in Guadalajara Ten years ending November 2008 184
The lease agreement for the land used for the tequila plant enlargement
includes a purchase option at maturity. The sales price would be the higher
value determined by independent appraisals performed by each of the parties
or, as the case may be, by an independent third appraisal selected by both
parties.
12
8. Goodwill
Goodwill as of December 31, 2005 and June 30, 2006 (unaudited) is as
follows:
Cost of acquisition of subsidiaries' shares $1,113,742
Share book value (643,267)
----------
470,475
Less - Accumulated amortization (182,059)
----------
$ 288,416
==========
9. Bank loans
The balance as of December 31, 2005 and June 30, 2006 (unaudited) is as
follows:
2005 June 30, 2006
(unaudited)
Syndicated bank loan in U. S. dollars and in Mexican pesos,
with Scotiabank Inverlat, S. A. ("Scotiabank") as managing
agent (key characteristics are explained below) $1,077,631 $1,105,578
GE Capital, financial lease in Mexican pesos for the
acquisition of vehicles 12,648 18,333
Banorte, S. A., financial lease in Mexican pesos for the
acquisition of vehicles -- 2,956
Revolving bank loan in Mexican pesos with Santander Serfin, S.
A., with a credit limit of $35 million Mexican pesos 38 29,570
---------- ----------
1,090,317 1,156,437
Less - current portion (315,430) (375,670)
---------- ----------
Total long-term debt $ 774,887 $ 780,767
========== ==========
Long-term debt matures as follows:
2005 June 30, 2006
(unaudited)
2007 $164,279 $167,026
2008 236,831 236,054
2009 373,777 377,687
-------- --------
$774,887 $780,767
======== ========
13
The U. S. dollar liability with ScotiaBank as of December 31, 2005 and June
30, 2006 (unaudited), was 24.9 million U. S. dollars ($267 million Mexican
pesos) and 23.6 million U.S. dollars ($269 million Mexican pesos) ,
respectively, and an additional Mexican pesos liability of $810.6 million
and $836.5 million, respectively, deriving from a loan granted on November
15, 2004, in which Scotiabank participates as managing agent. The funds
were mainly used for settling other bank loans. The loan is collateralized
by certain assets held by the controlling and subsidiary companies,
including agave inventories, tequila in process, finished tequila, specific
property, plant and equipment. The loan consists of three credit lines, the
first, with revolving credit facilities of $256 historical million Mexican
pesos and two loans, short and long-term, with a total of $940 historical
million Mexican pesos, payable in nine semiannual payments beginning
November 15, 2005. The liability in Mexican pesos and U.S. dollars bears
interest at the TIIE and LIBOR rates, respectively, plus a margin for the
interest coverage ratio which is agreed to in each of the loan agreements.
The most restrictive covenants in the loan agreement limit the performance
of additional investments in fixed assets, mergers, spin-offs and the
declaration of dividends over 50% of the net income. Additionally, the
covenants also require the Company to maintain certain financial ratios.
Management believes the Company is in compliance with such covenants as of
December 31, 2005 and June 30, 2006 (unaudited).
On April 15, 2003, the Company signed an interest rate swap agreement in
U.S. dollars with ING BANK (Mexico), S. A., through which the Company will
make payments computed on a fixed interest rate basis and will receive
amounts computed on a variable interest rate basis. The agreement covers up
to 13 million U.S. dollars in principal maturing on October 15, 2007, and
establishes an interest rate of 2.91% for the Company and LIBOR rate at six
months for the bank.
On February 8, 2005, the Company signed an interest rate swap agreement
with Banco Nacional de Mexico, S. A. through which the Company will make
payments computed on a fixed interest rate basis and will receive amounts
computed on a variable interest rate basis. The agreement covers up to $345
million Mexican pesos from February 15, 2005 to November 16, 2009 and
establishes a fixed interest rate of 9.71% for the Company and a TIIEE rate
of 28 days for the bank.
The estimated fair values of the interest rate swaps as of December 31,
2005, and June 30, 2006 (unaudited) and June 30, 2005 (unaudited) are not
material.
10. Accrued expenses and taxes other than income taxes
2005 June 30, 2006
(unaudited)
Taxes other than income taxes $825,463 $527,743
Other accrued expenses 51,437 77,811
Interest payable 24,118 4,554
-------- --------
$901,018 $610,108
======== ========
14
11. Labor obligations
Net period cost for labor obligations resulting from seniority premiums and
severance payments was $10,375 in 2005 and $5,208 for the six-month period
ended June 30, 2006 (unaudited). In 2005, the amount noted includes $9,735
for severance payments at the end of the work relationship. Beginning 2005,
the related liability and annual cost of such benefits are calculated by an
independent actuary using the projected unit credit method. The present
values of these obligations and the rates used for the calculations are:
2005 June 30, 2006
(unaudited)
Projected benefit obligation $(13,838) $(15,158)
Unamortized items:
Transition liability 8,649 6,845
Variances for assumptions and
adjustments based on experience 4,168 5,968
-------- --------
Net projected liability (1,021) (2,345)
Additional intangible asset (8,649) (6,845)
Item charged to the stockholders' equity (2,690) (2,378)
-------- --------
$(12,360) $(11,568)
======== ========
Net period cost $ 10,375 $ 5,208
Payments charged to net projected liability $ 9,705 $ 3,884
The rates used in the actuarial calculations, net of effects of inflation,
were:
2005 June 30, 2006
(unaudited)
Discount of the projected benefit
obligation at present value 4.5% 4.5%
Salary increase 1.0% 1.0%
Net period cost is comprised as follows:
2005 June 30, 2006 June 30, 2005
(unaudited) (unaudited)
Service cost $ 3,840 $1,894 $1,968
Amortization of the transition liability 5,037 2,590 2,582
Amortization of variances in:
Assumptions 93 51 48
Interest cost 1,405 673 720
------- ------ ------
Net period cost $10,375 $5,208 $5,318
======= ====== ======
15
12. Stockholders' equity
a. Common stock at par value as of December 31, 2005 and June 30, 2006
(unaudited), is as follows:
Number
of shares Amount
Fixed capital:
Series A-I 50 $ 50
Series B-I 16 16
--------- ---------
66 66
--------- ---------
Variable capital:
Series B-I 810,630 810,680
Series B-II 271,654 696,869
--------- ----------
1,082,284 1,507,549
---------
1,082,350
=========
Restatement increase 365,208
----------
Total per consolidated balance sheet $1,872,757
==========
b. Retained earnings include the statutory legal reserve. The General
Corporate Law requires that at least 5% of net income of the year be
transferred to the legal reserve until the reserve equals 20% of
capital stock at par value (historical pesos). The legal reserve may
be capitalized but may not be distributed unless the entity is
dissolved. The legal reserve must be replenished if it is reduced for
any reason. At December 31, 2005 and June 30, 2006 (unaudited), the
legal reserve, in historical pesos, was $57,173.
