FINANCIAL MANAGEMENT (10 to 15 Pages) Due date Tuesday (05/05/2015) at 06:30 NO PLAGRISM. Included Calculation

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This case was prepared by Professor Robert F. Bruner. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 1983 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 4/02.

Brown-Forman Distillers Corporation

In early July 1978, W. L. Lyons Brown, Jr., president and chief executive officer of Brown-Forman Distillers Corporation, faced an important acquisition decision. The principal owners of Southern Comfort Corporation had approached Brown in May with an offer to sell the company at a price of $94.6 million. In preparing his response, Brown was evaluating the reasonableness of the asking price and the likely effects of the acquisition on Brown-Forman’s share price. As a leading producer, marketer, and importer of wines and distilled spirits (including the well-known Jack Daniel’s brand), Brown-Forman ($457 million net sales) was the fifth-largest distiller in the United States, after National Distillers ($586 million), Seagram ($2,018 million), Heublein ($839 million), and Hiram Walker ($875 million).1 How Brown had chosen to position Brown-Forman among its competitors would affect the appraisal of Southern Comfort. Brown-Forman: Financial Goals and Performance In 1977, Brown-Forman’s management adopted new long-range financial goals regarding (1) hurdle rates for investment, (2) size of the capital budget through 1980, (3) target capital structure, and (4) dividend payout. The primary objective of these goals was to “increase the value of the stockholders’ investment.”2 The dividend payout ratio (all dividends paid divided by net income) was targeted at a range of 30 percent to 35 percent. Planned investment during the 1978–80 period included $86 million for advertising and promotion, $39 million in barreled whiskey inventory, and $19 million in new plant and equipment. Regarding capital structure, the ratio of total debt to total

1Net sales figures for all firms were from wine and distilled-spirits business lines only. 21978 Annual Report, 3.

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tangible capital,3 26.6 percent at the end of 1977, was viewed as offering “considerable flexibility in financing investment opportunities with either debt or equity.”4 Finally, the target hurdle rate, calculated as the return on total capital employed,5 was set at 14 percent for new capital projects in the distilling industry and 12 percent for investments in projects already in place. The 1977 Annual Report declared:

While we are pleased with our 1977 results, in order to improve our return on total capital employed, we will be selective in pursuing new capital projects and will concentrate our efforts on improving the profitability of our present business. Management will actively pursue investments in new capital projects that have an anticipated return of at least 14 percent after taxes on the capital employed. At the same time, we will continue our efforts to expand the most profitable operations of the company. With respect to other areas of our business, your management is taking steps through price increases and closer attention to asset management to improve profitability. If the returns of these operations do not attain a higher level, management will consider channeling the capital supporting them into more-profitable projects, products, and acquisitions.

Exhibit 1 compares the financial performance of Brown-Forman with its largest competitors. The company had a relatively larger profit margin, higher growth rates, and stronger balance sheet than its major competitors. The 1978 Annual Report noted:

The Company’s balance sheet is strong due to continued close attention to asset management. Our low debt/equity ratio and the excellent financial performance in recent years place the Company in a favorable position to assume higher levels of debt to finance acquisitions and other investment opportunities.

Value Line identified Brown-Forman as the “premier liquor company in the United States” and noted that the firm’s major brands continued to grow despite a flat industry growth trend.6 The company was expected to earn $2.45 per share in 1978 and to add another 15 percent to earnings per share in 1979. Brown-Forman’s income statement and balance sheet for the year ended April 30, 1978, are given in Exhibits 2 and 3. In 1978, two classes of stock existed for the company: Class A

3“Total tangible capital” was defined as the sum of all interest-bearing debt, deferred income taxes, preferred equity, and common equity less intangible assets.

41977 Annual Report, 15. 5“Return” was defined as the sum of net income (excluding extraordinary items), the after-tax cost of interest,

the increase in deferred income taxes, and the amortization of intangible assets during the year. “Average total capital employed” was defined as the sum of all interest-bearing debt, deferred income taxes, and preferred and common equity averaged at year-end.

6This and following quotes are from Value Line (April 14, 1978): 350.

