do not copy all rights reserved

Transcription

The CASE Journal
Volume 3, Issue 1 (Fall 2006)
11
The CASE Journal
Table of Contents
Click on the article or case title to go to that page
Dedication
Editorial Board and Policy
Letter from the Editor
Article and Case Abstracts
Invited Article
“Professor Moore and the Demons of Review”
Gina Vega, Salem State College, Barry Armandi, SUNY- Old Westbury, and
Thomas Leach, University of New England
Cases
“Declining Decorum at Darius D’Amore’s Shop at the Forum”
Fran Piezzo, Long Island University, Barry Armandi, SUNY – Old Westbury, and
Herbert Sherman, Long Island University – Brooklyn
“The ‘Yellow Snow’ Dilemma: A Capital Budgeting Case”
Brian A. Maris and Larry Watkins, Northern Arizona University – Flagstaff
“Enterprise Risk Management at Great Plains Energy”
Karyl B. Leggio & Marilyn L. Taylor, University of Missouri at Kansas City and
Jana Utter, Midwest ISO
“Beringer Wine Estates Holdings, Inc.”
Armand Gilinsky, Jr., Sonoma State University, and Raymond H. Lopez, James S. Gould,
& Robert R. Cangemi, Pace University
“Reborn Kyoto NPO (houjin)
Cynthia Ingols and Erika Ishihara (Research Assistant), Simmons School of Management
Membership Form
2
The CASE Journal
This volume of The CASE Journal
is dedicated to
Barry Armandi
(died September 7, 2006)
Fellow of The CASE Association
Associate Editor of The CASE Journal
Colleague
Friend
If the measure of a man or a woman is the size of his or her heart and the people he or she
touches, then it would take light years to measure the impact that Barry has made on his
students, his colleagues, and his profession. First and foremost, Barry was a master
teacher. He possessed a solid knowledge base and wonderful platform skills yet his most
keen attribute was his ability to facilitate discussions. He knew when to ask probing,
tough questions; knew when to let students flounder for a while with a case or exercise;
and, most importantly, knew how to get every one of his students involved in his courses.
Whether it was that twinkle in his eye, that wry smile, or that warm handshake or or
embrace, Barry made everyone feel welcome in his classes by providing a learning,
nurturing environment.
Secondly, Barry was a great colleague and mentor. Like myself, many of my colleagues
turned to Barry for sage advice and counsel. If there was a dispute or a tough decision to
be made, Barry would always provide the most humane, win-win approach to handling
any problem - he was the consummate politician. In any managerial situation that Barry
found himself in, he truly believed in the professionalism and expertise of the people he
worked with and therefore allowed them to seek their own paths, their own solutions. He
not only nurtured his students but his colleagues as well and those who have been blessed
enough to work with Barry can attest to the fact that he was a sheer pleasure to work
with.
Last, but certainly not least, Barry had a great passion for the case method - whether it
was case instruction, case writing, or case mentoring. As someone who has had the
privilege and honor to teach, write, and conduct seminars with Barry (and learn from the
master of the catchy case title and case hook), I can only wish that we could have cloned
him - he truly was a role model of the well-balanced academic and left a legacy for the
rest of us to continue. Barry will truly be missed and can never be replaced but a part of
him is with each and every one of us.
Sincerely,
Herbert Sherman (His "teaching note" side kick.)
3
The CASE Journal
EDITORIAL POLICY
The audience for this journal includes both practitioners and academics and thus
encourages submissions from a broad range of individuals.
SCHOLARLY WORKS: Cases with teaching notes; conceptual papers and papers
reporting original research as well as the applied implications of others' research in terms
of case teaching, research, and instruction; and creative learning, research and writing
methods are encouraged. We request that submitters of empirical research provide
appropriate data set analyses to allow for meta-studies (i.e. correlations matrices and chialpha’s). Because of the broad appeal of the journal to practitioners and academics, The
CASE Journal will not refuse to review a case or an article solely on the basis of format.
However, if a case or paper is accepted, the final version for publication will be expected
to adhere to the publication and manuscript guidelines. Cases and papers may be
returned due to issues relating to writing style and grammar.
The CASE Journal encourages authors to submit often to the Journal. However, authors
who are published in one publication year cannot be published a second time in that
publication year. Rather, additionally accepted papers will appear in subsequent
publication years. This policy does not apply to authors who submit papers for review
with different second authors from what appears on the first accepted paper in any given
publication year.
CASES: Those wishing to submit a case for potential publication should submit the entire
case along with the completed teaching notes for review. If accepted for publication,
only the case will be published along with a note for interested readers to contact the case
author for the teaching notes. All review and publishing rules which apply to scholarly
articles also apply for cases. Also, upon acceptance for publication, The CASE Journal
requires that the author(s) submit a signed letter of liability release prior to publication.
Authors are responsible for distributing the teaching notes as requested and their e-mail
addresses will be provided for such purpose.
INITIAL SUBMISSION: The CASE Journal blind reviews submissions and all
manuscripts submitted are to be original, unpublished and not under consideration by any
other publishing source. To ensure the blind review, there should be no authoridentifying information in the text or references. An abstract of 150 words or less should
accompany the paper. This journal will only accept on-line submissions. Send one (1)
copy to the editor by e-mail in MS-Word and/or IBM text format. A separate title page
must accompany the paper and include the title of the paper and all pertinent author
information (i.e. name, affiliation, address, telephone number, FAX number, and E-mail
address). If any portion of the manuscript has been presented in other forms
(conferences, workshops, speeches, etc.), it should be so noted on the title page.
COPYRIGHT: Authors submitting articles and cases for potential publication in The
CASE Journal warrant that the work is not an infringement on any existing copyright and
will indemnify the publisher against any breach of such warranty. Upon acceptance for
4
The CASE Journal
publication, authors must convey copyright ownership to The CASE Journal by
submitting a transferal letter signed and dated by all authors which contains the following
language: "in consideration of The CASE Journal acting to review, edit, and publish <title
of submission>, the author(s) undersigned hereby transfer(s), assign(s), or otherwise
convey(s) all copyright ownership to The CASE Journal."
Circulation Data:
Reader:
Frequency of Issue:
Copies per Issue:
Subscription Price:
Publishing Fee:
Sponsorship:
Academic and Practitioner
2-3 times per year (September, January and April
based upon available accepted manuscripts)
n/a Internet publication
Free with membership in The CASE Association
None. However, at least one of the publishing
authors must be a member of the CASE Association
($25 membership fee)
Professional Association
5
The CASE Journal
LETTER FROM THE EDITOR
Margaret Naumes
As the new and second editor, I am delighted to be introducing the first edition of
Volume 3 of The CASE Journal. Under the able leadership of Dr. Herb Sherman, the
journal went from conception to reality. He oversaw publication of the first two volumes,
four issues, with a total of four articles and seventeen cases, as well as a section on
pedagogical innovations. The strong review process and the quality of these published
cases set high standards for me to follow. Herb has been a source of inspiration and
support for me as I “learned the ropes.” I owe him a big bouquet of thanks.
Thanks are also due to Associate Editor Dr. Alan Eisner (Pace University) and CASE
Association President Dr. Gina Vega (Salem State College). Through their hard work,
our journal has established an on-going relationship with Primis and ecch, through which
the cases and articles are available for adoption for your courses. All royalties earned by
the cases will be shared by The CASE Association and the case authors.
Dr. Alan Eisner is also the production expert behind the journal. He not only creates the
final look of the cases and articles, but his expertise is also what gets us on-line and
available to our members.
We regret to inform you of the death of the journal’s other Associate Editor, Dr. Barry
Armandi. Barry was a marvelous mentor to new – and more experienced – case writers,
an esteemed colleague, and a Fellow and long-time friend to CASE. This issue of The
CASE Journal is dedicated to him, with our love and respect.
This edition of The CASE Journal offers an article and six cases, in a variety of
disciplines, that we hope you will find useful and enjoyable. Since the review process
takes time, most of the cases were originally submitted to, and accepted by, the previous
editor, Herb Sherman. Our reviewers are thorough, but also developmental, striving to
help authors create a most effective case. We hope that you will be inspired to submit
your own cases and articles.
The featured article in this edition is the third in the “Professor Moore” series. This time,
our intrepid professor is learning about the reviewing process for instructional cases. We
have all had a submission get raves from one reviewer and have another who feels it
should never be published. When it happens to Professor Moore, his colleagues help him
to understand and respond, leading at last to publication.
The first case, “Declining Decorum at Darius D’Amore’s Shop at the Forum,” on the
surface involves an unhappy employee and the threat of workplace violence in a small
retail outlet. Workplace diversity and a multicultural workforce also play an important
role, as does the store’s own culture. The case offers an introduction to these topics for
students with a limited business background, and offers them the opportunity to role play
6
The CASE Journal
the situation. Students are then asked to come up with both short term and long term
recommendations.
“The ‘Yellow Snow’ Dilemma: A Capital Budgeting Case” describes the situation faced
by a ski area after several years of inadequate natural snowfall and operating losses.
Snowmaking equipment using reclaimed wastewater would help increase the number of
skiable days, but would involve U.S. Forest Service approval, taking into account also
religious and social issues of the nearby Native American tribes. The environmental
impact statement necessary to begin the approval process would cost $750,000. This is a
rich case for students in corporate finance, involving risks from external environment as
well as capital budgeting analysis.
Also a case for advanced corporate finance students, “Enterprise Risk Management at
Great Plains Energy,” like “Yellow Snow,” gives students the opportunity to undertake
financial analysis and risk assessment. However, this case asks students to understand the
issues involved in establishing a program for Enterprise Risk Management. It is not just a
question of assessing risks and developing a system to deal with those risks; as the Risk
Manager finds out, implementation requires a thorough understanding of its impact on
the organization and on the people involved.
Students typically enjoy cases about the wine industry. “Beringer Wine Estates Holding,
Inc.” challenges them to think about the business side of the industry, in particular growth
and how to finance it. They will also need to think about the challenges of an IPO and
management issues involved in being a publicly-held company in an industry where most
competitors are family businesses. The case provides them with extensive data, both
financial and industry, to use in making their recommendation.
The final case in this edition is the first case accepted under my editorship. “Reborn
Kyoto NPO (houjin)” is both international and an example of social entrepreneurship.
Mrs. Kodama began with a determination to help people in third world companies and,
using donated kimonos and a network of volunteers, developed an organization that
teaches sewing skills, financed by sales of the products in Japan and the US, donations,
and small grants. Students will have to consider Mrs. Kodama’s leadership and the needs
of the organization as they recommend ways to help her face the challenges of building
the organization and finding a successor.
I hope that you will enjoy this edition of the journal. Please feel free to e-mail your
comments, cases, articles and suggestions to me at [email protected].
7
The CASE Journal
ARTICLE AND CASE ABSTRACTS
Professor Moore and the Demons of Review
Gina Vega, Salem State College
Barry Armandi, SUNY - Old Westbury
This is the third in a series of articles about case research, writing, teaching, and
reviewing. In this article, the protagonist, Prof. Moore, receives mixed reviews on his
case submission and learns how to respond to them in a positive way. The article is
written as if it were a case; it is fictitious.
Declining Decorum at Darius D’Amore’s Shop at the Forum
Fran Piezzo, Long Island University
Barry Armandi, SUNY - Old Westbury
Herbert Sherman, Long Island University-Brooklyn
An employee’s husband made violent threats to the store manager of a Las Vegas shop
specializing in skin care, makeup, fragrance, and hair care products of an international
company. The manager wanted the employee terminated. The employee confessed that
her husband also threatened her. The employee’s personnel file contained no performance
problems, but the store manager admitted that she had kept a separate file with such
documentation. The Executive Director and the Director of Human Resource
Management wondered what they should do.
The "Yellow Snow" Dilemma: A Capital Budgeting Case
Brian A. Maris, Northern Arizona University - Flagstaff
Larry Watkins, Northern Arizona University - Flagstaff
Arizona Snowbowl, a ski area located in northern Arizona, experienced several years of
inadequate snowfall resulting in both operating losses and negative cash flows. The CEO
had to decide whether to commit $750,000 for an Environmental Impact Statement (EIS)
related to a proposed $19.77 million snowmaking project that uses reclaimed wastewater.
U.S. Forest Service approval was required. Data for this case were obtained from the EIS
that the Snowbowl submitted to the U.S. Forest Service (USFS). Estimated skier days,
revenue levels, capital costs and interest rates are provided to facilitate the decision
modeling process. Students are expected to analyze the financial information and decide
whether or not undertaking the EIS project is cost effective while taking into account the
possibility that the regulatory and legal system might not allow the project to go forward.
8
The CASE Journal
Enterprise Risk Management at Great Plains Energy
Karyl B. Leggio, University of Missouri at Kansas City
Marilyn L. Taylor, University of Missouri at Kansas City
This case looks at the design and implementation of a risk management strategy. It
reviews the early moves by Great Plains Energy (GPE) to establish a corporate-wide
Enterprise Risk Management program. The corporate Chief Risk Officer is Andrea
Bielsker. Andrea appointed Jana Utter to take charge of coordinating the design and
implementation of the ERM program. Utter faces a number of challenges. She has had
to first conceptualize the program given the charge by the Board of Directors, then design
a process by which she identifies the risks that the corporation faces, assist in designing
measures for the risks, and work with the various divisions and functional areas to put
processes in place to mitigate the identified risks.
Beringer Wine Estates Holdings, Inc.
Armand Gilinsky, Jr., Sonoma State University
Raymond H. Lopez, Pace University
James S Gould, Pace University
Robert R. Cangemi, Pace University
The Beringer Wine Estates Company has been expanding its market share in the
premium segment of the wine industry in the 1990’s. After operating as a wholly owned
subsidiary of the giant Nestlé food company for almost a quarter of a century, the firm
was sold in 1996 to new owners, in a leveraged buyout. For the next year and a half,
management and the new owners restructured the firm and expanded through internal
growth and strategic acquisitions. With a heavy debt load from the LBO, it seemed
prudent for management to consider a significant rebalancing of its capital structure. By
paying off a portion of its debt and enhancing the equity account, the firm would achieve
greater financial flexibility which could enhance its growth rate and business options.
Finally, a publicly held common stock would provide management with another
“currency” to be used for enhancing its growth rate and overall corporate valuation. With
the equity markets in turmoil, significant strategic decisions had to be made quickly.
Should the IPO be completed, with the district possibility of a less than successful after
market price performance and these implications for pursuing external growth initiatives?
A variety of alternative courses of action and their implications for the financial health of
the Beringer Company and the financial wealth of Beringer stockholders are integral
components of this case.
Reborn Kyoto NPO (houjin)
Cynthia Ingols, Simmons School of Management
Erika Ishihara (Research Assistant), Simmons School of Management
9
The CASE Journal
Masayo Kodama, President, Reborn Kyoto NPO, believed foreign-aid food saved her and
other Japanese from starvation after World War II. Kodama was determined to help
others suffering in third world countries. After distributing emergency supplies in
Cambodia, Kodama developed a new vision: teach impoverished people how to “fish”
and they would feed themselves and their children for life. She decided to teach dressmaking skills to people in third-world countries. Kodama recruited volunteers in Japan
and these women, in turn, collected and prepared silk from kimonos. Japanese volunteer
seamstresses took the silk and supplies, traveled to such places as Vietnam and Yemen,
and taught people how to create clothes suitable for sale in western markets of Japan and
the US. Although the sale of products, along with small grants and private donations,
yielded subsistent revenues for the nonprofit organization, Kodama wondered how to
build her organization and to find a replacement for herself with so few resources.
10
The CASE Journal
Professor Moore and The “Demons” of Review
Gina Vega, Salem State College
Barry Armandi, SUNY/Old Westbury
[email protected]
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Professor Gloria Gorman, Department Chair and senior faculty member, thought it was time to
check on assistant professor Bob Moore. She knew he had been feeling down since his last two
case writing fiascos, when he was unable to obtain a release for his well-developed cases (see
"Professor Moore can't get there from here," Leach, 2005, The CASE Journal II, 1). She found
him in his office, looking sadly at the two useless cases still sitting on his desk.
Gloria: Hey, Bob. How're things going? I see you're still worrying about those two cases.
Bob: Yes, I am. I put in so much effort into researching and writing them. I followed all the
suggestions that John Stern gave me for writing the case and teaching note (see "Three days in
the life of Professor Moore," Armandi, Sherman & Vega, 2004, The CASE Journal I, 1). I put in
all the effort and time it took to develop trust, I researched carefully, I checked my facts, I wrote
all the sections in the order suggested, I stopped the cases at the right time for the protagonists to
make their decisions, my titles were interesting, my teaching notes were thorough and followed
the suggested format, they were comprehensive and clear. I worked so hard on these cases and
they led to nothing.
Gloria: You know, Bob, it's disappointing to feel that you've wasted your time. But in the
department, we don't feel that your efforts have been wasted. As we tell our students, more
learning comes from failure than comes from success. I'm sure you have been able to extract
some good lessons from these case writing experiences and that you are unlikely to repeat the
same mistakes. I think it's time to move on, Bob, to other experiences. So, if you'll agree, let's
change the subject and talk about something really important to the department – hiring a new
faculty member in time for the new academic year.
A
LL
Bob: You're right, Gloria. I'll put this aside and focus on something else. Yeah – hiring. It has
been really hard to find the right person to develop and teach our business ethics course. We've
advertised in the Chronicle of Higher Education , we've interviewed at the Academy of
Management. Nothing seems to work. Everyone who applies seems to have a Ph.D. in
organizational behavior, but they all want to spend their time doing exercises. No one wants to
tackle this specialty area, or maybe no one has the background.
Gloria: Right! Remember that woman we interviewed who claimed to be an ethicist, by which
she meant that SHE behaved ethically? Or the new Ph.D. who didn't have any idea how to
describe Sarbanes-Oxley?
Bob: Or that full professor who expected to be able to teach one course a semester and spend the
rest of his time writing?
TCJ 030101
11
The CASE Journal
Gloria: Or that ABD who "only" needed two courses releases a semester until he finished his
dissertation? Which he hadn't yet started? In fact, his proposal had not yet been accepted?!
The two of them dissolved in laughter thinking about the vagaries of the hiring process.
"Maybe we could write this up as a case," Bob suggested, laughingly.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Gloria: Why not? I'd be glad to work with you on it. And, I guarantee that I'll give you a
release!
Bob moved ahead with the idea of writing the case. After spending considerable time, he was
excited to have completed a polished draft and tried it out in one of his classes.
The Case
Bob: Hey Gloria, I’ve tried out our case on hiring new faculty in my MG 310, human
resource management class. I’ve disguised names of the college and faculty, but the rest might
sound pretty familiar. Here’s a condensed version of the case and teaching note that I used to get
things going.
Hiring new management faculty at Howell College
Hiring new faculty was always a tedious process and one that Marcus, the department
chair in management at Howell, loved and hated. He found it exciting to think about
expanding the capability of the department and bringing in someone who would
potentially be an asset, with impressive credentials, teaching breadth and depth, new
scholarly interests and with an interesting personality. He hated hiring because of the
tedium of the process, college politics, union issues, lengthy interviewing, faculty
disagreements over who should be offered the position and most critically, the risk of
hiring the wrong person.
A
LL
Writing and placing an ad for a faculty vacancy was the easy part (refer to Exhibit 1 for
the ad placed in the Chronicle). Before the ad could be placed, the approval from the
dean had to be secured in the midst of other requests by department chairs and funding in
general. Upon receiving letters and resumes of candidates, they had to be read by the
hiring committee and the field narrowed to just those who would be invited to campus for
interviews. To assist in drawing consensus on hiring decisions and for narrowing the
field from the numerous applications down to those invited for interviews, Marcus used a
five-point scaling technique for the various qualification categories. After candidates
were interviewed, everyone was instructed to write their reactions to the individuals,
including their strengths and weaknesses.
Marcus recalled a person whom they hired to teach Business Ethics, under rush
circumstances, in a conversation with Mitch, whom he had convinced to cover for the bad
hire that was made the previous year. That person was incompetent and was not given a
TCJ 030101
12
The CASE Journal
second year contract. His brief tenure at the college was a nightmare in terms of his
teaching ability and being available for students. He repeatedly said that he was doing
research, but he never produced anything.
Howell College
The college was a medium sized school with an enrollment of 6,500 that offered
numerous master and bachelor degrees. It was located in a city of 40,000 and was the
business and cultural center for the broader geographic area.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The management department was an established component of the business school and
had several senior faculty, associate and full professors. As a whole these senior faculty
were comfortable in their roles, probably too comfortable, since some had become
lethargic. Sure they did some research and taught their classes and that was the
problem. They wouldn’t admit to it, but their view of their college roles could be
described as “same ole, same ole”. Marcus thought to himself that he sometimes
wondered if they had a count-down calendar to retirement. They didn’t want to teach
new classes, teach at the branch locations, serve on their share of committees or do
anything different from what they had done in the past. This sometimes caused friction
with junior faculty who complained about having all of the less desirable assignments.
The union that represented the faculty seemed to be a mixed blessing in terms of its total
impact. It did provide protection from what some might say were power plays by the
administration. It did negotiate better salaries and benefits, even though everything was
subject to funding issues at the state government level. Marcus also complained about
time-consuming union meetings, which he had to attend. The union also had strict
language that especially benefited faculty with seniority. Marcus didn’t like the overall
additional rigidity that the union’s presence added to the already highly regulated HR
environment.
A
LL
The college had a special arrangement with the city in which it was located, about the
sharing of its library. The city contributed funding to the library in return for community
access. Generally speaking the arrangement was a win-win situation, but nothing is
perfect. The library’s board, including town and gown representatives, was concerned
about people who seemed to just hang out there. These individuals were poorly dressed
and not well groomed and it appeared that they may have been homeless. The business
reference section of the library had comfortable seating and was often used by the
community visitors. Students were somewhat understanding to a certain extent, but they
often complained that it was their library, as it was located on campus and these people
were not students. The city mayor, too, was concerned, but had not done anything to
address the situation.
The college contracted a consultant, with a public policy and HR background, to assist
with various issues faced by the college, including the library arrangement with the city.
Coincidentally, Marcus had know this person some years before and hoped that he might
make some suggestions for motivating the “retired” senior members of the department.
TCJ 030101
13
The CASE Journal
Instructor’s manual: Hiring new management faculty at Howell College
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
CASE DESCRIPTION
The disguised case describes the hiring of new faculty in a management department of a
school of business at a medium sized state college. It describes the feelings of the
department chair regarding the hiring process and the situation of the department, as
well as the college’s special joint funding of the library with the community. The case is
suitable for undergraduate principles of management and human resources classes. It
could be taught in one class with students expected to review related text readings in
addition to case preparation.
SYNOPSIS
The disguised case was written based upon the real situation of a unionized state college
and the difficulties the department chair faced in hiring a person to teach the Business
Ethics class. The department chair was searching for a replacement of a person hired
under rush circumstances who was not given a second year contract because of her
incompetence. The case is set in a management department where several senior
members appear to be unmotivated to teach anything new, complain about being asked to
teach off campus at branch locations, or accept their share of committee assignments.
Further, the college had a funding arrangement with its community that allowed for the
residents to use the library.
LEARNING OBJECTIVES
The learning objectives of the case are:
LL
1. To give the students a realistic overview of the complexities of the hiring
process at a medium sized college.
2. To give students an appreciation of the risks in hiring for any organization.
3. To give students an appreciation for the need to motivate members of an
organization.
4. To give students an opportunity to make recommendations about how to conduct an
effective hiring process.
A
TEACHING SUGGESTIONS
When the instructor is introducing a section of the course that focuses upon hiring,
inform the students that a case will be assigned. When lecturing on hiring,
stress the critical nature of job analysis, job specifications, sources of candidates and
designing and conducting an effective interview. In class have students, individually or
in teams, present their recommendations. Other students or teams could then agree or
disagree with the presenters and then offer their views and support for them.
Gloria: How was it received by your students?
TCJ 030101
14
The CASE Journal
Bob: Pretty well. I mean OK. Students seemed to identify somewhat; they liked the college
setting. I thought that they’d really like it, since they’ll be in the job market soon enough.
Gloria: You don’t sound real sure of the student response.
Bob: True, but I’ve only used it in one class. Let’s see how it went in Cynthia and Richard’s
classes. They said that they’ll be using it later this week.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Gloria: I’ll try it in my principles of management class.
A week later, Bob spoke with Cynthia, Richard and Gloria and incorporated various comments
and suggestions that he thought were valuable. He then sent it off to a case journal for review.
The Reviews
After a three-month wait that seemed interminable to Bob, the reviews came in – three reviews
in tabular form (see below) and one complex editorial review inviting a revise and resubmit.
Bob read the reviews with increasing dismay. Had these reviewers all read the same paper? And
how had the editor made the revise and resubmit decision? He brought the reviews to Gloria in
the hope that she could explain them to him and tell him where to start.
Bob: Gloria, do you have a few minutes? I'm a little confused and I'd appreciate your input.
Gloria: Sure, Bob. Just give me about five minutes to finish this email and let's go for some
coffee.
In the cafeteria, coffee steaming in front of them and students churning around them, Bob
brought out the reviews. He was distraught, confused, and angry. These were his first journal
reviews and he was appalled.
LL
Bob: What do they want from me? I have no idea what they are saying. They're all saying
something different! It looks like they all read different cases. Their comments make no sense
to me. They just didn't understand what I was trying to accomplish. I worked so hard and they
just tore it apart. I feel like I'll never get a case published!
A
Gloria: Take it easy, Bob. You got a revise and resubmit; that's the first step to an acceptance.
Journals simply don't accept anything – papers, cases, anything! – on the first shot. I know it's
hard to read these criticisms, especially the first time, but let's go through them slowly and try to
decode what they mean. You just have to remember that no one means to be hurtful; the
reviewers are trying to help you improve your work. Let's start with the raw reviews and then
move on to the editor's comments.
[Insert Exhibit II Here]
Gloria: Bob, wow! What a mixed bag of reviews! What did the editor say?
TCJ 030101
15
The CASE Journal
Bob: He tended to agree overall with the two reviewers who panned it. He wanted me to change
my focus, the teaching note or IM as they call it, get some more information, etc. He wants me to
revise and resubmit. Honestly, I don’t know if I can squeeze any more data from the situation.
Besides, reviewer #1 thought the case was appropriate for human resource management. He or
she got it! They knew exactly what we were trying to do and saw the value in both the case and
teaching note, IM, whatever.
Gloria: Let's look at the editorial letter. Sometimes that can really clear things up.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Bob: OK, but I don't see how…
[Insert Exhibit III here]
Gloria: I know this is frustrating. Here’s what I want you to do. Take a nice walk and clear your
head. Next, decide exactly what you are willing to do and what you are not willing to do and
why. If you feel you can handle all the reviewers, then do it and resubmit. If not, then you need
to take another approach.
Bob: Well what do you think? Give me an honest opinion about my chances of getting this
published with this journal. Should I just give up now and forget about this case?
Gloria: You mean put it in your bottom drawer to collect dust? And forget about all the work
you've already done on it? That's what a lot of academics do. If only they would mine their
bottom drawer and put in a little more effort, they would never have to worry about where their
next publication was coming from.
Bob: Yes, I guess you are right! It basically comes down to cost versus benefit.
A
LL
Gloria: I remember once I hadn’t received any reviews from a journal for nine months. I was
quite anxious and decided to contact the editor. After about a week, he sent me a letter saying
that the reviewer was just finishing it up. Two days later I got the review, if that’s what you want
to call it. It was two short paragraphs! There were misspellings and grammatical mistakes. The
reviewer made comments indicating he hadn’t even read the case, much less the TN. Besides that
the editor marked up the original copy by scribbling two comments and circling three words. A
cover letter was attached saying “We cannot accept this since there needs to be too much
revision. Why not attend one of our workshops, which will help you to get it published.” My
coauthor, John, and I were livid. I sent the editor a blistering letter back indicating that the case
had been presented at a VIP session of the Case Association, won the best case award, and had
been thoroughly revised given the comments of two previous reviewers! I also said that the lack
of depth in the reviews and the haphazard way it was processed did not speak highly of him or
the Journal. I also copied the president of the sponsoring association.
Bob: Wow! Remind me not to ever cross you! What did you do next?
Gloria: We sent it to another journal and with some minor revisions it was accepted. As a matter
of fact, it was published in three organizational behavior textbooks.
TCJ 030101
16
The CASE Journal
“Mind if I join you?” interrupted John Stern.
Gloria: John, how are you? How is the sabbatical? I thought you were in some developing
country and weren’t going to back until September? What a nice surprise!
Bob: Great to see you John. You look great!
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
John: Thanks. I feel fine and I was in Lower Slobistan, doing some research on an interesting
company. They are trying to get jet fuel from mud…seems like they have found a way to
distill…Oh, I’m sorry! I barged in on a conversation you were having about…what was it?
Reviewers? Mind if I join in?
Gloria: But of course! Tell us some of your experiences, so Bob won’t think he is alone.
John: Well, I remember one review, where it took the editor so long to get back to us and…
Gloria: Was that the Medical Labs case that we did?
John: Yes, remember that?
Gloria: I just told Bob about that one.
John: Oh good! Here’s another. Gloria and I did a case on a local manufacturing company,
Zodiac Incorporated. May be you have heard of them?
Bob: Yes, vaguely.
A
LL
John: Well it seems that there was this sexual harassment fiasco…but that’s not important. The
reviewing process is what went wrong. We sent it out to this Tier II journal and I didn’t hear
from them for about six months. I did a follow up with the editor and he said he would follow up.
A few days latter he said the reviews were forthcoming and we should hear any day. Sure
enough, about three days latter we got the reviews. Both were positive and made some good
suggestions for a revision. Both indicated that if the revisions were made to their specifications,
the case should then be accepted. Gloria and I hurriedly went off to do the revisions. But we hit a
snag. We needed to get more information from the Company. Our contact, however, was
overseas visiting the Company’s international operation and wouldn’t be back for a month! We
did all the remaining revisions and waited patiently for his return. Unfortunately, he was detained
in one of the countries, which is another story, and couldn’t get back to the States for another
month. After we met with him and received the information, we had to write some new sections
and rewrite others. It took us nearly four months to do the revisions! We then sent it off to the
editor. About a month later I contacted the editor to find out the status of the case. He informed
me that one of the reviewers had died suddenly and the other had retired and was not interested
in doing anymore reviewing. He apologized and said he would send it out to two more reviewers.
Bob: Uh…Can he do that? I mean of course he can, but is that really professional?
TCJ 030101
17
The CASE Journal
Gloria: Editors can do anything. They have the ultimate power of what goes into their
publication.
John: Well, as you may have surmised a few months later the reviews came back. Both were on
the negative side and expected substantial revisions. They even wanted us to undo much of what
the first reviewers wanted! Talk about a mess!
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Bob: What did you do?
John: I’ll let Gloria finish the story.
Gloria: I wrote the editor and explained what had transpired. John and I asked that since the
original reviewers had liked the case and we had adhered to their specific revisions, that their
reviews should be used, rather than the latter ones. Given the extraordinary circumstances, we
asked that the editor serve as the final reviewer, using only the first reviews as a guide, and
discarding the second ones. We made a very compelling case. The editor agreed and did the final
review. He made some suggestions that were similar to some of the suggestions made in the
second set of reviews. He also indicated that if we agreed and made the revisions, then he would
accept the case. We concurred, made the revisions, and the case was published.
Bob: Gloria, it seems that you have a knack for writing those letters to the editor. I thought that
once editors said something, it was cast in stone and there was no negotiating.
Gloria: Most of the time you’re right. But when there are unusual circumstances, or
disagreements among reviewers, or if the author can make a convincing argument, the editor
may look for some compromises.
A
LL
John: Remember, the editors are the guardians of excellence for their journals. They are the
quality control experts. They have to walk a narrow tightrope between the authors and reviewers.
You don’t want to turn off future submissions, such as what happened to us in the Medical Labs
case. We swore we would never send them another case. We also told that horror story to many
of our colleagues, which probably affected their decision to submit to that journal. On the other
side, you want to keep your reviewers happy. Imagine spending the time and effort reviewing a
case, making explicit and important suggestions and comments, only to have the review ignored
and the editor print the case as is? That would be demotivating, and the editor could lose some
high quality reviewers. So the editor has to realize the potential quandary he or she is in.
Sometimes they have to be mediators. Other times they have to be scapegoats. But above all they
are the final decision makers…and rightfully so!
Gloria: I like to write letters. Writing gives me the opportunity to phrase my thoughts correctly
without indicating displeasure or anger. Also, it gives me a record that I can follow up on at a
later time. Of course, I use email as much as possible. In my correspondence I get right to the
point. I don’t like beating around the bush. Bob, you and John know my style, especially from
managing the Department. Things usually go wrong because people don’t do their jobs. The
same hold true for managing a journal. So why belabor things. Solve the problem and go on!
TCJ 030101
18
The CASE Journal
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
John: Gloria is very effective in her approach. In my experiences as an editor, most of the time
we have to stay on the backs of our reviewers. About twenty percent of reviewers meet the
deadlines given to them. Another ten percent are quite lax and must be prodded to get the review
done. These latter reviewers are the ones that we usually weed out. The remaining seventy
percent usually need a reminder and within two weeks the reviews are in. Of course, I liked to
manage them by using emails today. However, in the past I use to call them on the phone. I still
do that sometimes depending on the reviewer. So as an author, when a problem arises with a
review, I like to call the editor. Most of the time that personal touch allows a full-blown
discussion of the suggestions and concerns. Oftentimes in written correspondence, the editor has
to be careful about what they are writing. Over the phone, a much richer dialogue can ensue. But
Gloria is right. It is a matter of style and comfort more than anything else.
Bob: Well Gloria, the reviewers were inconsistent, to say the least, with their reactions to the
case. They’re all over the place.
Gloria: I know, you sometimes wonder if they read the same case.
Bob: Have you ever received such a mixed bag?
Gloria: Not this bad.
Bob: I think reviewer #1 got it right, but then I want to believe her. The others must have been
multi-tasking. Were they thinking about a class prep at the same time as they read our case?
Gloria: Possibly, but we can’t disregard them, as they are the reviewers. Let’s read their
evaluations carefully. Ultimately, we do want to have a great case and one that will be
published. We must, however, keep in mind that this is our case. We should know what we
