TB0501

Graeme Rankine

Kangaroo Tail Winery Limited (B)

The Kangaroo Tail Winery was established by two Australian entrepreneurs, Anna Amphlett and Andrew Ferris,
to produce, market, and distribute high-quality premium wine in Tasmania, an island off the southern coast
of Australia. Tasmanian soil and water formations produce unique wines. Amphlett and Ferris developed the
Kangaroo Tail brand to reflect the distinctive local character of family-run wineries in Tasmania (see Exhibit 1).
Kangaroo Tail drew many local visitors to its weekend wine tastings and tours. Over time, it gained an excellent
reputation with wine connoisseurs from around the world. Soils in Tasmania are characterized as ferrosols that are
deep, well-structured soils with a red or red-brown color. The soils were formed from the weathering of basalt, a
volcanic rock extruded as lava by numerous small volcanoes some 10-50 million years ago. Consequently, the basalt
has had a long time to weather, which explains why these soils were so deep, with usually more than one meter
to unweathered rock.1 Tasmania now produced elegant cool-climate wines such as Pinot Noir, sparkling wines,
Riesling, Chardonnay, Sauvignon Blanc, Cabernet Sauvignon, and Pinot Grigio. Tasmania enjoyed a national
and international reputation as a leading producer of some of Australia’s premium wines, with its Pinot Noir
and sparkling wines winning particularly high praise and numerous trophies from wine judges and critics alike.2

Kangaroo Tail Winery operated from Richmond, Tasmania, Australia, about 27 kilometers from Hobart,
the capital city of Tasmania (see Exhibits 2 and 3). The winery was situated at about 350 meters above sea level
and experienced a relatively mild climate all year round. Richmond received about 600 mm of precipitation
per year, evenly throughout the year, but slightly more in November and December. The average high (low)
temperature during the winter months (June-August) was around 11°C (5°C) Centigrade, while the average
high (low) temperature during the summer months (November–January) was around 20°C (10°C). Forestry
products, agriculture, and tourism were the region’s other key industries. Wineries and winemaking grew rapidly
during the last five years, with several regions in the state offering wine tours for visitors.3

Tasmanian Wines
Tasmania’s cool climate was heavily influenced by its position in the cool waters of the Southern Ocean. The
first commercial vineyards were planted in Tasmania in 1865, but the industry collapsed a decade later largely
due to the gold rush on the mainland of Australia. The modern wine industry in Tasmania began as a rebirth in
the late 1970s. Tasmania had a diverse set of wine regions, from the Pipers River and Tamar Valley areas in the
north, to the Coal River, Derwent Valley, and Huon-Channel districts in the south. It developed a reputation,
both nationally and internationally, for producing high-quality premium wine from its pristine and natural
environment.

With its cool climate of long, sunny, and dry autumns, Tasmania had ideal growing conditions for developing
naturally elegant, intensely flavored, and aromatic wines, particularly Chardonnay and Pinot Noir. As well as
producing stunning wines, Tasmania was also a picturesque gourmet paradise.4

Company Background
Ferris, a retired executive, spent more than twenty years at Constellation Brands Inc., a leading global wine, beer,
and spirits company. The company’s New Zealand headquarters was in Auckland. After graduating from the
1
http://www.soilscienceaustralia.com.au/branches/tasmania.
2 http://winetasmania.com.au.
3 http://winetasmania.com.au/wine_trails.
4 https://www.wineaustralia.com/discover-australia-wine/tasmania-wines.

Copyright © 2017 Thunderbird School of Global Management, a unit of the Arizona State University Knowledge Enterprise. This
case was written by Professor Graeme Rankine for the sole purpose of providing material for class discussion. It is not intended to
illustrate either effective or ineffective handling of a managerial situation. Any reproduction, in any form, of the material in this
case is prohibited unless permission is obtained from the copyright holder.
This document is authorized for use only in Prof. Pradyumna Kumar Mohanty's Financial Reporting and Analysis 10.27.2021 at Xavier University Bhubaneswar (XUB) from Oct 2021 to Apr
2022.
 University of Sydney, Ferris began his career as an accountant in the Controllers unit of Constellation Brands,
rising to chief financial officer (CFO) at his retirement. Amphlett retired as a brand manager from Treasury Wine
Estates, a spinoff from Foster’s Brewing Company. Treasury Wine now managed the various wine brands Foster’s
had acquired over many years. Ampheltt, a marketing major at the University of Sydney, managed many Foster’s
brands, including Lindeman’s, Penfolds, Rawson’s Retreat, Wynns, Rosemount, and Sterling.