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stock had the exclusive voting right and was listed on the American Stock Exchange, while Class B common had no voting rights but was also listed. The Brown family held 74 percent of the Class A stock and 40 percent of the Class B, and also provided some of the senior officers and directors of the company some of the Class A stock. Brown-Forman: Product-Market Strategy and Performance “The production of distilled spirits is a relatively straightforward task. It is marketing skill that is critically important to the survival and growth of firms in this industry,” said William Street, senior vice-president. Brown succinctly stated Brown-Forman’s product-market strategy in a presentation to the New York Society of Security Analysts on June 29, 1978:

The company’s marketing philosophy is to produce and sell high-quality products which retail at prices generally at the upper end of the price scale within whatever category the product is sold. The company is a strong believer in heavy advertising support in order to build brands that have long life cycles with generally higher margins than are found on brands whose consumer appeal is based on price and shorter life cycles.

Brown-Forman’s product line included many well-known brands, which were categorized into three groups (see Exhibit 4). Outside observers suggested that Brown-Forman’s special competence was in building brand franchises. For example, the company purchased the Canadian Mist Brand from Barton Brands, Inc., in 1971, “Because we had no significant brand in the Canadian Whiskey market and perceived significant growth in that market,” said Brown. By 1978, it was Brown-Forman’s largest brand and grew 11.5 percent during 1977 versus 3.1 percent for all Canadian whiskeys. A second example would be the company’s investment in the Bolla and Cella brands of Italian wines. The preeminent example of the firm’s ability to build premium brand franchises was, however, Jack Daniel’s Tennessee whiskey. Brown said,

Jack Daniel’s’ compounded annual growth rate over the last five years has been between 10 and 15 percent and yet we know from tests in certain markets where we’ve allowed free supply both this year and last, that the growth has jumped to between 25 percent to 40 percent. I believe we can state without equivocation that Jack Daniel’s has the strongest and most loyal consumer franchise of any product in the industry.

What are the reasons for this phenomenal success? Number one, it has been our long-term marketing philosophy that top quality deserves the highest price, and over many years, Jack Daniel’s has been the highest priced American whiskey of any significant volume on the market. The brand is probably the only one that by

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policy has never granted quantity discounts of any kind. The fact that there has been a supply shortage from time to time has added to the mystique surrounding the label and no doubt has been a factor contributing to long-term sales growth. . . Jack Daniel’s is a unique product. . . . Our advertising over the years has emphasized the character of the distillery and the whiskey it produces. . . . Finally, the most exciting thing for us for the long term is that the big increase in demand, which is on the top of the normal 10-15 percent compounded annual growth, is coming primarily from the youth market . . . the corporation sees a very healthy, long life cycle ahead for this brand.

A new marketing thrust on the Jack Daniel’s brand had been to increase penetration of foreign markets. This campaign would require an expanded marketing organization overseas. Whereas skillful branding and product positioning could improve the sales performance of a particular product or product group, another factor, product-line mix, would also affect the sales growth of the company in the long run. Exhibit 5 suggests how demand for distilled spirits had changed during the previous ten years. Regarding the near future, Value Line expected sluggish industry growth overall, although “mystique” brands such as Jack Daniel’s would continue to grow:

The spirits companies are beset with a number of problems. While the shift to non-whiskeys is firmly entrenched, the white goods (vodka, gin, rum, and tequila) aren’t as profitable. . . . Since the overall liquor market hasn’t gotten significantly larger, sales penetration by any one product type has come at the expense of another category.

. . . Retail liquor prices have advanced about 15 percent over the last decade while the consumer price index rose 75 percent. Plainly, the industry has been reluctant to raise prices and has preferred to absorb cost increases because of the sluggish volume.

Southern Comfort The object of Brown-Forman’s acquisition interest was Southern Comfort Corporation (Consolidated) and Caligrapo, Inc., producers of Southern Comfort, a unique liqueur. By industry definition, a liqueur is a distilled spirit that contains more than 2½ percent sugar by volume. Generally, a liqueur is produced by adding a syrup or concentrate to an alcohol base. The concentrate gives the liqueur its distinctive flavor. Southern Comfort’s concentrate was mixed by a secret formula owned by Caligrapo, Inc. Caligrapo sold the concentrate to Southern Comfort, which purchased alcohol and mixed, bottled, and marketed the liqueur. Southern Comfort employed 22 salesmen; its sales in 1977 were about $64 million (see Exhibits 6 and 7).