c. Stockholders' equity, except restated paid-in capital and tax retained
earnings, will be subject to income tax payable by the Company at the
rate in effect upon distribution. The ISR rate was 30% in 2005 and 29%
in 2006. The rate will decrease to 28% in 2007 and thereafter. Any tax
paid on such distribution, may be credited against annual and
estimated income taxes of the year in which the tax on the dividend is
paid and the following two fiscal years.
d. Pursuant to a resolution of the general ordinary stockholders' meeting
of April 22, 2003, dividends were declared for $328,177 (nominal
value), of which $100,000 (nominal value) were paid in May 2004 and
commitment was made to pay $228,177 (nominal value) from January to
April 2004. In January 2004, the Company renegotiated the settlement
date for such dividends. During 2005, dividend payments for $110,473
nominal pesos were made ($118,837 constant pesos) and an agreement was
reached with the stockholders to settle the remaining amount of
$118,469 on March 31, 2006. Such amount was paid in February 2006.
e. The balances of the stockholders' equity tax accounts as of December
31, 2005 and June 30, 2006 (unaudited) are:
Contributed capital account of GIH $1,872,757
Net tax income account 844,656
Net reinvested tax income account 20,285
----------
$2,737,698
==========
As illustrated in the preceding table, the total amount of the
balances of the stockholders' equity tax accounts exceeds
stockholders' equity, according to the accompanying consolidated
balance sheets.
16
13. Foreign currency balances and transactions
a. At December 31, 2005 and June 30, 2006 (unaudited), the foreign
currency monetary position is as follows (in thousands of U.S.
dollars):
2005 June 30, 2006
(unaudited)
Assets 7,948 12,676
Liabilities (29,158) (25,639)
-------- --------
Net monetary liability position (21,210) (12,963)
======== ========
Equivalent in Mexican pesos $(227,178) $(147,743)
b. Transactions denominated in foreign currency were as follows (in
thousands of U. S. dollars):
2005 June 30, 2006 June 30, 2005
(unaudited) (unaudited)
Export sales 26,972 19,786 15,501
Import purchases 19,853 5,502 7,122
Interest expense - net 1,036 812 768
c. Nonmonetary assets of foreign origin as of December 31, 2005 and June
30, 2006 (unaudited) were as follows:
2005 June 30, 2006
(unaudited)
----------------------------- ----------------------------
Equivalent Equivalent
in Mexican in Mexican
U.S. dollars Pesos U.S. dollars Pesos
Inventories 3,207 $ 34,350 1,977 $ 22,532
Machinery and equipment 10,170 108,930 10,170 115,911
d. The exchange rates in effect at the dates of the consolidated balance
sheets and of issuance of the consolidated financial statements were
as follows:
December 31, June 30, February 28,
2005 2006 2006
U.S. dollar $10.7109 $11.3973 $10.4661
14. Income tax, tax on assets, and employee statutory profit sharing
In accordance with Mexican tax law, GIH and its subsidiaries are subject to
ISR and IMPAC which is paid on an individual basis. Valle pays taxes under
the simplified tax scheme. ISR is computed taking into consideration the
taxable and deductible effects of inflation, such as depreciation
calculated on restated asset values. Taxable income is increased or reduced
by the effects of inflation on certain monetary assets and liabilities
through the inflationary component, which is similar to the gain or loss
from monetary position. In 2006 and 2005, the ISR rate was 29% (16% for
Valle) and 30% (16% for Valle), respectively. IMPAC is calculated by
applying 1.8% (0.9% for Valle) on the net average of the majority of
restated assets less certain liabilities and is payable only to the extent
that it exceeds ISR payable for the same period; any required payment of
IMPAC is creditable against the excess of ISR over IMPAC of the following
ten years.
17
On December 1, 2004, certain amendments to the ISR and IMPAC laws were
enacted and were effective in 2005. The most significant amendments were as
follows: a) the ISR rate was reduced to 30% (16% for Valle) in 2005 and was
further reduced to 29% (16% for Valle) in 2006 and 28% (19% for Valle) in
2007 and thereafter; b) except for Valle, for income tax purposes, cost of
sales is deducted instead of inventory purchases and related conversion
costs; and taxpayers are able to elect, in 2005, to ratably increase
taxable income over a period from 4 to 12 years by the tax basis of
inventories as of December 31, 2004 determined in conformity with the
respective tax rules; c) as of 2006, employee statutory profit sharing paid
is fully deductible, and d) bank liabilities and liabilities with foreign
entities are included to determine the IMPAC taxable base.