wish to accomplish with it. We have the situation right here in front of us with its facts and the
reviewers don’t. Let’s go through the comments and evaluate them from
this perspective. I’m not trying to be argumentative with them, but this is our case!
LL
Bob: OK. I’ll keep an open mind and go to work..
Gloria: Good. I’ll do likewise and begin work on revisions to the TN.
A
The Revision
A few days later Bob met with Gloria.
Bob: Here are my suggestions for revisions to the case. First off, we need to tighten up the
decision focus. We may not have been clear enough in the introductory paragraphs in terms
what we want students to address. We do need a “hook” that effectively grabs the readers’
attention. How about Marcus Baer (I gave him a last name, as one reviewer suggested)
commenting to Mitch Myers about the critical importance of each member of the management
department and the wide disparity of qualifications for the Business Ethics position? Possibly
they could recall the “damage control” they went through in meeting with students about their
TCJ 030101
19
The CASE Journal
complaints about the “loser” that was teaching Business Ethics last year. I agree with the
reviewers that the comments regarding Marcus’ love/hate relationship with hiring is a bit weak.
Gloria: Sounds good.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Bob: Also, I was thinking that we develop further the student complaints about the bad hire.
Maybe there should be an exhibit with selected statements made by students from their student
evaluations. This could add depth and make the case more lively and interesting to the students.
Also, we could add another exhibit showing the scaling technique used by Marcus with the
results by faculty of the candidates. It would illustrate the criteria used by Marcus in ranking the
candidates.
The background section of the case needs to be there with its description of the college, of
course. I thought that we could leave the senior faculty situation, as it may be important in hiring
a person that fits in with the department’s members. It would add realism, but we must be
careful and not send students in a direction that isn’t the case’s primary focus, which is staffing
and not motivating senior members. I also believe that we should leave in the reference to the
state level budget appropriations for funding. State universities and other non-profit
organizations often face this reality, whereas a for-profit organization has more autonomy.
Gaining approval to conduct a search from the dean is a part of the overall hiring process.
Approval from a superior for hiring someone is always part of the staffing activity. The union is
merely a factual description of the setting and should remain. I do think that the library issue
really doesn’t need to be in the case. It is extraneous.
Gloria: You have really thought this through…
LL
Bob: Yes, I really have. Another thing that I think we should add is a concluding paragraph or
two that connects with the introductory hook. You know, we should lay out possible alternatives
that Marcus was considering. In doing so, we have to be sure that we have adequate facts in the
case for students to analyze. The critical hiring criteria should be alluded to and factors that were
of secondary importance. Maybe we should include another exhibit with the finalists’ curricula
vitae (CV's) and notes by faculty that Marcus and the department would consider in the oncampus interviews.
A
I’m going to add quotes from Marcus. One of the reviewers suggested it and it would help bring
the case to life even more. We’ll have to work together on it, since you were closer to the
problem and the current group of candidates. I want them to be accurate.
Gloria: I think your suggestions will strengthen the case. Now, let's see if they work with some
of the adjustments I’d like to make to the TN.
We did state in our original submission the courses where the case could be used. I still believe
that it would be appropriate for Principles of Management and Human Resources.
In terms of the Teaching or Learning Objectives, we can make some adjustments. The first one
that we listed is OK, as the case is based on our reality. With your added exhibit of students'
TCJ 030101
20
The CASE Journal
comments, the second objective will be more valuable, since the readers can better understand
the negative attitudes they express and the impact of a bad hire. That exhibit would also
illustrate what students view as most critical to them. This might also yield student commentary
on whether or not they agree with the priorities given to the various hiring qualifications used in
scaling the candidates.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Let's eliminate the third objective dealing with the motivational issues of some senior faculty
members. Motivation always is critically important, but it isn’t the focus of our case. I’ll
replace it with another objective, maybe: “To give the students the opportunity to role play a
hiring decision.” This objective is more decision focused and will bring out the reality of the
case’s circumstance. With your additions to the case, it is now really strong and should yield
meaningful debate by the students. Students should make the decision of whom to hire, or
possibly re-opening the search. In doing so the importance of hiring the right person will be
made clear.
We can reframe the fourth objective. What do you think about, “To give students an opportunity
to comment on Howell’s hiring process, to make recommendations for its improvement and to
identify the components for effective staffing”? Students could comment about the position’s
specifications and candidate requirements, Also, I’m thinking about the subtlety of advertising a
tenure track position outright or a one-year contract, with the possibility of entering a tenure
track after successful completion of the first year. Another issue that could be raised by students
or introduced by the instructor was the need for Marcus to gain the approval from the dean for a
full-time position. Some students may have had adjunct faculty that haven’t met with their
approval and the need for dedicated teachers.
Oh by the way, I like the term Learning Objectives better than Teaching Objectives. It reminds
me about what I want the students to take away from the case. Are you comfortable with that?
A
LL
In reference to Teaching Suggestions, I think we can adjust the Discussion Questions (DQ) to
better reflect the Learning Objectives. I have added additional literature citations to add depth to
my suggested answers for each of the DQs. I was thinking about the exhibits that you’ve added
to the case. With the scaling and CV exhibits, I added the suggestion of role playing as an
alternative to student presentations. The roles are pretty straightforward. Marcus would express
an opinion, after he has heard from others in the department and try to bring consensus for a
candidate recommendation. Select several students to play-out two or three senior and junior
faculty members. The students playing the senior roles should behave in a slightly arrogant and
slightly less interested manner, with the junior faculty roles being more directly sincere in their
recommendations. Debate should be based upon the facts from the CVs, criteria scale and
concern for the students’ views.
Bob: I like your proposed revisions – I think you have really improved the TN. I like the role
playing idea and the citations related to each DQ.
Gloria: Good! You know, the case is stronger. OK, I’ll go ahead and write a letter to the Editor
of the journal and indicate the changes that we’ve made.
TCJ 030101
21
The CASE Journal
The Decision
A few days later...
Gloria: Here you go Bob, the letter to the editor.
[Insert Exhibit IV Here]
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Two weeks passed and Bob was anxious to know the editor's decision. He called Gloria and she
told him that she had not yet received anything and advised him to have patience. A few days
later, Gloria called Bob and asked to see him immediately. Bob raced down the hall to Gloria’s
office,
Bob (panting): Well, did you hear?
Gloria: Calm down! Yes I heard. Congratulations! The case was accepted. The Editor
commended us on the revisions. She asked that we reformat the case according to their
guidelines, especially some of the tables. I’ll handle that. The case probably won’t be published
for another six months, given the backlogs most of the journals have. Oh, by the way, make sure
you sign the copyright release.
Bob: Copyright release?
Gloria: Yes, some journals want you to hold the copyright, while others want you to release it to
them. Most of the time it is the latter. It makes it easier for the Journal and the authors.
Bob: Ok.
Gloria: Well, congratulations again, and thanks for a great job. Now how do you feel about case
writing?
Bob: Mixed emotions, I guess. On one hand I’m glad it’s over. On the other, it was a great,
fulfilling experience. I’ll give you a fuller response after I see it in print. Six months, huh?
LL
Gloria: Always the pessimist! Ok, let me get back to work. And you…Go think of another case
we can work on together.
A
Six months passed and Gloria ran into Bob in the mailroom. They chatted for a while as they
sorted their mail. Both reached for similar brown paper envelopes. The mailing address was the
Journal in which their case had been accepted. Bob hurriedly ripped open the envelope, while
Gloria took her time. Fumbling through the Journal’s pages, Bob seemed bewildered.
Bob: Where is it? Where is it?
Gloria: Bob, check the table of contents!
TCJ 030101
22
The CASE Journal
Bob: Oh, right! Let’s see…(smiling) There it is…page 32. Wow! It looks nice. What do you
think, Gloria?
Gloria: Yes they did a good job. That’s what happens when you deal with high quality journals.
Now what do you think about case writing?
Bob: Seeing it in print gives me a real sense of accomplishment. At first I thought…
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Marianne (department secretary), interrupting: Oh Dr. Moore and Dr. Gorman! Sorry to
interrupt, but there is a phone call for each of you. Dr. Moore, line one, please. Dr. Gorman,
yours is on line three.
Bob and Gloria both answered their calls. After about fifteen minutes, they hung up with grins.
Gloria: Bob, that was Myron Katz of Excelsior University. He wanted to congratulate us on a
well-written case. He would like us to email him the teaching note. He thinks he can use it in his
classes next semester.
Bob: Myron Katz of Excelsior! Wow! I read a number of his articles in the Harvard Business
Review and Academy of Management Review. I also use his text in my HRM class. He is a
biggie!
Gloria: Yes, Myron is quite a scholar! He also doesn’t hand out compliments unless they are
warranted.
Bob: Oh, I almost forgot. My call was from Bill Naumes from the University of New Hampshire.
Gloria (feigning ignorance): Naumes? Naumes?
Bob: You know…Naumes and Naumes…the book on case writing...
Gloria: I know. I was just kidding you. What did he say?
LL
Bob: He loved it! He asked for the teaching note. I told him I would get it to him right away.
A
Gloria: Good! Let’s send them out emails today. Well, now what do you think about case
writing?
Bob: At first I was elated about doing it. I enjoy writing the cases and doing the research. Even
doing the teaching note wasn’t bad, once I pre-tested the case in my classes. But after the
reviews came in and they were so different, I became very reluctant and depressed. I think we
spent as much time doing the revisions, answering the reviewers, and corresponding with the
editor as we did with the teaching note, if not the case. I guess I've got some mixed emotions.
Yet…( Bob was interrupted again by Marianne).
TCJ 030101
23
The CASE Journal
Marianne: Sorry to interrupt again but there is an important call for Dr. Moore from a Dr.
Hildehead?
Gloria: That’s Celeste! Maybe they’re withdrawing the case! Ha! Ha!
Bob: Funny! Very funny! I wonder what she wants?
Bob took the call and returned after a while with a big smile.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Gloria: What’s up?
Bob: She wants me to review for the Journal. Of course I said yes. She’s emailing me a case
today with the guidelines. Any suggestions?
A
LL
Gloria: Welcome to the dark side of case publishing!
TCJ 030101
24
The CASE Journal
Exhibit I
FACULTY POSITION
HUMAN RESOURCE MANAGEMENT
Howell College
Howell College is a medium sized teaching college where staff, faculty, and students alike are focused on the
betterment of society.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Position description: Applications are sought for one tenure track position at the Assistant or Associate Professor
level in the area of Human Resource Management in the School of Business at Howell College. Applicants should
be able to teach the required introduction to human resources course as well as electives in the area of human
resources. Teaching load is four courses per academic year. This position comes with research support; excellence in
teaching and research is a must for tenure.
Rank and salary: The tenure-track professorial position is a three-year, renewable appointment to begin in Fall
2007. Rank and salary will be determined based upon academic achievement and experience.
Institution: The Howell College campus is located in a city of 40,000 and serves as the business and cultural center
of the region. For further information about the College and Business School, visit our Web site at:
www.howellcollege.edu .
Application: Please submit letter of application, curriculum vitae, three references, syllabi for two recent courses
taught and corresponding teaching evaluations to the attention of:
Associate Dean for Academic Affairs, HRM Search
Howell College, USA
Applications will be accepted until the position is filled.
A
LL
Howell College is an Affirmative Action/Equal Opportunity Employer and Educator.
TCJ 030101
25
The CASE Journal
Exhibit II
Reviewers’ Evaluation of Professor Moore’s Case
Is the case useful for the specified course?
Is the learning generalizable to other situations?
Reviewer 2
Reviewer 3
Excellent
Poor
Average
Excellent
Poor
Good
Average
Poor
Fair
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Is there a clear decision focus?
Reviewer 1
Excellent
Poor
Average
Excellent
Poor
Average
Good
Poor
Average
Good
Poor
Average
Excellent
Poor
Average
Good
Fair
Average
Excellent
Fair
Average
Good
Poor
Average
Are writing quality, spelling, and punctuation appropriate?
Excellent
Average
Average
Data Source Summary
Excellent
Fair
Good
Does the IM identify the courses in which to use the case?
Excellent
Fair
Good
Are teaching objectives specifically identified?
Excellent
Poor
Good
Good
N/A
Average
Average
Poor
Good
Good
Poor
Good
Are teaching approaches and suggestions useful?
Good
Poor
Average
Are exhibits adequate for class use?
Good
Poor
Average
Is the depth of analysis adequate for the target audience?
Good
Poor
Poor
Average
Average
Is the central problem important in the course?
Are there real characters to identify with?
Will students be able to identify with the case?
Will it capture the students' interest?
Is there enough information to address the problems?
Is the information clearly presented?
Is the case well organized?
Are the figures and exhibits helpful?
Are teaching objectives ambitious enough?
LL
Do assignment/discussion questions challenge students?
A
Are reasonable answers provided to the questions?
Is there linkage to the theoretical frameworks of the field?
TCJ 030101
26
Average
Fair
Good
The CASE Journal
Reviewer 2
Reviewer 3
This reader urges you to discover and follow the
style guide of the journal to which you are
submitting. This journal discourages footnotes
and end notes. It wants one paragraph for the case
synopsis and one paragraph for case usage. I
could not find a decision point. Neither was there
a "hook" at the beginning of the case. In other
words, why should a teacher assign this case? For
what purpose would students read this and would
it be interesting enough for students to continue
reading. Some characters are not very alive, they
have no statements publicly or privately, we know
almost nothing about them. We do know that
there was an incompetent former instructor and he
is the most interesting. Why was he so bad? What
did he do that the new applicants have to
overcome? This may be a case about human
resource management and the hiring process in
higher ed but we do not hear the voices of the
instructors, the applicants, the administration or
the students. There is so much extraneous
information. The entire background section is not
relevant. And I do not know the organization of
the department after reading your section with
that label. The situation of the union is confusing.
Clarify this. Geography is not relevant unless this
case is unique and I do not know of any
uniqueness from reading this case. You write so
much about "the previous instructor" but the
reader is never given information about that
problem. Furthermore, we really do not know the
problem that Marcus faces. He is chair of a
department (which, as usual, is subject to funding
constraints), there are some other personnel
problems (but we do not know them except
generally there are some faculty who do not want
to update their skills). There is nothing new here.
This case is not objective. It is obvious that the
authors were very involved and we continually
get their opinion, e.g., (for example,) Markus
realized that turning around the department was
too large for him, Marcus did not receive the
amount of feedback he anticipated, Marcus
realized that he must provide convenient branch
locations. All of this information is from Marcus
to your ears. Give us some information that is
objective. Would I come to the same conclusions
that you have from the data in the case? No. I urge
you to find a co-author who is a good writer to
revise this and take out all the personal
information.
I must admit this case didn't
grab me, which is unusual
because I like human resource
cases generally. The
presentation isn't bad, it's just
not exciting. There is a lot of
information compressed into
the case but not much
humanity, so I found myself
thinking of the College as a
person, which is not how I
like to approach cases. Other
than Marcus no one is really
drawn as a character, and I
didn't even know Marcus had
a last name until page 8. The
case certainly is useful for a
human resource management
course, and the point is
generalizable, but at the end
of the case I was unsure what
the questions would be. I
thought there would be some
sort of analysis but was left
wondering.
Reviewer 1
None
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Further
Explanations
TCJ 030101
27
The CASE Journal
A
LL
Data Source
Comments
I would really like to see quotes from
various people in this, mostly to
humanize it or give it life as a case. It's
not that information is not available;
it's just that it's presented in a detached
way. I know that's important, but
students also need to understand that
people have points of view, and
students need practice in sorting out
what's good information and what's too
biased to be helpful. This looks like a
case in which that element of decision
making could be introduced, but it's
not in the case. Also, as mentioned
above, I think the information that's
there could be organized a bit better.
Marcus could get his full name. It may
be better to start the case from the
point of view of the students, since
that's what the students are ultimately
asked to do. Or keep with Marcus but
have Marcus do an analysis similar to
what he's asked the faculty to do, as a
check on their reports versus his own
view of things.
Generally the data and research look
Because you know so much about this
good for this. The teaching note
situation and because you "know" the
mentions lots of interviews, and if true
answers you want, the case becomes
means that little additional interview
your case, not a case for most of us.
There is simply no decision point for the data need be gathered. The quotes are
there, they just need to be fished out. A
students. I encourage you to gather
map might be helpful, but of course it
information from other sources, the
would give away the location.
students, the dean who approves the
hires, the departmental hiring committee,
the other stakeholders. There would be
more to work with if you use data from
many sources.
In general, the case is well written.
However, we use a comma after the
abbreviation - e.g., in all U.S. writing.
Provide information that evolves from
case data and let students determine the
problems. For example, how do you
know that the first year students are a
problem? Did Marcus say that? Has he
asked the students themselves? Has he
asked other instructors to ask the the
students if they feel they are learning?
And so much of the information is
extraneous and does not contribute to the
problems of the case.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Case Data and
Presentation
Comments
TCJ 030101
28
The CASE Journal
Instructor's
Manual
A case is the data that you have
collected. An IM is the analysis of the
data. All of your diagrams and charts and
exhibits are specific to you. The average
reader can not create the same list of
stakeholders or causalities by reading the
case. In other words, the students should
be able to create these situation analysis
or SWOT analysis from reading the case.
We can not. When I look at your
teaching/learning objectives, students
can not "gain an appreciation" for
differences and similarities between
NPOs and for-profit organizations from
this case. Students do not have enough
information in the case to realistically
create stakeholder analyses or SWOT.
Students do not gain an appreciation of
leaders trying to change the organization
from this case. I urge you to get an
independent co-author, start with the
"LEARNING" objectives that you have
for the students. Then list the theories
that you want students to apply in the
case. Determine the actual problems that
you want students to work through. Then
outline your data for the case. Once you
get these matters in order, you can work
with an objective author to rewrite the
case to be more objective and helpful to
student learning. It is very difficult to
write about our experiences in a
generalized objective manner.
Generally I thought the teaching note
was pretty good. There are some things
I would like to see more of. Since the
case has been taught, more discussion
of experiences would be great,
particularly within the context of the
questions. There is some, but more is
better.
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Instructor's
Manual
Comments
TCJ 030101
29
The CASE Journal
Reviewer 1
Reviewer 3
Nearly ready; some revision
required, further review at editor’s
discretion.
Maybe accept; much work is Requires major revision in
case or IM for acceptance.
required to make this case
excellent.
I have been teaching the human
resource management course at the
end of an evening MBA program for
part-time students at a state college
for 33 years. I have written five
cases, used cases for the entire 33
years, and consider myself to be a
skilled case discussion facilitator as
well as a strong proponent of the
case method. I have read the case and
the teaching note three times and
reflected on them over a two week
period. I analyzed the case on my
own and wrote most of my
comments on the case itself before I
read the Teaching Note for the first
time. The strength of this case lies in
the opportunity it affords students for
the application of several specific
and prominent HRM techniques that
fall under a resource-based view of
the organization and strategy. The
case offers students the opportunity
to craft and recommend strategic
hiring practices, given its current
situation. This case has clear and
sufficient information for students to
carry out specific analyses.
You certainly have deep
information on a hiring
process. But we can not
separate your opinions from
what is realistic. And I can
not discover the decision
problem. What do you want
the students to decide? And
what theory do you want
students to work with in
making the decision? There
are many good examples of
human resource hiring cases.
I urge you to check out some
of them and contact the case
authors to get good IMs.
Good luck.
I think to meet the standard
this case needs a lot of work,
primarily in making it
interesting to the students. It
would be interesting to know
the reactions of students who
have used this case. I could be
totally off base, but I just don't
see it grabbing them at this
point. The seeds of a good
case are there.
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Is this case
and its
instructor's
manual
ready for
publication?
Summary
Comments
Reviewer 2
TCJ 030101
30
The CASE Journal
Exhibit III
Editorial Letter
Dear Professor Moore:
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Thank you for your patience during this review process. I know it can sometimes appear that the
reviewers are delaying inordinately; I would attribute this delay rather to unavoidable academic
pressures rather than a casual attitude towards the papers in review. Based on the reviewers' comments
and my own reading of the case and TN, I would like to invite you to revise and resubmit your case and
note before a publication decision is made.
The reviewers have raised some interesting issues and have offered you possible solutions to the
problems you have encountered with this case. I will not repeat each of their comments, but I will try
to give you some guidance as to how to proceed.
1.
The one area on which all three reviewers agree is the lack of clarity in the decision focus. As
you are undoubtedly aware, a decision focus is critical for acceptance as a case in this journal. You will
want to restructure the case a bit; perhaps end it sooner, before Marcus makes his recommendation.
2.
Your characters appear flat to the reader. Marcus is the only character with a personality, and
even he, as protagonist, needs beefing up. When characters are uninteresting, the whole case becomes
uninteresting, so tell us something about the job candidates, the members of the department, and the
student body. Are there funny anecdotes that you can add? Is the school a "sports" school, a "party"
school, a "grind" school? Stereotypes may have no place in our decision-making, but the reality is that
people make associations by types. You need to give the reader something to hold on to.
3.
When you identify your learning goals in the TN, please bear in mind Bloom's Taxonomy.
The specific goals for learning need to use action words identified with a particular level of learning
(e.g., "students will identify...; analyze;…evaluate…).
4.
Your TN in general needs quite a lot of work. You will want to look at the examples available
in good case writing texts (such as The Art & Craft of Case Writing, Naumes & Naumes) and also to
pay close attention to our manuscript specifications (posted online and with the journal itself) to make
sure your case and TN are structured appropriately.
LL
Your case has considerable potential. However, you will need to pay close attention to the
recommendations of the reviewers. When you resubmit, please include a letter detailing the changes
you have made and the reviewer requests that you have not agreed with. At this journal, we make a
decision after the second submission; you will not be invited to resubmit this case a third time. I hope
that these comments will be helpful to you in the revision of your case. I look forward to receiving
your revision.
A
Best regards,
Celeste Hildehead
Editor
TCJ 030101
31
The CASE Journal
Exhibit IV
Response Letter to the Editor
Dear Dr. Hildehead:
We have worked hard on revising our case, “Hiring new management faculty at Howell College”, and have
made numerous changes that are listed below that address many of the reviewers’ suggestions.
2.
3.
4.
5.
6.
7.
The introduction of the case has been re-written to be more interesting more decision focused by
bringing into mind the serious problem faced by Marcus Baer (last name added) in replacing a bad hire
of the previous year. This was accomplished by recalling the student complaints and the “damage
control” that the department was faced with.
We have added three exhibits for additional facts for student analysis: criteria scales completed by
faculty; student comments about the bad hire; the CVs of three final applicants. The appropriate
releases have been obtained.
We have removed the reference to the library situation, believing it to be extraneous.
Additional development of Howell’s background, the management department’s needs and candidate
descriptions with their CVs.
The Learning Objectives have been reviewed with several changes made. Objective number three has
been eliminated, since we believed that it was less relevant to the primary focus of the case. Objective
number four has been re-phrased, it now reads, “To give students an opportunity to comment on
Howell’s hiring process, to make recommendations for its improvement and to identify the
components for effective staffing”. We believe that it states more precisely one of the learning points
that we wish to accomplish with the case.
Additional theoretical links have been made by adding literature citations supporting the answers to
each DQ. Further, we have indicated the place in the courses where the case is appropriate, along with
the relevant chapters of well-adopted texts.
Finally, we have expanded the suggestions for teaching to include role-playing by students. Student
roles have been described.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
1.
LL
Let us conclude by saying that we respect and value the time that reviewers and you have given in
thoughtfully reading our case and their comments that were made. We kept an open mind in interpreting
their remarks, even though many were inconsistent with the others’. We made changes that strengthened
the case, based upon the reviewers’ suggestions and what we knew were the key issues and objectives for
the case. We believe that when you read the revised case, you’ll agree that it is improved and sufficiently
addresses the key concerns made by the reviewers.
Sincerely,
A
Gloria Gorman, Ph.D.
Bob Moore, Ph.D.
TCJ 030101
32
The CASE Journal
Declining Decorum at Darius D’Amore’s Shop at the Forum1
Fran Piezzo, Long Island University
Barry Armandi, SUNY – Old Westbury
Herbert Sherman, Long Island University – Brooklyn
[email protected]
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
“You know I’m from Communist Cuba and we handle complaints in a certain way,” shouted
Julio Baez to Susan Ryan, the Las Vegas store manager for Darius D’Amore Company. Susan,
visibly upset, walked to the back of the store and picked up the phone.
Background
The Darius D’Amore Company was one of the world’s leading manufacturers and marketers of
quality skin care, makeup, fragrance and hair care products. Darius and Dante D’Amore
founded the Company in New York City in 1945. Its products were sold in over 120 countries
and territories under the following brand names: Darius D’Amore, Darius, Dante, Beginnings,
Inferno, Heaven, Cleanique, Zodiac, Avalon, Madeline and Seasons. Each division had its own
specific and unique image, advertising and merchandising strategy.
The Company was headquartered in New York City, with manufacturing facilities located in the
United States, Belgium, Switzerland, the United Kingdom and Canada. The Company went
international in London in 1960 and established a presence in Hong Kong in 1961. There were
approximately 20,000 full-time employees worldwide. The Company was publicly traded since
November 1990, with members of the D’Amore family owning a majority of stock.
The Darius D’Amore Company sold its products through limited distribution channels,
consisting mainly of upscale department stores (i.e. Macy’s, Lord and Taylor), specialty retailers
(i.e. Nieman-Marcus, Nordstrom’s), international perfumeries and pharmacies and, to a lesser
extent, freestanding company stores, spas and duty-free shops. Upon acquiring Madeline and
Avalon, the Company entered two new channels of distribution: self-select retail (i.e. Wal-Mart)
and professional hair salons. In November 1998, the Company began to sell certain products
over the Internet.
A
LL
Darius D’Amore, the flagship brand of the Company was founded in 1945. It marketed
women’s makeup, fragrance and skincare products, as well as men’s fragrances and grooming
products. The Darius D’Amore brand was known for the high quality, innovative and
technologically advanced products it provided its customers. Darius D’Amore was sold in over
14,000 stores in more than 120 countries and territories and had nine full-service day spas in
cities across the United States and in Toronto, Canada. In addition, it owned and operated two
freestanding stores, one in Las Vegas and one in Smithtown, New York.
In fiscal year 2002, net sales for the Company were $4.7 billion. Net earnings were $331.6
million (before restructuring). The Darius D’Amore Company had more than 45 years of
consecutive annual sales increases. The Darius D’Amore brand alone had global net sales of $1.5
billion. Net earnings were $222.4 million. The Las Vegas Store had retail sales of $2.5 million
for fiscal year 2002.
1 All events are true. Names have been changed to provide confidentiality.
TCJ 030102
33
The CASE Journal
The Las Vegas Store
The Las Vegas Store at the Forum Shops at Caesar’s Palace opened for business in January
1994. The Forum Shops were adjacent to the Caesar’s Palace casinos and was home to more
than seventy retailers and restaurants. The Las Vegas Store employed approximately fifteen
people of diverse ethnic backgrounds, all of who were directly paid by the Darius D’Amore
brand. Of the fifteen, eleven were beauty advisors.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
There was a Store Manager, Assistant Manager, Operations Manager, Selling Manager and
Beauty (or Sales) Advisors (See Appendix A for the Store’s Organization Chart). Each Beauty
Advisor was paid a base salary plus 5% commission on sales. Top Beauty Advisors had a sales
goal of $300,000 for the year. A majority of the employees who were originally hired to open
the store were still there.
Las Vegas has a very transient population. Many of the store’s employees were transplants to
Las Vegas and had no immediate family living in the area. In essence, their co-workers became
their family. Since the Forum Shops were directly adjacent to a large casino, many customers
came to the store to spend their winnings on some of the exclusive and expensive items that were
available. The possibility of making a big sale was more important to the Beauty Advisors than
following Company policy and the Code of Conduct (See Appendix B). They rung up items
incorrectly, and gave away free merchandise. Also, most of the Beauty Advisors were highly
competitive and would try to make a sale at a colleague’s expense.
When the store originally opened, Chris Charles was placed as the store manager. Chris, a fortyfive year old Caucasian divorcee with two children and a ten-year employee, had an extensive
background in retail and knew the Las Vegas market very well. She had a great deal of contact
with other retail managers in the city. Chris got along well with her subordinates, even
socializing with them from time to time. In 2000, because of the store’s performance, Chris was
promoted to Executive Director, Retail Stores and Spa Marketing, but had to move to New York
City. She was still responsible for the Las Vegas store and would visit at least once a month.
A
LL
Prior to her departure for New York, Chris promoted her assistant manager, Susan Ryan. Susan,
a 42 year-old married Caucasian with a teenage child and a seven-year employee, had previously
owned her own store in Las Vegas, but felt the opportunity was better at Darius D’Amore. Like
Chris, she had various retail experiences and was well liked by her subordinates. Chris prepared
Susan for her new position by having her read the job description, showing her the monthly
reports that had to be sent back to New York, and going over various policies. There was no
formal training program.
Both Chris and Susan operated the store as if it was their own. They were on top of all problems
as they arose and made certain their subordinates were happy. In her desire to be liked, the Susan
rarely communicated bad news. As part of her job description, Susan monitored the daily,
weekly, and monthly sales logs. Deviations from the previous year’s numbers for each advisor
were noted. During the first week of the following month, she met with each advisor and
reviewed the numbers, giving helpful advice. Susan was reluctant to upset her top performers, so
TCJ 030102
34
The CASE Journal
many times she overlooked small violations of policy and the Code of Conduct. Susan did place
employees on warning numerous times, but decided to keep the warnings to herself in a separate
file. She never passed the information along to the Human Resource Department.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Susan’s Concerns
In September 2002, Joanne Turner (Director of Human Resource Management), a forty-one year
old married Caucasian with four children and a twenty year employee, received a call from
Susan, the store manager, expressing concern regarding the change in the store’s climate since
Maria Baez, a thirty-two year old married Hispanic with one small child and a seven year beauty
advisor, returned from maternity leave. Maria had a history of assorted performance problems.
Since she was hired, her sales numbers were the lowest of any beauty advisor, approximately
$45,000 for the first year up to $100,000 for the seventh. All the other beauty advisors sales
figures varied between $180,000 and $425,000 for 2001 and 2002. The average for the other
beauty advisors was approximately $240,000 for those years. Susan observed that Maria was
“buzzing around” the other sales advisors and vocalizing that the store did not have good
management. Susan spoke to her about the need to communicate with her directly and reiterated
that this was inappropriate behavior. Maria denied that anything was said.
About a week later, Maria’s husband, Julio, a thirty-five year old Hispanic from Cuba, was in the
store (as he frequently had been) and called Susan an expletive in front of customer and
associates. In a loud voice, he said that Susan was out to get his wife and that Susan had better
watch out. Susan was out of the store at the time. Upon hearing this from the advisors, Susan
wanted to know if she could ban Maria’s husband, Julio, from the store and if she could put
Maria on warning. Joanne told her that she could not put Maria on warning, since she had not
done anything wrong. She also told her that she should talk to Maria about the appropriateness of
having her husband present in the workplace. Joanne indicated that there was nothing in the
policy manual barring family members from being in the store. She also informed Susan to
follow the appropriate procedure if a disciplinary problem developed. That procedure included
an oral warning and discussion, two written warnings, suspension of one week without pay, and
if another incident occurred the employee was to be dismissed. At each step, Joanne reminded
Susan, that she should be copied.
A
LL
A week later, two other beauty advisors came to Susan to express their concern about working
with Maria. They felt intimidated by her. They reported that they heard Maria remark, “What
kind of people is Susan hiring while I am gone?” Susan noted that productivity for these two
beauty advisors decreased since Maria returned from her leave of absence.
Susan again had a discussion with Maria about her behavior. Maria denied saying anything
negative. She inferred that she was the one being harassed because other beauty advisors were
jealous of her lifestyle and good sales performance. Maria wanted an opportunity to meet with
her associates to rebut accusations. Susan said that was unnecessary.
Another week went by, when Kate Mulgrew, a thirty-six year old single Caucasian, a six year
employee and the selling manager, came to Susan. Apparently Kate heard Maria’s husband say,
“she (Susan) is causing my wife stress” and he threatened to put a grenade in her car and harm
TCJ 030102
35
The CASE Journal
her family. Kate, a friend of Maria, failed to mention this to Susan when it happened a few
weeks earlier.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Another Threat
Maria’s husband came into the store, again, before Maria arrived for work. Susan asked him if he
had said those things in front of the other sales advisors and customers. He told Susan that “he
couldn’t help it if she had liars and gossips working for her.” If he had an opinion about Susan, it
was one that he and his wife had together and shared only at home. He also said in a threatening
tone, “You know I’m from Communist Cuba and we handle complaints in a certain way.”
Susan was quite frightened and upset for herself and her family about this incident and asked
Joanne if the Company could terminate Maria. Two other beauty advisors threatened to resign,
since they were present during the outburst. They verified what Susan had told Joanne. The other
beauty advisors had heard of the incident, but indicated that they had never been present during
any of the interactions.
Joanne told Susan that Maria had not done anything wrong and could not be terminated. Joanne
advised Susan to contact Security at Caesar’s and inform them of the incidents and threat.
Caesar’s provided each store minimum security, but were to be notified of any major problems,
such as theft, breakage due to unruly customers, and the like. For these major problems,
complaints were to be filed with the Las Vegas Police.
Chris Charles (The Executive Director of the New York Region which was responsible for the
Las Vegas Store) called Maria to discuss what had happened. At this point, Maria became
hysterical and told Chris that her husband had also threatened her. She claimed that she sought
legal counsel and would be going to the Domestic Abuse Unit of the local police department.
A
LL
Upon investigation, Joanne learned that Maria’s husband had a police record with other
incidences of unspecified abuse. In reviewing Maria’s employee file, Joanne noted no
performance issues. When she raised this to Susan, Susan sent her the warnings that were located
in a different file. There were seven separate warnings beginning in July 1996 through
September 1998, for which no further actions were taken.
Chris and Joanne met to discuss what action should be taken.
TCJ 030102
36
The CASE Journal
Appendix A
The Darius D'Amore Company - The Las Vegas Store
2002
Charles Johnson
VP of Operations
Joanne Turner, Director
Human Resources
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Chris Charles, Executive Director
New York Office
Susan Ryan
Store Manager
Jane Blaine
Assistant Manager
Carol Oates
Operations Manager
A
LL
Kate Mulgrew
Selling Manager
TCJ 030102
37
Maria Baez
Beauty Advisor
Other Beauty Advisors
The CASE Journal
Appendix B
Darius D’Amore Inc.’s
Code of Conduct
BE A TEAM PLAYER