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Southern Comfort was owned by the estate of Francis E. Fowler, Jr., while Caligrapo was owned directly by his heirs, principally his sons, Francis G. Fowler, III, and Philip F. Fowler. Francis E. Fowler, Jr., had owned Southern Comfort for many years until his death in 1975.7 His sons managed the St. Louis company largely from California, where they and their father had chosen to live in recent years. Despite absentee management, the company was regarded as well run and efficient. Plant visits by Brown-Forman employees revealed modern equipment. Southern Comfort had enjoyed above-average growth in shipments (see Exhibit 8), which was consistent with the general rise in the consumption of liqueurs shown in Exhibit 5 but surprising in light of market surveys that over half of Southern Comfort’s consumers viewed it as a whiskey. Thus, compared with the slow growth of whiskey as a class, Southern Comfort’s performance was arresting. It was attributed in part to rock-and-roll singer Janis Joplin, who preferred Southern Comfort. Strengthened channels of foreign distribution also accounted for growth in export sales. Among marketing professionals, it was considered a very strong brand. Southern Comfort had never been sold at a discount by its manufacturer. Its performance notwithstanding, Brown believed that the brand had not been aggressively marketed. Through an intermediary, the Fowler brothers had approached Brown-Forman to solicit their interest in buying Southern Comfort Corporation and Caligrapo, Inc, for $94.6 million. Subsequently, Brown-Forman learned that, in recent years, two other major distillers had entertained the possible acquisition of Southern Comfort and had rejected it at that price. At the time of approaching Brown-Forman, the Fowlers were discussing acquisition with no other potential buyers. They seemed sincerely interested in selling to Brown-Forman, primarily because of a perceived fit of Southern Comfort with the Brown-Forman product line. Also, Brown-Forman resembled Southern Comfort in broad outline: a family-run business with a Southern heritage and a record of superior performance. The Fowlers indicated a willingness to accept cash for the two companies. Through an intermediary, they also suggested two other features of the acquisition. First, Southern Comfort Corporation owned some real property unrelated to the operations of the company. The Fowlers offered to repurchase that property at book value, about $5.9 million, after the acquisition. Second, they proposed that the acquisition be consummated after January 1979, when they expected Congress to lower the tax rate on capital gains. Brown contemplated financing $20 million of the purchase price with cash and financing the balance with bank debt. He estimated that up to $70 million could be borrowed at a nominal rate of 8 3/4 percent repayable over 7 years semiannually starting the following year. The company would be required to maintain an average compensating balancing of 7 percent on the amount borrowed.

7Following the death of Francis E. Fowler, Jr., an independent appraisal in 1977 deemed the fair market value of

the common stock of Southern Comfort to be $120 per share for estate- and inheritance-tax purposes.

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Because the proposed transaction would be taxable to the Fowlers, Brown-Forman could write up the value of the assets to the purchase price paid. Brown-Forman’s finance department estimated that the purchase price could be allocated as follows: $55.0 million Intangible assets (amortized over 40 years) 12.2 Property, plant and equipment (depreciated over 20 years) 27.4 Current assets $94.6 million Asking price Fundamentally, however, the attractiveness of the acquisition would rely on the strength of the cash flow from operations. A small team of executives developed a series of revenue, cost, and volume assumptions, which are summarized in Exhibit 9. The recent price history of Brown-Forman’s common stock is given in Exhibit 10.

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Exhibit 1

BROWN-FORMAN DISTILLERS CORPORATION

Comparative Financial Data, 1978 American Brown- National Publicker Hiram Distilling Forman Heublein Distillers Industries Seagram Walker Beta 1.41 1.10 1.71 .79 1.63 1.04 .65 Marginal tax rate .30 .50 .49 .47 .40 .46 .50 Debt/Equity 1.14 .247 .55 .34 .84 .53 .20 Debt - Cash Total capital .50 .11 .28 .16 .44 .32 .12 Assets/Equity 2.46 1.37 2.16 1.65 2.04 1.76 1.43 Sales/Assets 1.66 1.46 1.80 1.35 1.49 1.22 1.04 Profit/Sales .012 .073 .035 .052 .005 .038 .069 Price/Earnings 9.4 8.2 9.6 6.5 NMF 8.8 7.7 Dividend Yield at 4/14/78 NIL .043 .056 .08 NIL .042 .062 Self-sustaining growth rate .049 .102 .053 .079 .015 .041 .054 1978 expected sales growth .02 .09 .06 .08 .04 .07 .06 Market value Book value .46 1.26 1.53 .79 .63 .75 .77 Notes: (1) The long-term geometric mean risk premium (calculated as the difference between the return on the market

portfolio and the long-term return on government bonds) was 5.7 percent. The arithmetic mean risk premium was 8.7 percent.