The Company files ISR and IMPAC tax returns on an individual entity basis
and the related tax results are combined in the consolidated financial
statements.
a. ISR consists of the following:
2005
ISR:
Current $(81,654)
Deferred including the effect of rate reduction 110,826
--------
$ 29,172
========
To determine deferred ISR at December 31, 2005 and the six-month
periods ended June 30, 2006 (unaudited) and June 30, 2005 (unaudited),
the Company applied the different tax rates that will be in effect
beginning in 2006 to temporary differences according to their
estimated dates of reversal. In addition, in accordance with tax
regulations in effect as of 2005, the Company's management elected to
amortize the tax inventory (except for agave) of $526,434 at December
31, 2004 into taxable income over a 12-year period beginning in 2005,
based on inventory turnover. Accordingly, the initial effect of the
new regulation of no longer deducting inventory purchases is deferred.
b. The reconciliation of the statutory and effective ISR rates expressed
as a percentage of income before ISR is:
2005
Statutory rate (30%)
Effect of change in taxable inventory balance due to
changes in tax regulations 78%
Effect of permanent differences, mainly
nondeductible expenses (33%)
Difference in tax rates applied by subsidiaries
located in various tax jurisdictions 25%
Change in valuation allowance for recoverable tax on
assets paid and others 46%
-----
Effective rate 86%
=====
The income tax provisions at June 30, 2005 (unaudited) and June 30,
2006 (unaudited) were determined based on the estimated effective
annual tax rate.
18
c. The main items comprising the asset (liability) balance of deferred
ISR are:
2005 June 30, 2006
(unaudited)
Asset (liability):
Difference between the accounting and tax value of:
Inventories $(245,984) $(258,733)
Property, plant and equipment (76,499) (78,442)
Asset and liability reserves, tax loss carryforwards
and other items 234,671 218,321
--------- ---------
Deferred ISR liability $ (87,812) $(118,854)
========= =========
d. As of December 31, 2005 and June 30, 2006 (unaudited) certain
subsidiaries had tax loss carryforwards of $726,424 maturing between
2010 and 2015 which can be utilized against future profits. Likewise,
at that date, IMPAC of $12,592 paid in prior years can be recovered
subject to certain conditions. The related tax benefit was recognized
as a decrease of the deferred ISR liability.
15. Commitments and contingencies
a. On October 1, 2004, a share purchase and sale contract was executed by
Osborne Distribuidora, S. A. Sociedad Unipersonal (the "Vendor"), CH
Acciones, S. A. de C. V., a related party, (the "Buyer") and the
Company, as joint and several debtor, under which the Vendor agreed to
sell 24.5% of GIH shares, to the Buyer payable on October 3, 2006.
This transaction was financed with a promissory note bearing interest
at the annual LIBOR rate at one year plus 4.5 percentage points as of
June 1, 2005, which will be paid together with the principal at the
settlement date.
Simultaneously, on October 1, 2004, the Company signed an
"Administration and Source of Payment Trust Contract" with Banco
Santander Mexicano, S.A. as the trustee, Osborne Distribuidora, S. A.
Sociedad Unipersonal as the trust beneficiary, the Company as the
trustor and CH Acciones, S. A. de C. V. as the joint obligor. For this
purpose, Corporativo Herradura, S. A. de C. V. delivered to the trust,
newly formed shares representing 51% of the common stock of GIH. In
the event of the Buyer's noncompliance with the promissory note
payment conditions, the Vendor may foreclose the shares in the trust
in conformity with the established conditions.
b. On June 7, 2005, Herradura signed an agreement with
Meltum-Consultadoria e Marketing LDA ("Meltum") under which it granted
to Meltum an exclusive option for selling certain trademarks owned by
Herradura to third parties.
c. As of December 31, 2005, and June 30, 2005 and 2006, the Company has
several outstanding agave futures contracts with third parties under
which it is obliged to purchase approximately 4.0 million agave
plants, provided that such plants comply with the minimum quality
requirements specified in the contracts. The outstanding contracts
have different terms that are characterized as follows, (i) 2.6
million agave plants are related to contracts where the future
execution price is based on the market value of the agave on the
harvesting date, (ii) 0.6 million agave plants have fixed agreed-upon
execution price of $2.033/kilo, (iii) the remaining 0.8 million agave
plants have an agreed-upon execution price of $3.50/kilo. As of
December 31, 2005, and June 30, 2005 and 2006, the market prices of
the agave was estimated at $2.25/kilo, $2.50 and $2.00, respectively.
The contracts with fixed agreed-upon execution price do not qualify
for derivative accounting under MEX NIF C-10 Derivative Accounting,
since the contract terms do not provide a net settlement option. In
addition, the actual number of agave plants that will be realized vary
from contract to contract based on the uncertainty of the number of
plants that will meet the Company's minimum quality requirements.
Also, the date in which the agave plants are harvested is not fixed to
a specific harvesting date, since the agave plant maturation process
varies in a harvest from 4 to 8 years.
The Company has various contracts with third parties where the Company
utilizes third party land to grow its agave plants. The Company incurs
all expenses in relation to the maintenance of the agave plants
throughout the harvesting period. In the majority of these contracts,
the Company and the third party agree that 60% of the harvest will
belong to the Company and 40% will belong to the third party.
19
d. At the date of these consolidated financial statements, the Company is
involved in arbitrations related to certain disputes concerning
contracts for the exclusive distribution of the "El Jimador" and
"Herradura" product lines in the United States of America.
e. Neither the Company nor its assets are subject to any legal action
other than that which arises over the normal course of business.
16. New accounting principles
On January 1, 2006, MEX NIF Series A went into effect. Such Series A
represents the Conceptual Framework described in Note 3; however, some of
its provisions originated disagreement with particular MEX NIFs in effect.