DELIVER OUTSTANDING CUSTOMER SERVICE

TREAT EACH PERSON WITH DIGNITY
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D

ACT PROFESSIONALLY AT ALL TIMES

TRY TO LEAVE PERSONAL PROBLEMS AT THE DOOR

CONCENTRATE ON YOUR OWN BUSINESS

OFFER ENCOURAGEMENT TO SOMEONE WHO IS HAVING AN “OFF DAY”

CONGRATULATE THE ONE WHO “KEEPS SCORING”

TAKE RESPONSIBILITY, REMEMBER THE “TOTAL IMAGE” MAKES US ALL LOOK GOOD

LISTEN TO YOUR CUSTOMER AND THE TEAM, GOOD IDEAS COME FORM EVERYWHERE

COMMUNICATE, SHARE YOUR IDEAS

A
LL
BE ENTHUSIASTIC, SMILE AND HAVE FUN
TCJ 030102
38
The CASE Journal
The "Yellow Snow" Dilemma
A Capital Budgeting Case
Brian A. Maris, Northern Arizona University
Larry Watkins, Northern Arizona University
[email protected]
Situation
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
As he looked up the barren ski slope in December 2002, J.R. Murray wondered if there really
was a decision to make. Although average snowfall at the area is approximately 230 inches the
last few years had been well below that average. How many more "ski seasons" with only fifty
inches of snowfall could the owners of Arizona Snowbowl (Snowbowl) tolerate? Skier days the
previous season were down to 20% of average, certainly not enough to break even. Given the
nature of northern Arizona's weather it was no surprise that four of the last eleven years had
yielded a net loss for the ski area and perhaps more significantly a negative cash flow. The
partners were less than excited about their recent investment returns. Yet J.R., the CEO of
Snowbowl, did not want to throw good money after bad.
J.R. was trying to decide whether he should commit $750,000 in 2003 for an environmental
impact statement (EIS) on a proposal to make snow at the Snowbowl using reclaimed
wastewater. There was little doubt that making snow improved skiing conditions. The vast
majority of all U.S. ski resorts make snow. However, Snowbowl wasn't like most ski areas for
several reasons. For one, the area was located in Arizona's San Francisco Peaks mountain range
(the Peaks) which early Spanish explorers had named Sierra Sin Agua which translates to
"mountains without water". The City of Flagstaff had long ago successfully claimed the water
rights to what little water was available in the Peaks. That was why the use of reclaimed
wastewater was being considered. Also Snowbowl was located entirely within the boundaries of
the Coconino National Forest in an area considered sacred by several Native American tribes.
All of this combined to make approval of the proposal less than certain even if the EIS indicated
no adverse environmental affects.
LL
Background
A
The Snowbowl has been used for skiing since 1938, when a rope tow was installed at the end of
a dirt road. The area was privately owned (by Arizona Snowbowl Resort Limited Partnership)
and operates on 777 acres under a U.S. Forest Service (USFS) Special Use Permit that is
renewed on a 40-year basis. Under this arrangement the partnership owns the improvements,
including two lodge buildings, four lifts, and various other structures located on the property. In
essence the land was leased to Snowbowl subject to significant restrictions. The current lease
between the Snowbowl and the USFS allows the Snowbowl to accommodate a “comfortable
carrying capacity” of 2,825 skiers.
Most Snowbowl skiers were Arizona residents and it was not considered a major destination for
out-of-state skiers. As of 2002, the Snowbowl had 127 acres of ski runs and 2,300 vertical feet of
drop, ranging from 9,200 feet in elevation to 11,500 feet. The number of annual skier visits
TCJ 030103
39
The CASE Journal
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
averaged 98,000, a number that was expected to increase to 110,000 over the next ten years due
to population growth if the ski area was not upgraded (USFS, 2005). The success of each ski
season is entirely dependent on the amount of natural snowfall, which in turn is highly variable,
due to the southern location. Snowfall per season in recent years has ranged from more than 450
inches in 1992-93 to 50 inches in 2001-02. The number of skier days has mirrored snowfall,
ranging from approximately 180,000 in 1992-93, to less than 20,000 in 2001-02. From 1993 to
2002 the Snowbowl earned profits of $2.65 million. During that same period it made capital
investments of $4.42 million, or approximately 8.9 percent of gross revenue (USFS, 2005). That
was somewhat higher than the six percent of gross revenues considered the minimum amount ski
resorts must invest annually for maintenance.
The benefits of artificial snow have been apparent to Snowbowl owners and managers for many
years. Artificial snow would allow the Snowbowl to have a fixed opening date and a guaranteed
ski season. That would have a number of benefits, including:
• Increased and more stable revenue stream.
• Stable employment opportunities.
• Improved skiing conditions and recreational opportunities.
In recent years, Snowbowl owners and management explored the possibility of using treated
wastewater from the City of Flagstaff to make snow. The City agreed to provide treated
wastewater for that purpose. Making snow with wastewater is an existing technology for the
disposal of excess effluent in some regions but apparently has not been used for snowmaking at
U.S. ski resorts.
Social Context
A
LL
The San Francisco Peaks are considered sacred by several Native American tribes, including the
300,000 member Navajo tribe (largest in the U.S.). The Peaks are identified as sacred mountains
in the Navajo story of creation, as well as other traditional Navajo stories. In addition, they mark
the western boundary of the area traditionally considered by Navajos to be their home. “The
Peaks are part of me,” according to Joe Shirley, Jr., president of the Navajo Nation. “It’s hard to
put into words how a landmark can represent the essence of your soul, but it does.” (“Skis carve
a path of controversy, 2005.) The Hopis (another northern Arizona tribe) have similar traditional
attachments to the Peaks. In addition, certain environmental groups, including the Sierra Club
oppose further development of public land in general, and have stated opposition to the
expansion of the Snowbowl and artificial snowmaking there, particularly with recycled
wastewater. The Navajos, Hopis and the Sierra Club have all stated their intention to oppose
snowmaking with recycled water at Snowbowl to the Forest Service, and if necessary in the court
system. When the Snowbowl’s lease was renewed in 1979 it was opposed by many of the same
groups and was contested all the way to the Supreme Court, which declined to hear the case.
Most ski areas in the west operate on USFS land and many, perhaps most of them use artificial
snow, having received USFS approval to do so. However, none of them use reclaimed
wastewater. In addition, there are perhaps few sites that Native Americans view to be as sacred
as the San Francisco Peaks. Because this is a unique situation, there is some probability that the
project will not be approved either by the USFS or the courts.
TCJ 030103
40
The CASE Journal
Regulatory Process
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The USFS is required to manage public lands under its control to provide multiple uses. The
Forest Service has allowed other ski resorts operating on National Forest land to make artificial
snow, including Vail and Aspen. However, the Forest Service is also required to consider the
religious and philosophic beliefs of indigenous peoples. Because of opposition by Native
Americans and environmental groups, the Forest Service might decide against allowing the
Snowbowl to make artificial snow. Even if approval is granted by the Forest Service, legal
challenges remain probable. Litigation will increase the cost and the length of time required for
the desired improvements, and increase the probability that the Snowbowl will not be allowed to
proceed. The cost of developing the required Environmental Impact Statement is $750,000. If the
courts rule against the Snowbowl, that investment will be lost. Based on discussion with USFS
personnel and legal counsel J.R. has concluded that there is a 90% probability that the
application for the snowmaking proposal will be approved by the Forest Service and that any
judicial proceedings will be resolved with a favorable outcome.
Decision
J.R. had determined that his decision model would be based primarily on capital budgeting
techniques. Although the decision must ultimately consider the social and regulatory
externalities, these are factors that increase the inherent risk of the undertaking.
The Proposal
A
LL
As the result of preliminary engineering estimates the Snowbowl developed a proposal that
includes the following:
• Construct a 14-mile pipeline from Flagstaff to the Snowbowl.
• Install a buried, 10 million gallon snowmaking water reservoir.
• Add two new high-speed chairlifts.
• Add new ski trails.
• Install snowmaking equipment on 205 acres.
• Add 400 parking spaces.
• Build a tubing and snowplay area.
• Expand one of the two existing lodges.
• Build a Native American cultural and education center.
Total cost of the proposal (in 2003 dollars) was estimated to be $19.77 million (including the
EIS). If the decision was made to proceed with the EIS its $750,000 cost would be incurred at the
end of 2003. J.R. estimated that regulatory approval would take two years. The remaining
investment in the snowmaking project would occur at the end of 2006. Snowmaking would
allow the Snowbowl to provide skiing an average of 125 days per year. The number of skier
visits was expected to increase from the current average of 98,000 to 257,000, including
snowplayers (sledders and tubers). (USFS, 2005.) J. R. Murray believed this could be
accomplished while remaining within the ski area’s previously approved “comfortable carrying
capacity” (CCC) of 2,825 skiers, and in fact would bring facilities into proper balance with
current use levels. It should be noted that the CCC is a planning tool to be used by the ski area
managers and the USFS and not a cap on visitation. (Without the planned improvements, the
TCJ 030103
41
The CASE Journal
number of skier days was expected to increase to 110,000.) In addition to increasing the number
of skiers, snowmaking would provide greater stability. The number of annual skier visits would
be expected to be within 15 percent of the expected value. (USFS, 2005) In generating cash flow
projections over the ten year planning period, J. R. relied on an operating profit margin (defined
as earnings before interest, taxes, depreciation and amortization [EBITDA] as a percent of
revenue) of 23.5 percent.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
From discussions with his accountants, J.R. determined that, for tax purposes, both the EIS and
construction costs (when/if incurred) will be depreciated using the MACRS 7-year class, based
on the following percentages:
Year
%
1
14
2
25
3
18
4
12
5
9
6
9
7
9
8
4
Social Benefits
A
LL
The local Chamber of Commerce, which strongly supported the proposal, and Snowbowl's
management have worked together to promote the positive benefits of snowmaking at
Snowbowl. These benefits include:
• More fees paid to Forest Service (up from $89,900 to $193,000 annually).
• More sales tax collections (up from $257,000 to $650,000 annually).
• More property taxes paid (up from $36,200 to $455,000 annually).
• Increased community-wide employment (up by 331 FTEs by the end of the 10-year
planning period).
• Increased visitor spending in the community.
• Increased recreational opportunities.
It was hoped that the supposed benefits of the project would motivate the local community to
support the proposal and lobby on behalf of the Snowbowl to political leaders at both the local
and national levels.
TCJ 030103
42
The CASE Journal
Supplemental Data
Cost of Capital:
According to the “2002-03 Economic Analysis of U.S. Ski Areas,” the average debt ratio for
U.S. ski areas was 46%.
Snowbowl was privately held, so no beta for its stock is available. However, according to the
MSN website, betas for two much larger, publicly traded ski resorts were:
0.9
1.0
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Vail Resorts, Inc.
Intrawest Corp.
Market interest rates in January, 2003:
20-year T-bond
Baa Corporate
5.02%
7.35%
Historical market risk premium, based on T-bond rate: 5.3%
Tax Rate:
The partners of Arizona Snowbowl Resort Limited Partnership had a marginal tax rate of 40%.
Summary of Impacts of Alternatives
Alternative 1
2003
Base
No Action
Skier Visits
Day skiers
Destination skiers
Snowtubers
Alternative 2
Proposal
64,234
72,372
125,685
33,908
-
38,204
-
89,015
42,000
LL
Per capita skier spending onsite
A
Food & Beverage
Retail
Lift tickets/lessons
Total
Destination skiers
6.10
7.54
33.76
47.40
Day skiers
2.47
3.05
34.18
39.70
Per capita snowtuber spending
Food & Beverage
Retail
Tubing tickets
Total
TCJ 030103
1.85
2.29
10.25
14.39
43
The CASE Journal
Reference List
Skis carve a path of controversy in Arizona. (2005, March 30). Christian Science Monitor, p. 3.
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
U.S. Department of Agriculture, Forest Service, Southwest Region, Coconino National Forest.
(2005, February). Final Environmental Impact Statement for Arizona Snowbowl Facilities
Improvement.
TCJ 030103
44
The CASE Journal
Enterprise Risk Management at Great Plains Energy
Karyl B. Leggio, University of Missouri at Kansas City
Marilyn L. Taylor, University of Missouri at Kansas City
[email protected]
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Following the collapse of Enron, market analysts were demanding more transparency in dealings
with the energy industry. And, short of receiving this information, Wall Street had dramatically
reduced its expectations and the valuations for firms in the industry while raising the assessment
of energy’s inherent risk. As a result, Great Plains Energy’s (GPE’s) Board of Directors, given
the changing nature of the power industry and difficulties various firms had recently encountered
(See Exhibit 1.), had asked management to identify what it was doing to assess and manage
corporate risk.
In Mid-April 2003 Jana Utter, Risk Manager for GPE, wrestled with the draft of her report on
GPE’s progress in implementing its Enterprise Risk Management (ERM) function. She believed
a successful risk management plan would help to lower GPE’s cost of capital, add robustness to
the growth projections, provide the much-needed transparency the analysts were demanding, and
ultimately create value for the shareholders. The plan was to be presented to GPE’s risk
management committee on April 21st.
REGULATION TO DEREGULATION: THE ENERGY INDUSTRY
LL
The Energy Industry of which Electric Power Generation was a component was subject to a
number of regulatory bodies. (See Exhibit 2 and Appendix A for information on regulatory
entities for the Energy Industry.) One of the major impetus issues for GPE’s increased concern
for risk was increased risks that accompanied deregulation of the firm’s industry. Deregulation
for the power industry had followed the general path set by deregulation for natural gas. From
the 1930s to 1985, prices for natural gas were regulated. Regulation assured no price gouging of
customers; however, there was no competition and customers had no choice among suppliers.
Between 1985 and 1992, the Federal Energy Regulatory Commission (FERC) issued orders that
required pipeline companies to allow third parties to transport gas on the pipeline systems.
Essentially, third parties could purchase gas and “rent” space on a competitor’s pipeline to
transport that gas to the third party customers (e.g., local gas utility companies or large industrial
users). Third party marketers and brokers sprang up to participate in the gas sales business.
A
Between 1993 and 1999, FERC orders led to further deregulation of the natural gas companies.
Pipeline transport companies were no longer allowed to sell gas. If a firm owned a gas transport
system, that firm was only allowed to transport gas. Essentially the firm’s only line of business
was contracting for use of its pipeline. This rule served to eliminate the incentive for pipeline
companies to discourage access to their pipelines from third parties and moved to ensure fair
competition. This change led to a proliferation of third party marketers and also to the greater
customer choice. The change allowed many smaller third party firms, industrial and commercial
facilities, to be able to choose their gas provider. However, on into the first years of the TwentyFirst Century most residential customers did not have practical choice among natural gas
suppliers.
TCJ 030104
45
The CASE Journal
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The power industry was also in the process of deregulating. The 1992 Energy Policy Act (EPA)
required “wholesale wheeling”, i.e., regulated utility companies were required to allow third
parties to use their transmission lines to transport power. KCPL was one of the first in the
industry to request and obtain a wholesale transmission tariff from FERC in order to participate
in wholesale wheeling. The FERC approved tariff for KCPL established what the company
could charge independent power producers and other power generating entities for access to their
transmission lines. “Wholesale wheeling” was thought to be the precursor of the still expected
“retail wheeling,” which would allow the private retail customers to choose between different
power providers.
Regulation of the industry occurred at both the national and state levels. In the early 2000s
Kansas and Missouri, the two states in which KCPL operated, were confronting major issues
regarding deregulation. (See Appendix B for issues regarding the debates in these two states in
2002.) GPE’s Strategic Energy subsidiary operated under regulations in Pennsylvania, a state
which had been avante garde in terms of deregulating.
COMPANY OVERVIEW
Great Plains Energy is a registered holding company and the corporate parent with four segments
---Kansas City Power & Light, Strategic Energy, KLT Gas Inc., and KLT Investments.
GPE - Corporate Parent.
GPE’s history originated as Kansas City Power and Light (KCPL). As of October 2001, the
Kansas City Power & Light company, previously the parent company of several subsidiaries,
became a subsidiary of the newly constituted registered holding company, Great Plains Energy
(GPE).1
A
LL
KCPL’s subsidiaries became subsidiaries of GPE. Holding company structures were common in
the energy industry. Most power generation remained under regulation by state and federal
agencies. (See Appendix A for the regulatory agencies that had to approve the restructuring of
GPE into a holding company.) Regulators set a rate of return that these firms were able to earn
on the regulated businesses. Since firms typically wanted to earn a higher overall rate of return,
most energy firms were interested in competing in non-regulated industries. In order to do so, a
firm usually created a holding company, with its regulated businesses separated from its nonregulated businesses.
At year-end 2002, GPE’s assets were valued at $3.5 billion with annual revenue of $1.9 billion.
(See Exhibits 3-6 for income statements, balance sheets, share performance, and financial ratio
comparisons to the industry.) The company’s goal was “to build a diversified energy company
that annually produces growth of five percent earnings per share.”2 The firm’s stated objective
was to deliver “…an attractive return for our shareholders. Our utility business is a reliable
electric service provider in a diverse Midwestern economy, generating stable cash flows and
strong operational performance. Our non-regulated businesses add growth opportunities to the
total shareholder return. Stability. Disciplined growth. Dividends. That's our story.“3 (See
Exhibit 7 for the company’s new logo and statements of mission and vision.)
TCJ 030104
46
The CASE Journal
KANSAS CITY POWER & LIGHT
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
KCPL, GPE’s major subsidiary, was a full-service, regulated energy provider operating in the
Kansas City metropolitan area. Founded in 1882, KCPL served more than one million residents
in 24 northwestern Missouri and Kansas counties - a territory of about 4,600 square miles.
Delivering that power required 1,700 miles of transmission lines, more than 10,000 miles of
overhead distribution lines, and approximately 3,400 miles of underground distribution lines.4
The company operated six plants with 21 generating units that provided power for sale to the
firm’s customers and also to the wholesale market. KCPL had 4,100 megawatts of generating
assets in operation or under construction.
KCPL generated electricity via two sources – nuclear fuel (33%) and coal (67%). KCPL’s
nuclear-generated electricity came from the Wolf Creek (nuclear) Generating Station. The
nuclear facility was owned by three companies --- KCPL (47% ownership), Western Resources
(47%), and Kansas Electric Power Cooperative (6%). Wolf Creek opened in 1985 and had
generated electricity at one of the cheapest rates in the nation. The nuclear facility was a major
factor for KCPL's continuing reputation for being a low-cost power producer. Wolf Creek was
so efficient, that in its first year of operation, KCPL generated $33M in sales of “spot power” or
power available to sell to wholesalers at a profit. In early 2003, KCPL was in the process of
building a gas-generated power plant.
KCPL in the 1990s
For KCPL, the 1990s were characterized by acquisition and merger activity. In July 1990 KCPL
aggressively pursued an acquisition of Topeka-based KGE, its partner in the Wolf Creek nuclear
facility. When KGE announced plans to merge with Kansas Power and Light, another Kansas
utility company, KCPL withdrew its offer. KGE and KPL formed Western Resources. KCPL
turned its attention to preparing for an anticipated more competitive power market. The firm
focused on improving its operating efficiency in all sectors of its utility operations including
decreasing debt and cutting costs.
A
LL
In the mid-1990s KCPL was in merger negotiations with Utilicorp, a firm that originated as a
Kansas City-based utility firm that served eastern Missouri. As deregulation unfolded, Utilicorp
had acquired other utility companies in multiple states as well as operations in New Zealand and
Australia, and had also established a significant energy trading company. Western Resources
mounted a hostile takeover attempt targeted at KCPL. Ultimately, Utilicorp withdrew its merger
offer and KCPL and Western agreed to merge. However, a sale price tied to volatile stock
prices, among other issues, ultimately ended the deal in early 2000, and KCPL remained
independent. Many observed that the outcome of the fray was favorable for KCPL because the
failed merger attempt had prevented KCPL from executing the M&A strategy so aggressively
pursued by other firms in the energy industry. In the economic downturn following 9/11 and the
Enron fiasco, many other utility firms that had more aggressively diversified suffered significant
financial setbacks. In contrast, KCPL’s stock price fell, but its conservative strategy and careful
attention to operations and cost containment kept the firm largely profitable.
TCJ 030104
47
The CASE Journal
Recent Service Disruptions
In the late 1990s and into the Twenty-First Century, KCPL suffered two major disruptions in
service, one related to the firm’s coal-fired Hawthorne plant and the second related to an
unprecedented ice storm.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
In 1998 KCPL was a net seller of excess power. The company’s financial situation benefited
from the summer’s heat wave as demand for power sharply increased prices. Firms such as
Enron, Aquila (formerly Utilicorp), and Dynegy priced aggressively and bought and sold power
in the increasingly deregulated markets. KCPL contracted during this time for an independent
consulting firm to re-evaluate its credit and risk management policy to determine the
creditworthiness of counter parties. However, before the report was presented in January of
1999, one of KCPL’s power plants, the Hawthorne Five, blew up. Overnight KCPL moved from
being a net seller to a net buyer of power.
When Hawthorne Five came back online in July 2001, KCPL again became a net seller of power.
More counter parties had formed in the interim and KCPL needed to evaluate the
creditworthiness of the various potential counter parties. Jana and her team evaluated contracts
between KCPL and counter parties, completed credit scores, and assessed the credit risks
associated with individual trading partners.
On January 31, 2002 Kansas City suffered the most devastating ice storm in the region’s history.
That morning, 305,000 customers, more than two-thirds of the company’s customers, lost power.
Company crews worked 16-hour shifts. Management personnel took on emergency support
duties. Crews came from 12 other states to help. By February 9 most service was restored. In
recognition of the extraordinary effort, the Edison Electric Institute presented KCPL with is
“2002 EEI Emergency Response Effort.” Chairman and CEO Bernie Beaudoin said, “I want to
extend my personal thanks to my co-workers, our fiends from other utilities and partners in local
and state governments for their dedicated response. Thanks, too to KCPL customers who stayed
in touch and offered patience and moral support.”5 The estimated cost of the repairs and cleanup
work amounted to a $0.05 cent per share reduction in earnings in 2002.
A
LL
KCPL- An Efficient Company
Through its early history, the 1990s, and the opening years of the Twenty-First Century, KCPL
was consistently known for its low-cost production and conservative business operations. As
depicted in Exhibit 8, KCPL had maintained excellent efficiency, enough to provide a relative
decrease in electric prices over 20 years in comparison with the ever-rising natural gas prices and
the overall consumer price index increase.
KCPL’s financial results over the prior three years were as follows:
$M
Operating revenues
Operating income (loss)
Net income
TCJ 030104
2000
956
173
75
2001
1034
229
92
48
2002
1071
249
96
The CASE Journal
KLT GAS, INC.
KLT Gas was a Houston, Texas-based subsidiary that specialized in the acquisition and
development of unconventional natural gas properties, primarily coal bed methane. The company
focused on extracting methane that was trapped in underground coal, as well as in exploring and
drilling wells to demonstrate production and reserve value. In 2003, the firm’s development
portfolio consists of a total of 250,000 acres in basins located in five states --- Colorado, Kansas,
Nebraska, Oklahoma and Wyoming.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
KLT Gas performed geologic and engineering analyses. The development team looked for new
projects, secured a lease for those properties when they intended to drill to determine if methane
was present, and maintained operational control of the project during the early stage. Once
methane was located on the site, the firm developed the site and searched for a buyer. KLT’s
focus was on finding and early stage development of a site. Once the reserves were located, the
firm looked for a buyer for the land and product.
KLT performed rigorous geologic and engineering analyses before committing capital to any of
its projects to mitigate exploration risk as much as possible. The typical phases in an exploration
project included: leasing and pilot, development, and divestiture.
KLT’s financial results over the prior three years were as follows:
$M
Operating revenues
Operating income (loss)
Net income
2000
31
110
79
2001
.3
13
14
2002
1.1
11
-
STRATEGIC ENERGY
A
LL
Strategic Energy began in 1986 with three attorneys who worked on bypass contracts. Large
manufacturers had multiple plants located throughout the country. The power generators that
operated the plants were generally gas powered. The plants generally built direct tie-ins to the
major gas pipelines. Strategic Energy created the proposals requesting bids from natural gas
companies. The gas companies bid on the right to supply gas to all of a firm’s plants. Strategic
Energy worked out the terms to allow the companies to directly access the major gas pipelines
(i.e., by-pass contracts). Acting as a broker, Strategic Energy managed the bid process and
collected a management fee for these services. Strategic had also expanded into managing the
billing processes. This business was also successful, and Strategic chose to expand again, this
time into managing natural gas portfolios.
Strategic Energy was located in Pennsylvania, one of the early states to deregulate electric
power. The firm decided to expand into the power business. But unlike the gas business where
Strategic Energy had served simply as a broker, for the power business, Strategic took title to the
power and resold it. As a result, the firm needed greater credit capacity to allow for ownership
of more power contracts. KCPL became the partner with the needed credit capacity. By 2003
KCPL/GPE had expanded its initial 1999 Strategic Energy 43% ownership to 89% ownership,
TCJ 030104
49
The CASE Journal
and in 2003 had $203 million outstanding as guarantees on power purchases for Strategic
Energy.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
By the early 2000s Strategic Energy had transformed itself from an energy consulting firm into
one of the largest competitive retail energy providers in the United States. The Pittsburgh, PAbased energy management company had more than 33,100 commercial and industrial customers
in states with deregulated energy markets, including California, Ohio, Pennsylvania, New York,
Massachusetts and Texas. More states were expected to come online in the next few years.
For a management fee, Strategic Energy bought wholesale power under long-term contracts for
direct delivery to retail customers who were also under long-term contracts. Through its state-ofthe-art Energy Management Center, the company procured and managed power 24 hours a day,
365 days per year from hundreds of wholesale suppliers, providing its customers with long-term
budget certainty and substantial savings. Strategic Energy’s President and CEO Rick Zomnir
explained, "We have at our fingertips the most up-to-the-minute information on buying power in
the wholesale energy market. So we are able to manage our customers' electricity like a mutual
fund - we act much like an advisor, aggregator and manager of our customers' electricity
portfolios."6 With its unique business model, Strategic Energy had a customer retention rate of
more than 95 percent. Its financial results over the previous three years were as follows:
$M
Operating revenues
Net income
2000
130
6
2001
412
22
2002
790
30
KLT – a Holding Company for Non-Regulated Business Ventures
KCPL formed its unregulated subsidiary, KLT Inc., two months after the 1992 passage of the
Energy Policy Act (EPA). The wholly owned subsidiary was structured as a holding company in
order to permit KCPL to more readily undertake non-regulated business ventures. In 2003 KLT
owned three subsidiaries --- KLT Energy Services (initial investment 1992), KLT Telecom
(1995), and KLT Power (1996).
A
LL
KLT Energy Services Inc. This subsidiary had three main business activities --- managing
energy needs and selling bulk power to large organizations, providing outdoor lighting services
to municipalities (for example, Kansas City), and providing the KCPL Worry Free Service
program. Worry Free bundled financing, maintenance, and warranty of residential heating and
cooling appliances into a single monthly free. The service was available to KCPL customers as
well as other retail markets.
KLT Telecom. KLT Telecom invested in the application of several innovations including
CellNet and Digital Teleport (DTI). CellNet Data Systems technology applied to wireless meter
reading and had potential as a platform for home security systems. As a result of CellNet,
KCPL had had wireless meter reading since 1997. DTI, a 1996 investment, involved a new
fiber optic network that would distribute power to service territories that would open up as
deregulation allowed. DTI was located in St. Louis, 250 miles away. KCPL/GPE’s initial
investment purchased 47% of the company. This ownership position increased to 84% when the
telecommunications company suffered operating losses and needed a capital infusion.
TCJ 030104
50
The CASE Journal
Ultimately DTI declared bankruptcy and in 2003 KCPL/GPE had made arrangements to sell its
facilities to another telecommunications company.
KLT Power Inc. This subsidiary’s investments included ownership of gas and oil reserves,
international exploration and production, and independent power plant initiatives. U.S. activities
focused on development of Iatan 2, a 705-megawatt coal plant in Missouri. Investors included
five other utility companies located in three Midwestern states. KCPL would manage the new
generating facility.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Internationally, KLT power focused on Asia and South America. The company had international
construction ventures in various phases in China, India, and Brazil. Of two recently hired vice
presidents, one had worked on Latin American business opportunities for five years. The other
had worked for Enron where he was responsible for power and pipeline expansion in South
America.
ENTERPRISE RISK MANAGEMENT AT GREAT PLAINS ENERGY
With Hawthorn 5 back up and running, KCPL was again a net seller of wholesale power, only
now, KCPL’s wholesale business had grown to include many large energy marketers rather than
just the traditional utilities and municipalities that KCPL had transacted with for decades.
Strategic Energy’s business was also growing, and SE was also exposed to many large energy
marketers. Most energy companies active in the wholesale markets were forming ERM
functions in order to manage the consolidated risks of the company. Due to GPE’s increasing
activity in the wholesale markets, in fall 2001 the GPE Board had asked Jana Utter’s boss, CFO
Andrea Bielsker, to initiate an ERM system. The firm established a corporate Risk Management
Committee (GPRM Group) and another for its major subsidiary, Kansas City Power & Light
Company (KCPL). At the time Andrea was already “spread thin” and, with the Board’s
encouragement, established a position that would be responsible for coordinating risk assessment
at the corporate level. Jana Utter, a participant in GPE’s management leadership program, was
returning from maternity leave in March 2002 and agreed to take on the position as one of the
rotation assignments in her executive development program. Initially the role was temporary,
however, by June 2002 Jana agreed to take on the responsibility for GPE’s ERM permanently.
A
LL
Jana recognized that a good ERM system would provide a solid assessment of the firm’s risk
exposure throughout the organization, for example, risks emanating from IT security,
commodities, operations, and HR issues such as succession planning. She also realized that the
ERM program would need to evaluate any risk mitigation instruments such as insurance
contracts and hedges. She targeted to meet with the heads of key functional areas to find out
what kind of risk management plans they already had in place and to get their views on what risk
management meant to them. She began by informally interviewing the heads of the various
functional areas in KCPL, ultimately developing a draft of a fairly formal interview protocol to
use throughout the corporation. The Audit Department finalized the questionnaire and had
begun the process of carrying out the interviews with approximately 15 of the company’s senior
vice presidents and senior level managers.
TCJ 030104
51
The CASE Journal
In her informal interview with KCPL’s IT department in March 2002 Jana found the department
already had a risk management plan in place. IT had addressed many of its risks including
firewalls, up-to-date virus scanning programs, staff awareness of the most current viruses,
batteries to supply power in the event of power interruptions, a backup system to change over to
if needed, and a plan in case the dispatch center for repair crews went down, as well as backup
systems for power scheduling and power purchasing. In short, in her interviews she found that
the company’s management was not ignoring the risks, but no one had taken a corporate level
view of risk to determine if practices in place were adequate to understand and manage firm risk.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The company had hired risk managers in various areas; for example, there was a manager of
Corporate Enterprise and Ethics and a KCP&L Delivery Risk Manager. Jana realized ERM
needed to cover monitoring corporate risk as a whole. However, her early efforts focused on
credit management since this was an area that had little attention paid to it and the company’s
activities in the wholesale markets had grown substantially. Given that GPE provided credit
support on behalf of SE to SE’s wholesale counterparties, it was important to have oversight of
the credit exposure of the counterparties with whom Strategic Energy was interacting.
Jana’s role as GPE’s ERM included some direct responsibilities for risk management at KCPL
including wholesale credit management. She devoted considerable time to a credit management
program for qualifying the firms GPE contracted with to supply power. The initial phase of their
work was to calculate credit exposures based on the level of account receivables outstanding to a
counter party. The system would track the counter-parties using the ratings from major credit
rating services (S&P, Moody’s, and Fitch) in addition to other qualitative measures.
Additionally, Jana led the risk management committee, a group whose responsibility was to
calculate, communicate, and mitigate risk throughout the organization. They identified risks in
the energy industry as falling into seven broad categories:
A
LL
Market Risk - changes in the value of open positions in the wholesale power book due to
changes in the price of electricity.
Credit Risk - a counter party’s failure to meet the terms of any contract or otherwise fail
to perform as agreed.
Liquidity Risk - the lack of transparency of prices due to a relatively small number of
players and transactions.
Transaction Risk - problems with service or product delivery.
Compliance Risk - violations or non-conformance with laws, rules, regulations,
prescribed practices or ethical standards.
Strategic Risk - adverse business decisions or improper implementation of those
decisions.
Reputation Risk - negative public opinion.
Jana identified a number of challenges for the ERM process including choice of measures,
information collected, the connections between various RM programs such as the company’s
energy risk management program OATI7, making sure the GPE Board had ERM as a standing
item on its agenda, getting word out throughout the company, and winning the cooperation of
TCJ 030104
52
The CASE Journal
other managers. She recognized that she needed a hand-in-hand relationship with GPE’s
Corporate Secretary who was in charge of the firm’s audit group. She recalled a comment by a
manager from another major electric power company regarding the relationship between ERM
and audit. “It’s a delicate balance,” she remembered him saying, “because Audit is viewed
negatively whereas the ERM view is consultative. The managers will tell ERM a lot more.”
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
In addition, Jana recognized that the corporate ERM emphasis would shift as the company’s
strategy shifted. GPE’s Strategic Energy subsidiary was an example. As GPE’s ownership
position in this subsidiary increased, corporate revenues and earnings would became more
dependent on this subsidiary. Corporate would have to increase its prioritization on this
subsidiary. Another type of risk accompanied acquisitions. Acquired companies would come
with their own procedures, governance processes, contracts, and incentives. It would be the
responsibility of an ERM function to make sure that subsidiaries’ policies and practices were
reviewed and modified as opportunities arose, for example, when a subsidiary went to renew a
contact.
Incentive compensation approaches differed with various functions. For example, Strategic
Energy’s traders were compensated differently than managers with operating responsibilities. It
was not yet fully clear what risks were posed by the various compensation approaches. Serving
as a former trader of natural gas for another company, Jana observed, “Our accountant said he is
not concerned about any of these people (i.e., traders) doing anything wrong. I’m not concerned
about people, but I am concerned about positions. Take people out of it. What happens if (a
long-term trader) retires and we hire somebody else and we don’t have controls in place?” Jana
knew that one of the long-term traders at KCPL was about to retire. Currently there were no
trading limits for KCPL’s traders, thus allowing traders to potentially take positions in the
market. Jana wondered what issues might arise as newer people occupied the trading positions.
COMPANY LEADERSHIP
LL
The KCPL top leadership was a fairly stable group. (See Exhibit 9 for 2002 Executives and
Board Members.) Chairman and President and Chief Executive Officer was Bernard “Bernie” J.
Beaudoin. Beaudoin had been preceded by Drue Jennings who been with KCPL for more than
two decades before retiring in 1998. Jennings originally joined the legal department at KCPL in
1974 and quickly worked his way up to become President in 1987, CEO in 1988, and eventually
Chairman in 1991. Jennings was known for his deep involvement in the community.
A
“Bernie” J. Beaudoin was substantially responsible for the structuring and creation of KLT. He
had served as President of the subsidiary company KLT, Inc. from its inception date in 1992.
Beaudoin originally joined KCPL in 1980 as the Director of Corporate Planning. He was
promoted to Vice President of Finance in 1984 and then Senior Vice President of Finance in
1991 before moving over to start KLT in 1992. Beaudoin was a M.B.A. graduate of MIT and
had experience with holding companies.
The KCPL board membership (See Exhibit 10) had also remained relatively stable and in 1996
had been carefully constructed to reflect multiple constituencies. For example, two of the board
members, William H. Clarke and Dr. Linda Hood Talbot, represented the interests of community
TCJ 030104
53
The CASE Journal
stakeholders. Three other members, Dr. David L. Bodde, Robert J. Dineen, and George E.
Nettels Jr., contributed to the strength and interests of KCPL’s unregulated holdings and projects.
THE ERM MANAGER’S CHALLENGES
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
As Jana Utter reviewed GPE’s ERM progress to date and thought about the company she worked
for, she expected there would be challenges ahead. Her job, in creating the report for the ERMG
and the Board was to summarize and evaluate that progress as well as anticipate those
challenges.
TCJ 030104
54
The CASE Journal
Exhibit 1
Significant Corporate Difficulties
December 2001 - November 2002
2001
12/2
Global Crossing files for bankruptcy protection
TYCO announces resignation of Chairman/CEO for “personal reasons
Arthur Andersen guilty verdict
Adelphia files for bankruptcy
WorldCom announces larges bankruptcy in U.S. history
Adelphia founder arrested
TYCO CEO, CFO, and General Counsel indicated; TYCO Board
decides not to re-nominate any directors who were members of Board
prior to July 2002
Harvey Pitt, Chairman of the SEC, announces his resignation
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
2002
1/28
6/3
6/15
6/25
7/21
7/24
9/12
Enron files largest bankruptcy in history
11/5
A
LL
Source: Skadden, “corporate governance in the Spotlight,” Energy & Power Risk
Management USA 2003 Conference, Houston, TX, May 13-14, 2003.
TCJ 030104
55
The CASE Journal
Exhibit 2
Regulatory Entities for the Energy Industry
Oversight Bodies:
•
•
•
•