(2) The yield to maturity of 10-year U.S. Treasury bonds (a proxy for the ex ante risk-free rate) was 8 percent.

The yield on 90-day U.S. Treasury bills was 7.08 percent. Source of market premium: R. G. Ibbotson and R. A. Sinquefield, Stocks, Bonds, Bills, and Inflation: The Past (1926-1978) and the Future (1978-2000) (Charlottesville, Va.: Financial Analysts Research Foundation, 1977), Exhibit 28. Source of financial ratios: Value Line (April 14, 1978). Source of betas: “Security Risk Evaluation,” Merrill Lynch Pierce Fenner & Smith, Inc., April 1978.

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Exhibit 2

BROWN-FORMAN DISTILLERS CORPORATION

Consolidated Statements of Income (in thousands except per-share amounts)

Years Ended April 30, 1977 1978 Net sales $396,176 $457,071 Cost of sales 274,733 310,539 Gross profit 121,443 146,532 Selling, advertising, administrative, and general expenses 69,714 76,395 Other income (expense): Write-off of intangible asset - (2,300) Miscellaneous, net 1,760 1,314 Earnings before interest and taxes 53,489 69,151 Interest expense 6,249 5,804 Income before taxes 47,240 63,347 Taxes on income 23,500 32,100 Net income $ 23,740 $ 31,247 Earnings per common share $ 1.85 $ 2.45 Source: 1978 Annual Report.

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Exhibit 3

BROWN-FORMAN DISTILLERS CORPORATION

Consolidated Balance Sheets (in thousands of dollars)

April 30

1977 1978 Assets Cash $ 9,354 $ 8,875 Short-term money market investments 36,171 20,797 Accounts receivable, trade 40,446 59,759 Inventories 148,794 167,142 Other current assets 1,380 1,030 Total current assets 236,145 257,603 Investments in associated companies 6,494 6,554 Property, plant, and equipment, at cost: 74,229 81,010 Less accumulated depreciation 38,384 41,709 Net property, plant, and equipment 35,845 39,301 Other assets 4,716 6,360 Goodwill, franchises, brands, and trademarks 21,671 18,787 Total Assets $304,871 $328,605 Liabilities and Stockholders' Equity Current portion of long-term debt $ 5,000 $ 5,000 Accounts payable and accrued expenses 32,213 39,361 Accrued taxes 6,659 11,475 Deferred income taxes 2,759 1,650 Total current liabilities 46,631 57,486 9.3% serial notes, less current portion, $5,000 due each September 1, 1979-1988 60,000 50,000 Deferred income taxes 1,226 2,894 Total liabilities 107,857 110,380 Stockholders' Equity Capital stock: Preferred 40¢ cumulative, 1,177,948 shares authorized and outstanding 11,779 11,779 Class A common stock, voting, issued shares, 4,020,634 1,206 1,206 Class B common stock, non-voting, issued shares, 8,888,105 2,667 2,667 Capital surplus 91,146 91,146 Retained earnings 94,138 115,349 Less common treasury stock, at cost (Class A, 61,742 shares; Class B, 261,377 shares) (3,922) (3,922) Total stockholders' equity 197,014 218,225 Total liabilities and stockholders' equity $304,871 $328,605 Source: 1978 Annual Report.

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Exhibit 4

BROWN-FORMAN DISTILLERS CORPORATION

Product-Line Information 1977 Industry Share % Sales Sales of Market American Spirits (53% Brown Forman sales) Growth 1977 Growth NA Jack Daniel’s Tennessee Whiskey NA NA 3% Old Forester Bottled in Bond Bourbon Whiskey +4.4% 2.9% NA Old Forester Kentucky Straight Bourbon Whiskey NA 2.9% 7.2% Early Times Kentucky Straight Bourbon Whiskey 2.0% 2.9% Imported Spirits (24% B-F sales) 10.5% Canadian Mist Canadian Whiskey +11.5% +3.1% NA Ambassador Scotch Whiskeys NA +0.2% NA Usher’s Green Stripe Scotch Whiskey NA +0.2% NA Pepe Lopez Tequila NA NA NA Old Bushmill’s Irish Whiskey NA NA NA Martell Cognacs NA NA Wines & Specialties (23% B-F sales) 4.6% Bolla Italian Wines +32.5% +37% 3.3% Cella Italian Wines +77% +37% NA Cruse French Wines NA NA NA Veuve Clicquot French Champagnes NA NA NA Noilly Prat Vermouths NA NA NA Anheuser German Wines NA NA 3.2% Korbel California Champagnes 11% NA 6.1% Korbel California Brandy NA +15.2%1 NA Bols Liqueurs and Brandies NA +9.0% 15-year percentage increase, 1971–76. Sources: Company estimates and Liquor Handbook (New York: Gavin-Johnson Associates, 1982), 74.