After their retirement, Amphlett and Ferris acquired a 100-hectare dairy farm in Richmond. The dairy
farm had an old farmhouse, which they lived in, as well as some barns with milking equipment. The couple
decided to contribute the 100-hectacre property in exchange for shares in Kangaroo Tail Winery, which they
would establish as a legal entity with the help of their outside attorneys. Recognizing that the winery would
need additional resources, Amphlett and Ferris agreed to approach an old friend, Roy Herberger, who worked
as a loan officer at the EZ-Loan Corporation. Via email, Herberger indicated that the Amphlett-Ferris business
plan looked promising, but that EZ-Loan would need to review a comprehensive set of pro forma financial
statements before the $12 million loan would be considered. The loan agreement required a fixed interest rate
of 6% per year on the outstanding loan balance, and specified that the loan would be repaid at the end of each
year in equal annual installments over ten years.

Kangaroo Tail would build a facility to house the winery. It was agreed that Kangaroo Tail would build a
small-capacity winery to limit their risk exposure, but the planned facility could be expanded relatively quickly
if the venture proved successful. James Amphlett, the couple’s billionaire son, helped build the winery buildings
and assisted in the production of the first test batch of wines. The first crush—about 800 liters—was given to
friends and family members to determine whether the business could produce wines of sufficient quality and
at a price that would lead to a sustainable business model. The reaction was unanimously positive, and thus the
Kangaroo Tail Winery began as a commercial venture.

Production Techniques
The couple decided that Kangaroo Winery would initially focus on producing wine from grapes acquired from
local Tasmanian wineries. If wine production and marketing were successful, the business might plant vines
on the 100-hectare property and become a wine grower. Kangaroo Tail would make its wines in small batches
under carefully controlled conditions. The winery would acquire grape stock from a variety of growers located
throughout Tasmania. Kangaroo Tail wines would be made using old-world, labor-intensive techniques with a
minimum of processing.

The business would hand-sort all fruit as it was brought in and put through a crusher/stemmer. Yeast would
then be added as it was transferred to small open-top containers that were carefully hand-stirred several times a
day during the primary fermentation process. The output was to be transferred to small basket presses that would
be slowly ratcheted down by hand to carefully extract the juice.

The wine would then be moved into oak barrels to finish its fermentation and aging process. They would
be aged in a variety of French oak, Hungarian oak, and American oak barrels for a minimum of one year (see
Exhibit 4). The wines would be gently racked from barrel to barrel several times to remove the spent yeast that
settled to the bottom. They would then be bottled and corked, and held for a minimum of an additional six
months before release.

Establishing the Business

As a result of guidelines established by the company’s legal advisors, Amphlett and Ferris decided that additional
financial events would need to occur in the start-up phase of the business as follows:

1. Based on an appraiser’s assessment of the value of the farmland of $12 million, Amphlett and Ferris would
receive twelve (12) million shares of common stock in the Kangaroo Tail Winery Limited for contributing
the 100-hectare farmland to the business. No value was attributed to the existing buildings because they
would need to be demolished and sold as firewood. The proceeds from the firewood sale would be roughly
equal to the demolition costs.

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This document is authorized for use only in Prof. Pradyumna Kumar Mohanty's Financial Reporting and Analysis 10.27.2021 at Xavier University Bhubaneswar (XUB) from Oct 2021 to Apr
2022.
 2. Ferris would receive two (2) million shares of common stock with a value of $2 million for the buildings he
had constructed on the former farmland.

3. The bank loan of $12 million would be signed and the cash disbursed to Kangaroo Tail Winery immediately.

4. Cash fees for attorneys, incorporation costs, and corporate officers’ salaries during the start-up phase would
amount to $150 thousand.

5. Kangaroo Tail Winery would initially purchase $500 thousand of inventory consisting of bottles, labels,
corks, and grapes for cash.