Two levels of corporate disclosures, i.e., those that are required by:
•
•

Regulatory agencies (FERC and CFTC) that deal with mandates on energy, commodity,
and trade regulation
Deal with financial reporting and governance
New or proposed rules and legislation:
•
•
•

FERC and state utility commissions
Commodities futures Trading Commission (prevent manipulation of commodity prices
and fraud by or against market users)
Dept. of Justice/Federal Trade commission (prevent join actions or agreements that limit
competition, i.e., antitrust)
SEC
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D

Sarbanes-Oxley Act of 2002 and SEC implementation
NYSE rule proposals
Nasdaq rule proposals
Sarbanes-Oxley provisions
CEO & CFO certifications
Disclosure controls and procedures
Internal controls
Codes of ethics
Whistleblower protections
Audit committee responsibility for discussing risk assessment policies
A
LL
•
•
•
•
•
•
TCJ 030104
56
The CASE Journal
Exhibit 3
Great Plains Energy Annual Income Statement
In Thousands, Except Per Share Amounts
Electric
Electric - KCP&L
Electric -Strategic
Gas Sales
Total Revenue
1999
2000
2001
2002
$897,393
$0
$0
$20,814
$0
$951,960
$111,844
$48,297
$0
$967,479
$396,004
$15,754
$0
$1,009,868
$788,278
$0
$24,658
$3,275
$3,767
$82,681
$63,736
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Other Revenues
1998
$938,941
$0
$0
$9,063
Cost of Fuel
Cost of Revenue
Sale of Property
General Taxes
Direct Operating
Depreciation
$972,662
$143,349
$69,010
$1,420
$93,636
$70,998
$117,913
$921,482
$129,255
$105,822
$1,200
$93,051
$62,589
$123,269
$1,115,868
$153,144
$220,567
($99,118)
$92,228
$74,466
$132,378
$1,461,918
$163,846
$411,108
$171,477
$98,060
$77,802
$158,771
$1,861,882
$159,666
$735,115
($92)
$99,351
$91,944
$151,593
Other Direct Costs
$233,231
$220,534
$249,926
$323,663
$332,650
$729,557
$735,720
$823,591
$1,404,727
$1,570,227
Other, Net
($89,583)
($100,667)
($110,480)
($133,148)
($114,182)
$153,522
$85,095
$181,797
($75,957)
$177,473
$32,800
$3,180
$53,166
($35,914)
$48,285
$120,722
($3,884)
$1.64
$81,915
($3,733)
$1.66
$128,631
($1,649)
$1.66
($40,043)
($1,647)
$1.66
$129,188
($1,646)
$1.66
EPS Reconciliation
Adjusted Income Available to Common
Primary/Basic Average
Pri/Bas EPS Ex. Extraordinary Items**
$116,838
$61,884
$1.89
$78,182
$61,898
$1.26
$126,982
$61,864
$2.05
($41,690)
$61,864
($0.67)
$127,542
$62,623
$2.04
Net Income
$116,838
$78,182
$157,055
$25,818
$124,542
Pri/Bas EPS In. Extraordinary Items**
$1.89
$1.26
$2.54
* Adapted from Multex Fundamental / ProVestor Plus Company Report at www.multex.com, 2003
** $15,872 extraordinary item in 2001; accounting change charges in 2000 $30,000 and 2002 ($3,000)
($0.42)
$1.99
Total Expenses
Income Before Taxes
Income Taxes
Income After Taxes
A
LL
Preferred Dividend
Common Dividends/Share
TCJ 030104
57
The CASE Journal
Exhibit 4
Great Plains Balance Sheet (In Thousands)
Assets
1998
1999
2000
2001
2002
Cash & Equivalents
$43,213
$13,073
$34,877
$29,034
$65,302
Other Curr. Asset
$10,725
$8,837
$15,192
$24,228
$22,776
Receivables*
$70,131
$71,548
$133,953
$152,114
$200,972
Inventories+
$64,112
$68,878
$67,204
$103,973
$72,111
$188,181
$162,336
$251,226
$309,349
$361,161
$55,488
$46,207
$150,586
$155,130
$168,196
Total Current Assets
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Deferred Charges
Limited Part.
Other LT Assets***
Goodwill
Prp./Equip., Net
$0
$104,260
$98,129
$81,136
$68,644
$452,247
$378,444
$254,420
$257,104
$258,611
$0
$0
$11,470
$37,066
$46,058
$150,731
$187,030
$340,585
$85,036
$61,025
Utility Plant
$3,576,490
$3,628,120
$3,832,655
$4,332,464
$4,428,433
Depreciation
($1,410,773)
($1,516,255)
($1,645,450)
($1,793,786)
($1,885,389)
$3,012,364
$2,990,142
$3,293,891
$3,463,499
$3,506,739
Current Liabilities
$337,272
$492,983
$556,966
$899,424
$550,090
Total Long Term Debt
$749,283
$685,884
$864,347
$778,686
$974,335
Total Assets
Liabilities
Deferred Taxes
$625,426
$592,227
$590,220
$594,704
$593,169
Other LT Liabilities
$319,519
$315,342
$321,944
$372,873
$410,675
$2,031,500
$2,086,436
$2,333,477
$2,645,687
$2,528,269
Total Liabilities
Shareholder Equity
Preferred Stock
$89,062
$39,062
$39,062
$39,000
$3,900
$443,699
$418,952
$473,321
$344,815
$363,579
Other Equity*
($1,594)
($4,005)
($1,666)
($15,700)
($33,606)
Common Stock
$449,697
$449,697
$449,697
$449,697
$609,497
$980,864
$903,706
$960,414
$817,812
$978,470
$3,012,364
$2,990,142
$3,293,891
$3,463,499
$3,506,739
61,909
61,909
61,909
61,909
69,196
Retained Earnings
Total Equity
Total Liab. & Sh. Equity
Shares Outstanding
A
LL
* Adapted from Multex Fundamental / ProVestor Plus Company Report at www.multex.com, 2003
** Accounts receivable includes: 1998: “Other Receivables” $38,981; 2000: Equity Security $18,597.
*** 1998 includes $343,247 “Investment/Other”
+ Includes Treasury Stock 2001: ($903); 2002: ($4)
TCJ 030104
58
The CASE Journal
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Exhibit 5
Stock Prices
1998
High Price
Low Price
Year End Price
Year End P/E
Dividend Yield
High P/E
Low P/E
1999
2000
Cash Flow
Revenues
Share Information
Market Capitalization
Shares Outstanding
Trading Float
Monthly Trading Volume
Beta
$27.56
$26.98
$25.00
$28.00
$20.81
$20.88
$23.19
$15.96
$21.36
$29.63
$22.06
$27.44
$25.20
$22.88
$24.17
11.8
15.7
17.5
13.4
NM
11.2
5.50%
7.50%
6.10%
6.60%
7.30%
26
19.5
26.5
NM
NM
12.3
14.8
12.6
12.4
NM
NM
10.5
Multiple
$2.04
11.8
$13.58
1.8
$4.87
5
$29.73
0.8
$1.7 Billion
$69.2 Million
$68.5 Million
$6.6 Million
0.4
$1.66
A
LL
Indicated Annual Dividend
TCJ 030104
YTD 2003
$29.00
Per Share
Book Value
2002
$29.63
Per Share Statistics & Current Price Multiples
Earnings
2001
$31.81
59
The CASE Journal
Exhibit 6
Ratios & Industry Comparisons
Industry
Average
GXP
Industry Low
S&P 500
11.8
26.8
11.1
0.4
14.7
29.7
9.2
0.1
458.4
230.8
13.9
3.6
0.0
14.9
1.9
(3.0)
23.0
49.9
16.5
1.0
5.0
15.3
0.8
1.8
1.9
5.8
28.5
1.0
1.5
2.4
25.0
441.8
3.1
6.3
7.8
0.0
0.0
0.0
0.0
0.0
16.1
27.4
3.0
4.3
7.3
6.9%
6.6%
0.5%
81.4%
5.3%
4.6%
-4.6%
58.0%
57.0%
19.7%
311.7%
350.0%
2.0%
0.0%
-100.0%
0.0%
2.2%
1.4%
1.9%
27.5%
27.8%
27.4%
15.8%
NM
NM
11.6%
0.5%
1.0%
-30.0%
-5.9%
10.5%
8.2%
-3.0%
3.3%
-4.6%
20.5%
233.7%
270.3%
368.8%
674.6%
482.4%
246.5%
311.7%
273.2%
-100.0%
-100.0%
-100.0%
-641.5%
-98.2%
-54.6%
-100.0%
-100.0%
7.8%
4.1%
9.8%
24.9%
23.1%
10.7%
1.9%
4.6%
0.5
0.7
1.0
1.3
3.3
0.5
0.8
1.5
1.8
3.7
28.6
35.0
68.9
85.0
26.6
0.0
0.0
0.0
0.0
(925.0)
1.2
1.7
0.7
0.9
13.6
3.7%
2.7%
4.6%
3.1%
15.8%
9.3%
2.4%
3.1%
2.9%
3.7%
8.6%
11.6%
84.5%
11.3%
210.8%
31.1%
386.7%
36.4%
-462.9%
-157.5%
-104.3%
-224.6%
-146.6%
-352.8%
6.4%
7.6%
10.3%
12.2%
18.4%
20.9%
29.1%
38.1%
23.8%
29.5%
33.1%
33.7%
25.7%
28.4%
100.0%
100.0%
57.6%
50.4%
-48.0%
-7.2%
-86.6%
-91.3%
47.4%
47.9%
20.7%
22.1%
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Price/Earnings Ratios
Current P/E
High P/E - Last 5 Years
Low P/E - Last 5 Years
Beta - 5 Yr. Monthly Avg.
Other Valuation Multiples
Price to Cash Flow
Price to Free Cash Flow
Price to Sales
Price to Book
Price to Tangible Book
Dividends
Dividend Yield
5 Year Average Yield
5 Year Dividend Growth Rate
Payout Ratio
Growth Rates
Revenue vs. Qtr 1 Yr. Ago
Revenue vs. Last Year
Revenue vs. 5 Year Growth Rate
EPS vs. Qtr. 1 Yr. Ago
EPS vs. 1 Yr. Ago
EPS - 5 Yr. Growth Rate
Dividend - 5 Yr. Growth Rate
Capital Spending - 5 Yr. Growth
Financial Strength
Quick Ratio
Current Ratio
LT Debt/Equity
Total Debt/Equity
Interest Coverage
Management Effectiveness
Return on Assets
Return on Assets 5 Yr. Avg.
Return on Investment
Return on Investment - 5 Yr. Avg.
Return on Equity
Return on Equity - 5 Yr. Avg.
Profitability Ratios
Gross Margin
Gross Margin - 5 Yr. Avg.
EBITD Margin
EBITD Margin - 5 Yr. Avg.
Industry High
TCJ 030104
60
The CASE Journal
15.7%
18.2%
9.5%
9.1%
6.9%
7.4%
27.2%
20.4%
16.0%
17.9%
9.4%
12.0%
6.4%
7.8%
35.7%
36.2%
59.4%
40.1%
1549.9%
54.2%
1113.6%
97.3%
79.3%
85.9%
-91.9%
-92.1%
-88.3%
-14.7%
-88.3%
-14.9%
0.0%
0.0%
18.5%
18.3%
16.6%
17.5%
11.9%
11.5%
31.4%
35.1%
$611,255
$42,412
9.7
17.8
0.5
$640,312
$46,396
7.2
14.4
0.4
$3,496,294
$486,267
17.0
279.1
1.4
$43,667
$2,536
0.0
0.0
0.0
$567,689
$73,150
9.3
11.0
0.9
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Operating Margin
Operating Margin - 5 Yr. Avg.
Pretax Margin
Pretax Margin - 5 Yr. Avg.
Profit Margin
Profit Margin - 5 Yr. Avg.
Effective Tax Rate
Effective Tax Rate - 5 Yr. Avg.
Operating Efficiency
Revenue/Employee
Net Income/Employee
Receivable Turnover
Inventory Turnover
Asset Turnover
TCJ 030104
61
The CASE Journal
Exhibit 7. Great Plains Company Logo and Statements of Mission and Vision
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Mission Statement:
To manage diverse energy-related business to achieve stability, disciplined growth, and dividends for
shareholders while focusing on community and social responsibility. 8
A
LL
Vision Statement:
Dedicated people working together to build a diversified Tier 1 energy company that annually produces
growth of 5% earnings per share.9
TCJ 030104
62
The CASE Journal
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Exhibit 8. KCPL Electric Prices from 1986-2002 compared with natural gas, and
the CPI, adjusted for inflation.
TCJ 030104
63
The CASE Journal
Exhibit 9. Great Plains Energy Senior Executives
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Corporate Governance
Bernard J. Beaudoin
Chairman, President and Chief Executive Officer - Great Plains Energy Inc.
William Downey
President - Kansas City Power & Light
Bruce Selkirk
President - KLT Gas, Inc.
Richard Zomnir
President and Chief Executive Officer - Strategic Energy
Jeanie Sell Latz
Executive Vice President - Corporate and Shared Services of Great Plains Energy & Corporate Secretary
Andrea Bielsker
Senior Vice President of Finance, Chief Financial Officer & Treasurer
John J. DeStefano
President - Home Service Solutions
President - Great Plains Power
Stephen T. Easley
Vice President – Generation Services
William P. Herdegen, III
Vice President – Distribution Operations
Nancy J. Moore
Vice President - Customer Services
Douglas M. Morgan
Vice President - Information Technology and Support Services
Brenda Nolte
Vice President - Public Affairs
William G. Riggins
General Counsel
Lori Wright
Controller
Richard A. Spring
Vice President - Transmission Services
Andrew B. Stroud, Jr.
Vice President – Human Resources
TCJ 030104
64
The CASE Journal
Exhibit 10. Great Plains Energy Members of the Board of Directors
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Bernard J. Beaudoin
Chairman, President and Chief Executive Officer - Great Plains Energy Inc.
Dr. David L. Bodde
Professor of Technology and Innovation, Bloch School of Business, University of Missouri-Kansas City
Mark A. Ernst
President & Chief Operations Officer, H&R Block Inc.
Randall C. Ferguson
Customer Relations Executive, Midmarket West, IBM
William K. Hall
Chairman, President, & Chief Executive Officer, Falcon Building Products Inc.
Luis A. Jimenez
Vice President and Chief Strategy Officer, Pitney Bowes, Inc.
James A. Mitchell
Executive Fellow, Leadership Center for Ethical Business Cultures
William C. Nelson
Chairman, George K. Baum Asset Management
Dr. Linda Hood Talbott
Chairman, Center for Philanthropic Leadership, President, Talbott Associates
Robert H. West
Retired Chairman and Chief Executive Officer, Butler Manufacturing Company
TCJ 030104
65
The CASE Journal
Appendix A
Regulatory Bodies and Regulations10
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The Public Utility Holding Company Act (PUHCA). PUHCA was enacted in 1935 and among other issues
prevented utility holding companies from subsidizing unregulated business activities from profits obtained from their
regulated business activities and captive customers. PUHCA required that all non-regulated businesses be kept separate
from the regulated business. Some large utilities wanted PUHCA repealed, arguing that the law was obsolete and
restricted competition and diversification in the electric industry. Others felt that simply repealing PUHCA would most
likely result in a wave of mergers that would create a few disproportionately large and influential companies, rendering
competition meaningless and harming consumers and the environment. Congress enacted PUHCA as a response to
questionable business activities practiced by huge utility holding companies during the 1920s and 30s. These holding
companies controlled utilities in complicated pyramid structures, where a few investors at the top held controlling
shares of many subsidiary companies. In the early 1930s, three holding companies controlled almost half the utility
industry, with one owning 130 utilities.
This pyramid structure led to a variety of problems. For example, subsidiaries of the holding company could charge
each other inflated rates for service, and hide the charges in their regulated rates. Also, since the holding company was
legally separate from the subsidiary, it was not liable for debts. Some analysts believe that utility holding company
abuses greatly contributed to the Stock Market Crash of 1929 and the ensuing Depression. Due to their shaky finances,
holding companies were "fair weather" corporations, and when the Depression came, many went under.
Traditionally, utilities were monopolies, free from competition, but regulated by state and federal governments.
Regulators tried to keep the utilities operating efficiently, to keep electricity prices low, and to protect captive and small
customers from being gouged. Important parts of this authority come from PUHCA, allowing regulators to limit
business practices that could undermine the stability of the utility, increase rates, and harm the environment.
Federal Energy Regulatory Commission (FERC). FERC was an independent regulatory agency within the
Department of Energy that regulated the transmission and sale of natural gas for resale in interstate commerce, the
transmission of oil by pipeline in interstate commerce, and the transmission and wholesale sales of electricity in
interstate commerce. FERC licenses and inspects private, municipal and state hydroelectric projects. FERC oversaw
environmental matters related to natural gas, oil, electricity and hydroelectric projects. FERC also administered
accounting and financial reporting regulations and conduct of jurisdictional companies, and approved site choices as
well as abandonment of interstate pipeline facilities. The Commission recovered all of its costs from regulated
industries through fees and annual charges.
Nuclear Regulatory Commission (NRC). The U.S. NRC was an independent agency established by the Energy
Reorganization Act of 1974 to regulate civilian use of nuclear materials. NRC is headed by a five-member
Commission. NRC's primary mission was to protect the public health and safety, and the environment from the effects
of radiation from nuclear reactors, materials, and waste facilities. The agency also regulated nuclear materials and
facilities to promote the common defense and security.
LL
Federal Communications Commission (FCC). The FCC was an independent United States government agency,
directly responsible to Congress. The FCC was established by the Communications Act of 1934 and is charged with
regulating interstate and international communications by radio, television, wire, satellite and cable. The FCC's
jurisdiction covers the 50 states, the District of Columbia, and U.S. possessions.
A
Missouri Public Service Commission (MPSC). MPSC was the Missouri state government agency charged with
ensuring that citizens of the state received safe, adequate, and reliable utility services at reasonable rates. The
commission had to balance the interests of the public-ratepayers as well as company shareholders. In proceedings the
commission set rates to give the utility companies an opportunity, but not a guarantee, of earning a reasonable return on
its investment after recovering its prudently incurred expenses.
Kansas Corporation Commission (KCC). KCC’s mission was to protect the public interest through impartial, and
efficient resolution of all jurisdictional issues. The agency was responsible for regulating rates, service and safety of
public utilities, common carriers, motor carriers, and regulate oil and gas production by protecting correlative rights
and environmental resources.
TCJ 030104
66
The CASE Journal
Appendix B
The Changing Regulatory Landscape in Kansas and
Missouri – Current Debates in 200211
Regulation was established under the premise that it would keep electricity prices below what they otherwise would be.
Although, throughout much of its history regulation arguably achieved this, regulation has failed to keep electricity
prices so in recent years. Technological advances in the electric power industry have now made it possible and
desirable to expose at least parts of the industry to competition.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Kansas and Missouri have joined the circle of states currently contemplating what path to follow for their electric
power industries. Their policy on industry restructuring hinges largely on their position on retail competition, which
is synonymous with the concepts "retail wheeling" and "customer choice." These terms all refer to allowing retail
electricity consumers, namely residential, commercial and industrial customers, to have the right to purchase
unbundled electric services from other than the local franchised electric utility. Currently, virtually all retail
consumers in Kansas and Missouri purchase what can be called "bundled sales service" from the local utility, whether
an investor-owned utility, rural electric cooperative or municipality. Bundled sales service combines different
components or sub services -- electric energy, transmission, distribution, metering, billing, and so forth -- to retail
consumers in the form of "packaged" electric service. Retail customers pay one price for this service.
Retail competition refers to the situation where retail customers have been given the right to buy electric energy or
other unbundled services from entities other than the local franchised utility. Under retail competition, for example,
end-use customers would have the option to buy electric energy directly from power generators or from intermediaries,
such as load aggregators, power marketers, or energy service companies. In a more fully-developed form of retail
competition, customers would be able to choose from a wide range of services, such as metering, billing, energy
management, and risk management, priced separately and opened to alternative suppliers. Under retail competition,
customers could continue to purchase bundled sales service from the local utility, purchase their electric energy from a
power exchange, with or without what are called "contracts for differences," or bilaterally with a power generator.
Customers may have special meters to take advantage of real-time pricing.
Kansas and Missouri face three choices: (1) suspend consideration of retail competition for an indefinite period, (2)
initiate steps to phase-in retail competition, or (3) move immediately toward full-scale comprehensive retail
competition. The first choice seems increasingly unlikely in view of the accelerated actions of other states around the
country in endorsing the idea of retail competition and the political tenor in Washington, D.C. to restructure the
electric power industry.
The second choice, which can be characterized as a "moving-deliberatively approach," typifies the activities of
several states. In these states, retail competition is being phased-in over a number of years, in many instances with
pilot or experimental programs.
The third choice, immediate movement toward full-scale retail competition, is being carried out by a few states,
notably California. These states generally have high electricity prices relative to the rest of the country, and anticipate
large short-term benefits for consumers.
LL
With retail competition unfolding across the country, it seems inevitable that Kansas and Missouri will have to face
the reality that doing nothing today only postpones having to do something tomorrow. If one believes this to be true,
then the choice for Kansas and Missouri narrow to how fast should retail competition be initiated and what ground
rules should apply. The longer Kansas waits to open up retail markets, the longer Kansas electricity consumers will
have to wait to enjoy the full benefits of competition in the wholesale power market.
A
Good public policy demands that a governmental action should produce positive benefits for society. In the context of
retail competition in the electric power industry, good public policy means essentially that electricity consumers in
the long term should benefit from being allowed to choose among alternative suppliers for the purchase of different
electric services. The choices Kansas and Missouri to accept deregulation benefits will accrue gradually over a
number of years, with longer-term gains resulting from innovations and efficiencies in new investments and new
services tailored to meet customers' needs.
Although the growing consensus among analysts is that consumers would benefit under retail competition, proper
institutional mechanisms would be required. A big concern of some interest groups is that the transition period may
bring costs to certain consumers and utilities. A major policy question for Kansas is: Should Kansas proceed with
retail competition even if some utilities or consumers expect to be worse off during the transition period? This
"equity" issue should be an integral part of the debate over retail competition. If, for example, some groups would be
seriously injured, then, at least for political purposes, some transitory mechanisms may be required to mitigate this
problem.
TCJ 030104
67
The CASE Journal
The fundamental question of how retail competition will affect the electric power industry in Kansas and Missouri.
Kansa and Missouri assume that the wholesale power market will continue to develop in the same direction that it has
over the past several years. That is to say, wholesale power transactions will increasingly be consummated under
competitive conditions.
Increasingly, electric utilities are taking advantage of attractive prices in wholesale markets and are passing cost
savings to their customers. How can retail customers benefit any more than they are currently when they, instead of
the local utility, purchase low-cost wholesale power? The simple answer is that much of the power sold by utilities,
whether located in Kansas and Missouri or elsewhere, to their retail customers is priced above the current market
level. The price for this power, net of transportation and distribution costs, is based on historical embedded costs that
commonly lie far above the price of power currently available in a competitive wholesale marketplace.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Recent actions by Kansas and Missouri electric utilities reflect ongoing changes occurring in the U.S. electric power
industry. It should be expected that utilities in Kansas and Missouri will continue to undergo restructuring and reform
irrespective of the status of retail competition in the state. The electric power industry in Kansas and Missouri will
evolve on a course toward restructuring in line with emerging technological, political, and economic realities. As
argued elsewhere in this report, the pertinent question for Kansas and Missouri at this point in time is not whether
retail competition will come, but when and how. A valuable lesson can be learned from the natural gas industry where
competition, starting in the wellhead sector, has shifted to the other sectors of the industry. For any industry it is
difficult to bottle up competition once initiated. The spread of competition from wholesale to retail markets seems
inevitable, as it is a natural outgrowth of economic pressures exerted by market participants who want to receive the
full benefits of an open marketplace.
In many ways recent actions in Kansas and Missouri exemplify those in other states. Mergers, consideration of
revamping the activities and structure of power pools, pressures to transmit low-cost wholesale power to end-use
consumers, formation of marketing companies, cost restructuring by electric utilities, the offering of special discount
rates to large customers all reflect the movement in the electric power industry toward competition.
Kansas and Missouri’s utilities have, for some time, offered special discount rates to large customers. The rates are
generally applicable to the incremental load of existing firms or to a new firm's entire load. These rates are frequently
contained in a special contract negotiated between utility and individual customers. Over the last several years,
special discount rates have resulted in electricity prices to large customers falling relative to prices charged to smaller
customers.
Pressure for Change
Pressure for expanding competition in the United State electric power industry has proliferated in recent years. This
phenomenon is an outgrowth of competition in the generation sector of the industry. One lesson that we have learned
from the deregulation-restructuring experiences of other industries, such as natural gas and telecommunications, is
that competition, once begun, becomes difficult to contain. In the natural gas industry, for example, competition in the
wellhead sector exerted great pressure to open up the pipeline and distribution sectors. Currently, a major activity is
the liberalization of retail gas markets for all customers including residential and small commercial.
LL
Increasingly, utilities and other market participants acknowledge the reality of competition in the electric power
industry extending to retail markets. Most serious analysts and other observers of the industry agree that this
movement is irreversible. Utilities have begun to develop rates and terms and conditions for individual retail services.
Even utilities currently not required to offer unbundled retail services see the "handwriting on the wall." They want to
be ready to compete when retail competition starts.
A
The push for retail competition originates from various interest groups. Independent and utility-affiliated generators
want to expand their markets to include a greater number of potential buyers. Marketers want the opportunity to put
deals together involving different services for retail customers. Some vertically integrated utilities also favor retail
competition. They see opportunities to sell their generation and other services outside their franchise area, while at the
same time feeling confident that they can fend off competition within their service area. Last, but certainly not least,
industrial customers want lower-priced electricity now being sold in wholesale bulk markets.
In sum, the movement to retail competition across the country appears robust, as different interest groups see large
benefits from a restructured and more competitive electric power industry. These reforms are being driven by market
forces and technological changes that ultimately will unravel existing industry and regulatory practices.
We should note, however, that retail competition will radically change the modus operandi of industry operation,
pricing and planning, and of public utility regulation itself. An endorsement of retail competition in Kansas and
Missouri would be a significant event that should not be taken lightly. It will lead to new institutions and major
adaptations of current ones. Because the retail power sector has been so highly monopolistic and regulated, shifting to
an environment where competition becomes a dominant feature would require time and considerable readjustment by
everyone. The transition to an "equilibrium" competitive marketplace may cause difficulties for some and take several
TCJ 030104
68
The CASE Journal
years to complete. One argument can be made that the sooner the transition begins and ends, the sooner the long-term
benefits of retail competition will arrive. If the Kansas and Missouri Legislatures, for example, endorse the concept of
retail competition, it would be good policy to "get the ball rolling" in the shortest time possible. This means more than
just studying retail competition; it means developing ground rules to implement retail competition in a fashion that
maximizes benefits to customers by some specified date.
Kansas and Missouri may be affected by federal legislation regarding restructuring of the electric power industry.
Five comprehensive restructuring bills have so far been introduced; three of them contain "date certain" provisions,
one gives states the discretion to determine whether or not they want to implement retail competition, and one lifts
constraints on states desiring to implement retail competition. The major issues surrounding the current debate
encompass jurisdictional authority, the "date certain" issue, universal service, and renewable energy.
Critics of Retail Competition
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Vocal critics of retail competition have included incumbent electric utilities that fear the loss of profits or surplus.
Some investor-owned utilities have argued that revenue losses would diminish the returns from their existing assets.
Municipalities worry that the loss of surpluses earned from utility operations will jeopardize their fiscal integrity or
force a cutback on municipal services. Electric cooperatives fear that expanded competition in the electric power
industry may result in the loss of customers and, consequently, their ability to pay back outstanding debts. In a
competitive environment, firms which are able to restructure their costs and provide services that consumers want
stand to gain. Inefficient firms either drop out or merge with firms that see the opportunity to increase the earnings
from the inefficient firm's assets.
Kansas and Missouri need to confront the question of whether it is willing to have consumers pay higher prices for
electricity in return for protecting electric utilities from competition. Certainly, the welfare of the "owners" of electric
utilities represents a legitimate interest in the debate over retail competition. But it should be pointed out that the
primary consideration in any discussion of retail competition or electric power industry restructuring should be given
to the welfare of electricity consumers. If consumers are not expected to benefit, then little reason exists for industry
restructuring. Of course, as in the case of other industries that have deregulated or restructured, consumers have
benefited, but at varying levels.
Critics of retail competition make two broad arguments. First, unlike wholesale competition, retail competition would
not benefit all end-use electricity consumers. In fact, they regard retail competition as a poor public policy, since only
a small number would benefit at the expense of everyone else. Second, competition in wholesale power markets will
tend to maximize benefits to retail customers. As long as the utility purchases the lowest-cost or "best" available
power, retail customers receive the greatest possible benefits.
Turning to the first argument, when all retail customers have the availability of different service providers they should
be able to benefit, although at varying levels. Faced with new market choices, retail customers have the opportunity to
lower their electricity bills and, perhaps more important, have access to a greater number of services.
Model of Retail Competition
If deregulation occurs, Kansas and Missouri could face the following:
(1) Continue to purchase bundled-rates service (e.g., recourse service) from their local utility.
(2) Negotiate a bilateral (physical or financial) contract with a generator,
LL
(3) Assign an aggregator or some kind of marketer to purchase different services, or
(4) Purchase spot power directly from the power exchange.
A
In a fully developed retail-competition world, other-than-local-utility services could include ancillary services,
billing, metering, and information services. Retail competition does not imply that customers acquiring electric
energy from another party would completely bypass the local utility. We expect, similar to the case of natural gas that
virtually all customers opting for unbundled service would continue to receive distribution service from the local
utility. Responsibility for maintaining the distribution system and assuring reliable local delivery service would still
remain with the local utility.
Finally, the question arises: How should Kansas and Missouri regard electric energy as a potentially tradable
commodity? Should Kansas and Missouri, for example, encourage the export of electric energy to other states or other
regions within the state? Certainly, in the case of wheat, Kansas and Missouri farmers benefit when they are able to
sell to buyers in other states and countries throughout the world. Exporting wheat from Kansas and Missouri is widely
regarded as beneficial to both farmers and the state as a whole.
Some critics of retail competition argue that a state with low-cost electric energy should discourage exports,
reasoning that in-state electricity consumers would otherwise pay higher prices. Such a position, however, would be
detrimental to the well being of Kansas and Missouri. First, low-cost electric energy should be regarded as a resource
TCJ 030104
69
The CASE Journal
whose value to Kansas and Missouri increases with the size of the market within which it can be sold. Policymakers
in Kansas and Missouri would not think of restricting the market for wheat produced within the state. Why should
policymakers take a different position when it comes to electric energy? From an economic perspective, any
commodity or service should be sold to whoever values it the most. Not only does society as a whole benefit but
producers also gain from receiving a potentially higher price or from selling more of their commodity or service.
Prices to in-state consumers may or may not increase. It can be argued that by liberalizing electricity markets in terms
of allowing imports and exports, in-state electricity consumers would have access to a greater number of generators.
As discussed elsewhere in this report, retail competition would provide Kansas and Missouri utilities with stronger
incentives to keep their costs down and to be responsive to customer demands. In sum, a policy that attempts to
restrict the trading of electric energy is ill advised, contrary to good economics and the overall well being of Kansas
and Missouri.
Guidelines
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Retail competition will engender major changes in how regulation should oversee the activities of electric utilities and
in how electric utilities conduct their business. On the one hand, retail competition will reduce the role of regulators
in performing certain functions. On the other hand, especially during the transition, regulatory intervention may be
needed to make sure that electricity markets develop competitively and not in a direction where incumbent utilities
will be able to engage in anticompetitive practices. Consequently, during the transition, a host of issues will need to
be addressed to help assure that retail competition benefits consumers and society as a whole.
Guidelines for retail competition reflect principles from which policy directives can be established. One strategy is for
the Kansas Legislature to develop guidelines that the KCC would be responsible to execute. Missouri Public Service
Commission (MPSC) would be responsible in Missouri side. Because retail competition would have a wide-sweeping
effect on the electric power industry in Kansas and Missouri, many of the current regulatory practices and policies
would need to be revisited. Otherwise, leaving intact existing regulatory rules could have a debilitating effect on the
benefits of retail competition in Kansas.
Ten general guidelines for implementing retail competition in Kansas and Missouri are presented below:
1. All retail customers should have choice. Depriving certain customers of choice precludes them from enjoying the
potential benefits offered by restructuring of the electric power industry. In addition, cost shifting would become
more likely, harming those customers who remain captive to the local utility. Customer aggregation would help in
making it possible for small customers to obtain more attractive prices and terms that an individual customer could
not get alone.
2. True customer choice requires the availability of different unbundled services offered by various providers.
Unbundling a greater number of services should make retail electricity markets more competitive. Over time, retail
competition should evolve to where a number of services, in addition to electric energy, are being offered by different
providers at stand-alone prices. It is conceivable that many of these services can be sold under competitive conditions.
These services can be repackaged and sold by a market aggregator. Unreasonable regulatory barriers should not
constrain the entry of new service providers. Barriers only serve to benefit incumbent firms at the expense of
consumers.
LL
3. Quality of electric service should not be jeopardized. This should not imply that all consumers would receive the
same quality of service that they currently do. Some consumers would choose lower quality service if they are
compensated with lower prices. The overall quality of service may decrease, and correctly so, if it is true that under
the existing regime consumers are receiving excessive quality of service in the sense that they would be willing to
sacrifice some quality for lower prices. If regulators want to assure that service quality does not fall below a specified
level, they can impose penalties on utilities that fail to meet the minimum standard.
A
4. Cost-shifting should not be allowed to harm any consumer who is unable to choose among different service
providers. Under retail competition, cost reallocation should only occur when compatible with a more economically