Consequently, in March 2006, the CINIF issued Interpretation Number 3 to
the Financial Reporting Standards (INIF No. 3), Initial Application of
NIFs, thus establishing, that provisions set forth in particular NIFs that
have not been amended should be transitorily adhered to, while their
tailoring to the Conceptual Framework is in progress. For example, in 2006,
neither revenues, costs and expenses were required to be classified as
ordinary and nonordinary in the statement of operations, nor other
comprehensive income items in the statement of stockholders' equity needed
to flow into the statement of operations at the time net assets that gave
rise to them were realized.
The CINIF continues to pursue its objective of moving towards a greater
convergence with international financial reporting standards. To this end,
on December 22, 2006, it issued the following MEX NIFs, which will become
effective for fiscal years beginning on January 1, 2007:
- NIF B-3, Statement of Income
- IF B-13, Events Occurring after the Financial Statements Date
- NIF C-13, Related Parties
- NIF D-6, Capitalization of Comprehensive Financing Cost (Income)
Some of the major changes established by these standards are as follows:
NIF B-3, Statement of Income, sets the general standards for presenting and
structuring the statement of income, the minimum content requirements and
general disclosure standards. Consistently with NIF A-5, Basic Elements of
Financial Statements, NIF B-3 now classifies revenues, costs and expenses,
into ordinary and non ordinary. Ordinary items (even if not frequent)
derive from primary activities representing the entity's main source of
revenues. Non ordinary items derive from activities other than those
representing the main source of revenues. Consequently, classification of
certain transactions as special and extraordinary, according to former
Bulletin B-3, was eliminated. As part of the structure of the statement of
operations, ordinary items should be presented first and, at least, show
income or loss before income taxes, income or loss before discontinued
operations, if any, and net income or loss. Presenting operating income is
neither required nor prohibited by NIF B-3. In this case, line item other
income (expense) is presented immediately before operating income. Cost and
expense items may be classified by function, by nature, or a combination of
both. When classified by function, gross income may be presented. Employee
statutory profit sharing should now be presented as an ordinary expense,
and no longer recognized as an income tax. Special items mentioned in
particular MEX NIFs, should now be part of other income and expense and
items formerly recognized as extraordinary should be part of non-ordinary
items.
20
NIF B-13, Events Occurring after the Financial Statements Date, requires
disclosure of asset and liability restructurings, creditor waivers to their
right to demand payment in case the entity defaults debt contractual
obligations occurring in the period between the date of the financial
statements and the date of their issuance, only in a note to the financial
statements and recognition in the financial statements of the period in
which such events take place. Formerly, these events were recognized in the
financial statements instead of only disclosing them. NIF A-7 Presentation
and Disclosure, in effect as of January 1, 2006, requires, among other
things, that the date on which the issuance of the financial statements is
authorized be disclosed as well as the name of authorizing management
officer(s) or body (bodies). NIF B-13 establishes that if the entity owners
or others are empowered to modify the financial statements, such fact
should be disclosed. Subsequent approval of the financial statements by the
stockholders or other body does not change the subsequent period, which
ends when issuance of the financial statements is authorized.
NIF C-13, Related Parties, broadens the concept "related parties" to
include a) the overall business in which the reporting entity participates;
b) close family members of key or relevant officers; and c) any fund
created in connection with a labor-related compensation plan. NIF C-13
requires the following disclosures: a) relationship between the controlling
and subsidiary entities, regardless of whether or not any intercompany
transactions took place during the period; b) that terms and conditions of
consideration paid or received in transactions carried out between related
parties are equivalent to those of similar transactions carried out between
independent parties and the reporting entity, only if enough evidence
exists; c) benefits granted to key or relevant officers, and d) name of the
direct controlling company and, if different, name of the ultimate
controlling company. Notes to comparative financial statements of prior
periods should disclose new provisions of NIF C-13.
NIF D-6, Capitalization of Comprehensive Financing Cost (Income),
establishes general capitalization standards that include specific
accounting for financing in domestic and foreign currencies or a
combination of both. Some of these standards are: a) mandatory
capitalization of comprehensive financing cost ("RIF") directly
attributable to the acquisition of qualifying assets; b) in the case of
financing in domestic currency used to acquire assets, yields obtained from
temporary investments before the capital expenditure is made, are left out;
c) exchange gains or losses from foreign currency financing should be
capitalized considering the valuation of associated hedging instruments, if
any; d) a methodology to calculate capitalizable RIF relating to funds from
generic financing; e) regarding land, RIF may be capitalized if development
is carried out; and f) conditions that must be met to capitalize RIF, and
rules indicating when RIF should no longer be capitalized. The entity may
decide on whether to apply provisions of NIF D-6 for periods ending before
January 1, 2007, in connection with assets in the process of being acquired
at the time this NIF goes into effect.
At the date of issuance of these financial statements, the Company has not
fully assessed the effects of adopting these new standards on its financial
information.
17. Financial statement issuance authorization
On February 28, 2006, the issuance of the consolidated financial statements
was authorized by C.P. Yuri Mariel Zepeda, Controller.
21
18. Subsequent events
a. On March 2, 2006, a final ruling was issued regarding arbitration on
the contract for the exclusive distribution of the "El Jimador"
product line in the United States of America as follows: (1) such
contract will not be automatically renewed and will terminate on June
30, 2006, and (ii) the distributor should pay to Herradura 727
thousand U.S. dollars for damages incurred. However, the arbitration
judges have not issued a decision with respect to the payment of legal
and court fees. At the date of issuance of these consolidated
financial statements, the existing arbitration for the distribution
contract with this same distributor for the "Herradura" product line
is still pending.
b. Regarding the share purchase and sale contract noted in Note 15 a., on
August 3, 2006, the Buyer paid 145.2 million U.S. dollars for GIH
shares, which included principal plus interest. Simultaneously, the
Company executed an agreement to terminate the trust described in the
second paragraph in Note 15 a., whereby the parties granted the
broadest settlement permitted under law and the Trustee granted the
Joint Obligor the share certificate for the shares in the trust.
