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includes low-end Charmat and transfer process brands. Moreover,
we find no evidence in Korbel’s recent sales history to justify
an assumed 4.5-percent sales growth for 1999 and thereafter.
b. Operating Margin
Dr. Bajaj’s projected annual operating (pretax)7 margin
(total revenues less cost of goods sold, excise taxes,
depreciation, officers’ compensation, and selling, general, and
administrative expenses (SG&A)) for 1995 and all subsequent years
is 12 percent of sales revenues. He bases his projection upon
the 5-year simple average of operating margins for the 1990-1994
period. Dr. Spiro’s projected annual operating margin for 1995-
1999 and subsequent years is 13.3 percent of sales revenues.
Dr. Spiro computes each element of cost entering into his
projection of operating margin separately, in some cases based
upon 2-year averages, in others, based upon 5-year averages. In
computing average annual SG&A for 1990-1994, Dr. Spiro fails to
include $420,000 of promotional expenses incurred by Korbel in
1993, which Dr. Spiro attributes to the launching of a new
product (Armstrong Ridge champagne). Dr. Spiro considers that to
be a special, nonrecurring cost that, in future years, will be
borne by Brown-Forman pursuant to the Brown-Forman agreement. We
do not agree with Dr. Spiro’s treatment of the 1993 promotional
7 The parties agree that the only tax applicable to the
income of Korbel is California’s 1.5-percent income tax on
S corporations.
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