rationalized rate design. Consumers who currently receive subsidies may face higher prices for certain services; but
from an economic perspective, this would not be undesirable: the problem of some customers paying below-cost
prices would be mitigated. Cost reallocation that results from the utility exploiting its market power for certain
customers is another matter that should be avoided. For example, charging residential customers higher prices
because they do not have choice while other retail customers do, exemplifies a form of cost shifting. As mentioned
above, allowing choice for all retail customers represents the appropriate response to this problem. The greater the
scope of retail competition, in terms of the number of eligible customers and unbundled services, the less likely cost
shifting would occur.
5. The local utility should be obligated to provide services for which it continues to have monopoly power. For
services provided in a competitive setting, the local utility should no longer have an obligation to serve. Historically,
obligation-to-serve rules were imposed as a restraint on monopoly power. For those services, for example, electric
energy, where the local utility no longer has monopoly power, legislators or regulators would need to redefine the
TCJ 030104
70
The CASE Journal
local utility's obligation to serve. For services where the local utility still has a monopoly position, the obligation to
serve should remain.
6. Utilities should be compensated for any service they continue to provide or any costs imposed on them by third
parties. If, for example, customers purchase electric energy from a third party but continue to receive other services
from the local utility (e.g., distribution, transmission, metering, billing), the utility should receive "fair" compensation
from these customers. Under pricing these services represents a form of cost shifting that transmits a false signal to
customers and hurts other customers.
7. All providers of unbundled services should have equal opportunities. This means that all providers should operate
on a competitively neutral playing field. When such a condition fails to exist, it becomes extremely difficult if not
impossible to determine whether electric services are being supplied by the "best" providers. As an essential feature
of a properly functioning efficient market, all service providers should conform to the same rules.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
8. Regulatory rules for individual unbundled services should be commensurate with the market environment within
which they are transacted. As a general rule, services for which the local utility no longer has monopoly power
should be deregulated. Other services, such as distribution, would continue to be regulated but perhaps subject to
other than rate-of-return regulation (e.g., price caps).
9. Anticompetitive behavior should be minimized. Such behavior removes the benefits of retail competition from
consumers. Self-dealing abuses, cost shifting, and discriminatory access to essential facilities are all examples of
anticompetitive behavior that hurt consumers at the benefit of utilities. Mitigation of anticompetitive practices should
be an important function of regulation under a retail-competition regime.
10 Customer information and education should be made available. Without adequate information, consumers would
more likely make bad choices or continue to do what they did before. Consumers in any market require at least
amount of information to take advantage of and benefit from new market opportunities. The KCC and MPSC can
play a vital role in assuring that consumers know the new rules regarding consumer rights and responsibilities, know
about new market opportunities, and have access to information needed for well-informed decision-making.
A
LL
In sum, these guidelines should help to increase the benefits of retail competition for Kansas and Missouri by
satisfying three conditions. First, all retail customers would have a chance to directly benefit from an open electricity
market. Second, regulation would still control the prices of monopoly services and assume an important role in
monitoring and remedying anticompetitive practices. Third, all new entrants and incumbent firms would have an
equal opportunity to participate.
TCJ 030104
71
The CASE Journal
Endnotes
The new holding company traded on the NYSE under the ticker symbol “GXP”.
2
www.greatplainsenergy.com
3
http://www.greatplainsenergy.com/investor/index.html
4
http://www.kcpl.com/about/about_corpintro.html
5
2002 Annual report, p. 9.
6
http://www.greatplainsenergy.com/sel.html
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
1
7
Open Access Transmission, Inc. provided KCPL’s power scheduling system. OATI, the software
program, calculated credit risks based on the level of accounts receivable the customer.
8
http://www.greatplainsenergy.com/investor/overview.html
9
http://www.greatplainsenergy.com/investor/2002AR.pdf
10
Sources: http://www.ucsusa.org/clean_energy/renewable_energy/page.cfm?pageID=118;
http://www.appanet.org/legislativeregulatory/legislation/puhca.cfm;
http://www.ferc.gov/About/about.htm#What%20is%20FERC?; http://www.nrc.gov/who-we-are.html;
http://www.nrc.gov/what-we-do.html; http://www.fcc.gov/aboutus.html;
http://www.psc.state.mo.us/press/consumer_issues/A_Snapshot_Of_What_We_Do_2002-09-26.pdf;
http://www.greatplainsenergy.com/aboutgpe.html; http://www.kcc.state.ks.us/mission.htm;
11
A
LL
Sources: http://www.plunkettresearch.com/energy/energy_overview.htm; http://www.emec.com
/aaaa/dereg/dereg2.htm; http://www.eei.org/issues/comp_reg/finmark.htm;
http://www.eei.org/issues/comp_reg/states_rules.pdf ; Douglas Caves, Kelly Eakin and Ahmad Farepui,
The Electricity Journal, April 2000;
TCJ 030104
72
The CASE Journal
BERINGER WINE ESTATES HOLDINGS, INC. 1
Armand Gilinsky, Jr., Sonoma State University,
Raymond H.Lopez, Pace University,
James S. Gould, Pace University,
Robert R. Cangemi, Pace University (Retired)
[email protected]
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The real challenge is to retain the culture of the organization in a changing and accelerating environment in the
marketplace. My job is to keep the good things rolling and revise things that need revising. I don't want people to
lose their passion for the things that have made this company a success.1
Walter T. Klenz, Chairman & CEO, Beringer Wine Estates.
Peter Scott, the new chief financial officer of Beringer, walked into his office at the Napa,
California corporate headquarters of the firm on Monday morning, June 1, 1997, and found a
note from his boss, CEO Walter T. Klenz. The note read: “Welcome, Pete, to Beringer and to
the beginning of a new career path in the world of publicly-traded corporations!” It directed him
to a meeting with other senior managers, the Board of Directors, and key investors of the
privately held firm.2
Klenz opened the meeting by stating its primary objective: “We are all here to prepare a business
plan that will result in Beringer Wine Estates becoming a publicly-held company.” He turned to
Peter Scott and said “we will all be working on the details, Pete, but your responsibility is to
coordinate and control this effort.”
Earlier in the spring, the board had set a target for the new issue—Fall 1997. Since, typically,
most companies’ Initial Public Offerings (IPOs) were not well received by the equity markets
and their investors during the end-of-year holiday season, Scott’s window for a successful
offering was probably only a maximum of four months. 3
A
LL
The top management team believed that Beringer’s operations had achieved a sustainable growth
rate in revenues of more than of 10 percent per annum. [See Exhibits 1–3 for Beringer’s
consolidated income statements and operating data.] The value of Beringer’s brand portfolio was
substantial and continued to grow as it expanded product offerings up the premium wine price
scale. The wine business was capital intensive. Therefore, in order to sustain and increase
growth, access to a broad range of financial sources of capital would be a critical element in
achieving Beringer’s strategic goals. Its current capital structure reflected over $200 million of
1
The authors gratefully acknowledge Drs. William Welty and Rita Silverman for their direction, inspiration, and
support in sparking our interest in case research and case writing. We also acknowledge the significant contributions
of Yvonne Hock, Victoria Underhill, Jackie Womack, and Ana Perreaux for their editorial and printing assistance.
The case was also tested for its academic integrity and usefulness as a learning tool through the format of a
colloquium held under the auspices of the Center for Applied Research within the Lubin School of Business of Pace
University. The authors thank the directors of the Center, Dr. Michael Szenberg, director of the Center, and Dr.
Surendra K. Kaushik, associate director, for their efforts on our behalf.
TCJ 030105
73
The CASE Journal
residual long-term debt from a leveraged buyout (LBO) in 1996. [See Exhibits 4 and 5 for
Beringer’s consolidated balance sheets and statements of cash flow.] The team felt that reducing
the combined risk of high operating and financial leverage and at the same time expanding
capital choices could have beneficial outcomes; reduce the firm’s costs of capital and enhance
revenue growth prospects to above 15 percent per year. An IPO would also reward patient
investors by providing them with liquidity and an exit route for their holdings in Beringer.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Scott and his management team worked diligently throughout the summer of 1997 to implement
his board’s directives. One critical component of the IPO process was the choice of an
investment banker. Although there were a number of interviews, this decision turned out to be
one of the easiest for Scott. Beringer’s current owners, Texas Pacific Group (TPG), had worked
on a number of deals with Goldman Sachs over the years. In addition, another winery, the
Robert Mondavi Company, had gone public approximately four years earlier and the lead
underwriter was Goldman Sachs. Everyone at Beringer felt comfortable with Goldman Sachs—
the Mondavi issue had been well accepted by the investment community and Goldman Sachs
understood the wine business. It seemed a natural fit.4
With Goldman Sachs announced as the underwriter and internal progress being made throughout
the firm, at its August meeting Mr. Klenz had asked Scott, “Are you ready? Can we take
Beringer public before the holidays?” After a brief pause, Scott’s reply was in the affirmative.
Some critical questions needed to be addressed by both Beringer management and Goldman
Sachs. What would be the size of the issue in dollars? How many shares would be issued to the
public and in what price range? How could Texas Pacific Group Investors keep voting control of
the ownership of the business? What would be the use of proceeds from a successful offering?
How much stock must be sold in order to create an efficient market environment for the shares
and the shareholders? What should be the target capital structure of the firm after the IPO?
A
LL
After Goldman Sachs had been selected as the lead underwriter, some of these questions began
to be answered, at least on a preliminary basis. A target of approximately $100 million was
selected to meet financing needs of the firm and efficiency and liquidity needs of the investment
market. With an initial target price range of $21 to $23 per share, a 5 million-share offering was
discussed at length. The net proceeds would enable the firm to refinance some of the most
expensive and confining components of its current capital structure, the preferred stock and the
subordinated note. [See Exhibit 6 for characteristics of Beringer’s financial structure.] The
firm’s debt/total capital ratio would also move towards a more manageable and efficient range of
60-65 percent from its current levels in excess of 75 percent, on a book value basis.5 Finally,
current equity holders of Beringer were interested in maintaining voting control of the company
after any IPO. Therefore, it was decided that only Class B shares would be sold to the public.
There were two classes of common stock created at the time of the buyout from a large, multinational food and beverage products company. Class A shares had 20 votes each while Class B
shares had one vote each.
Beringer formally announced its IPO intentions on August 27, 1997. A “road show” was
scheduled by Goldman Sachs for the middle two weeks of October. Upon its completion,
TCJ 030105
74
The CASE Journal
representatives of the Board of Directors, management, and the underwriters would meet in New
York City and, after equity market trading closed down on Monday, October 27th, determine
final pricing and the number of shares to be sold in the IPO, expected to be released to the
markets on Tuesday morning.
BERINGER’S HISTORY
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
In 1875 two German emigrants, Jacob and Frederick Beringer, purchased property in St. Helena,
California, for $14,500. The following year Jacob began working his new vineyards and started
construction of a stone winery building. He employed Chinese laborers to build limestone aging
tunnels for his product. In 1880, Frederick opened a store and a wine cellar to accommodate the
sale of wine in New York. The Beringer Brothers commenced an education and marketing
program to introduce Napa Valley wine to the East Coast market. Their specialty, even in those
early years, was premium table wines.
The winery was continuously owned by Beringer family members until 1971, when they sold it
to the Nestlé Company. Over the next 25 years, Nestlé hired management to implement an
expansion strategy that included purchase and development of extensive acreage positions in
prime growing regions of Napa, Sonoma, Lake, Santa Barbara, and San Luis Obispo counties in
California. Ownership of these vineyards enabled the firm to control a source of high quality,
premium wine grapes at an attractive cost. The operation, renamed Wine World Estates, also
acquired and developed a number of California wineries, including Beringer, Meridian
Vineyards, and Chateau Souverain.
In a series of sweeping moves overseen by Wine World’s winemaker, Myron Nightingale,
throughout the 1970’s and early 1980’s operations were overhauled, the winery was retooled,
vineyards were acquired, long term vineyard leases were negotiated and the company focused on
the production and sale of great wines. The winery achieved a reputation for doing things the
right way rather than taking shortcuts to achieve its objectives.
LL
Results of these initiatives began to bear fruit in the late 1980s. New private reserve wines were
winning accolades throughout the industry and, overall, wine quality was rising rapidly. Wine
World began to redefine itself as a top-quality producer, slowly but steadily shedding its prior
image for making “ordinary wines.”
A
In 1984, Michael Moone spearheaded operations of Wine World and accelerated transformation
of the firm. Moone pursued expansion via both acquisitions and start-ups of new brands. Chateau
Souverain, located in the Sonoma Valley, was acquired in 1986. Also that year a new brand,
Napa Ridge was launched. The Estrella River Winery in Paso Robles was revamped as Meridian
Vineyards in 1988.
In 1990, Moone relinquished his CEO position to current chairman Walter Klenz. Klenz had
joined Wine World in 1976, first working in marketing and then in financial operations.
In early 1996, Moone reentered the market with a private company named Silverado Partners.
Together with dealmaker David Bonderman, who headed the Texas Pacific Group (TPG), a
TCJ 030105
75
The CASE Journal
leveraged buyout of Wine World Estates was engineered by Moone. The $350 million plus deal
resulted in the business going back to its roots, with the new name of Beringer Wine Estates.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
One of the most important goals of venture capital sponsored leveraged buyouts is an “exit
strategy” for investors to realize positive returns on their investment. Principals of TPG had
chosen the Beringer operations and completed their acquisition with this goal in mind. In
addition to its strong brand recognition in the product marketplace, it was expected that when a
public sale of shares was made, they would be well received by investors, especially those
familiar with this industry.
Klenz’s strategic vision for Beringer included internal growth through brand development and
external growth of the firm’s business through mergers and/or acquisitions. A publicly traded
company would create the greatest financial flexibility in order to accomplish its goals as well as
to provide liquidity for current owners. This meant preparing the company for life as a public
firm.6 Management information systems needed to be enhanced, accounting, reporting, and
control systems needed to be put into place and the firm needed to keep its records on a quarterly
basis, to comply with SEC requirements. Doug Walker was hired in 1996 as Vice President ,
Corporate Planning to implement many of these systems, but the final piece of the puzzle was
the hiring of a chief financial officer, in order to coordinate these activities as well as to plan for
future operations.
A
LL
Early in June of 1997, Peter F. Scott was brought on board as a senior vice president for finance
and operations. Scott had spent seven years with Kendall-Jackson Winery, most recently as
senior vice president, finance and administration. He had also spent six years as a management
consultant and eight years with a nationally-known public accounting firm. He learned of
Beringer’s IPO plans and become intimately involved with their preparation from the outset.
TCJ 030105
76
The CASE Journal
BERINGER’S FINANCIAL HISTORY
After operating as a wholly owned subsidiary of Nestlé from 1971 through 1995, TPG Partners,
L.P. acquired all the then outstanding common stock of Beringer Wine Estates Company in
1996. The total purchase price was approximately $371 million, which included net cash paid of
$258 million, short-term mezzanine financing provided by the seller of $96 million, and
acquisition costs of $17 million.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Beringer’s capital structure on January 1, 1996, after the TPG acquisition, was composed of: 7
Item
Class A Common Stock
Class B Common Stock
Total Shares
Series A Preferred Stock
Credit Agreement (maximum
of $150 million)
Term Loan, Tranche B
(secured by all properties)
Term Loan, Tranche A
(secured by all properties)
Senior Subordinated Notes
Total Long Term Financing
Amount
938,000 shares
9,058,590 shares
9,996,590 shares
Dollars
$ 4.66 million
45.04 million
$49.70 million
300,000 shares
$27.05 million
$86.00 million
$150.00 million
$20.00 million
$33.24 million
$287.00 million
The buying group put together this financing package and utilized financial leverage to the
fullest extent possible, given the size of their equity commitment ($50 million) and the
willingness and ability of financial institutions to lend them the remaining funds.
LL
On April 1, 1996, the company acquired the net assets of Chateau St. Jean from Suntory
International Corporation. Net cash paid to the seller amounted to $29.3 million, with
acquisition costs of $1.9 million, for a total purchase price of $31.2 million.
A
In order to pay for this acquisition, the company issued 945,000 Class B common shares for a net
proceeds of $4.725 million. Subsequently, in September 1996, the company issued 11,980 Class
A shares and 224,380 Class B shares to investors, resulting in net proceeds of $825,000.
On February 28, 1997 Beringer acquired Stags’ Leap Winery, Inc. from Stags’ Leap Associates
and various individuals. Net cash paid to the sellers amounted to $19.2 million; with a note due
the seller aggregating $2.85 million. Together with transactions expenses of $1.15 million the
total cost amounted to $23.2 million.
In March 1997 the company issued 833,334 shares of Class B common stock, resulting in net
proceeds of $4,955,000. It may be observed that the average price at which common stock (A &
TCJ 030105
77
The CASE Journal
B) was sold varied from $4.97 per share in January 1996, to $5 per share in April 1996. By
September of that year, the price was only $3.50 per share. Finally, in March of 1997 the average
selling price had rebounded to approximately $5.95 per share. For comparative purposes, book
value per share was $4.17 as of June 30, 1996 and $3.46 as of June 30, 1997.
BERINGER’S STRATEGY IN THE 1990s8
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
By the late 1990s, Beringer had achieved a leadership position in the premium wine market in
the United States. A number of strategies contributed to this position and would continue to be
implemented by the firm. “You have to establish some fundamental themes for your company”
Klenz remarked, “and you have to be careful you don’t have too complex a message.” In a 1997
interview published in the Wine Spectator, Klenz stated:
There’s no secret to what drives Beringer Wine Estates. Its wineries focus on wines that consumers like to
drink in the styles and prices that are most popular. The challenge is how do you make wines at all these
different price points. It’s not volume – it’s quality we’re after. That’s what’s made us and that’s what
we’re going to focus on.9
Beringer marketed a portfolio of six brands of wines from major California growing areas across
all premium price segments. This multi-brand portfolio provided opportunities for growth at each
price point without diluting the value of any individual brand. In addition, this portfolio offered
consumers a choice of familiar and appealing products that were differentiated by variety,
region, and price, while providing distributors with a broad assortment of brands for their selling
efforts. To supplement its domestic brands and to meet the growing U.S. demand for premium
wine, Beringer imported products from a number of countries for more than a quarter century. In
recent years they had been working with winemakers in Italy, Chile, and Southern France to
produce premium wines designed to compete in the rapidly growing $ 7 to $10 a bottle market
segment.
LL
High quality products at competitive prices had been central to Beringer’s strategy since its days
under Nestlé’s control. The firm’s team of 14 experienced winemakers produced these wines
using high quality premium wine grapes and state-of-the-art equipment in each stage of the
winemaking process. For their efforts, the company had achieved considerable acclaim from
industry experts. For example, in 1996, eight Beringer brands were included in Wine Spectator's
“Top 100” wines of the world, more than any other wine company since that survey began in
1988.
A
Premium variety grapes were among the most important determinants of wine quality and a
significant component of product costs. Beringer produced a larger percentage of its grape
requirements (excluding White Zinfandel requirements) from premium varietals than most of its
competitors. This strategy enabled Beringer to improve its control over grape quality and costs
as well as to help assure continuity of grape supply. Grape supply and prices were cyclical,
inasmuch as many uncontrollable factors impacted the quantity and quality of grapes produced in
any given year.
Beringer either owned or controlled through long-term leases approximately 9,400 acres in
California's prime wine growing regions of Napa, Sonoma, Lake, Santa Barbara, and San Luis
TCJ 030105
78
The CASE Journal
Obispo counties. In crop year 1996, 23.4 percent of overall grape requirements were grown on its
owned or controlled vineyards. When White Zinfandel requirements were excluded from the
calculations, 48 percent of requirements were supplied by owned or controlled vineyards. To
meet requirements for White Zinfandel, the company strategy was to purchase grapes or bulk
wine, primarily through long-term contracts.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Simultaneously, during the 1990s a number of major trends emerged in the California wine
industry. These trends included: consolidation of the industry’s “three-tier” distribution network
(winery-wholesaler/distributor-retailer), consumers’ “trading up” from inexpensive jug wines to
premium priced varietal wines such as Chardonnay, Merlot, and Cabernet Sauvignon, and the
development of “second-label wines” at moderate price points by many producers.
In response, Beringer purchased Chateau St. Jean and Stags’ Leap wineries. By acquiring these
attractively positioned properties, Beringer was able to immediately diversify its brand portfolio
and achieve operating efficiencies by integrating sales, marketing, and administrative functions.
Beringer also believed that its professional management could improve wine quality and increase
productivity at the acquired wineries, resulting in increasing sales and profitability. Management
expected to continue to evaluate acquisition candidates and make strategic winery acquisitions
on a highly selective basis.
The firm’s wineries and product brands were of varying sizes, with products at different price
points. “Pieces of the business can grow at varying rates,” said Klenz, “and we do want to focus
on growth because the market rewards growth. But you can’t take a broad-brush approach and
say we’re going to grow all the brands by 10 percent…it’s the $7 to $10 [price] range that’s
Beringer’s focus.” Because it was incrementally less costly and time-consuming to expand a
winery’s production than to start a new brand, prospects for growth at its larger wineries,
Meridian and Napa Ridge, was apparent. At Beringer’s smaller wineries, such as St. Jean and
Souverain, the emphasis was to “drive their reputations,” rather than volume.10
LL
Consumer marketing had also become an integral component of Beringer's strategy. It used
sophisticated marketing techniques more typical of consumer packaged goods companies than of
wine producers. These techniques included product branding, advertising, product publicity, and
packaging initiatives in consumer marketing, as well as extensive trade marketing targeted at the
second and third tier wholesale/distribution and retail channels.
A
By 1997, Beringer had achieved exceptional depth and experience in both the wine and branded
consumer packaged goods industries. The average tenure of the company’s senior management
in the wine industry was 19 years while their average tenure at Beringer was 14 years. The team
had produced an exceptional record of performance in recent years and expected to continue and
even enhance operating effectiveness in the future.
DIRECT COMPETITION
There were hundreds of wine producers operating in the United States in the 1990s. Most were
relatively small operations located primarily in California. Of the approximately 1,500 wineries
in operation, the top 20 produced almost 90 percent of all American wines. Of the larger firms,
TCJ 030105
79
The CASE Journal
probably the most well-known was the E&J Gallo Wine Company, which had recently
established a premium varietal winery, Gallo of Sonoma. [See Exhibit 7 for a list of the top 20
brands of U.S. domestic table wine producers.]
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Consolidation among wineries began to accelerate, as smaller wineries decided to sell to larger
ones in order to achieve greater economies of scale in marketing and economies of scope in
gaining access to distribution channels. The “consolidators” were generally public firms that
were able to offer predominantly family-run wine businesses a means to greater liquidity of their
investment in a larger, more diversified operation. Concurrently, the attractiveness of
California’s wine industry to entrepreneurs continued unabated as new, small operations were
started each year.
A handful of U.S. wineries had completed or were known to be in the process of offering their
stock to the public as a means of raising capital and achieving greater investment valuation and
liquidity. Most prominent among the public wineries was the Robert Mondavi Corporation,
which had a portfolio of brands similar to Beringer’s. By 1997, Mondavi had been public for
approximately four years. Canandaigua Wine Company, another publicly held business, was by
contrast a much larger, more diversified beverage producer than either Beringer or Mondavi.
They followed a strategy of expansion in the wine business that was primarily facilitated by
mergers and/or acquisitions. [See Exhibit 8 for comparative company product portfolios.]
The Robert Mondavi Corporation11
The Robert Mondavi Company was founded in 1966 by its eponymous owner and winemaker,
Robert Mondavi, to produce quality premium table wines that would compete with the finest
wines in the world. Its strategy was to sell its wines across all principal price segments of the
premium wine market. The company also sold wine under importing and marketing agreements
with other business entities. Recent financial data for Robert Mondavi are shown in Exhibits 9–
12.
A
LL
Products were sold through a global network of over 200 leading distributors in the U.S. and 90
countries around the world. These distributors then resold the product to restaurants and retail
outlets. Substantial portions of Robert Mondavi’s wine sales were concentrated in California and,
to a lesser extent, in New York, New Jersey, Texas, Pennsylvania, Florida, and Massachusetts.
Export sales accounted for approximately 8 percent of net revenues, with major markets in
Canada, Europe, and Asia. Several international joint ventures allowed the company to market
wines from Italy, France, and Chile, as well as those from California vineyards.
Robert Mondavi had been expanding its holdings of prime wine producing acreage over the
years, to a current level (1997) of over 5,000 acres. In addition, it had solidified excellent longterm relationships with grape-growing partners.
For more than three decades, the Robert Mondavi name had been synonymous with winegrowing
excellence, marketing innovation and environmental integrity. Together, these translated into
extraordinary brand equity for Robert Mondavi and its principal wine products. Brand strength
and the firm’s ability to maintain and build on its strength have been among the Robert Mondavi
Corporation’s most important assets and considered key to its continued success.
TCJ 030105
80
The CASE Journal
In the 1990s there had been a proliferation of wine brands and expectations were that this trend
would continue into the foreseeable future. In this environment, only brands with a clear, quality
image and strong consumer franchise were likely to succeed and grow in market share and
profitability. The brands in the Robert Mondavi portfolio had precisely these characteristics.
Each of the firm’s nine brands had a distinct personality, served a defined market niche, and
leveraged Robert Mondavi’s global reputation, distributor network, and infrastructure.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
From a marketing perspective, the Robert Mondavi portfolio served the broad spectrum of
consumer demand. There were brands that appealed to the first-time wine drinker as well as to
the experienced oenophile (wine connoisseur). Brands were sold at supermarkets and club stores
as well as fine wine shops and restaurants. Brands were created for every day enjoyment of
consumers, as well as for “special occasions.”
The company had a clear formula for its current success and future competitiveness in the wine
market. It obtained the finest grapes available, maintained state-of-the-art production facilities,
and utilized innovative marketing strategies. A powerful distribution network resulted in growing
acceptance of Robert Mondavi’s well-defined brands in the competitive market environment of
the 1990s.
Canandaigua Wine Company, Inc. 12
Canandaigua Wine and its subsidiaries operated in the alcoholic beverage industry. The firm was
a producer and supplier of wines, an importer and producer of beers and distilled spirits, and a
producer and supplier of grape juice concentrate in the United States. It maintained a portfolio of
more than 125 national and regional brands of beverage alcohol, which were distributed by over
1,400 wholesalers throughout the United States and selected international markets. Its beverage
alcohol brands were marketed in five general categories: table wines, sparkling wines, dessert
wines, imported beer, and distilled spirits. Recent financial data for Canandaigua are shown in
Exhibits 13–16.
A
LL
Internal growth in support of the firm’s brands had been supplemented by an active acquisition
strategy over the last five years. In October 1993, Canandaigua acquired all of the tangible and
intangible assets of Vintners International Company, Inc. and Hammondsport winery for a
purchase price of $148.9 million. Vintners was the fifth largest supplier of wine in the United
States, owning two of the country’s most highly-recognized brands, Paul Masson and Taylor
California Cellars.
In August 1995, Canandaigua acquired the Inglenook and Almaden brands, the fifth and sixth
largest selling table wines in the United States, a grape juice concentrate business and wineries in
Madera and Escolon, California, from Heublein, Inc. The company also acquired Belaire Creek
Cellars, Chateau La Salle and Charles Le Franc table wines, Le Domaine champagnes, and
Almaden, Hartley, and Jacques Bonet brandy. The aggregate consideration for these brands and
properties was $130.6 million in cash and options to purchase 600,000 shares of Class A
common stock; 200,000 exercisable at $30 per share; and 400,000 exercisable at $35 per share,
at any time up to August 5, 1996. All of these options expired unexercised, on August 5, 1996.
TCJ 030105
81
The CASE Journal
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
In September 1995, Canandaigua, through a wholly-owned subsidiary, Barton Incorporated,
acquired certain assets of United Distillers Glenmore, Inc., and certain of its North American
affiliates. Included in this transaction were rights to the Fleischmann’s, Sköl, Mr. Boston,
Canadian LTD, Old Thompson, Kentucky Tavern, Chi-Chi’s, Glenmore, and di Amore distilled
spirits brands. In addition, the deal included the U.S. rights to InverHouse, Schenley, and El Toro
distilled spirits brands, along with inventories and other assets. The aggregate consideration for
these acquired brands and other assets was $141.78 million, plus assumption of certain current
liabilities.
THE BEVERAGE INDUSTRY IN THE UNITED STATES
Consumption of beverages purchased by consumers in the U.S. had grown steadily, yet
unspectacularly, in the 1990s. Total annual consumption per capita expanded from 154.3 gallons
in 1991 to over 164.5 gallons in 1996. By far the largest beverage category was soft drinks. At a
level of 54.2 gallons per capita in 1996, soft drinks represented 31.4 percent of total beverage
spending at retail. They also represented one of the few categories that were growing in both
absolute and relative terms in the 1990s. Soft drinks’ absolute growth of 6.4 gallons per capita in
the 1990s was by far the largest in any single beverage consumption category. On a relative
basis, their annual growth rate of 2.7 percent was second only to the 4.9 percent growth rate in
the bottled water category. Bottled water nevertheless owned a market share just over one-fifth
as large as that of soft drinks. [Exhibit 17.]
U.S. Wine Consumption
Wine consumption per capita remained fairly steady in the 1990s, fluctuating only slightly
between 1.7 and 1.9 gallons per capita. [Exhibit 18.] After rising steadily in the late 1970s and
through most of the 1980s, absolute and relative growth had slowed considerably in the 1990’s.
On the basis of retail spending, however, the wine market represented 6.1 percent of the
beverage industry. Although this was down from the 6.5 percent levels of the early 1990s, it
showed how these higher value products ranked in importance at the retail level. [Exhibit 19.]
A
LL
Major segments in the wine industry included the following broad categories: table, fortified,
vermouth, sparkling, coolers, and ciders. The largest category, by consumption, was table wines,
representing an 81.6 percent market share in 1996, up steadily from 79.4 percent in 1993.
Domestically produced wines represented the largest segment of the market. In 1993, 85.7
percent of all wine categories were produced domestically, with the remainder being imported.
With imports rising at a rate of almost 13 percent per year between 1993 and 1996, their share
had grown from 14.3 percent of the market to 18.8 percent over this four-year period. [Exhibit
20.]
Wine shipments into the wholesale distribution channel trended downward from 1985 levels of
244 million cases to the 189 million case level in 1993. Since that time, however, there was a
reversal, with shipments reaching 213 million cases in 1996 and an estimated 220 million for
calendar 1997. Sparkling wines, coolers, and other wine categories reached their peak of
consumer acceptance as far back as 1987 and have since been declining fairly steadily to a range
of only approximately one-third those lofty levels. [Exhibit 21.]
TCJ 030105
82
The CASE Journal
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
California table wine shipments had grown continuously from 43.4 percent of the industry in
1985 to 63.2 percent in 1996. Wine production from other U.S. states had grown by almost 80
percent since 1985, yet still accounted for only 5 percent of U.S. shipments in 1996. Jug wines
made up almost 85 percent of California table wine shipments in 1985. This trend has been down
for most of the last decade, until a low of approximately 56 percent was reached in 1993. Even
with an upturn in shipments over the last three years, this percentage continued downward,
reaching 51 percent in 1996.
The growth segment of the California table wine industry may be found in the various