c. Regarding Note 15 b., on August 18, 2006, Herradura executed a
termination and settlement agreement for the option contract executed
with Meltum, since the parties acknowledged and agreed that one of the
conditions to which the brand purchase-sale transaction was subject to
had not been fulfilled.
d. On October 16, 2006, the interest rate swap agreement in U.S. dollars
signed by the Company with ING BANK (Mexico), S.A., noted in the third
paragraph of Note 9, was cancelled by both parties with an accumulated
favorable difference of $113.
e. On December 28, 2006, the interest rate swap agreement with Banco
Nacional de Mexico, S.A., as noted in the fourth paragraph of Note 9,
was cancelled by both parties with an accumulated unfavorable
difference of $11,421.
f. On January 18, 2007, the Company settled the bank debt referred to in
the first paragraph of Note 9 and, based on the settlement letter
issued by Scotiabank, the Company cancelled all its mortgages and
obtained the release of all collateral provided as guarantees.
g. On January 18, 2007, the business transaction between the Company and
Brown-Forman Corporation ("BF") was concluded for 778,066,000 U.S.
dollars in cash proceeds which includes (a) 66,616,000 U.S. dollars
for payment of inter-company debt owed by Valle (which shares were
acquired by BF) to entities not acquired by BF and (b) 22,000,000 U.S.
dollars placed in escrow, which amounts will be released to the
sellers in the future subject to the absence or satisfaction of any
claims for indemnification made by BF. Also, there is an additional
cash consideration of 10,000,000 U.S. dollars which is a holdback to
be paid to the Company subject to customary post-closing working
capital adjustments and payment by BF of certain taxes payable in
connection with the transaction. In addition, BF has assumed debts
with suppliers for 27,169,000 U.S. dollars. The items billed to BF are
as follows (in thousands of U.S. dollars):
Asset Amount
Property, plant and equipment 60,221
Accounts receivable 26,236
Inventories 58,432
Brands 545,083
Shares of Valle de Amatitan 15,349
-------
Subtotal 705,321
Taxes (inventories and fixed assets) 43,298
-------
Total 748,619
=======
Following the sale of the Company's main assets in January 2007, as
discussed in the previous paragraph, management has not defined the
Company's future operations. The accompanying financial statements do
not include adjustments related to the valuation and classification of
assets and the classification and amount of liabilities, which might
be required if the Company is unable to continue operating.
22
Differences between Mexican Financial Reporting Standards
and U.S. Accounting Principles
The accompanying historical consolidated financial statements of Grupo
Industrial Herradura S.A. de C.V. and its subsidiaries (collectively, "GIH") are
presented in accordance with Mexican Financial Reporting Standards ("MFRS"),
which differ in certain respects from accounting principles generally accepted
in the United States ("U.S. GAAP").
The following is a summary of the principal differences between MFRS and U.S.
GAAP, as they relate to GIH, and that could affect consolidated operating
income, net income, stockholders' equity and changes in financial position of
GIH are described below. This summary does not purport to be complete.
Additionally, it may exclude certain differences that may affect the disclosure,
presentation or classification of transactions or events in the financial
statements of GIH. Further, this summary did not attempt to identity all future
differences between MFRS and U.S. GAAP that may affect the financial statements
as a result of transactions or events that occur in the future. The analysis
below does not include an analysis of principal differences between MFRS and
International Financial Reporting Standards ("IFRS").
Recognition of the effects of inflation
Under MFRS, GIH recognizes the effects of inflation in its financial information
as required by Mexican accounting Bulletin B-10, "Accounting Recognition of the
Effects of Inflation on Financial Information," as amended ("Bulletin B-10"),
issued by the Mexican Institute of Public Accountants ("MIPA"). Consequently,
the amounts shown in the accompanying consolidated financial statements and in
the notes thereto are expressed in thousands of constant Mexican pesos of
purchasing power as of the date of the most recent consolidated balance sheet
presented.
Under U.S. GAAP, financial statements are stated at historical cost. However,
for reports for Mexican companies when there is a reconciliation to U.S. GAAP,
such reconciliation does not include the reversal of the adjustments to the
financial statements for the effects of inflation required under Bulletin B-10,
because the application of Bulletin B-10 represents a comprehensive measure of
the effects of price level changes in the Mexican economy and, as such, is
considered a more meaningful presentation than historical cost-based financial
information.
Statements of changes in financial position and cash flows
MIPA Bulletin B-12, "Statement of Changes in Financial Position," specifies the
appropriate presentation of the statement of changes in financial position based
on financial statements stated in constant Mexican pesos. Bulletin B-12
identifies the sources and applications of resources representing differences
between beginning and ending financial statement balances in constant Mexican
pesos. In accordance with this bulletin, monetary and foreign exchange gains and
losses are not treated as non-cash items in the determination of resources
provided by operations.
Statements of cash flows under U.S. GAAP are addressed by Financial Accounting
Standards Board ("FASB") Statement No. 95, "Statement of Cash Flows," which does
not provide guidance with respect to inflation adjusted financial statements. If
GIH were to present statements of cash flows without reversing the effects of
inflationary accounting, it would adopt the guidance issued by the American
Institute of Certified Public Accountants ("AICPA") SEC Regulations Committee's
International Practices Task Force in its meeting held on November 24, 1998,
encouraging foreign registrants that file price level adjusted financial
statements to provide cash flow statements that show separately the effects of
inflation on cash flows.
Deferred income tax
MIPA Bulletin D-4, "Accounting for Income Tax, Asset Tax and Employee Profit
Sharing," requires an asset and liability approach for recognizing existing
temporary differences for income tax, asset tax and statutory employee profit
sharing that are expected to reverse over a definite period of time. Bulletin
D-4 is similar to U.S. GAAP with respect to accounting for current and deferred
income taxes, except for the accounting treatment of deferred employee profit
sharing.