6. The company would spend $4 million in cash to acquire equipment to be used in crushing, separating, and
fermenting the grape juice.

7. The company would also spend $6 million in cash to purchase French, Hungarian, and American oak barrels.
The barrels would be considered a long-run investment in equipment because these barrels typically lasted
for many years.

8. The couple agreed that Ferris would retain the title of President and Chief Executive Officer (CEO) and that
Amphlett would be Chief Marketing Officer (CMO). Both would be members of the Board of Directors.

Subsequent Events
In order to comply with the bank’s request for projected financial statements, Ferris compiled a list of the important
events that would likely occur during the first year of operations. The list included the following events:

1. Kangaroo Tail would sell two types of wine—bulk wine and premium bottled wine. It was estimated that
bulk sales would be 350,000 liters at $10 per liter. Sales of premium wine were estimated to be 100,000 one
(1) liter bottles at $18 per bottle. About 80% of sales revenue would be on credit terms of 30-60 days. The
remaining amount uncollected at the end of the year was projected to be $2,160 thousand.

2. Additional purchases of inventory (grapes, corks, bottles, etc.) were estimated to be $700 thousand during
the year. All purchases would be on credit terms of 30-60 days. It was estimated that the unpaid balance of
this credit purchase at the end of the year would be $80 thousand.

3. The loan agreement on the bank loan called for payments at the end of the year. Interest would also have to
be paid.

4. Payroll expenses for employees, including those involved in transportation and manufacturing, were estimated
to require cash outlays of $400 thousand during the year. Selling and general administration expenses of
$200 thousand were also expected to require cash outlays during the first year.

5. Additional equipment to expand future production was estimated to require a cash outlay of $500 thousand.

6. A physical inventory would be necessary to determine the cost of corks, bottles, etc., remaining in inventory.
The company’s policy was to order only as much inventory as would be needed for the year’s sales. Thus, it
was estimated that the ending inventory would be zero.

7. Depreciation for the year was determined to be as follows:

a. $1,050 thousand per year for equipment—based on an estimated life of 10 years.
b. $100 thousand per year for buildings —based on an expected life of 20 years.

8. The company’s start-up costs would be written off over two years.

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This document is authorized for use only in Prof. Pradyumna Kumar Mohanty's Financial Reporting and Analysis 10.27.2021 at Xavier University Bhubaneswar (XUB) from Oct 2021 to Apr
2022.
 9. Kangaroo Tail issued 250,000 shares of common stock to a passive outside investor for $4 per share to finance
future expansion plans.

10. A friend of the family passed on a bottle of the company’s Pinot Noir wine to Robert Parker, a famous wine
critic, who raved about the company’s first bottling. Based on this review, Amphlett and Ferris thought their
shares would now be worth considerably more and that this should be reflected in the pro forma financial
statements.

11. The state of Tasmania has no state income taxes. Because Kangaroo Tail was a new start-up, the Australian
Federal Income Tax Code provided for reduced taxes over the first five years of the company’s operations.
Federal taxes were estimated to be only $350 thousand with 60% being paid by the end of the year.

12. On the last day of the year, Amphlett and Ferris decided to acquire $650 thousand of inventory in anticipation
of next year’s production. Credit terms were 30-60 days.

13. Amphlett and Ferris expected to declare and pay cash dividends of $400 thousand.

Required
1. Determine the balance sheet at the end of the period when the business was established.

2. Using the results from (1), prepare the pro forma balance sheet at the end of the first year of operations, and
the pro forma income statement and statement of cash flows for the first year’s operations.

4 A01-17-0012
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2022.
 Exhibit 1. Kangaroo Tail’s Logo

Exhibit 2. Location of the Kangaroo Tail Winery

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This document is authorized for use only in Prof. Pradyumna Kumar Mohanty's Financial Reporting and Analysis 10.27.2021 at Xavier University Bhubaneswar (XUB) from Oct 2021 to Apr
2022.
 Exhibit 3. Kangaroo Tail Winery’s Estate in Richmond, Tasmania

Exhibit 4. Hungarian Oak Barrel

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This document is authorized for use only in Prof. Pradyumna Kumar Mohanty's Financial Reporting and Analysis 10.27.2021 at Xavier University Bhubaneswar (XUB) from Oct 2021 to Apr
2022.