“premium” categories defined below. Revenues at the wholesale level show even stronger
growth in the premium categories, implying that prices have been robust, resulting in faster
growth in revenues than in shipments.
U.S. Wine Production
The internal structure of the wine industry in the United States had been undergoing fundamental
changes in terms of product, especially in the table wine category. As the largest segment of
production and value of shipments at over 80 percent in 1996, these products have been
responding to changes in the tastes and preferences of consumers for higher quality, premium
wines. [Exhibits 22.]
A
LL
The grapes used to produce table wine are of varying quality. Varietals are delicate, thin-skinned
grapes whose vines usually take approximately four years to begin bearing fruit. As defined by
the Bureau of Alcohol, Tobacco and Firearms truth-in-labeling standards, one variety—the name
of a single grape — may be used if not less than 75 percent of the wine was derived from grapes
of that variety, the entire 75 percent of which was grown in the labeled appellation of origin.
Appellation denoted that “…at least 75 percent of a wine’s volume was derived from fruit or
agricultural products and grown in place or region indicated….”13 To develop the typical varietal
characteristics that result in enhanced flavor, taste, and finish could take another 2-3 years. These
additional growing periods increased both investment costs and product quality.
“Table” wines are those with 7-14 percent alcohol content by volume and are traditionally
consumed with food. This is in contrast to other wine products such as sparkling wines
(champagnes), wine coolers, pop wines, and fortified wines, which are typically consumed as
stand-alone beverages. Table wines that retail at less than $3.00 per 750 ml. bottle are generally
considered to be generic or “jug” wines, while those selling for more than $3.00 per bottle are
considered premium wines.
TCJ 030105
83
The CASE Journal
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Premium wines generally have a vintage date on their labels. This means that the product was
made with at least 95 percent of grapes harvested, crushed, and fermented in the calendar year
shown on the label and used grapes from an appellation of origin. (i.e., Napa Valley, Sonoma
Valley, Central Coast, etc.). Within the premium table wine category, a number of market
segments have emerged, based on retail price points. Popular premium wines generally fall into
the $3.00 - $7.00 per bottle range, while super premium wines retail for $7.00 - $14.00. The ultra
premium category sells for $14.00 - $20.00 per bottle. Any retail price above $20.00 per bottle is
considered luxury premium. [Exhibit 23.]
THE ECONOMIC ENVIRONMENT IN 1997
The United States’ economy continued its extraordinary performance during 1997.14 [See
Exhibit 24 for selected financial markets data from June – September 1997.] Growth in the gross
domestic product extended gains that began with the end of the last recession, officially dated as
March 1991. Unemployment continued a long-term decline, personal, national income grew
robustly, and inflation at both the producer and consumer levels was historically low and
continuing to decline. In international markets the U.S. dollar remained strong, especially
against Asian currencies that linked their currencies to the dollar.
Alan Greenspan, chairman of the Federal Reserve, expressed a bit of skepticism toward this
performance. He stated that the U.S. economy was on an “unsustainable track.” This opinion
resulted in fear of an interest rate increase to slow down economic activity and prevent a flair-up
in inflation.
LL
Financial markets were not only reflective of activities in the U.S., but also of international
conditions. Problems started to materialize in Asia during the summer months of 1997. A
collapse of financial markets in Thailand, followed by those in Singapore, Malaysia, and
Indonesia resulted from the bursting of real estate and stock market bubbles in those countries.
Trophy buildings had been constructed on a speculative basis and financed with long-term bank
lending. Commercial banks in those nations funded these assets with short-term foreign
borrowings, many denominated in dollars and other hard currencies. When real estate and stock
prices collapsed, the result was a full-fledged banking crisis as financial institutions’ collateral
went up in smoke.
A
Investors all headed for the exits at the same time, desperately seeking to convert their local
currency holdings into dollars. The result was a collapse of these currencies and an evenstronger dollar than might have been warranted by the exceptional performance of the U.S.
economy.
This cashing in of local currencies inevitably led to dramatic decreases in domestic money
supplies. As the credit-worthiness of almost every company and bank in the region came into
question, their ability to borrow abroad was so seriously impaired that a general liquidity crisis
occurred, and the malaise began to spread.
TCJ 030105
84
The CASE Journal
As these same elements unexpectedly appeared in South Korea, the world’s eleventh largest
economy, the world received a stern financial wake-up call. A deep and prolonged recession in
Asia now appeared quite probable. Worries also spread that this “Asian Flu” could extend into
Japan, the world’s second largest economy. If this occurred, could the “Goldilocks economy” of
the West fall prey to these Asian ills?
THE FINANCIAL ENVIRONMENT IN 1997
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Financial markets in the United States performed reasonably well throughout the summer and
early fall of 1997. Valuations were quite high, historically, with the S & P 500 trading between
24 and 26 times trailing earnings in early October. Late in the third week of that month, just as
the Beringer road show was ending, the equity markets in the U.S. commenced a precipitous
decline. On Thursday and Friday, October 23 and 24, the DJIA declined by 320 points. The
following Monday a decline of 554 Dow points took place, “the largest single numerical drop in
the history of the DJIA.” 15
From an all time high of 8259 on August 6, when the DJIA market capitalization stood at $1.94
trillion, as of Monday evening, October 26, the market cap was $1.54 trillion, a decline of 20.8
percent. For Monday’s trading alone, $129 billion of value disappeared, representing a decline
of 6.6 percent. Over these three days the bond markets were also affected by a “flight to quality.”
The 30-year Treasury yield declined from 6.42 percent on October 22 to close at 6.13 percent on
October 27.
Equity strategists at leading financial institutions had a variety of interpretations and opinions
concerning these violent swings in security prices. “It could go down thirty percent or forty
percent” from this year’s market peaks warned Barton Biggs, chief global strategist at Morgan
Stanley, Dean Witter Discover, in a conference call to clients and on television appearances.
Ralph Acampora, technical analyst at Prudential Securities and a bull, pulled in his horns. He
became “temporally negative” on the stock market and warned his firm’s sales force of a “nasty
market correction” to come.
LL
A Barrons Roundtable regular, Jim Rogers, shuttling between a Peter Jennings interview on
ABC and another on-camera session with CNBC that eventful evening, opined that the sell off
“could be the beginning of a major bear market, the Big Kahuna itself” that would send financial
asset prices crashing around the world.16
A
In contrast, Edward Kerschner, head of Paine Weber’s investment policy committee, told clients
that if market prices fell another 5 percent from their closing levels on Monday, October 27, “it
would be a compelling buying opportunity.” His models showed that the markets were 5 percent
undervalued. “If prices become 10 percent undervalued, it’s time to buy.”
Finally, Abby Joseph Cohen, strategist at Goldman Sachs and a prominent stock market bull for
most of the 1990s, published the following commentary at the close of trading Friday, October
24. “Despite the Asian troubles, the United States’ economic and profit outlook remains solid.”
With Asian markets disrupted, the U.S. should prove a safe haven for investment money.
TCJ 030105
85
The CASE Journal
As a result of the further, extraordinary decline on Monday, October 27, she actually boosted her
allocation to stocks in Goldman’s model portfolio from 60 percent to 65 percent. “I was calm
and confident because everything in my work indicated that the economy was going great from
the standpoint of jobs, profit growth and muted inflation pressures. It was just one of those
classic moments when emotion caused the market to become disoriented from economic
reality.”17
PETER SCOTT’S DILEMMA
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The meeting on the Monday evening of October 27th was anything but upbeat. The DJIA had
finished the day down over 550 points due to lingering fears from the Asian financial crisis. How
would these events affect Beringer’s decision? Should it go ahead with the offering and risk
disenfranchising new shareholders if stock prices continued to decline? Or should it follow the
suggestions of Goldman Sachs, as it had been doing for the past few months?
Although the IPO market in recent months had shown continued strength and receptivity for
many types of companies, Pete remembered two charts prepared for him by the underwriters
[Exhibit 25 and 26]. They showed clearly how volatile the IPO markets could be. Although
considered quite strong at the moment, they could cool off very quickly for an extended period
of time. Postponing the issue could mean waiting for perhaps another three to six months or
more, which could adversely affect strategic initiatives planned for the next year.
Postponement of the IPO for any appreciable length of time would also generate other concerns
that would have to be addressed by the Beringer management team. In private board meetings a
few scenarios had been proposed and “played out” for the next four years. They included
various assumptions concerning company growth rates and their financial statement
implications.
LL
Going through Peter’s mind was the possibility of using debt sparingly, only enough to keep
Beringer’s current debt/equity ratios roughly constant. A 10 percent growth in revenues could be
achieved, just by keeping the firm’s market share unchanged. A 15 percent growth rate could be
achieved if the firm utilized internally generated cash flow, increased its use of debt, and utilized
its equity at book value for one or more strategic acquisitions.
A
In another board meeting, there was a discussion of the impact of a successful IPO on the
weighted average cost of capital (WACC) of Beringer and how the reduced cost of equity could
enhance prospects for external growth in the years ahead.
Back in the boardroom at Goldman Sachs, executives were monitoring market sentiment and
discussing investor reactions to current circumstances.
Based upon indications of interest
being kept by underwriters during the road show, the issue was sure to be oversubscribed. In
fact, based on preliminary indications of potential demand, the target price range had been
increased the previous week to $23 to $26 per share. Before the stock market swoon on Monday,
the range had been raised once more, to $26 to $28 per share. Klenz asked everyone at the
meeting — particularly Peter Scott—to voice an opinion.
TCJ 030105
86
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The CASE Journal
TCJ 030105
87
The CASE Journal
ENDNOTES
1
Laube, James, “Going Public,” Wine Spectator, December 31, 1997-January 15, 1998, pp. 112-134
2
3
Interview with Peter F. Scott.
Interview with Peter F. Scott
4
5
6
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The prime motivation for the public offering of shares of Robert Mondavi was to settle a family dispute revolving
around operating strategy in the wine business between the Mondavi brothers; Peter, who kept the family business
(Charles Krug Winery) and Robert, who started the Robert Mondavi Company.
“Beringer’s IPO: Big Demand May Boost Price – Again,” The Wine Enthusiast, October 27, 1997.
Interview with Walter Klenz.
7
Beringer Wine Estates Holdings, Inc. Prospectus, October 28, 1997, pp. 49-50
8
Beringer Wine Estates Holdings, Inc. , Prospectus October 28, 1997, pp. 30-32
9
Laube, J. op. cit.
10
Laube, J., op. cit.
11
The Robert Mondavi Corporation Annual Report, 1997.
12
The Canandaigua Wine Company Annual Report, 1997.
13
Title 27 Part 4 of the Code of Federal Regulations. Bureau of Alcohol, Tobacco and Firearms, Regulatory
Agency, United States Department of the Treasury.
14
Bloomberg Personal, April 1988: 70-73.
15
Browing, E. S., “Not Even the Bulls See a Fast Recovery,” Heard on the Street, Wall Street Journal, October 28,
1997: C-1.
Laing, Jonathan R., “Abby Says Relax,” Barrons, February 23, 1998: 31.
17
Laing, op. cit.
A
LL
16
TCJ 030105
88
The CASE Journal
EXHIBIT 1
BERINGER WINE ESTATES HOLDINGS, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Old Beringer
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
New Beringer
Year
Ended
June 30,
1997
A
LL
Gross revenues…………………………
Less excise taxes……………………….
Net revenues……………………………
Cost of goods sold……………………..
Gross profit…………………………….
Selling, general and administrative
expenses……………………………..
Amortization of goodwill………………
Operating income (loss)………………..
Other income (expense):
Interest expense………………………
Other, net……………………………..
Income (loss) before income taxes
(Provision for) benefit of income taxes
Net income (loss)
Cumulative preferred stock dividend and
accretion of discount
Net loss allocable to common
stockholders
Loss per share:
Primary
Supplemental (unaudited)
Weighted average number of common
shares and equivalents outstanding:
Primary
Supplemental (unaudited)
Six Months
Ended
June 30,
1996
Six Months
Ended
December 31,
1995
$282,801
13,341
269,460
177,829
91,631
$131,227
6,364
124,863
93,626
31,237
$113,057
6,190
106,867
54,114
52,753
$213,742
11,732
202,010
101,287
100,723
78,647
12,984
36,020
(4,783)
35,241
956
16,556
64,006
1,912
34,805
(26,401)
892
(12,525)
7,076
(5,449)
(12,830)
255
(17,358)
7,993
(9,365)
(2,214)
125
14,467
(6,381)
$ 8,086
(5,730)
1,047
30,122
(13,369)
$ 16,753
(4,920)
(2,054)
$(10,369)
$(11,419)
$
$
$
(0.85)
(0.19)
12,186
17,286
(1.04)
10,978
Source: Beringer Wine Estates Holdings, Inc. Prospectus, October 28, 1997, p. F-4.
TCJ 030105
Year
Ended
June 30,
1995
89
The CASE Journal
EXHIBIT 2
Summary of Consolidated Financial Information
($ thousands, except per share data)
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The Company was incorporated for the purpose of acquiring Beringer Wine Estates Company and its
wholly owned subsidiaries. The acquisition from Nestlé Holdings, Inc. of all the outstanding common
stock of Beringer Wine Estates Company by the Company occurred on January 1, 1996 (the Acquisition”).
The Company constitutes the successor company (“New Beringer”) and is reflected in the historical results
of operations beginning on January 1, 1996. The historical results of operations through December 31,
1995 are the results of Beringer Wine Estates Company and it's consolidated subsidiaries (“Old Beringer”).
New Beringer
Statement of operations
data:
Net revenues
Old Beringer
Yr. Ended
June 30,
6 Mos. Ended
June 30,
6 Mos.
Ended
1997
1996
1995
Year Ended June 30,
1995
1994
1993
$269,460
$124,863
$106,867
$202,010
$180,836
$159,176
177,829
93,626
54,114
101,287
90,004
79,871
91,631
31,237
52,753
100,723
90,832
79,305
12,984
(4,783)
16,556
34,805
25,433
20,911
Interest expense
(26,401)
(12,830)
(2,214)
(5,730)
(7,007)
(7,619)
Income (loss) before taxes
(12,525)
(17,358)
14,467
30,122
18,949
13,862
(5,449)
(9,365)
8,076
16,753
10,469
7,659
_____--
_____--
_____--
____--
4,920
2,054
Net income (loss) allocable
to common Stockholders
$ (10,369)
$(11,419)
$ 8,086
$16,753
$ 10,469
$ 7,659
Loss per share
Primary
Supplemental (6)
$
$
$ 5,234
21,915
7,082
$ 10,457
46,309
10,763
$ 9,790
35,746
16,904
$ 9,671
31,152
15,489
Cost of goods sold (1)
Gross profit (2)
Operating income (loss) (3)
Net Income (loss) (5)
Preferred dividends and
accretion of discount
A
LL
Weighted average
common shares
outstanding (7)
Primary Supplemental
Other financial data:
Depreciation and
amortization (8)
EBITDA (9)
Capital expenditures
TCJ 030105
(0.85)
(0.19)
$ (1.04)
12,186
17,286
10,978
$ 9,120
66,304
33,956
$ 4,497
32,100
3,031
90
The CASE Journal
EXHIBIT 2 (CONTINUED)
Old Beringer
New Beringer
As
Adjusted(10)
At June 30,
At June 30,
1997
1996
1995
1994
1993
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
1997
At June 30,
Balance sheet data:
Working capital
$209,711
$209,711
$209,129
$ 27,955
$ 7,650
$ 12,408
Total assets
Total long-term debt, including current
portion
467,184
467,184
438,742
289,922
286,454
278,579
239,965
319,112
289,244
-
-
-
Total long-term obligations (11)
Common stock and other stockholders’
equity
Redeemable preferred stock, common
stock and other stockholders’ equity
242,584
356,072
317,531
-
-
256
157,687
43,993
48,381
158,326
140,880
140,411
157,687
78,334
77,484
158,326
140,880
140,411
A
LL
(1)
In accordance with purchase accounting rules applied to the Company’s acquisitions, inventory was increased to fair market value. Due to this
inventory step-up, cost of goods sold increased in the six months ended June 30, 1996 and the year ended June 30, 1997 by $32,131 and $43,308,
respectively.
(2)
Gross profit without the inventory step-up would have been $63,368 and $134,939 in the six months ended June 30, 1996 and the year ended
June 30, 1997, respectively.
(3)
If the inventory step-up had not occurred, operating income would have been $27,348 and $56,292 for the six months ended June 30, 1996 and
for the year ended June 30, 1997, respectively.
(4)
If the inventory step-up had not occurred, income (loss) before income taxes would have been $14,773 and $30,783 for the six months ended
June 30, 1996 and for the year ended June 30, 1997, respectively.
(5)
If the inventory step-up had not occurred, net income (loss) would have been 49,593 and 420,086 for the six months ended June 30, 1996 and
for the year ended June 30, 1997, respectively.
(6)
Supplemental earnings per share (I) illustrates the effect on earnings per share of the repurchase of all the outstanding shares of Series A
Preferred Stock ($38,706), repayment of all of the outstanding Subordinated Notes ($38,150), including a prepayment penalty of 43,150, and
repayment of $39,719 of the line of credit and $6,000 of long-term debt with the estimated net proceeds from this offering, as if such transactions
occurred at the beginning of the applicable period and (ii) gives effect to the issuance of the 5,100,000 shares of class B Common Stock offered
hereby, as if such shares were outstanding at the beginning of the applicable period. See Note 1 of Notes to Consolidated financial Statements.
(7)
See Note 1 of Notes to consolidated financial Statements for an explanation of the determination of shares used in computing earnings per
share.
(8)
Includes amortization of goodwill from 1993 to 1995, which was eliminated in connection with the Acquisition.
(9)
EBITDA represents earnings before interest, income taxes, depreciation, and amortization. For the six months ended June 30, 1996 and the
year ended June 30, 1997, $32,131 and $43,308, respectively, of inventory step-up are included in EBITDA. EBITDA is not a measure of
financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as an indicator
of the Company’s operating performance or to cash flows as a measure of liquidity.
(10)
Assumes the issuance and sale of the 5,100,000 shares of Class B Common Stock offered hereby on June 30, 1997. See note (6) above.
(11)
Includes line of credit, long term debt, less current portion, other liabilities, and the Series A Preferred Stock.
Source:
Beringer Wine Estates Holdings, Inc., Prospectus, October 28, 1999, p. 6.
TCJ 030105
91
The CASE Journal
EXHIBIT 3
Beringer Wine Estates Holdings, Inc.
Supplemental Consolidated Financial Data
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The supplemental consolidated financial data set forth below are presented herein to reflect on a
pro forma basis the comparative consolidated financial data without the inventory step-up
included in the audited results for the six month period ended June 30, 1996 and the year ended
June 30, 1997. On January 1, 1996, an investment group led by TPG Partners, L.P. and its
affiliates (collectively “TPG”) acquired the Company from a subsidiary of Nestlé S.A. This
transaction was accounted for as a purchase, resulting in new basis of assets and liabilities
effective January 1, 1996.
Year Ended June 30,
1997
Statement of operations data:
Net revenues
Cost of goods sold(1)
Gross profit(1)
Operating income (1)
Interest expense
Income before taxes (1)
Taxes(2)
Net income
Operating Data (Unaudited)
Cases Sold
Average net selling price
(1)
1995
($ thousands)
$269,460
134,521
134,939
56,292
(26,401)
30,783
10,697
$ 20,086
$231,730
115,609
116,121
43,904
(15,044)
29,240
11,560
$ 17,680
$202,010
101,287
100,723
34,805
(5,730)
30,122
13,369
$ 16,753
5,420
$49.70
5,000
$46.34
4,570
$44.20
LL
Notes:
1996
1994
1993
$180,836
90,004
90,832
25,433
(7,007)
18,949
8,480
$ 10,469
$159,176
79,871
79,305
20,911
(7,619)
13,862
6,203
$ 7,659
A
For the years ended June 30, 1996 and 1997, cost of goods sold was reduced and gross profit, operating
income and income before taxes were effectively increased by $32,131 and $43,308, respectively, as a
result of the inventory step-up.
(2)
For the years ended June 30, 1996 and 1997, income taxes have been computed on net income after
adding back the amount of the inventory step-up.
The inventory step up is used to reflect the increase in the value of wine from the time it was placed in
the barrels until the time it is “purchased” or valued in a buyout or IPO transaction.
Source: Beringer Wine Estates Holdings, Inc. Prospectus, October 28, 1997, p.p. 7 & 23.
TCJ 030105
92
The CASE Journal
EXHIBIT 4
Consolidated Balance Sheets
(in thousands, except share and per share data)
June 30,
1996
1997
115
28,226
214,097
5,024
247,462
212,378
267
7,077
$467,184
$ 14,223
23,484
208,069
3,994
249,770
182,520
88
930
5,434
$438,742
$ 10,114
2,001
2,461
3,661
5,998
5,698
4,104
3,714
37,751
104,000
211,398
29,368
6,333
388,850
$ 9,053
1,429
4,059
5,034
1,538
946
13,742
816
4,024
40,641
86,000
202,428
32,189
361,258
34,341
29,103
$
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
ASSETS
Current assets:
Cash
Accounts receivable-trade, net
Inventories
Prepaid and other current assets
Total current assets
Property, plant and equipment, net
Investments
Notes receivable from affiliate
Other assets, net
Total assets
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND OTHER STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable-trade
Book overdraft liability
Accrued promotion expenses
Accrued payroll, bonuses and benefits
Accrued interest
Other accrued expenses
Income taxes payable
Deferred tax liabilities
Current portion of long-term debt
Due to Nestlé
Total current liabilities
Line of credit
Long-term debt, less current portion
Deferred tax liabilities
Other liabilities
Total liabilities
Commitments and contingencies
Redeemable preferred stock
Redeemable Series A Preferred Stock, $0.01 par value; stated at
redemption value, less non-accreted discount of $2,836,000 and
$2,738,000, including cumulative dividends in arrears; 2,000,000
shares authorized; 319,389 and 369,640 shares issued and outstanding
TCJ 030105
93
The CASE Journal
Common stock and other stockholders’ equity:
Class A Common Stock, $0.01 par value; 2,000,000 shares
authorized; 1,008,000 and 1,019,980 shares issued and outstanding
Class B Common Stock, $0.01 par value; 38,000,000 shares
authorized; 10,639,590 and 11,716,212 shares issued and
outstanding
Notes receivable from stockholders
10
117
(636)
106
(340)
1,848
57,470
(14,816)
43,993
1,848
56,124
(9,367)
48,381
78,334
77,484
$467,184
$438,742
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Warrants
Additional paid-in capital
Accumulated deficit
Total common stock and other stockholders’ equity
Total redeemable preferred stock, common stock and other
stockholders’ equity
Total liabilities redeemable preferred stock, common stock and
other stockholders’ equity
10
A
LL
TCJ 030105
94
The CASE Journal
EXHIBIT 5
Old Beringer
Six Months
Year Ended
Ended
June 30,
December 31,
1995
1995
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Consolidated Statements of Cash Flows
(In thousands)
New Beringer
Year
Six Months
Ended
Ended
June 30,
June 30,
1997
1996
Cash flows from operating activities:
Net income (loss)
$ (9,365)
$(5,449)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
(8,930)
(15,596)
Deferred taxes
1,873
5,429
Depreciation
397
970
Amortization
210
Provision for doubtful accounts
33
(17)
Other
Change in assets and liabilities:
Accounts receivable-trade
(688)
(4,139)
Inventories
48,864
17,412
Prepaid and other assets
(95)
(2,786)
Accounts payable-trade
(4,938)
1,991
Book overdraft liability
2,001
Accrued promotion expenses
234
1,032
Accrued payroll, bonuses and
1,236
(398)
benefits
Accrued interest
5,034
964
(900)
1,137
946
(946)
Other liabilities
6,333
Net cash provided by (used in)
$8,148
$33,701
operating activities
A
LL
Cash flows from investing activities:
Acquisitions of property, plant and
equipment
Dispositions of property, plant and
equipment
Beringer Acquisition
CSJ Acquisition
SLW Acquisition
Distributions from investments
Proceeds from notes receivable from
affiliate
Net cash used in investing activities
TCJ 030105
(33,956)
187
(20,351)
$(54,120)
95
$ 8,086
$16,753
968
4,278
956
(189)
1,522
8,547
1,910
1
(7)
(91)
(24,536)
(463)
4,427
(228)
608
(526)
445
(1,312)
3,540
631
(956)
(1,810)
1,219
3,114
-
327
803
7,101
-
$(3,661)
$38,779
(271,798)
(31,176)
86
(7,082)
997
-
(10,763)
1,146
148
-
350
$(305,569)
$(6,085)
$(9,469)
-
-
(3,031)
-
The CASE Journal
18,000
12,500
(816)
86,000
203,152
-
(4,024)
5,780
318
-
(91,738)
54,417
27,049
1,848
106
-
-
17
-
31,864
(14,108)
14,223
$
115
280,728
8,860
5,363
$ 14,223
11,606
1,860
3,503
$ 5,363
(26,920)
2,390
1,113
$ 3,503
11,589
-
(26,920)
-
-
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Case flows from financing activities:
Net proceeds from line of credit
Proceeds from long-term debt
Repayments of long-term debt
Net proceeds (repayment) of amounts
due to Nestle
Issuance of common stock
Issuance of preferred stock
Issuance of stock warrants
Proceeds from notes receivable from
stockholders
Contributions from Nestlé
Net cash provided by (used in)
financing activities
Net increase (decrease) in cash
Cash at beginning of the period
Cash at end of the period
A
LL
TCJ 030105
96
The CASE Journal
EXHIBIT 6
Characteristics of the Financial Structure of
Beringer Wine Estates Holdings:
June, 1997
Senior Subordinated Notes
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
In connection with the acquisition of the company in January, 1996, senior subordinated
notes were sold to certain investors. These notes are secured by all properties, are
subordinated to both term loans as well as amounts outstanding under the line of credit,
accrue interest at 12.50 percent per annum, payable quarterly and are due January 10,
2006. Outstanding balance is currently $33.428 million.
Investors also hold 308,291 Class A stock warrants and 123,318 Class B stock warrants,
both detachable from the notes. The warrants were allocated an imputed fair value of
$1,848,000 on the date of issuance, resulting in a discount in face amount of the senior
subordinated notes, using the Black-Scholes option pricing model, with the following
weighted average assumptions:
1.
2.
3.
4.
dividend yield of 0 percent
expected volatility of 45 percent
risk-free interest rate of 5.23 percent
expected life of 10 years
Each Series A and Series B stock warrant provides the holder with the right to purchase
one share of Class B common stock in exchange for one Series A or Series B stock
warrant plus one cent. These stock warrants are exercisable at any time through January
2006, with the right to exercise terminating in the event the company completes a public
offering of not less than $50 million and is listed on a nationally-recognized stock
exchange.
Senior Secured Credit Facility
LL
A credit agreement was also arranged with several financial institutions, consisting of a
term loan with two separate tranches and a secured revolving line of credit for working
capital advances and standby letters of credit.
A
Line of Credit
The line of credit has a maximum credit available of $150 million and expires on January
16, 2001. The maximum credit available will be reduced if the value or amount of
certain assets of the company which determine the borrowing base for the line of credit
fall below certain specified levels. The maximum credit available will also be reduced to
the extent of any outstanding amounts due to growers. Interest under the line of credit,
which is payable quarterly, accrues at a rate determined under various bank interest
programs, currently 7.94 percent to 8.69 percent. The company may, at its option, elect
to convert all or any portion of outstanding indebtedness under the line of credit to a fixed
interest rate. The company must pay a quarterly commitment fee equal to .50 percent per
TCJ 030105
97
The CASE Journal
annum of the average daily amount by which the maximum credit available exceeds the
outstanding balance on the credit line.
Term Loan, Tranche A
This term loan agreement, in the amount of $20 million, is secured by all company
properties and accrues interest determined by various bank interest programs, currently
7.41 percent to 8.32 percent. Interest is payable quarterly with quarterly principal
payments commencing April 1, 1999. The loan is due to be paid off on July 16, 2005.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Term Loan, Tranche B
This term loan agreement, in the amount of $161.684 million, is also secured by all
company properties. It accrues interest determined by various bank interest programs,
currently 7.61 percent to 8.38 percent. Interest is payable quarterly with quarterly
principal payments commencing April 1, 1997. The loan is due to be repaid off on July
16, 2005.
Terms of the credit agreement and the notes agreement contain, among other provisions,
requirements for maintaining certain working capital and other financial ratios, and limit
the company’s ability to pay dividends, merge, alter the existing capital structure, incur
indebtedness and acquire or sell assets. The credit agreement also contains provisions
requiring prepayment of a portion of the outstanding principal balance based on certain
defined excess cash flow calculations. The bank has waived this provision as it relates to
the June 30, 1996 and 1997 calculations.
A
LL
Prior to January 16, 2000, the company may, at its option, redeem the senior subordinated
notes, in whole or in part, at a redemption price equal to the sum of the aggregate
principal amount of the notes being redeemed plus accrued and unpaid interest to the date
of redemption, plus a penalty equal to the present value of the originally scheduled
principal and related interest thereon, through the original maturity date, in excess of the
amount of principal being redeemed. Between January 16, 2000 and 2005, the company
may, at its option, redeem the notes, in whole or in part, at a redemption price equal to the
sum of the aggregate principal amount of the notes being redeemed, multiplied by a
redemption price factor which declines from 106.9 percent at January 16, 2000 to 100.0
percent at January 16, 2005, plus accrued and unpaid interest to the date of redemption.
Additionally, within thirty days after the closing of an initial public offering, the
company, at its option, may redeem up to 50 percent of the outstanding notes at a
redemption price equal to the sum of the aggregate principal amount of the notes being
redeemed multiplied by a redemption price factor which declines from 110 percent to 107
percent from January 16, 1996 to 2000, plus accrued and unpaid interest to the date of
redemption.
Redeemable Preferred Stock
The company has authorized 2 million shares of Series A Preferred Stock with a par
value of $.0001 per share. These preferred shares are non-voting and senior to all other
classes and series of the company’s stock. The preferred stock pays a semi-annual
dividend rate per share of 7 percent of the liquidation value of $100 per share. Dividends
are cumulative and are accrued and payable semi-annually from their date of issuance.
TCJ 030105
98
The CASE Journal
All dividends are paid in additional shares of preferred stock for the first ten payment
dates. Thereafter, dividends shall be paid in cash to the extent they do not cause an event
of default under the company’s credit agreements. In the event of an involuntary
conversion, liquidation value is equal to the previously stated $100 per share.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
In January, 1996, the company issued 300,000 preferred shares, resulting in net proceeds
of $27,049,000. In September, 1996, another 3,548 shares were issued, for an additional
$318,000. During the period ending June 30, 1996, 19,389 shares accrued to preferred
shareholders. In the fiscal year ending June 30, 1997, 46,703 shares accrued to preferred
shareholders.
At the option of the company, preferred stock may be redeemed, in whole or in part, at a
redemption price equal to the liquidation value of $100 per share plus accrued and unpaid
dividends to the date of redemption. The company is required to redeem all outstanding
shares of preferred stock in January, 2008, at a price per share equal to the liquidation
value of $100 per share plus accrued and unpaid dividends to the date of redemption.
Common Stock and Other Stockholder’s Equity
The company has authorized 2 million shares of Class A common stock, par value $.01
per share, and 38 million shares of Class B common stock, par value $.01 per share.
Each share of Class A common stock is entitled to 20 votes, while each share of Class B
common stock is entitled to one vote on all matters submitted to a vote of the
stockholders of Beringer. Generally, all matters to be voted upon by stockholders must
be approved by a majority of the votes entitled to be cast by all Class A and Class B
shareholders, voting together as a single class.
LL
Holders of both Class A and Class B common stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors, subject to preferences
applicable to any then outstanding preferred stock. In the event of liquidation,
dissolution or winding up of the company, holders of the common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding preferred stock.
A
The Class A common stock is convertible at the option of the holder, on a one-for-one
basis, into shares of Class B common stock. Additionally, in the event that Beringer
completes a public offering of not less than $50 million and is listed on a nationallyrecognized stock exchange, and upon the approval of a majority of the shares of Class A
common stock, the Class A shareholders can be required to convert their shares into
shares of Class B common stock on a one-for-one basis.
In January, 1996, the company issued 938,000 shares of Class A common stock and
9,058,590 shares of Class B common stock. Net proceeds to the company were
$49,692,000, net of notes receivable from stockholders of $340,000. In March, 1996, the
company issued 945,000 shares of Class B common stock, resulting in net proceeds of
$4,725,000. In September, 1996, the company issued 11,980 shares of Class A common
stock and 224,380 shares of Class B common stock. Net proceeds to the company were
$825,000, net of notes receivable from stockholders of $356,000. In March, 1997, the
TCJ 030105
99
The CASE Journal
company issued 833,334 shares of Class B common stock, resulting in net proceeds of
$4,955,000, net of notes receivable from stockholders of $46,000.
For the six month period ending June 30, 1996, the company issued 6,000 shares of Class
B common stock to Directors, in lieu of cash compensation. For the fiscal year ending
June 30, 1997, the company issued 18,908 shares of Class B common stock to Directors,
in lieu of cash compensation.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Notes receivable from stockholders, who are also employees of Beringer, bear interest at
the prime rate, which was 8.25 percent at June 30, 1996, and 8.5 percent at June 30, 1997.
These notes are due ten years from their date of issuance, and are secured by the
underlying security. The notes become due upon termination of the holders’ employment
at Beringer, or upon sale of the underlying security.
Beringer Wine Estates Holdings, Inc. Prospectus, October 28, 1997,
pp. F14-19.
Beringer Wine Estates Holdings, Inc. Annual Report, 1998, Notes to
Financial Statements.
A
LL
Sources:
TCJ 030105
100
The CASE Journal
EXHIBIT 7
Top 20 Brands of Domestic Table Wine Production
(in thousands of 9-liter cases)
1994-1996
Marketing Company
1996
1995
1994
1995-96 %
Change
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Brand
Carlo Rossi
Franzia
Gallo Label
Gallo Reserve
Cellars
Almaden
E&J Gallo Winery
Wine Group
E&J Gallo Winery
17,000
15,800
14,000
15,500
13,000
13,000
15,200
8,100
11,700
9.7%
21.5%
7.7%
E&J Gallo Winery
Canandaigua Wine Co.
11,250
7,500
10,000
7,750
9,300
8,125
12.5%
-3.2%
Inglenook
Sutter Home
Robert Mondavi
Beringer
Paul Masson
Sutter Home Winery
Robert Mondavi Winery
Wine World Estates
Candandaigua Wine Co.
7,500
6,685
5,825
5,230
3,500
7,500
5,425
5,095
4,860
3,600
6,520
4,855
4,150
2,290
3,400
0.0%
23.2%
14.3%
7.6%
-2.8%
Glen Ellen
Vendange
Peter Vella
Fetzer
Heublein
Sebastiani Vineyards
E&J Gallo Winery
Brown-Forman
Beverage
Sebastiani Vineyards
3,450
3,200
3,100
3,520
2,465
2,570
3,290
1,760
2,300
-2.0%
29.8%
20.6%
2,498
2,365
2,175
3,360
2,255
6,180
14.7%
-29.6%
Kendall-Jackson
Winery
E&J Gallo Winery
2,315
2,110
2,055
1,960
1,585