Under MFRS, deferred employee profit sharing is recognized only for timing
differences arising from the reconciliation between book and taxable income for
employee profit sharing purposes, on which it may be reasonably estimated that a
future liability or benefit will arise and there is no indication that the
liabilities or benefits will not be materialized.
Under U.S. GAAP, income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recognized if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax asset will not be realized. The effect on the deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Under MFRS, a net presentation is required either as a non-current asset or
long-term liability. U.S. GAAP requires a separate presentation of current and
non current income tax assets or liabilities.
Capitalization of financing costs
Under MFRS, capitalization of comprehensive financing cost on assets under
construction or in pre-operating stage is allowed but not required.
Under U.S. GAAP, interest expenses incurred during the construction
(development) period on qualifying expenditures must be considered as an
additional cost to be capitalized. Under U.S. GAAP when the financing is in
Mexican pesos, the monetary gain is included in this computation; when financing
is denominated in U.S. dollars, only the interest is capitalized and exchange
and monetary gains and losses are excluded.
Inventories
MIPA Bulletin E-1, "Agriculture," establishes the rules for recognizing,
valuing, presenting, and disclosing biological assets and agricultural products.
It also establishes the treatment to be given to government subsidies on
biological assets.
This bulletin establishes that biological assets and the agricultural products
(the latter at the time of their harvesting) are to be valued at their fair
value, net of estimated costs at point of sale. Also, the Bulletin establishes
that whenever the fair value cannot be determined in a reliable, verifiable and
objective manner, the assets are to be valued at their production cost, net of
accumulated impairment, if any.
Under U.S. GAAP, inventories of biological assets and agricultural products are
to be valued at the lower of cost or market, where "market" means current
replacement cost except that: (1) market should not exceed the net realizable
value (i.e., estimated selling price in the ordinary course of business less
reasonably predictable costs of completion and disposal); and (2) market should
not be less than net realizable value reduced by an allowance for an
approximately normal profit margin.
Accounting for the impairment or disposal of long-lived assets
MIPA Bulletin C-15, "Accounting for the Impairment or Disposal of Long-Lived
Assets," defines the rules for the computation and recognition of asset
impairment losses and their reversal, as well as for the presentation and
disclosure of both assets whose values have been impaired and of the
presentation and disclosure of both assets whose values have been impaired and
of discontinued operations. Under Bulletin C-15, an impairment loss is equal to
the difference between the carrying amount of the assets and the higher of (i)
the net selling price or (ii) value in use, which is based on discounted cash
flows and the discounted rate used is a pretax rate. Also, under this bulletin
an entity can reverse an impairment loss that was previously recognized when
such loss no longer exists or has decreased. Impairment losses, as required by
this bulletin, are not included in the determination of operating income.
The accounting and reporting for the impairment or disposal of long-lived assets
under U.S. GAAP is addressed by FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Under FASB Statement No. 144, an
impairment loss would be calculated based on the excess of the carrying amount
of the long-lived asset over its fair value, where the fair value is the amount
at which the asset could be bought or sold in a current transaction between a
willing buyer and seller other than in a forced or liquidation sale. When future
cash flows are used to estimate fair value, the discount rate should be net of
taxes. Reversal of previously recognized losses is not permitted by U.S. GAAP
and impairment losses are included in the determination of operating income.
Transactions between entities under common control
Goodwill recognized by the GIH was the result of the acquisition of certain
subsidiaries that were under common control. Before the adoption of the new
Mexican Accounting Bulletin B-7, "Business Combinations," which was effective
January 1, 2005, the Company recognized the excess of the purchase price paid
over the net book value of the entities acquired as goodwill.
For U.S. GAAP purposes, transactions between entities under common control are
recognized as a capital transaction but are recorded at the lower of net book
value and fair value.
Push-down accounting
Under U.S. GAAP, purchase transactions that result in an entity becoming
substantially wholly owned establish a new basis of accounting for the purchased
assets and liabilities. When the form of ownership is within the control of the
parent, the basis of accounting for purchased assets and liabilities should be
the same regardless of whether the entity continues to exist or is merged into
the parent's operations. Therefore, the cost incurred by Brown Forman in the
acquisition of the GIH would have been "pushed down," i.e., used to establish a
new accounting basis in the separate financial statements of GIH.
Labor obligations
Effective January 1, 2005, GIH adopted the revised provisions of MIPA Bulletin
D-3, "Labor Obligations," which required GIH to recognize a liability for
employee severance payments based on actuarial calculations. As allowed by
Bulletin D-3, GIH elected to amortize the effect of the transition as expense
over the estimated average remaining service period of the employees.
A similar obligation is required under U.S. GAAP by FASB Statement No. 112,
"Employers' Accounting for Postemployment Benefits - an amendment of FASB
Statements No. 5 and 43," which became effective January 1, 1994. FASB Statement
No. 112 required the effect of the transition to be reported in a manner similar
to the cumulative effect of a change in accounting principle. Accordingly, no
intangible asset for labor obligations would be presented in GIH,s balance sheet
under U.S. GAAP.
Pension and other postretirement benefits
In September 2006, the FASB issued FASB Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, and
amendment to FASB Statements No. 87, 88, 106 and 132 (R)." FASB Statement No.
158 requires plan sponsors of defined benefit pension and other postretirement
benefit plans (collectively, "postretirement benefit plans") to recognize the
funded status of their postretirement benefit plans in the statement of
financial position, measure the fair value of plan assets and benefit
obligations as of the date of the fiscal year-end statement of financial
position, and provide additional disclosures.