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Exhibit 5

BROWN-FORMAN DISTILLERS CORPORATION

Consumption Changes by Types of Distilled Spirits Case Shipments 1966–71 1971–76 % % Product type Change Change Total distilled spirits +22.2 + 9.8 American whiskeys −4.6 −21.9 Blends −7.3 −29.2 Straights + 0.9 −14.7 Bonds −29.1 −36.4 Other −26.2 +106.7 Scotch +54.5 + 8.2 Canadian +70.6 +31.5 Gin +18.9 + 4.3 Rum +77.1 +43.2 Brandy +41.3 +15.2 Cordials, liqueurs +44.1 +45.5 Vodka +51.6 +55.1 Prepared cocktails +30.3 +116.5 Other +328.9 +97.7 Source: Liquor Handbook, 44 and 74.

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Exhibit 6

BROWN-FORMAN DISTILLERS CORPORATION

Southern Comfort Corporation and Subsidiary Income Statement

(for the years ended December 31) 1976 1977 Net sales $ 57,308,426 $ 64,183,392 Cost of sales 40,909,265 45,814,353 Gross profit 16,399,161 18,369,039 Selling, administrative, and general expenses 9,446,120 10,193,517 Income from operations 6,953,041 8,175,522 Other income (expense): Royalties on Canadian sales 329,804 355,940 Interest (186,210) (62,283) Rental property, net (141,457) 111,329 Other, net (5,237) 2,466 (3,100) 407,452 Income before income taxes 6,949,941 8,582,974 Provision for income taxes 3,453,400 4,211,512 Net income 3,496,541 4,371,462 Earnings per common share $ 59.67 $ 79.95 Source: Annual reports.

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Exhibit 7

BROWN-FORMAN DISTILLERS CORPORATION

Southern Comfort Corporation and Subsidiary Consolidated Balance Sheets, December 31

Assets 1976 1977 Current Assets: Cash $ 750,108 $ 1,341,190 Accounts receivable 12,305,064 12,118,758 Inventories 6,554,342 7,365,841 Prepaid expenses 59,218 35,952 Total current assets 19,668,732 20,861,741 Property, at cost: 4,933,708 5,556,624 Less: Accumulated depreciation 2,105,195 2,439,268 2,828,513 3,117,356 Investment in rental property, less accumulated depreciation of $171,996 and $106,878 1,673,585 1,614,633 Total property, net 4,502,098 4,731,989 Display Silver, at cost 152,297 152,297 $ 24,323,127 $ 25,746,027 Liabilities and Stockholders' Equity Current Liabilities Notes payable to bank, unsecured $ 2,350,000 $ -- Current portion of long-term notes payable 858,461 62,067 Federal spirits and rectification taxes payable 4,933,465 7,096,549 Accounts payable and accrued expenses 1,489,093 1,076,973 Dividends payable 8,493 8,343 Income taxes 572,571 738,279 Total current liabilities 10,212,083 8,982,211 Long-Term Notes Payable, less current portion 1,297,894 35,827 Deferred Compensation Payable, less current portion 51,200 -- Stockholders’ Equity: Preferred stock, no par redeemable at $10, $.50 cumulative outstanding 33,374 and 33,974 shares 169,870 166,870 Common stock, $1 par, authorized 170,000 shares, issued 120,000 shares 120,000 120,000 Retained earnings 19,011,274 23,363,049 19,301,144 23,649,919 Less: treasury stock, at cost, 66,214 and 65,437 common shares 6,539,194 6,921,930 12,761,950 16,727,989 $ 24,323,127 $ 25,746,027 Source: Annual reports.