1,850
12.7%
7.7%
Heublein
E&J Gallo Winery
2,000
1,400
1,700
2,200
1,555
750
2,100
1,500
-
-9.1%
-10.0%
130.0%
Sebastiani
LL
Kendall-Jackson
A
Wm. Wycliff
Taylor California
Cellars
Blossom Hill
Turning Leaf
Source: The Wine Institute, http://www.wineinstitute.org
TCJ 030105
101
The CASE Journal
EXHIBIT 8
Company Product Portfolios
Products
Beringer
Mondavi
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Wines
NonVarietal
Canandaigua
Almaden
Inglenook
Paul Masson
Taylor California Cellars
Cribari
Manischewitz
Inglenook
Paul Masson
Marcus James
Deer Valley
Dunnewood
Varietal
Beringer
Meridian Vineyards
Chateau St. Jean
Napa Ridge
Chateau Souvrain
Stag’s Leap
Robert Mondavi Winery
Robert Mondavi Coastal
Woodbridge
Byron
Vichon
La Famiglia
Opus One
Luce
Calitierra
Dessert
Richards Wild Irish Rose
Cisco
Taylor
Cook’s
J.Roget
Great Western
Taylor
Corona
Modele Especial
St. Pauli Girl
Tsingtao
Barton
Fleischmann’s
Mr. Boston
Montezuma
Canadian LTD
Paul Masson Grand
Amber
Ten High
Inver House
Monte Alban
Sparkling
Beers
A
LL
Spirits
Source: Annual Reports of each company for fiscal year 1996.
TCJ 030105
102
The CASE Journal
EXHIBIT 9
Robert Mondavi Corporation
Selected Consolidated Financial and Operating Data
Year Ended June 30,
1996
1995
1994
(in thousands, except per share data)
1993
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
1997
Income Statement Data
Gross revenues
Less excise taxes
Net revenues
Cost of goods sold
Gross profit
Operating expenses
Operating income
Other income (expense):
Interest
Other
Income before income taxes
Provision for income taxes
Net income
Earnings per share
Weighted average number of
common
shares and equivalents outstanding
$315,998
15,224
300,774
165,988
134,786
79,831
54,955
$253,540
12,710
240,830
122,385
118,445
70,707
47,738
$210,361
10,892
199,468
97,254
102,215
64,160
38,055
$176,236
9,209
167,027
88,102
78,925
56,198
22,727
$177,748
9,608
168,140
92,979
75,161
52,191
22,970
(10,562)
1,880
46,273
18,048
$ 28,225
$ 1.80
(8,814)
1,543
40,467
16,029
$ 24,438
$ 1.61
(8,675)
215
29,595
11,775
$ 17,820
$ 1.39
(6,698)
(305)
15,724
6,212
$ 9,512
$
.75
(7,486)
(1,020)
14,464
5,801
$ 8,663
$
.83
15,670
15,203
12,787
12,731
10,385
6,450
$ 46.22
5,437
$ 43.86
4,550
$ 43.42
3,873
$ 42.70
3,991
$ 41.73
Operating Data (Unaudited)
Cases sold (1)
Average net selling price (2)
(1)
LL
Notes:
Case information based on industry standard 9-liter case, in thousands.
Average net selling price is reported on a per-case basis and represents net revenues, excluding
net revenues from bulk wine and grape sales, divided by the total number of cases sold during the
period.
A
(2)
TCJ 030105
103
The CASE Journal
EXHIBIT 10
(in thousands, except share data)
ASSETS
1997
June 30,
1996
,
1995
Current assets:
Cash
Accounts receivable-trade, net
Inventories
Prepaid income taxes
Deferred income taxes
Prepaid expenses and other current assets
$ 150
59,222
167,695
1,677
5,593
$234,337
$
39,495
142,565
2,370
570
840
$185,840
900
32,601
113,375
770
$147,762
Property, plant and equipment, net
Investments in joint ventures
Other assets
Total assets
186,990
19,212
4,386
$444,925
156,754
17,100
1,501
$361,195
120,934
11,792
1,826
$282,314
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
$
A
LL
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Book overdraft
$
$
403
$
Notes payable to banks
8,750
Accounts payable – trade
14,769
13,733
9,411
Employee compensation and related costs
10,608
10,322
9,247
5,446
2,828
1,986
Current portion of long-term debt
6,790
4,115
6,071
Income Taxes Payable
1,160
Deferred revenue
2,064
1,682
1,493
1,495
Deferred Income Taxes
48,427
33,083
30,893
Long-term debt, less current portion
158,067
123,713
113,017
10,848
8,944
7,368
Deferred executive compensation
5,395
6,098
5,839
1,102
665
Other liabilities
1,017
Total liabilities
223,754
172,940
157,752
Commitments and contingencies (Note 10)
Shareholders’ equity:
Preferred Stock: Authorized-5,000,000 shares
Issued and outstanding-no shares
Class A Common Stock, without par value:
Authorized-25,000,000 shares
Issued and outstanding-7,499,024 and 7,281,529 shares
76,138
73,402
33,441
Class B Common Stock, without par value:
Authorized-12,000,000 shares
Issued and outstanding-7,676,012 shares
12,324
12,324
13,364
Paid-in capital
3,289
1,334
101,195
76,757
Retained earnings
129,420
221,171
188,255
124,562
$361,195
$282,314
Total liabilities and shareholders’ equity
$444,925
TCJ 030105
104
The CASE Journal
EXHIBIT 11
(In thousands)
June 30
,
1996
1995
$ 28,225
$ 24,438
$ 7,820
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
1997
A
LL
Current flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization
Equity in net income of joint ventures
Other
Changes in assets and liabilities
Accounts receivable-trade
Inventories
Prepaid income taxes
Other assets
Accounts payable-trade and accrued expenses
Deferred revenue
Deferred executive compensation
Other liabilities
Net cash provided by (used in) operating activities
Acquisitions of property, plant and equipment
Distributions from joint ventures
Contributions to joint ventures
Cash flows from financing activities:
Book overdraft
Net additions (repayments) under notes payable to bank
Proceeds from issuance of long-term debt
Principal repayments of long-term debt
Proceeds from issuance of Class A Common Stock
Exercise of Class A Common Stock options
Other
Net cash provided by financing activities
Net increase (decrease) in cash
Cash at the beginning of the year
Cash at the end of the year
TCJ 030105
105
797
12,534
(2,510)
213
(19,727)
(26,030)
1,036
(4,753)
3,830
3,399
382
(703)
(85)
(3,392)
(489)
10,263
(1,751)
178
710
8,854
(1,547)
687
(6,894)
(501)
(29,319) (17,230)
(1,036)
148
(353)
6,239
6,625
(1,160)
733
189
(366)
259
516
437
(29)
1,502
15,919
(42,552)
1,657
(359)
(41,254)
(40,084)
4,102
(7,530)
(43,512)
(27,823)
482
(458)
(27,799)
(403)
8,750
60,000
(22,971)
289
2,447
(3,316)
44,796
150
$
150
403
40,368
(37,572)
35,520
2,401
(10)
41,110
(900)
900
$
-
(18050)
43,547
(13818)
182
208
318
12,387
507
393
$ 900
The CASE Journal
EXHIBIT 12
The Robert Mondavi Corporation
Financial & Market Data
Fiscal Years Ending June 30,
1997
1996
1995
(High)
(Low)
47 3/8
26 ½
33 ¾
17 5/8
17 ½
6½
Earnings Per Share (Diluted)
1.80
1.61
1.39
15.670 m
15.203 m
12.787 m
Book Value Per Share
14.11
12.38
9.74
Price/Earnings Ratio (High)
(Low)
26.3
14.7
21.0
10.9
12.6
4.7
Market Value (High)/Book Value
3.4
2.7
1.8
Market Value (Low)/Book Value
1.9
1.4
.7
1.3-1.7
1.4-1.9
1.5-1.8
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Stock Price
Number of Shares Outstanding
Beta
A
LL
Source: Standard & Poor’s Stock Reports
Company Annual Reports
TCJ 030105
106
The CASE Journal
EXHIBIT 13
Canandaigua Brands, Inc.
Consolidated Statements of Income
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
For the Years Ended
February
29.
1996
August
31,
1995
August
31,
1994
$ 1,534,452
(399,439)
1,135,013
(844,181)
290,832
$1,331,184
(344,101)
987,083
(722,325)
264,758
$ 1,185,074
(278,530)
906,544
(653,811)
252,733
$ 861,059
(231,475)
629,584
(447,211)
182,373
(208,991)
-
(191,683)
(159,196)
(121,388)
81,841
(34,050)
(3,957)
69,118)
(28,758)
(2,238)
91,299
(24,601)
(24,005)
36,980
(18,056)
47,791
40,360
66,698
18,924
(20,116)
27,675
(16,339)
$ 24,021
(25,678)
$ 41,020
(7,191)
$ 11,733
$1.41
$1.40
$1.20
$1.20
$2.14
$2.13
$.74
$.74
19,657,297
19,706,271
20,006,267
20,006,267
19,147,935
19,296,269
15,783,583
16,401,598
February 28,
1997
GROSS SALES
Less-Excise taxes
Net sales
COST OF PRODUCT SOLD
Gross profit
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
NONRECURRING RESTRUCTURING
EXPENSES
Operating income
INTEREST EXPENSE, net
Income before provision for Federal
and state income taxes
PROVISION FOR FEDERAL AND
STATE INCOME TAXES
NET INCOME
A
LL
SHARE DATA:
Net income per common and common
equivalent share:
Primary
Fully diluted
Weighted average common shares outstanding:
Primary
Fully diluted
$
TCJ 030105
107
The CASE Journal
EXHIBIT 14
Canandaigna Brands, Inc.
February 28,
1997
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
ASSETS
CURRENT ASSETS:
Cash and cash investments
Accounts receivable, net
Inventories, net
PROPERTY, PLANT AND EQUIPMENT, NET
OTHER ASSETS
Total assets
February 29,
1996
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable
Current maturities of long-term debt
Accounts payable
Accrued Federal and state excise taxes
Other accrued expenses and liabilities
LONG-TERM DEBT, less current maturities
DEFERRED INCOME TAXES
OTHER LIABILITIES
COMMITMENTS AND CONTINGENCIES
A
LL
STOCKHOLDERS’ EQUITY
Class A Common Stock, $.01 par valueAuthorized, 60,000,000 shares; Issued, 17,462,332 shares at
February 28, 1997, and 17,423,082 shares at February 29, 1996
Class B Convertible Common Stock, $.01 par valueAuthorized, 20,000,000 shares; Issued, 3,956,183 shares at
February 28, 1997, and 3,991,683 shares at February 29, 1996
Additional paid-in capital
Retained earnings
Less-Treasury stockClass A Common Stock, 1,915,468 shares at February 28,
1997, and 1,165,786 shares at February 29, 1996, at cost
Class B Convertible Common Stock, 625,725 shares at
February 28, 1997, and February 29, 1996, at cost
Total stockholders’ equity
Total liabilities and stockholders’ equity
TCJ 030105
108
$ 10,010
142,592
326,626
21,787
501,015
249,552
270,334
$1,020,901
$ 3,339
142,471
341,838
30,372
518,020
250,638
285,922
$1,054,580
$ 57,000
40,467
63,492
17,058
68,556
246,573
338,884
61,395
9,316
$ 111,300
40,797
59,730
19,699
68,440
299,966
327,616
58,194
12,298
174
174
40
40
222,336
179,275
392,825
221,133
142,600
363,947
(25,885)
(5,234)
(2,207)
(28,092)
364,733
$1,020,901
(2,207)
(7,441)
356,506
$1,054,580
The CASE Journal
EXHIBIT 15
Canandaigna Brands, Inc.
(in thousands)
For the Year
Ended
For the Years Ended
August 31,
___1995__
August
31,
___1994_
_
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
February 28,
___1997___
For the Six Months
Ended
February
February
28,
29,
1995
___1996__
_(unaudit
_
ed)
A
LL
Cash flows from operating activities:
TCJ 030105
109
The CASE Journal
$ 27,675
$ 3,322
$ 20,320
$ 41,020
$ 11,733
22,359
9,507
5,769
248
112
(3,371)
-
9,521
4,437
1,991
81
275
-
9,786
2,865
57
-
15,568
5,144
19,232
(33)
(2,050)
-
10,534
3,281
(4,319)
13,935
161
3,523
16,232
3,271
(431)
(2,641)
24,617
898
80,093
107,768
(27,008)
(70,172)
(2,350)
(2,362)
4,066
(8,564)
1,930
(88,155)
(84,833)
1,586
(18,783)
3,079
(30,068)
6,907
(28,175)
(3,817)
(56,563)
(36,243)
7,392
41,528
(3,884)
(13,415)
(1,025)
(20,784)
(15,375)
32,298
73,318
(17,946)
784
1,703
2,680
4,405
4,023
(3,795)
15,446
27,179
(31,649)
(13,848)
9,174
(36,323)
(16,077)
(11,307)
555
(26,829)
(11,342)
(11,342)
(37,121)
(28,300)
1,336
(64,085)
(7,853)
(4,000)
(5,100)
3
(16,950)
(54,300)
(50,842)
(20,765)
(1,550)
61,668
998
17
-
111,300
(14,579)
656
224
13,220
-
57,100
(7,474)
341
47,000
103,313
(22,100)
(47,000)
50,100
(57,906)
633
1,325
47,000
103,400
(22,100)
(47,000)
(2,035)
(6,856)
(4,624)
1,056
10
-
(64,774)
110,821
(82,000)
49,180
(82,000)
(6,548)
(3)
(12,452)
6,671
3,339
10,010
(841)
4,180
3,339
1,595
1,495
$ 3,090
2,685
1,495
4,180
(2,223)
3,718
$1495
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Net income
Adjustments to reconcile net income to net cash provided by (used
i) operating activities:
Depreciation of property, plant and equipment
Amortization of intangible assets
Deferred tax provision (benefit)
Stock option expense
Amortization of discount on long-term debt
(Gain) loss on sale of property, plant and equipment
Restructuring charges – fixed asset write-down
Accrued interest on converted debentures, net of taxes
Change in operating assets and liabilities, net of effects from
purchases of businesses:
Accounts receivable, net
Inventories, net
Accounts payable
Accrued Federal and state excise taxes
Other accrued expenses and liabilities
Other
Total adjustments
Net cash provided by (used in) operating activities
Purchases of property, plant and equipment, net of minor disposals
Payment of accrued earn-out amounts
Proceeds from sale of property, plant and equipment
Purchase of brands
Purchases of businesses,, net of cash acquired
Cash flows from financing activities:
(Repayment of) proceeds from notes payable, short-term borrowings
Principal payments of long-term debt
Purchases of treasury stock
Payment of issuance costs of long-term debt
Proceeds from issuance of long-term debt, net of discount
Proceeds from employee stock purchases
Exercise of employee stock options
Proceeds from Term Loan, long-term debt
Proceeds from equity offering, net
Repayment of notes payable from equity offering proceeds
Repayment of notes payable from proceeds of Term Loan
Repayment of Term Loan from equity offering proceeds, long-term
debt
Fractional shares paid for debenture conversions
Net cash (used in) provided by financing activities
$
A
LL
Net increase (decrease) in cash and cash investments
Cash and cash investments, beginning of period
Cash and cash investments, end of period
TCJ 030105
110
$
$
The CASE Journal
EXHIBIT 16
Canandaigua Wine Company
Financial & Market Data
August 31,
1995
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Fiscal Years Ending
February 28, 1997
February 26,
1996
Stock Price
(High)
(Low)
39 ½
15 ¾
53
33 ½
48
29 ¾
Earnings Per Share (Diluted)
1.40
1.20
2.13
19.706 m
20.000 m
19.296 m
18.51
17.83
18.24
Price/Earnings Ratio (High)
(Low)
28.2
11.3
44.2
27.9
22.5
14.0
Market Value (High)/Book
Value
Market Value (Low)/Book
Value
Beta
2.1
3.0
2.6
.9
1.9
1.6
.9-1.1
1.0-1.3
1.0-1.4
Number of Shares
Outstanding
Book Value Per Share
A
LL
Source: Standard & Poor’s Stock Reports
Company Annual Reports
TCJ 030105
111
The CASE Journal
EXHIBIT 17
Consumption of Beverages
in the United States
(gallons per person)
1991-1996
1996
1995
1994
1993
1992
1991
Soft Drinks
Coffee
Milk
Beer
Bottled
Water
Tea
Juices
Powdered
Drinks
54.2
30.1
24.8
22.6
51.2
29.9
24.8
22.4
49.6
29.5
25.0
22.7
48.8
28.4
25.1
22.8
48.0
26.6
25.2
22.9
47.8
26.6
25.5
23.2
11.5
6.6
6.4
11.0
6.6
6.4
10.3
6.9
6.5
9.5
6.9
6.5
9.0
7.0
6.5
8.8
7.1
6.4
5.2
5.2
5.2
5.2
5.3
5.6
Wine
1.9
1.8
1.8
1.7
1.9
1.9
Distilled
Spirits
Totals
1.2
1.2
1.3
1.3
1.4
1.4
164.5
160.5
158.8
156.2
153.8
154.3
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Beverage
Category
A
LL
Source: Adams/Jobson’s Wine Yearbook, 1997, Adams/Jobson’s Publishing Corp.,
New York, NY 10036
Beverage Industry Annual Manual
TCJ 030105
112
The CASE Journal
EXHIBIT 18
Wine Consumption in the
United States
1980-1997(E)
Total Table
Wine
(millions of
gallons)2
Total Table
Wine
(per capita)3
Total Wine
(millions of
gallons)1
Total Wine
(per capita)3
1997E
1996
1995
523
505
469
1.95
1.90
1.79
462
443
408
1.72
1.67
1.56
1994
1993
1992
1991
1990
459
449
476
466
509
1.77
1.74
1.87
1.85
2.05
395
381
405
394
423
1.52
1.48
1.59
1.56
1.70
1989
1988
1987
1986
1985
524
551
581
587
580
2.11
2.24
2.39
2.43
2.43
432
457
481
487
378
1.74
1.86
1.98
2.02
1.58
1984
1983
1982
1981
1980
555
528
514
506
480
2.34
2.25
2.22
2.20
2.11
401
402
397
387
360
1.69
1.71
1.71
1.68
1.58
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Years
Notes: 1All wine types including sparkling wine, dessert wine, vermouth, other special
natural
and table wines.
2
Table wines include all still wines not over 14 percent alcohol content.
3
Per capita consumption based on the resident population of the U. S.
Associates
TCJ 030105
113
Gomberg, Fredrikson &
The CASE Journal
EXHIBIT 19
United States Beverage Market Shares
Per Retail Dollar
(in percents)
1991-1996
1996
1995
1994
1993
1992
1991
Soft Drinks
Beer
Distilled
Spirits
Milk
Juices
31.4%
25.2
30.3%
25.6
29.7%
25.8
29.6%
26.7
28.7%
27.0
28.5%
26.8
15.6
8.3
6.3
16.2
8.5
6.4
16.3
8.7
6.5
15.9
8.6
6.1
16.1
8.6
6.5
16.5
8.5
6.4
6.1
6.0
6.0
6.1
6.5
6.5
3.9
3.9
3.9
3.8
3.6
3.9
2.2
.6
2.2
.6
2.0
.6
2.0
.6
1.9
.6
1.9
.7
.4
.4
.4
.5
.5
.5
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Beverage
Category
Wine
Coffee
Bottled
Water
Tea
Powdered
Drinks
Totals
A
LL
Source: Adams/Jobson’s Wine Yearbook, 1997, Adams/Jobson’s Publishing Corp.,
New York, NY 10036
Beverage Industry Annual Manual
TCJ 030105
114
The CASE Journal
EXHIBIT 20
Wine Consumption by Category
(in thousands of gallons)
1993 – 1996
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Sparkling
Coolers,
Ciders,
etc.
Table
Total
1993
1994
1995
1996p
95-96
AGGR 1993-96
Domestic
1993
1994
1995
1996p
95-96
AGGR 199396
Vermouth
Total
360,249
376,457
392,165
409,202
4.34%
4.34%
28,391
26,688
24,719
27,240
10.20%
-1.37%
4,496
4,033
3,778
4,737
25.38%
1.75%
31,481
30,428
29,933
31,443
5.05%
-0.04%
29,013
21,988
19,561
28,753
46.99%
-0.30%
453,630
459,594
470,156
501,375
6.64%
3.39%
307.337
319,479
331,787
329,011
-0.84%
26,199
24,245
22,256
24,426
9.75%
2,784
2,136
2,064
2,800
35.66%
23,334
22,502
21,861
23,245
6.33%
28,989
21,988
19,561
28,753
46.99%
388,643
390,350
397,529
408,235
2.69%
2.30%
-2.31%
0.19%
-0.13%
-0.27%
1.65%
52,912
56,978
60,378
80,191
32.81%
2,192
2,443
2,463
2,814
14.25%
1,712
1,897
1,714
1,937
13.01%
8,147
7,926
8,072
8,198
1.56%
24
0
0
0
64,987
69,244
72,627
93,140
28.24%
14.87%
8.68%
4.20%
0.21%
n/a
12.75%
A
LL
Imported
1993
1994
1995
1996p
95-96
AGGR 199396
Fortified
P = Preliminary
Source: The U.S. Wine Market, 1997 Edition, Impact Databank Review and
Forecast,
A Publication of M. Shanken Communications, Inc., New York, NY 10016
TCJ 030105
115
The CASE Journal
EXHIBIT 21
Wine Shipments
In the United States
(in million of cases)
1985-1996
California
Table
Sparkling Wine,
Coolers, Other
Other
States
Bulk and
Bottled
Imports
Totals
1996
1995
1994
1993
1992
1991
134.8
125.3
116.8
112.4
113.3
105.3
36.8
46.4
43.5
47.1
54.8
62.8
10.6
9.0
7.9
7.7
7.7
7.9
30.9
25.3
24.4
21.8
24.3
20.1
213.1
206.0
192.6
189.0
200.1
196.1
1990
1989
1988
1987
1986
1985
108.4
109.3
112.1
109.2
107.0
105.9
77.6
81.4
89.0
101.9
98.8
85.1
6.8
5.6
5.6
5.5
5.9
5.9
21.3
24.3
25.2
27.7
35.1
47.1
214.1
220.6
231.9
244.3
246.8
244.0
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Year
Note:
A case contains 9 liters of product.
A
LL
Gomberg, Fredrikson and Associates
TCJ 030105
116
The CASE Journal
EXHIBIT 22
California Table Wine Shipments
In the United States
(in millions of cases)
l985-1996
Jug
Popular
Premiu
m
Super
Premium
Ultra
Premium
Luxury
Total Higher
Premium
Totals
68.8
65.8
63.3
62.9
66.3
65.3
44.6
41.0
37.5
35.5
34.3
28.7
16.8
14.5
12.3
10.7
9.7
8.5
3.8
3.4
3.2
2.9
2.7
2.6
.8
.6
.5
.4
.3
.2
21.4
18.5
16.0
14.0
12.7
11.3
134.8
125.3
116.8
112.4
113.3
105.3
73.4
79.1
83.8
84.8
86.3
89.7
24.5
21.9
20.7
17.7
14.4
11.1
8.0
6.1
5.6
5.0
4.7
3.9
2.3
2.0
1.9
1.6
1.5
1.1
.2
.2
.1
.1
.1
.1
10.5
8.3
7.6
6.7
6.3
5.1
108.4
109.3
112.1
109.2
107.0
105.9
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Year
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
Note:
A case contains 9 liters of product.
A
LL
TCJ 030105
117
The CASE Journal
EXHIBIT 23
California Table Wine Revenues
(in billions of dollars)
1985-1996
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
Jug
Popular
Premium
Super
Premium
Ultra
Premium
Luxury
$ .981
.921
.887
.865
.912
.898
.863
.811
.841
.848
.875
.905
$
1.540
1.394
1.238
1.154
1.096
.918
.686
.591
.538
.443
.360
.271
$ 1.210
1.015
.849
.728
.650
.570
$
Totals
.528
.399
.364
.320
.290
.234
.415
.351
.320
.287
.269
.251
$ .180
.130
.101
.079
.059
.046
$ 3.345
2.890
2.508
2.248
2.074
1.785
$ 4.326
3.811
3.395
3.113
2.986
2.683
.224
.193
.178
.149
.138
.106
.036
.029
.024
.020
.018
.015
1.474
1.212
1.104
.932
.806
.626
2.337
2.023
1.945
1.780
1.681
1.531
A
LL
TCJ 030105
Total
Premium
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Year
118
The CASE Journal
EXHIBIT 24
Selected Financial Markets Data
July 1997
August 1997
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
June 1997
September
1997
Treasury Rates
Secondary Market for
Bills
90 Days
6 Months
Notes and Bonds
1 Year
5 Years
10 Years
30 Years
5.05
5.12
5.14
5.19
4.95
5.09
5.69
6.38
6.49
6.77
5.54
6.12
6.22
6.51
5.56
6.16
6.30
6.58
5.52
6.11
6.21
6.50
Bonds
Corporate Bonds (S & P)
AAA
AA
A
BBB
BB
7.20
7.29
7.47
7.73
8.23
6.92
7.20
7.19
7.45
7.88
6.98
7.10
7.26
7.49
8.19
6.86
6.98
7.15
7.38
7.99
Floating Rates
Prime Rate
Commercial Paper
8.50
5.55
8.50
5.54
8.50
5.51
8.50
5.53
LL
4.93
5.13
A
Source: Federal Reserve Bulletin
Standard & Poor’s Bond Guide
TCJ 030105
119
The CASE Journal
Exhibit 25
Total Number of Initial Public Offerings (IPO's)
in United States Markets
900
864
800
693
681
700
664
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Source: Securities Data Co.
570 575
600
517
494
500
400
365
351 332
347
300
512
253
222 209
172
200
140
148
121
86
100
61
9
0
1972
1974
5
1976
38
1978
1980
1982
A
LL
1970
40 31
TCJ 030105
120
1984
1986
1988
1990
1992
1994
1996
The CASE Journal
Exhibit 26
Total Proceeds of Initial Public Offerings (IPO's)
in United States Markets
(in billions)
50
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
48.8
45
40
35
33.8
Source: Securities Data Co.
29.3
30
25
20
17.7
15
16.7
23.4
22.7
1992
1994
16.3
12.4
10
6.3
5
3.1
2.2
0.8 1.1
0
1972
1.8
1974
1.4
0.2 0.3 0.2 0.2 0.4
1976
1978
1980
TCJ 030105
4.5
1.2
1982
A
LL
1970
0.8
6.1 6.1
3.6
121
1984
1986
1988
1990
1996
The CASE Journal
Reborn Kyoto NPO (houjin)
Cynthia Ingols, Associate Professor
Erika Ishihara, Research Assistant
Simmons School of Management, Boston MA USA
[email protected]
There is always a problem finding funding. What we do is unique and it is hard to find
a funding source that matches our mission. It is a constant struggle.
Masayo Kodama, President, Reborn Kyoto NPO.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Introduction
Masayo Kodama, president; Shigeyo Nakajima, lead instructor; and Yuka Aoki, director, all of Reborn
Kyoto NPO, relaxed as their plane took off from Boston for their homeward trip to Kyoto. It was
November 2005, and they had just completed a two-day sale of Reborn Wear: colorful, silk women’s
clothes made in training programs for impoverished women from donated and refurbished kimonos (see
Exhibits 1 and 2). Kodama had shipped 150 garments and over 200 accessories and sold roughly 60% of
them (see Exhibit 3), collecting nearly $12,000, slightly better than the last two US sales to date. Kodama
was pleased, but she knew the $60,000 they collected annually from sales would not come close to
meeting the needs of poverty stricken women around the globe. There was still so much to do and
pressure to expand the organization’s activities was great, but without a stable financial base, Reborn was
limited in the projects it could accomplish. Kodama, who was thinking of a day when she could retire
from Reborn, struggled to bring the company’s clouded future into focus.
Kodama’s organization had taught approximately 600 women in Cambodia, Vietnam, Yemen, Laos and
Sri Lanka to restyle donated Japanese kimonos - traditional silk garments holding important cultural
significance - into contemporary clothing for Japanese and American markets. Kodama and Nakajima had
been involved in the inception of Reborn Wear 26 years ago and had been donating their time a good part
of each week to the organization since then. Both were nearing retirement age. Aoki, the only paid
employee, was just starting out in her mid 20s. Kodama wondered who would come forward to take the
reins of her beloved organization. Reborn Kyoto NPO was still struggling to remain solvent and viable as
an internationally active non-profit. As they expanded sales into new countries, questions on imports,
taxation and non-profit status became critical but no one in the organization had the expertise to resolve
them. In addition, Kodama worried that many volunteers were older Japanese women and their sewing
skills were a dying art. How could Reborn continue to grow? And if it didn’t grow and change to meet
the needs of the modern world, what would happen to Reborn and its mission?
A
LL
Background
In 1959 Kodama graduated from Gifu Pharmaceutical University and married Masahi Kodama, a
surgeon, with whom she later had two children. Kodama explained:
I began to feel that I did not have to do everything perfectly. I was able to cast aside my doubts and quit
my job to become a full-time mother and wife. The children needed me, but I also had a feeling deep
inside that I wanted to help people. My husband saw the bomb’s devastation on Hiroshima. My father,
who was a military doctor, taught me that all people needed help in times of war. I became committed to
the idea of world peace. I wanted to bring people hope. But I wasn’t really able to articulate my feelings
until much later.
Back in Japan four years later, a conversation with an old friend, Satoyo Ono, was a turning point in
Kodama’s life. Ono, whose daughter had gone to kindergarten with Kodama’s daughter, told her about an
exchange student from Cambodia who was studying at Kyoto University and was concerned about his
TCJ 030106
122
The CASE Journal
home country. The student had started fundraising for Cambodian refugees and he wanted to expand his
activities. He came to Ono who in turn asked Kodama for help. The refugee’s story of the hardship of life
after a war was a familiar one to Kodama. She recalled:
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
When I was growing up, my generation experienced poverty. When World War II ended, I was
in the second grade. There was no food, no school supplies, nothing. I was raised by the
goodwill of people from all over the world. The developed countries gave us food aid
including corn, skim milk and rice. I remember how world aid saved us from starvation.
When I saw news about Cambodian refugee camps in Thailand, I felt that it was time for me to
give.
Ono and Kodama established the Kampuchean Refugee Relief Program (KRRP) in 1979 and organized a
fundraising campaign for Cambodian refugees. The plan was simple: participants, mostly students and
housewives, stood with boxes on a busy street and asked for donations. At that time it was rare in Japan
for ordinary citizens to take such a proactive approach to help another country (see Exhibit 4). Television
stations and newspapers raced to cover the story and the publicity generated donations from all over
Japan. Kodama felt that they had stuck a chord with others of her generation who had reached a level of
prosperity and felt it was time to give back. KRRP gathered approximately $66,500 in the first year alone.
Early obstacles
But hurdles arose. One was how to deliver the money to the people who needed it most. At the
beginning, KRRP gave all its donations to large international organizations. Kodama wanted to know
how the funds were spent so she could inform donors, but she couldn’t obtain sufficient information. As a
result, in 1980 she and Ono visited Cambodian refugee camps in Thailand and personally delivered the
aid packages to the people.
Another challenge KRRP faced was how to fund operational costs. Many donors specified their money
should be used for medical supplies and food. Kodama respected that, but KRRP also needed to pay for
telephone, printing and other office expenses. At first KRRP members paid those costs from their own
pockets, but as the organization grew so did the cost to run it. Kodama envisioned selling items to
subsidize everyday costs, leaving donated money untouched for direct delivery to Cambodia. To that end,
Kodama started the Women’s Working Group (WWG) a sub-unit of KRRP. She organized a project
where women donated new items from their houses and sold them in charity bazaars, using the proceeds
for the organization’s expenses.
LL
As time went on another issue arose. Kodama realized direct donations were not sufficient to help the
country truly recover from the stress of war. She and Ono reevaluated their operation. Kodama explained
their new approach:
A
Relying on charity can harm people’s pride and spoil their life. It was appropriate to give
medical supplies and food for emergency, but in the long-term, the true help was to support
them to become financially independent. We pondered what could KRRP do to assist their
financial independence? Then we thought about giving them seeds of rice, so they could grow
it. When they harvested rice, they could keep some seeds and plant them again. But, it was
still charity. We wanted to create a sustainable model to help people in a developing country.
After talking to leaders in a Thai refugee camp, we came up with the idea of loans for small
businesses.
Since refugee camp businesses threatened Thai commerce, the target market was limited to the people
within the camp. Despite that restriction, the desire for financial independence sparked refugees’ interest.
KRRP began by loaning 3,000 baby chicks to a group of families. Three months later the group had
TCJ 030106
123
The CASE Journal
successfully raised the chicks and sold chicken meat within the camp at below market price. Their success
story spread quickly and soon KRRP was helping to launch additional poultry, pottery and hand-made
textile businesses. Kodama noticed a positive ripple effect in the camp -- a sense of pride among the
refugees that she attributed to not only their achieving self-sufficiency but also to their repaying the loans.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Reborn Wear: the Beginning
The WWG had branched out from the charity bazaars and had been collecting used clothes to send to
Cambodia . They found that many people donated full kimonos. Both because Cambodia’s warm climate
made them unsuitable as clothes and because the garments themselves possessed such high sentimental
value in Japanese society, the group didn’t know how best to use them. Kodama recalled:
I received letters with kimono donations. Some kimonos had a long history behind them. One
kimono owner was supposed to get married with the kimono, but never married and kept the
kimono. One kimono was a deceased mother’s memento. The donation of a kimono was a
sign of care for other people. A kimono carries the love of the person who donated it. Looking
at the kimonos, I felt that I had a responsibility to make the best use of their love.
In 1986 a WWG volunteer who was a fashion designer suggested making western-style clothes from the
kimonos and then selling them. Kodama’s group members were highly skilled seamstresses, since sewing
was a must-have skill for Japanese women of her generation. Fifteen volunteers created jackets and pants
with the silk kimono cloth. The resulting product line was named “Reborn Wear” since it was a birth of
new clothes from old kimonos. In the same year they organized their first sales event in Kyoto.
Encouraged by the resulting positive responses to Reborn Wear, the group decided to expand its publicity.
Members visited radio stations and newspapers to promote their new line and to increase kimono
donations. A huge outpouring of support resulted. The group collected more than 2,000 kimonos and
Japanese people bought Reborn Wear products at premium prices, generating approximately $4,000 the
first year for KRRP’s administrative costs.
Developing the First Dressmaking Training Project
Kodama had not forgotten her vision of helping struggling third-world people become financially
independent. In the long run, she believed, teaching or developing skills would be more beneficial than
sending goods. Though a professional pharmacist, teaching medicine in Cambodia was out of the
question. Then she thought of sewing. One of her group’s volunteers was a sewing teacher and Kodama
believed possessing that skill would lead Cambodian women towards greater self-sufficiency.
LL
With the idea firmly in place, the next challenge was choosing the location. Kodama explained the
selection process:
A
We identified several [Cambodian] refugee camps [in Thailand] where people were suffering
from poverty. Even though there were many places that needed our help, we had limited
resources. We had to choose strategically. We wanted to reach out to a place where the
United Nations had not provided sufficient aid. We also looked for a leader figure. The leader
was key because after we provided training, a leader had to continue to organize and train
people. We chose places where we could find good leaders and allies such as NGOs in the
region. We found a village that fit our criteria at the border of Cambodia and Thailand. There
was no official camp there, but many refugees had settled without UN aid. As we researched
more, we found a group of women who had sewing machines in the village. We decided to
teach there.
TCJ 030106
124
The CASE Journal
In 1990 the WWG sent its first contingent – an instructor and two assistants -- to teach dressmaking to 20
women in the Thai camp, but the project ended abruptly when Cambodia’s government stabilized and the
refugees began returning to their home country.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
KRRP -- renamed NICCO -- struggles to achieve recognition
In the meantime, KRRP was growing exponentially. In 1988, KRRP was renamed Nippon International
Cooperation for Community Development (NICCO) to signal the expansion of project areas to other
nations like Thailand, Vietnam and Laos. NICCO became an international non-governmental
organization (NGO) dedicated to the promotion of economic self-reliance in poor and developing
countries. In 1990 Cambodian leaders asked NICCO to help develop a village of 5,000 people in
Cambodia. NICCO assisted with building schools and medical facilities and digging wells. Subsequently
the village accepted 35,000 returning refugees and by 1993 the community became self-sustaining.
Although NICCO had operated for nearly ten years, and was gaining in importance in the third world, it
was not incorporated until 1993. Japan had few regulations for governing non-profits that operated in the
private sector. Ono recalled the process of incorporation:
Until the early 1990s, the environment surrounding non-profit organizations in Japan was not
as fully developed as it was in countries like the United States. The fact that NICCO took eight
years to gain corporate status and another three years to be eligible for receiving taxdeductible donations proves how difficult it was for non-profit organizations to receive social
[and legal] recognition as entities that played a meaningful role in Japanese society.
In 1993, when NICCO received its tax-deductible status, it was instructed to separate out the WWG due
to its revenue-generating nature. The WWG, which had worked under NICCO, became an independent
entity named Reborn (Supporting Organization of NICCO). Reborn continued to work closely with
NICCO, which referred small training projects to Reborn.
The Vietnam and Yemen Projects
In search of its next project, NICCO turned to Vietnam. On one trip when Ono’s husband returned to
Japan from Thailand, he sat next to a Vietnamese professor who hadn’t purchased Japanese Yen in
advance. Ono gave him some to use and much to his surprise, the man later returned the money and
invited the Onos to Vietnam. They accepted and the professor, who taught at Ho Chi Min University,
showed the Onos poverty-stricken areas of his homeland. Once back in Japan, Ono contacted both the
Ministry of Foreign Affairs and the Ministry of Education, and the ministries described the impoverished
provinces of Vietnam..
A
LL
In 1993 Reborn decided to help the May 15th School in Ho Chi Minh City, the largest city in Vietnam.
The government had built the school for about 200 pupils – those too poor to afford fees necessary to
attend public schools and who lacked supervision due to their parents’ death(s) or imprisonment. Some
of these students lived at the school, which offered two types of instruction: an academic curriculum and
vocational training. It was the vocational training component that the school principal asked NICCO and
Reborn to support.
Reborn volunteer Shigeyo Nakajima, a long-time dressmaking teacher, set up a two-month course. Thirty
females -- from teenagers to women in their late twenties -- attended her class. She taught them how to
dismantle and wash kimonos and then basic sewing skills. As the students improved they learned how to
construct garments and assemble accessories with sewing machines and patterns provided by Reborn.
Nakajima, who had taught sewing in Japan for 30 years, spoke of the unique circumstances confronting
her and her students in Vietnam:
TCJ 030106
125
The CASE Journal
Usually, I have taught beginner students using easy-to-handle materials such as cotton. I had
to teach these beginners with silk, the most difficult material to handle. That was a challenge
by itself, but on top of that, the outcome from the training process was expected to be sellable
quality. It was pressure for me as well as for the students. The students were very serious
about learning sewing skills and the training went very well.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Kodama felt that it was important to start the trainees with silk, asserting that once they mastered sewing
with silk, that all other fabrics would be easy. The trainees received financial rewards when they finished
garments. At the end of the course, Reborn left behind not only kimonos to be remade into Reborn Wear
but also one-half of the compensation for each to-be-made garment. When the Vietnamese sewers
finished their products our local staff shipped them to Japan where the women’s group checked them over
and then sent the appropriate payment balance back to the workers in Vietnam. Kodama had a system for
rewarding trainees:
We did not pay for the low quality garments. Because this training was an aid, some people
may think that we should have paid the full amount for all the products. But we felt that
paying for the bad products would send a wrong message to the students. We were afraid that
their skills would not improve. They needed incentives to perform well. When we paid the full
amount for good ones and about a half for bad ones, the improvement of their skills was
amazing.
Each year since 1993, Reborn has sent an accredited dressmaking instructor with assistants to teach
sewing in Vietnam. More than 400 students have graduated from those classes and some of them have
gone on to secure dressmaking jobs in the city.
In 1999, Reborn expanded the scope of its work in two different geographical directions, midland