MFRS still requires that an unfunded pension cost be recognized if net period
pension cost exceeds the plan assets, and that a prepaid pension cost be
recognized if net periodic cost is lower than the plan assets. If the
accumulated benefit obligation exceeds the fair value of plan assets, a
liability that is at least equal to the unfunded accumulated benefit obligation
must be recognized. In these circumstances, an additional minimum liability may
be recognized to the extent that a prepaid pension cost has been recognized, the
unfunded pension cost is lower than the unfunded benefit obligation, or if no
prepaid pension cost or unfunded pension cost has been recognized.
MFRS also states that if an additional minimum liability is recognized, an equal
amount shall be recognized as an intangible asset provided that the asset
recognized does not exceed the amount of unrecognized prior service cost, and
the excess, if any over the unrecognized prior service cost, would be presented
in other comprehensive income.
Exhibit 99.2
Brown-Forman Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statements of Operations
The following unaudited pro forma combined condensed statements of operations
relate to the acquisition by Brown-Forman Corporation (the "Company") of
substantially all of the assets of Grupo Industrial Herradura S.A. de C.V.
("Grupo Industrial Herradura") and certain of its affiliates relating to its
tequila business.
The acquisition was completed on January 18, 2007, pursuant to the Asset
Purchase Agreement, as amended by the First Amendment, the Second Amendment, and
the Third Amendement, dated as of August 25, 2006 among Jose Guillermo Romo de
la Pena, Luis Pedro Pablo Romo de la Pena, Grupo Industrial Herradura, S.A. de
C.V., certain of their respective affiliates, the Company and Brown-Forman
Tequila Mexico, S. de R.L. de C.V., a subsidiary of the Company (the "APA").
The unaudited pro forma combined condensed statements of operations reflect the
results of the Company for its fiscal year ended April 30, 2006, and the nine
months ended January 31, 2007, with pro forma adjustments as if the acquisition
had occurred on May 1, 2005. The following unaudited pro forma combined
condensed financial information has been derived by application of pro forma
adjustments to historical consolidated financial statements included elsewhere
in this filing or previously filed with the Securities and Exchange Commission.
Such pro forma and historical financial information is presented on a U.S. GAAP
basis.
No pro forma balance sheet is presented because the transaction is already
reflected in the consolidated balance sheet as of January 31, 2007, included in
the Company's quarterly report on Form 10-Q for the period then ended, as filed
on March 9, 2007.
The pro forma adjustments are based upon presently available information,
estimates and assumptions described herein and in the notes to the unaudited pro
forma combined condensed statements of operations. The pro forma adjustments are
described in the accompanying notes and give effect to events that are (a)
directly attributable to the acquisition, (b) factually supportable, and (c)
expected to have a continuing impact.
The unaudited pro forma statements of operations for the year ended April 30,
2006, and the nine months ended January 31, 2007 do not reflect any adjustment
for the incremental margins that the Company may achieve from becoming the
importer of the Herradura brands in the U.S. In addition, the unaudited pro
forma statements of operations do not reflect cost savings from synergies which
may be realized or integration costs to be incurred subsequent to the
acquisition. The unaudited pro forma statement of operations for the nine months
ended January 31, 2007 reflect a reduction in trade inventories in Mexico.
The reporting currency of Grupo Industrial Herradura is the Mexican peso. The
historical statements of operations for the year ended April 30, 2006 and the
nine months ended January 31, 2007 were translated into U.S dollars at the
average exchange rate for the related period of 10.76371 and 11.01035 Mexican
pesos to one U.S. dollar, respectively. These translations should not be
construed as a representation of the U.S. dollar amounts actually corresponding
to these Mexican peso amounts.
The unaudited pro forma combined condensed statement of operations was prepared
using the purchase method of accounting as described in FASB Statement No. 141,
Business Combinations, to account for the acquisition. Accordingly, as discussed
in the Company's quarterly report on Form 10-Q for the nine months ended January
31, 2007, the cost of the acquisition was $794.9 million, consisting of the
purchase price of $778.1 million and transaction costs of $16.8 million. The
purchase price is subject to customary post-closing working capital adjustments
as set forth in the APA. The cost of the acquisition has been preliminarily
allocated based on management's estimates and independent appraisals as follows:
(U.S. dollars in millions)
Accounts receivable:
Trade $ 51.8
Other 46.9
Inventories 140.8
Property, plant, and equipment 63.0
Deferred income taxes 4.3
Goodwill 344.2
Other intangible assets 216.6
------
Total assets 867.6
------
Accounts payable and accrued expenses 71.2
Long-term debt 0.2
Other noncurrent liabilities 1.3
------
Total liabilities 72.7
------
Net assets acquired $794.9
======
A preliminary valuation of the acquired intangible assets was performed by a
third party valuation specialist to assist the Company in determining the fair
value of each identifiable intangible asset. Standard valuation procedures were
used in determining the fair value of the acquired intangible assets. The
following table summarizes the identified intangible asset categories and their
weighted average amortization period, where applicable:
Weighted Average
Amortization Period Fair Value
Finite-lived intangible assets:
Customer relationships 37.0 years $5.3
Indefinite-lived intangible assets:
Trademarks and brand names $211.3
Goodwill 344.2
The initial allocation of the cost of the acquisition was based on preliminary
estimates and will be revised as asset valuations are finalized and further
information is obtained on the fair value of liabilities.
The acquisition was financed with approximately $115 million of cash and
approximately $680 million of commercial paper, $400 million of which was
subsequently replaced with long-term debt.
The unaudited pro forma condensed combined statement of operations is based on
available information and the assumptions and adjustments described in the
accompanying notes. The unaudited pro forma combined condensed financial
information is presented for illustrative purposes only and does not purport to
represent what the results of operations and financial condition would have been
had the acquisition actually occurred as of the date indicated, nor does it
project the results of operations for any future period or the financial
condition at any future date. The unaudited pro forma statement of operations is
based upon assumptions and adjustments that management believes are reasonable
and is qualified in its entirety and should be read in conjunction with the
historical financial statements and accompanying notes of the Company included
in the annual report on Form 10-K for the year ended April 30, 2006, and the
quarterly report on Form 10-Q for the nine months ended January 31, 2007, which
have been previously filed with the Securities and Exchange Commission, and the
historical financial statements included elsewhere in this filing.