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Exhibit 8

BROWN-FORMAN DISTILLERS CORPORATION

Historical Data: Case Shipments of Southern Comfort Corporation

U.S. Calendar Years Domestic Export Canada Total 1958 109,347 2,380 5,635 117,362 1959 123,928 2,528 6,000 132,456 1960 145,667 2,621 6,707 154,995 1961 149,998 2,778 7,166 159,942 1962 168,063 3,409 7,505 178,977 1963 182,220 4,746 8,225 195,191 1964 210,331 5,569 9,600 225,500 1965 269,687 9,662 12,540 291,889 1966 332,719 8,937 15,518 357,174 1967 381,457 12,253 18,408 412,118 1968 443,993 16,024 19,484 479,501 1969 524,171 15,945 23,334 563,450 1970 541,832 20,784 26,923 589,539 1971 617,201 39,031 36,129 692,361 1972 684,115 61,184 48,478 793,777 1973 716,798 190,678 61,828 969,304 1974 829,341 232,795 70,407 1,132,543 1975 850,778 189,123 85,141 1,125,042 1976 904,993 291,185 95,070 1,291,248 1977 1,047,896 303,916 111,566 1,463,378 20-year compound growth 11.9% 27.44% 16% 13.45% 5-year compound growth 8.8% 37.8% 18.2% 13% Source: Southern Comfort Corporation records.

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Exhibit 9 BROWN-FORMAN DISTILLERS CORPORATION

Assumptions Used in Southern Comfort Cash-Flow Forecast (in dollars except for case volumes [in units] and expenses [in $000])

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Profit per case U.S. domestic Revenue $49.62 $50.62 $51.42 $52.42 $52.92 $53.92 $54.92 $55.92 $56.92 $57.92 $58.92 Cost of goods 33.52 34.10 34.75 35.41 36.14 36.93 37.78 38.70 39.70 40.77 41.93 Advertising 4.07 4.01 3.80 3.68 3.83 3.89 3.92 3.97 3.33 3.18 3.37 Selling Regular .55 .58 .59 .60 .61 .62 .63 .63 .65 .67 .70 Transition .71 .34 .15 Export Revenue 19.21 20.32 21.50 22.55 23.21 23.80 25.16 26.15 27.15 28.15 29.15 Cost of goods 7.08 and increases at 8% annually thereafter. Advertising 1.44 1.38 1.37 1.37 1.37 1.36 1.37 1.37 1.37 1.37 1.37 Brokerage 2.75 2.76 2.75 2.85 2.72 2.69 2.68 2.67 2.67 2.67 2.67 Selling exp. .05 .05 .05 .06 .06 .06 .06 .06 .07 .07 .08 Canada Royalty 3.48 3.48 3.48 3.48 3.48 3.48 4.00 4.00 4.00 4.00 4.00 Concentrate profit 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55 1.55 Case volumes (in thousands) U.S. 1,140 1,225 1,315 1,410 1,510 1,615 1,725 1,835 1,923 1,984 2,015 Export 325 350 380 405 425 445 463 480 490 500 500 Canada 115 125 138 150 160 170 180 190 200 210 220 Corporate level1 G&A Expense 1,665 1,800 1,944 2,100 2,268 2,449 2645 2,857 3,086 3,332 3,599 Transition 430 380 180 Settlements 400 400 400 400 Interest expense2 113 122 132 142 154 166 179 194 209 226 244 1For forecasting purposes, investment to maintain plant and equipment could be expected to be offset by depreciation expense, but there would be some additional investment in working capital as sales grew. 2On seasonal borrowings for working-capital financing. Analysts at Brown-Forman viewed this item as virtually an operating expense and considered including it in their forecast of free cash flows. Source: Brown-Forman Distillers Corporation estimates.

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Exhibit 10

BROWN-FORMAN DISTILLERS CORPORATION

Stock-Price Data Brown Forman Class A Class B S&P 500 Index 1/3/78 19.875 20.000 93.82 2/1/78 19.750 19.375 89.93 3/1/78 20.500 20.500 87.19 4/3/78 21.875 21.250 88.46 5/1/78 23.500 23.750 97.67 6/1/78 24.750 24.875 97.35 6/2/78 24.875 25.000 98.14 6/9/78 25.625 26.375 99.93 6/16/78 26.375 27.000 97.42 6/23/78 26.000 26.500 95.85 6/30/78 25.625 24.875 95.53 Source: ISL Daily Stock Price Record, Standard & Poor’s Corporation.