Vietnam and Sanaa, Yemen. Dangphoung Village in midland Vietnam is an eight-hour drive by car from
Ho Chi Minh City. NICCO had already built an elementary school in 1994 and a health care facility in
1995 in the village . In 1998, NICCO received a request from the 57 families of Dangphoung for a
dressmaking training program. The 300 minority Koho tribal people living in the village formerly
employed a slash-and-burn agriculture; however, they were now obliged to practice fixed agriculture by
the Vietnamese government
LL
Reborn sent a team of two sewing instructors and two assistants to Dangphoung Village and offered a
dressmaking course for three weeks. Since then, members of Reborn Kyoto have visited twice a year and
have instructed a total of 150 women in the village. Nakajima recalled:
A
The conditions were very rough. The tables were crudely built and there was no electricity. Sewing
machines were manual, so we did not need electricity, but we needed an iron. We borrowed a
generator in a village and whenever we needed to iron, we used the generator.
In the same year, Reborn started its first dressmaking project in Sanaa, the capital of Yemen, the poorest
country in the Middle East. Yemen was located in the southern part of the Saudi Arabian peninsula and
unlike neighboring countries, it did not have oil deposits. The illiteracy rate of women in Yemen was
70%. The Yemen Project was funded by Nippon Foundation1for three years. In 2002, Reborn handed over
1
The Nippon Foundation is a non-profit, grant-making organization founded in 1962. The Foundation is providing
aid to projects that fall under one of the following four categories:
1) public welfare in Japan
2) voluntary programs in Japan
TCJ 030106
126
The CASE Journal
the training program to a local NGO. Graduates of the dressmaking program worked as dressmakers, both
to make Reborn clothing and to produce local clothing for sale to the Yemeni public. Reborn continued to
support the Sanaa women after the completion of their training program by sending them materials,
checking the clothing they made, and selling the finished products at Reborn Wear sales. Kodama
explained that each project had different issues:
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Each group has a different culture and technique. For a project in Laos, for example, we realized that
the women were skilled in weaving, so instead of sewing, we made thread from the Kimonos and helped
the Laotian women weave handbags and coats from both Kimono and local silk. Those products are
very high quality.
Volunteers and Staff at Reborn Kyoto
Kodama moved in several directions through the years to develop the organization. For example Kodama
sought help from NICCO and her personal connections to create a trustworthy board of advisors who
could bring different resources to the table. Kodama wrote the articles of association, which stated that
the Board should meet twice a year. Ono and NICCO’s accountants both became board members.
Kodama’s husband recommended friends. By 2002 the Board of Advisors included Satoyo Ono, the
President of NICCO; Shigeyo Nakajima, head instructor; Hironobu Hama, a physician; Shin Fukuda, a
member of the Senior Volunteer Organization; and Yoshiro Kitano, a certified public accountant.
Reborn’s head office was in Kyoto, Japan. When NICCO started, they rented a small room in a YWCA
facility, but as the activities expanded they needed a larger office. When a NICCO member inherited a
house, he rented the second floor to NICCO and Reborn at below market price.
Twenty volunteers worked twice a week to organize Reborn’s garment-making and handicraft courses.
An accredited instructor oversaw the dressmakers. Prior to each training program, volunteers matched
kimonos with designs and bought thread, fasteners and other accessories. Although they taught students
how to wash kimonos, volunteers helped with the laundry process if classrooms lacked washing. But
mostly they untied the kimonos, put them in order, completed clothes students had made (i.e., sewing on
buttons, making buttonholes), and made samples of Reborn Wear for teaching purposes. Both the clothesmaking and handicraft groups created new designs and merchandise that improved and increased the
Reborn Wear product line.
LL
Most of the volunteers were between 50 and 80 years old. The membership gradually changed over the
years. Some were 24-year veterans while others had been with the organization less than a year. The
volunteers either heard about the Reborn Wear exhibition sales on the news or happened to visit the sales
and were moved by Reborn’s mission. One of the volunteers explained why she joined Reborn:
A
When I was thinking about my retirement, I came across Reborn Wear sales. I was in a kimono related
business for most of my life and Reborn Kyoto seemed a smooth transition and worthwhile activity for
me. But, if the hours were demanding, I could not have handled it. Once or twice a week is a perfect
pace for me.
Other volunteers described Reborn Kyoto as a place where they felt needed, fulfilled and had fun. Ono
commented on the differences between NICCO’s and Reborn’s activities:
NICCO increased its budget from 15 million yen ($135,000) to more than $100 million yen
($900,000) in 24 years. Our activities expanded because people who needed us did not
3) maritime and ship-related projects
4) overseas cooperative assistance
TCJ 030106
127
The CASE Journal
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
decrease. I hope that there will be a day when an organization like NICCO is not needed, but
until then, we do what needs to be done to create a better environment for the 6.5 billion
people on earth. Reborn and NICCO have the same goal, but the approaches are different.
NICCO has 10 full-time Japanese staff and 50 local staff. Our activities, like building schools,
digging wells, and developing environmentally friendly agricultural methods, need a strong
workforce. In 1996, we started an internship program to generate future leaders. Every year,
we send 25 college students to various areas where we operate.. We have new people coming
in every year, but the turnover rate is also high. On the other hand, Reborn Wear’s activities
need the senior group’s skills. If Reborn had moved at the same speed as NICCO, the members
would have been too tired to continue. Because the organizations are fundamentally different
in nature, Reborn should keep the pace according with the capacity of its active members. The
important thing is to let members continue participating and let change happen gradually.
Kodama knows the right pace.
When Reborn was a sub-group of NICCO, NICCOs full-time staff handled the administrative tasks. After
Reborn became independent, the volunteers took turns performing the administrative tasks. Kodama
wanted to hire a full time-staff, but she had not been able to find the right person who could share the
same vision and was willing to work hard in spite of a low salary. In 1998, Yuka Aoki, a former intern at
NICCO, came on board as the first full-time and only paid staff member of Reborn. Aoki recalled:
I learned English at Kansai Gaigo University and after I graduated, I wanted to find a job
where I could help people in foreign countries. The internship opportunity at NICCO fit my
interest. My first job at NICCO was to publicize internship positions for the dressmaking
project that NICCO had supported. One day, the President of NICCO asked me if I wanted to
learn dressmaking and go to Vietnam with dressmaking specialists as an assistant. So, I took
lessons once a week from Ms. Nakajima and I went to Vietnam in 1998 for three months.
After Aoki came back to Japan, she joined Reborn Kyoto. She explained:
I like the Reborn Wear project. When I visited small Vietnamese villages, I felt that I could
work with the people there. I talked to people and understood how they lived. I madegood
friendships with them. It was very satisfying.
Another major reason for Aoki to join Reborn was Kodama:
A
LL
Masayo (Kodama) is a person of ideas. I learn a lot from Masayo. She is always active and
has great ideas. Because there is no monetary compensation for volunteers, sometimes it is
difficult to motivate them. I do not know how much I can expect from volunteers, but Masayo
deals with them very well. She is good at motivating them and me. She does not tell me exactly
what to do, but instead, she gives me some kind of a vision by saying “wouldn’t it be great if
we can do this and that!” and makes me feel like I want to do it. No one can bring Reborn
together like Masayo.
Aoki’s responsibilities included most of the administrative work, including bookkeeping, public relations,
newsletter editing, writing proposals for governmental funding, organizing sales events and arranging
dressmaking training trips to Vietnam. Given the wide variety of tasks, she expressed a concern about
Reborn’s operation:
I think it would be ideal to hire one more paid staff, but right now, it is financially difficult.
We would like to help different countries, but starting a new project is challenging. We already
TCJ 030106
128
The CASE Journal
have projects in two cities in Vietnam and we are still trying to start new projects in different
countries.
While Reborn continued its activities, Kodama and Aoki completed the process of registering Reborn
Kyoto as a NPO. Reborn Kyoto became an accredited NPO Corporation in 2002.
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Financing Projects
Whenever Reborn planned a new project and at the beginning of each fiscal year, Aoki researched federal
grant programs and subsidies from private organizations and filed applications for funds. For example the
Japanese Ministry of Foreign Affairs provided grants for projects that fit into its policies and
requirements. Private organizations and foundations also provided subsidies to non-profit activities, but
usually limited funding for one project per organization. Therefore, Reborn had to find various supporters
for each project. The project in the May 15th School in Ho Chi Minh City, for example, was funded by
Osaka Community Foundation.
In 2005, Reborn received approximately $20,000 in federal funds, representing roughly one-eighth of
Reborn’s annual budget. It also received funding from Amnesty International and the Red Cross. Reborn
Wear’s sales revenues covered about 60 percent of expenses. In 2003, the time-limited grant from the
Ministry of Foreign Affairs ended but Reborn secured a new grant from the Ministry of Posts and
Telecommunications. Some years there were more programs for which Reborn could qualify although its
success rate in receiving the grants varied. The amount of private donations stayed roughly level year to
year. (See Exhibit 5) Kodama was hoping to start a project in South America by approaching
organizations in the US for help, hoping that South America’s proximity to the US would make it
attractive for funding.
Selling Reborn Wear Products
Completed garments and accessories were sold annually in Reborn Wear exhibitions in Kyoto and
Fukuoka.
Kodama believed that Reborn products must be desirable to the consumers:
LL
We do marketing research. We needed to create something that sells, but people’s tastes are
different. First, we pick a location where we can find allies in the region and identify the
presence of our market. Volunteer helpers in the location are very important because we rely
on them for our home stay, renting a large space and sales promotions. We also need markets
where people understand the kimono, appreciate the concept of our products and are willing
to buy. We use networks of friends to identify locations.
A
Although the products were attractive to customers, there were several constraints to increasing sales.
Since the products were the result of training programs, product availability was the function of students’
skill and motivational levels. It was very difficult to predict how many garments and accessories students
would produce. Although Reborn still had approximately 2,000 donated kimonos, they did not know how
many would be donated in the future.
Expanding into the International Marketplace
In 2000, Kodama took an important step when she visited friends in the United States when she presented
Reborn Wear to American women. Their positive reactions suggested there might be sales opportunities
in the US. To expand internationally, Kodama tapped into her personal friendships. When Kodama’s
husband was a visiting researcher at National Institute of Health in Washington D.C., she had built a
friendship with her host’s mother, Eleanor, and her daughters, Susan and Carol Bratley. In the mid 1970s
Eleanor Bratley rented out a room in her house after her children left home. One of the residents was
Kodama’s husband, Masashi Kodama. They struck up a friendship. Kodama explained:
TCJ 030106
129
The CASE Journal
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
When I came to Washington D.C. with my husband, Masa, I met Eleanor Bratley, who was
Carol and Susan Bratley's mother. Eleanor had the same Christian feelings of trying to "do
good onto others" so we got along well. Eleanor visited us twice and stayed with us in Japan.
I also exchanged cooking lessons with Susan, who was living in Washington DC when we
visited there. I got to know the family more and more in this way. Eleanor was very interested
in my efforts to do something to help the miserable condition of many people in this world.
This was the time of the Cambodian refugee crisis. Eleanor passed away from cancer in 1982
but my relationship continued with both of her daughters. In 2000, my husband and I took a
three-month trip to Boston, and I spent quite a bit of time with Carol. At this time I did some
research and I spoke with both Carol and Susan about the possibilities of selling Reborn Wear
in the United States. With their help and advice, we were able to start our first exhibitions in
2001 in Washington DC and Boston, and subsequently we have also had sales in San
Francisco and Hilo, Hawaii.
Organizing a Sale in Boston
Carol Bratley was a real estate developer and property manager living in Charlestown, Massachusetts.
When Kodama asked for help, Bratley accepted the responsibility for organizing a sales event in Boston.
Bratley explained why she got involved:
There is a family relationship. My mother became a close friend of the Kodamas and they, in
turn, were incredibly generous to her. She was an outgoing person anyway, but the Kodamas’
friendship was very special to her. The second time my mother went to Japan, Masa took her
around to his hospital to see if they could do something about her illness. Because of this
generosity, I feel a sense of obligation, not in the sense of ‘I better do this or else’, but more in
a sense of reciprocity. You do what you can for the other person.
Bratley ran the local business association for four years and had experience in organizing events. She had
a list of things that needed to be done and started planning in July for the sale scheduled in October 2003.
LL
I looked around for a place to hold the sale. I shied away from public locations because there
were not enough products for a big sale. I asked a neighbor, who had a beautiful house in
Charlestown, if she were willing to host the sale. There was another person whom I met in
Italian class and I asked her to join us. I asked three other people to help. They were delighted
to take part in this venture after I explained the project. Everyone was fascinated by the idea.
No one asked how much of the money went back to the dressmaking programs. I assumed that
as much money as possible would go to the programs. Expenses like tags, invitations, stamps,
rental of clothing racks were reimbursed by Reborn Kyoto. Reborn staff stayed with
volunteers.
A
Invitations went out three weeks before the event. Reborn sent the products from Japan. Bratley and her
volunteers helped Kodama and Aoki price the products, ranging from $5 to $300. Approximately 100
people attended the event and the first sale in Boston raised $11,000 and sold about 28% of the garments
available. The sales were scheduled to take place every two years because Reborn Kyoto could not
supply enough products to make the sale an annual event in Boston and a 2004 sale was already planned
for San Francisco. The product variety was also an issue. As Bratley explained:
A group of volunteers in Boston met in January 2004 to talk about what would be appropriate
for 2005. One thing I learned was that we can suggest products, but Masayo brings what she
can. Some products did well in one market and not in another.
TCJ 030106
130
The CASE Journal
Bradley organized the Reborn sale in Boston in the fall of 2005. She rented the Charlestown Artist
Cooperative, a renovated warehouse space with good lighting and on-the-street parking. She spent about
$400 printing and sending out 1,000 invitations and another $100 for renting display racks. She advertised
the sale to the Japanese consulate and the Japanese Society in Boston. She, Kodama, Aoki and other
volunteers set up the clothing display on Friday morning for an afternoon exhibit and sale. Over the next
two days approximately 75 people looked and bought the unique Reborn items, ranging in price from $5
for quilting kits of kimono silk to $250 - $300 for “cozy coats,” silk jackets with silk and woven linings.
One shopper observed: “These jackets compare in price and quality to handcrafted jackets sold by
American designers at such places as the Cambridge Artists Cooperative.”
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Another shopper explained:
I shopped on Saturday, and was dismayed at how the inventory had been reduced! I vowed that
next time Reborn Kyoto came to Boston, I’d shop on the first night to get a fuller selection. I did
buy a cozy coat and was thrilled with it. It was brown with ivory and black Japanese letters. At
someone’s suggestion, we had Mrs. Kodama interpret the lettering. She explained that the
material came from a man’s kimono and the lettering was the Samauri code of conduct of “battle
only as a last resort.” US consumers buy so much from overseas and think nothing of what "made
in India" really means. But this personal contact, with the actual manufacturer, speaking her
language, brought into vivid perspective what “going global” means. Every time I wear that
jacket I think about the women who made it 8,000 miles away.
A third shopper wandered around the sale for quite a while, trying on several jackets and a dress:
I looked at several jackets that were lovely. The fabric was very soft and beautiful and the
workmanship was good. Somehow none of them suited me. Then I spotted a lightweight jacket
made of very fine wool in a beautiful azure blue with a pattern of Japanese fans sprinkled across it.
When I tried it on, I knew this was my jacket. There was something odd about the closure, however.
When I brought it to the front where a salesperson was taking the sales, I mentioned this to the
diminutive Japanese lady by the register. She whipped out a needle, thread and scissors and solved
the problem in about a minute and a half. I did not know it then, but I had just met Kodama.
Bratley explained the motivation behind people’s support:
A
LL
One of the reasons that people got involved was that they really admired Masayo. They put
themselves in her shoes and thought, ‘This is an impressive person who has done what many of
us would like to do. I wonder how she does it.’ Americans were interested in her, what she did
and in her missionary instinct. She was charitable not only with her money, but with her time.
She operates as if one person can change the world. She articulates that very well. A sense of
good will permeates her work. Hers is a story of generosity.
The 2005 sale generated revenues of nearly $12,000. Just over 30% of the garments (not including
accessories) were sold, which was an improvement from the 27% and 18% sold previously in Boston and
San Francisco respectively. Bratley questioned how Reborn Kyoto could increase its revenues. Without
control over types and amounts of products, it was very difficult to promote the next sale. Reborn’s
expansion into the US depended solely on networks of friends. In the absence of a permanent local
organization, the sales events had to be organized by friends who recruited other volunteers. The demands
on individual volunteers were high, especially for Bratley:
It takes at least one or two people who are willing to organize the sale and they, in turn, enroll
others. But, how are we going to expand the network? I speak on the phone and ask customers
TCJ 030106
131
The CASE Journal
from the last sale, ‘Could you give me the names of ten people who would like to be invited to
the upcoming sale?’ I have databases of names and contacts, but I have to think about the
long-term strategy. If we don’t have unique and interesting things to offer at a Reborn Wear
sale, will friends help and customers continue to buy at future sales?
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
In addition to the issue of supporters in the United States, there were regulatory compliance issues.
Bratley was concerned about Reborn’s tax treatment in the United States. Reborn was eligible for
Japanese tax exemption, but what about in the US? Bratley expressed her concern to Kodama who
consulted a Japanese accounting firm regarding the tax issue. Kodama received a report stating they did
not have a tax liability in the United States (see Exhibit 6). But the tax issues were an additional burden
for Aoki, who had no international business background. Given Reborn’s limited resources, who should
take responsibility for assuring that the organization was in compliance with laws and regulations of
different countries was still an unanswered question.
Planning the Future of Reborn Kyoto NPO
As Kodama leaned backed in her seat on their transcontinental fight, she felt satisfied that her vision of
nurturing the economic independence of women and children in developing countries through the
instruction of dressmaking had been realized. Despite having accomplished so much in 26 years, Kodama
could not stop worrying about the future of Reborn Kyoto. As the organization’s activities expanded, new
issues emerged. The initial goals of the organization, to fund administrative costs for NICCO, had long
been eclipsed by Reborn’s own mission.
A
LL
How could Reborn stabilize and grow its revenue stream? Should it focus on sales, grants or increasing
private donations? How should it spend its money most effectively? What type of person should Kodama
look for in her replacement?
TCJ 030106
132
The CASE Journal
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Exhibit 1: Reborn Wear Products
Cushions
Exhibit 2: Kimono
The kimono is a traditional costume that most associate with the Geisha and Samurai. With its deep cultural
ties to Japanese spirits, manners and behavior, the kimono remains central to several time-honored Japanese
customs, including the tea ceremony, flower arrangement, Kabuki, traditional Japanese dance, and wedding
ceremonies.
Until the Meiji period (1868-1912), a kimono was considered everyday wear. The fabric is usually silk, but
can be cotton or hemp depending on the season. Adornments include fine embroidery; jewels; thread made
from gold or silver; shells; and even actual leaves. For the most expensive kimonos, specially trained
craftsmen hand painted designs. Also special dyeing techniques have been used for some fabrics.
A
LL
After US Admiral Matthew Perry ended Japanese isolation in 1853, Japan and its people were open to
influence from the outside world. In the Meiji period, Japanese law required government officials and military
personnel to wear Western clothing for official functions. Ordinary men and women also began to adopt the
western style of dress, wearing their kimonos only on more formal occasions. Today, people still wear them
for special occasions like weddings, funerals, tea ceremonies, and summer festivals. For people in Kyoto,
kimonos retain a special value. Kyoto was the capital of Japan 1200 years ago and even after the capital was
moved to Tokyo, Kyoto remained the artistic and cultural hub of Japan as well its kimono industry center.
TCJ 030106
133
The CASE Journal
Exhibit 3 – Details from Boston 2005 Reborn Sale: data from internal document
Item
price ($)
number
brought
number
sold
sold rate
(%)
Amt Collected
175
6
6
100.0%
1,050.00
Happi Jacket
180
2
2
100.0%
360.00
Haori Jacket
160
2
2
100.0%
320.00
Coat of woven fabric
400
1
1
100.0%
400.00
Puffy Jacket
275
7
6
85.7%
1,650.00
Farmer's Jacket, short
75
4
3
75.0%
225.00
T shirt blouse, long sleeve
85
4
2
50.0%
170.00
Hooded Jacket
200
11
5
45.5%
1,000.00
China collar blouse, half sleeves
130
7
3
42.9%
390.00
China collar blouse, long sleeves
130
5
2
40.0%
260.00
75
8
3
37.5%
225.00
150
6
2
33.3%
300.00
140
5
1
20.0%
140.00
Farmer's Jacket, long
160
12
2
16.7%
320.00
Seethrough poncho
100
6
1
16.7%
100.00
Pants
130
7
1
14.3%
130.00
Shirt with cuffs
125
8
1
Shirt with york
125
1
0
Shirt without cuffs
100
7
1
Lucy's long Vest
220
1
0
0.0%
0.00
90
2
0
0.0%
0.00
130
3
0
0.0%
0.00
120
2
0
100
2
1
150
1
0
60
9
0
90
7
0
50
1
1
100
1
0
0.00
Vest of woven fabric
160
1
1
160.00
Dress with half sleeves
200
Dress with Kimono sleeves
220
Dress with shoulder strap and matching top
250
0.00
Dress, indigo cotton
200
0.00
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Reversible Jacket
T shirt blouse, half sleeve
Men's shirt
Men's vest
Puffy Japanese Vest
Long shirt
Skirt
Skirt, rap style
Patch-work Skirt
Vest
LL
Tank Top
Vest, very short
A
Vest, side buttomed
12.5%
0.00
100.00
0.00
0.0%
100.00
0.00
0.0%
0.00
0.00
0.0%
50.00
0.00
10
Subtotal Garments
TCJ 030106
125.00
149
134
0
47
0.0%
31.5%
0.00
7,575.00
The CASE Journal
Exhibit 3 (Continued)
price ($)
number
brought
Jewerly bag
20
15
15
100.0%
300
zipped pouch
12
8
8
100.0%
96
round applique bag
12
7
7
100.0%
84
Evening bag
23
7
7
100.0%
161
compact puffy bag
15
5
5
100.0%
75
puffy scarf
25
4
4
100.0%
100
12
4
4
100.0%
48
hand dye scarf, wide
20
3
3
100.0%
60
eveining bag, small
15
3
3
100.0%
45
new fabric scarf, #1 single
25
3
3
100.0%
75
new fabric scarf, #2 single
25
3
3
100.0%
75
woven bag
60
2
2
100.0%
120
Indigo square shoulder bag
15
2
2
100.0%
30
new fabric scarf, #3 double
45
2
2
100.0%
90
shell
12
2
2
100.0%
24
bag with flower
15
1
1
100.0%
15
yellowish patchwork shoulder bag
28
1
1
100.0%
28
120
1
1
100.0%
120
hand dye scarf, narrow
15
19
18
94.7%
270
craft piece
10
19
16
84.2%
160
80-100
6
5
83.3%
400
25
5
4
80.0%
100
5
20
15
75.0%
75
110-125
11
8
72.7%
880
patchwark shoulder bag
25
3
2
66.7%
50
Totes
40
5
3
60.0%
120
15
5
3
60.0%
45
45
15
8
53.3%
360
Evening shoulder bag
35
8
4
50.0%
140
Sharon's bag
40
2
1
50.0%
40
cushion
25
6
2
33.3%
50
T shirts, white
20
18
7
25.9%
140
T shirts, black
20
9
Indigo round shoulder bag
15
1
0
0.0%
0
hand bag
Subtotal Accessories
Total Entire Sale
15
1
226
375
0
169
216
0.0%
74.8%
57.60%
0
4,376.00
11,951.00
ring holder
yellow scarf, fringed
patchwork double scarf, narrow
square patchwork bag
presentation bag
A
tie
LL
patchwork double scarf, wide
zouri
TCJ 030106
number sold rate
Amt Collected
sold
(%)
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Item
135
0
The CASE Journal
Exhibit 4: Historical context of Japanese Non-Profit Organizations (NPOs)
Japan's nonprofit sector was institutionalized during the Meiji Era in 1898 with the enactment of the Civil Law,
but nonprofits remained minor entities in Japanese society. Nonprofits required government approval and had
to follow strict government specifications and policy goals to become incorporated.2 Nonprofit organizations
(NPOs) such as private schools, social welfare institutions and hospitals were funding in part by and were
considered an arm of the Japanese government. Most nonprofits were not motivated to raise funds. KRRP
(later NICCO) was one of the first organizations not government related. Other non-profits emerged in Japan
during the 1970s. By the mid-1990s grassroots citizen organizations blossomed in a new era of civic
voluntarism, initially operating as unincorporated organizations.3
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
The NPO Law enacted in 1998 was significant in that it permitted grassroots organizations to become
incorporated without government control of their activities. With the government demonstrating its trust of
non-profits by granting them corporate status, public trust in NPOs followed. The NPO Law allowed NPOs to
set up bank accounts, rent office space and own assets.4 Charitable donations by individuals became tax
deductible in Japan in 1999. 5 An individual could take tax deductions only for donations to certain nonprofit
organizations certified by the government as "special public-interest promotion corporations" ("tokutei koueki
zoshin hojin"), or a few other types of organizations, such as political parties. The number of "special publicinterest promotion corporations" in Japan as of April 2002 was only 19,9916 compared with 1.2 million
charitable organizations in the United States as of 1998.7 Moreover, to qualify for tax deductions in Japan,
individuals must have made contributions of more than 10,000 yen ($79.90) and the tax deductible portion is
only the amount of the contribution exceeding 10,000 yen. This restriction discouraged donations by
individuals and corporations, severely limiting fund-raising by Japanese NPOs.
By 2001 the issue of tax-deductible donations took a step forward with enactment of a new system. Certain
NPO Corporations were finally allowed to receive tax-deductible contributions if they were certified by the
National Tax Agency as having fulfilled certain requirements:
• the charity’s activities could not be focused solely on the local community;
• the charity had to report its donor list to the government;
• private donations had to be at least one third of its total income.
2
A
LL
Although public interest in NPOs increased, they existed outside mainstream Japanese civil society. Japanese
donors were interested in how their gifts were spent. One study found that 61.4 percent of contributors to a
charity said that "the use of the funds collected should be made easier to understand.”8 Thus accountability is
important in building support for NPOs, which were expected to be able to explain their activities. One report
listed several impediments to charitable fundraising and public giving, including:
• Government requirements made it difficult for many charities to obtain tax-deductible status.
• Many Japanese considered social-welfare the responsibility of the government.
• A Japanese tradition known as intoku-youhou, or "secret good deeds bearing good fruit," encouraged
people to perform acts of good will in private. This tradition prevented some people from making big
donations to nonprofit organizations that might draw attention to themselves.
Yamaoka, Yoshinori. “Developing Japan’s Non-Profit Sector and Constructing a New Civil Society.”
http://www.gdrc.org/ngo/jp-civil-society.html.
3
Matsubara, Akira and Hiroko Todoroki. “Japan’s “Culture of Giving” and Nonprofit Organizations.” May 2003.
http://www.npoweb.jp/english/cgp.html
4
Doteuchi, Akio. “The growing Role of Nonprofit Organizations a s Society Matures-Issues and Possibilities in the
Next Century.” NLI Research. NLI Institute 2000. No. 140
5
Matsubara, Akira and Hiroko Todoroki. May 2003. http://www.npoweb.jp/english/cgp.html
6 Ibid.
7
The New Nonprofit Almanac and Desk Reference: The essential Facts and Figures for Managers, Researchers, and
Volunteers. Independent Sector, Urban Institute. Jossey-Bass; 1stedition (Feburary 22, 2002)
8
Matsubara, Akira and Hiroko Todoroki. May 2003. http://www.npoweb.jp/english/cgp.html
TCJ 030106
136
The CASE Journal
Unlike the US Postal Service, Japan’s postal system did not offer discounts on nonprofit mailers and
that discouraged the use of direct-mail solicitations to raise money.9
A
LL
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
•
9
Coalition for Legislation to Support Citizens’ Organizations (C’s), Report on Conditions Related to Specific
Nonprofit Corporations in Regard to Revisions to the Approved Specified Nonprofit Corporation System, Tokyo:
Coalition for Legislation to Support Citizens’ Organizations (C’s), 2003.
TCJ 030106
137
The CASE Journal
FYE 3/02
$62,145
357
5,253
10,608
7,023
1,607
0
61
3
0
$87,058
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Exhibit 5: Financial Statements (in US dollars): Reborn Kyoto NPO (houjin)
FYE 3/04
FYE 3/03
FYE 3/05
Revenues
Reborn Wear Sales
$54,062
$76,265
$56,362
Sewing Training Fees
339
675
301
Subsidies from private
0
10,239
5,299
organizations
Federal Grant
0
0
22,072
Individual Donations
41,795
8,666
16,460
Group Donations
17,400
15,090
14,523
Membership fees
2,911
3,664
3,508
Other income
1,111
21
580
Interest
0
0
0
Loans
0
14,775
0
$129,396
$119,104
Total Revenues in this
$118,539
period
A
LL
Expenses
Operational Expenses:
Sewing Training – Ho Chi
Min city
Sewing Training – Dong
Phong Village
Sewing Training – Yemen
Sewing Training – Laos
Sales
Cost of goods sold – China
Total Operational Expenses
Administrative Expenses
Salary and Benefits
Travel
Correspondence
Honorariums
Shipping
Insurance, utilities and rent
Maintenance
Printing
Supplies
Fixtures
Auditing
Miscellaneous
Total Administrative
Expenses
Donations to NICCO
Loss disposition
Taxes
Total Expense in this period
Revenue and expense
difference
$4,974
$13,148
$36,916
55,099
48,866
20,068
0
5,164
17,651
9,504
$92,392
213
563
30,284
17,252
$109,763
24,402
$81,947
$31,532∗
$17,962**
6,037
2,686
1,813
793
195
2,772
269
327
1,749
0
3,516
2,715
$22,872
9,281
3,738
1,301
0
0
2,694
61
906
836
1,451
0
543
$20,813
19,372
5,262
4,324
2,979
0
13,205
172
2,415
1,502
1,387
0
618
$51,236
0
1,066
651
$112,072
$6,467
985
0
0
$133,620
$(4,225)
868
1,720
304
$105,652
$13,452
784
∗
Expenses in this year were not broken down between projects.
** Administrative expenses were not broken out in this year.
TCJ 030106
138
$83,553
$3,505
The CASE Journal
Exhibit 6: Excerpts from a translation of the report by Miyabi accounting firm regarding Kyoto
Reborn NPO’s tax concerns in the United States
Selling products in the USA and the related tax issue
D
R O
IG N
H OT
TS C
R OP
ES Y
ER
VE
D
Definition of the current status of Reborn Kyoto’s activities in the Unites States:
1. Selling recycled second hand clothes once a year in Washington DC, Massachusetts, California and
Hawaii.
2. The location of these sales is prepared each time by local volunteer staff members with no expenses
incurred.
3. Products being sold are sent or brought each time from Japan
4. Sales staff is comprised of Japanese members who travel to the sales location and local volunteer staff
members
5. Organizer of the sales is Reborn Kyoto, N.P.O. and the expenses and income are included in the accounts
of the organization. The sales are recognized as the profitable projects of the organization and counted in
calculation of the corporate tax.
Report Contents
1. Basic premise
When Reborn Kyoto NPO holds sales in the United States, its tax matter should be treated based on the
“United States-Japan Income Tax Convention (Agreement number 6, June 23, 1972).”
2. “Permanent Establishment”(as per the United States-Japan Income Tax Convention)
The decision on whether your organization should pay tax or not depends on whether or not it has “Permanent
Establishment” (“PE” hereafter) as mentioned in article 9 in the United States-Japan Income Tax Convention.
In the convention, as PE is defined as “a fixed place of business through which a resident of a Contracting
State engages in industrial or commercial activity” this is the central point in analyzing Reborn Kyoto’s tax
position in the United States. It is possible to view that the venues Reborn Kyoto NPO occasionally uses in the
United States might be considered a “fixed place” and the selling of recycled second hand clothes could be
called “industrial or commercial activity”. Our accounting firm can not judge whether Reborn Kyoto has PE or
not. This judgment is made by the tax department of the US government, not by the Japanese government, and
thus it depends on how the US government sees individual facts such as the sustainability, scale and the
existence of representation for the sales.
A
LL
However, we do consider that as long as you have the recognition that your organization has no PE (in other
words, that the venues you prepare for the sales in the United States are not permanent or continual), it is
defensible position for you to conclude that your organization has no duty to pay sales or income tax. But it
has to be taken into account that the Unites States government has not assessed whether Reborn Kyoto has PE
or not, and thus until this assessment is made, the question of tax will remain open to interpretation.
3. Conclusion
In conclusion, we believe that do no need specific tax details right now.
TCJ 030106
139
The CASE Journal
The CASE Association
2006-2007 Membership Form
Please fill in the following information. Mail this form to the VP for Membership
whose name and address appear at the bottom of the page.
Salutations: □ Dr. □ Mr. □ Mrs. □ Ms. □ Prof. □ Other: ______
Name:__________________________________________________________
School: _______________________________________________________
Address: _____________________________________________________
______________________________________________________
5. City & State ___________________________________________________
6. Telephone #: ___________________________________________________
7. E-mail address: _________________________________________________
1.
2.
3.
4.
2006 DUES PAYMENT
__ I already paid my 2006-2007 membership through NACRA (you must have
paid CASE dues to NACRA)
__ I am enclosing my check for $25.00
Please make check payable to The CASE Association and mail to:
Dr. David Desplaces
Barney School of Business
University of Hartford
200 Bloomfield Avenue
West Hartford, CT 06117
If you have questions, you may call (860.768.4270) or e-mail
([email protected])
www.caseweb.org
140