Brown-Forman Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Nine Months Ended January 31, 2007
(U.S. dollars in millions, except per share amounts)
Historical
Historical Grupo Industrial Pro Forma Pro Forma
Brown-Forman Herradura(a) Adjustments Combined
Net sales $2,115.4 $138.6(b) -- $2,254.0
Excise taxes 446.1 -- -- 446.1
Cost of sales 550.4 86.8 -- (c) 637.2
-------- ------ ------ --------
Gross profit 1,118.9 51.8 -- 1,170.7
Advertising expenses 267.2 10.8 -- 278.0
Selling, general, and administrative expenses 378.1 33.2 (0.1)(d) 413.3
2.0 (e)
0.1 (f)
Other expense (income), net (20.1) -- -- (20.1)
-------- ------ ------ --------
Operating income 493.7 7.8 (2.0) 499.5
Interest income 14.2 0.9 -- 15.1
Interest expense 19.6 9.6 (9.6)(g) 47.5
27.8 (h)
0.1 (i)
-------- ------ ------ --------
Income (loss) from continuing
operations before income taxes 488.3 (0.9) (20.3) 467.1
Income tax expense 157.4 2.4 (8.7)(j) 151.1
-------- ------ ------ --------
Net income (loss) from continuing operations $ 330.9 $ (3.3) $(11.6) $ 316.0
======== ====== ====== ========
Earnings per share from continuing operations:
Basic $2.69 $2.57
Diluted $2.66 $2.54
Shares (in thousands) used in the
calculation of earnings (loss) per share
Basic 122,810 122,810
Diluted 124,189 124,189
Brown-Forman Corporation and Subsidiaries
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended April 30, 2006
(U.S. dollars in millions, except per share amounts)
Historical
Historical Grupo Industrial Pro Forma Pro Forma
Brown-Forman Herradura Adjustments Combined
Net sales $2,444.3 $197.3(b) -- $2,641.6
Excise taxes 468.4 -- -- 468.4
Cost of sales 654.9 118.5 -- (c) 773.4
-------- ------ ------ --------
Gross profit 1,321.0 78.8 -- 1,399.8
Advertising expenses 325.6 21.1 -- 346.7
Selling, general, and administrative expenses 480.0 38.4 (0.2)(d) 521.0
2.7 (e)
0.1 (f)
Other expense (income), net (47.2) -- -- (47.2)
-------- ------ ------ --------
Operating income 562.6 19.3 (2.6) 579.3
Interest income 14.6 1.1 -- 15.7
Interest expense 18.0 13.7 (13.7)(g) 55.2
37.0 (h)
0.2 (i)
-------- ------ ------ --------
Income from continuing
operations before income taxes 559.2 6.7 (26.1) 539.8
Income tax expense 164.0 3.7 (11.3)(j) 156.4
-------- ------ ------ --------
Net income from continuing operations $ 395.2 $ 3.0 $(14.8) $ 383.4
======== ====== ====== ========
Earnings per share from continuing operations:
Basic $3.24 $3.14
Diluted $3.20 $3.11
Shares (in thousands) used in the
calculation of earnings per share
Basic 122,094 122,094
Diluted 123,439 123,439
Brown-Forman Corporation and Subsidiaries
Notes to Unaudited Pro Forma Combined Condensed Statements of Operations
(U.S. dollars in millions)
(a) Represents the historical results of Grupo Industrial Herradura for the
period from May 1, 2006 until the acquisition date of January 18, 2007, after
which date the historical results of Grupo Industrial Herradura are included in
the historical results of Brown-Forman Corporation.
(b) The historical net sales of Grupo Industrial Herradura are presented net of
excise taxes.
(c) No adjustment for incremental cost of sales related to the $4.9 million
step-up of work-in-process and finished goods inventory in accordance with the
purchase method of accounting has been included due to the expected
non-recurring nature of that expense, which is expected to be recognized in the
Company's actual results of operations during the twelve months following the
acquisition date.
(d) Adjustment represents the historical depreciation expense related to
property, plant and equipment of Grupo Industrial Herradura that was not
included in the acquisition.
(e) Adjustment represents the incremental depreciation expense related to the
$21.0 million step-up of depreciable property, plant and equipment in accordance
with the purchase method of accounting. The incremental depreciation expense is
based on the 8-year average estimated useful lives of the stepped-up property,
plant and equipment.
(f) Adjustment represents the incremental amortization expense related to the
$5.3 million step-up of finite-lived intangible assets in accordance with the
purchase method of accounting. The incremental amortization expense is based on
the 37-year estimated life of the stepped-up intangible assets.
(g) Adjustment represents the historical interest expense related to debt of
Grupo Industrial Herradura that was not included in the acquisition.
(h) Adjustment represents the interest expense incurred to finance the
acquisition based on assumed interest rates of 5.35% for $280 million of
variable-rate commercial paper, 5.60% for $150 million of variable-rate 3-year
bonds, and 5.45% for $250 million of fixed-rate 5-year bonds. An increase
(decrease) in interest rates of one-eighth of one percent for the variable-rate
cash investments and debt instruments would result in a $0.5 million increase
(decrease) in the annual pro forma interest expense.
(i) Adjustment represents the interest expense resulting from the amortization
of $0.8 million in estimated deferred debt issuance costs related to the $400
million in bonds ($150 million of 3-year bonds and $250 million of 5-year bonds)
issued on April 2, 2007 in connection with the financing of the acquisition. The
deferred costs are amortized over the lives of the related bonds.
(j) Adjustment represents the estimated income tax impact of the unaudited pro
forma adjustments.