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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-8251
ADOLPH COORS COMPANY
(Exact name of registrant as specified in its charter)
COLORADO 84-0178360
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
311 Tenth Street, Golden, Colorado 80401
(Address of principal executive offices) (Zip Code)
303-279-6565
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of August 1, 2002:
Class A Common Stock - 1,260,000 shares
Class B Common Stock - 34,943,265 shares
ADOLPH COORS COMPANY AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page(s)
Condensed Consolidated Statements of Income for
the periods ended June 30, 2002 and July 1, 2001 3-4
Condensed Consolidated Balance Sheets at June 30,
2002 and December 30, 2001 5-6
Condensed Consolidated Statements of Cash Flows for
the periods ended June 30, 2002 and July 1, 2001 7
Notes to Condensed Consolidated Financial Statements 8-36
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 37-55
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 55-59
PART II. OTHER INFORMATION
Item 1. Legal 59
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 59
(b) Reports on Form 8-K 59
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
-------------------------------
JUNE 30, JULY 1,
2002 2001
----------- -----------
Sales - domestic and international $ 1,339,225 $ 809,729
Beer excise taxes (315,256) (117,029)
----------- -----------
Net sales 1,023,969 692,700
Cost of goods sold (616,220) (424,880)
----------- -----------
Gross profit 407,749 267,820
Marketing, general and administrative expenses (286,311) (194,618)
Special credit (charge) 1,074 (1,084)
----------- -----------
Operating income 122,512 72,118
Gain on sale of distributorship -- 2,900
Interest income 6,347 4,387
Interest expense (19,563) (328)
Other (expense) income (2,571) 1,143
----------- -----------
Income before income taxes 106,725 80,220
Income tax expense (39,109) (30,368)
----------- -----------
Net income $ 67,616 $ 49,852
=========== ===========
Net income per common share - basic $ 1.87 $ 1.34
=========== ===========
Net income per common share - diluted $ 1.84 $ 1.33
=========== ===========
Weighted average number of outstanding
common shares - basic 36,117 37,284
=========== ===========
Weighted average number of outstanding
common shares - diluted 36,684 37,520
=========== ===========
Cash dividends declared and paid per
common share $ 0.205 $ 0.205
=========== ===========
See notes to unaudited condensed consolidated financial statements.
3
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
-------------------------------
JUNE 30, JULY 1,
2002 2001
----------- -----------
Sales - domestic and international $ 2,276,981 $ 1,447,557
Beer excise taxes (513,690) (211,157)
----------- -----------
Net sales 1,763,291 1,236,400
Cost of goods sold (1,092,064) (776,033)
----------- -----------
Gross profit 671,227 460,367
Marketing, general and administrative expenses (501,725) (364,576)
Special charge (1,802) (1,084)
----------- -----------
Operating income 167,700 94,707
Gain on sale of distributorship -- 2,900
Interest income 10,608 8,999
Interest expense (28,973) (1,139)
Other income 2,356 4,315
----------- -----------
Income before income taxes 151,691 109,782
Income tax expense (56,872) (41,602)
----------- -----------
Net income $ 94,819 $ 68,180
=========== ===========
Net income per common share - basic $ 2.63 $ 1.83
=========== ===========
Net income per common share - diluted $ 2.60 $ 1.81
=========== ===========
Weighted average number of outstanding
common shares - basic 36,045 37,244
=========== ===========
Weighted average number of outstanding
common shares - diluted 36,477 37,604
=========== ===========
Cash dividends declared and paid per
common share $ 0.410 $ 0.390
=========== ===========
See notes to unaudited condensed consolidated financial statements.
4
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 30,
2002 2001
---------- ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 138,106 $ 77,133
Short-term marketable securities -- 232,572
Accounts receivable, net 489,387 94,985
Notes receivable, net 101,694 13,747
Inventories:
Finished 109,404 32,438
In process 34,349 23,363
Raw materials 48,268 41,534
Packaging materials 12,851 17,788
---------- ----------
Total inventories 204,872 115,123
Other current assets 96,780 72,969
---------- ----------
Total current assets 1,030,839 606,529
Properties, at cost and net 1,321,140 869,710
Goodwill 621,055 6,955
Other intangibles, net 534,395 79,334
Investments in joint ventures 201,036 94,785
Other assets 393,966 82,379
---------- ----------
Total assets $4,102,431 $1,739,692
========== ==========
(Continued)
See notes to unaudited condensed consolidated financial statements.
5
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
JUNE 30, DECEMBER 30,
2002 2001
----------- ------------
(Unaudited)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 326,693 $ 222,493
Accrued salaries and vacations 53,662 56,767
Taxes, other than income taxes 144,890 31,271
Accrued expenses and other liabilities 373,155 122,014
Current portion of long-term debt 106,708 85,000
----------- -----------
Total current liabilities 1,005,108 517,545
Long-term debt 1,513,375 20,000
Deferred tax liability 231,689 61,635
Other long-term liabilities 267,393 189,200
----------- -----------
Total liabilities 3,017,565 788,380
----------- -----------
Shareholders' equity:
Capital stock:
Preferred stock, non-voting, no par value
(authorized: 25,000,000 shares; issued: none) -- --
Class A common stock, voting, no par value
(authorized and issued: 1,260,000 shares) 1,260 1,260
Class B common stock, non-voting, no par
value, $0.24 stated value (authorized:
200,000,000 shares; issued: 34,935,043 in
2002 and 36,048,008 in 2001) 8,318 8,259
----------- -----------
Total capital stock 9,578 9,519
Paid-in capital 11,392 --
Unvested restricted stock (656) (597)
Retained earnings 1,034,407 954,981
Accumulated other comprehensive income (loss) 30,145 (12,591)
----------- -----------
Total shareholders' equity 1,084,866 951,312
----------- -----------
Total liabilities and shareholders' equity $ 4,102,431 $ 1,739,692
=========== ===========
(Concluded)
See notes to unaudited condensed consolidated financial statements.
6
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
-------------------------------
JUNE 30, JULY 1,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 94,819 $ 68,180
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in net earnings of joint ventures (30,115) (22,498)
Distributions from joint ventures 28,064 13,932
Depreciation, depletion and amortization 108,720 60,019
Gains on sales of securities (4,003) (3,087)
Net gain(loss) on sale or abandonment of
properties and intangibles 2,056 (3,489)
Deferred income taxes 2,551 (12,901)
Change in operating assets and liabilities (105,806) 9,131
----------- -----------
Net cash provided by operating activities 96,286 109,287
----------- -----------
Cash flows from investing activities:
Purchases of securities -- (171,174)
Sales and maturities of securities 232,758 207,925
Additions to properties and intangible assets (104,503) (90,518)
Proceeds from sales of properties 13,158 8,313
Acquisition of Coors Brewers Limited, net of
cash acquired (1,588,348) --
Investment in Molson USA, LLC -- (65,000)
Other 247 13,555
----------- -----------
Net cash used in investing activities (1,446,688) (96,899)
----------- -----------
Cash flows from financing activities:
Issuances of stock under stock plans 11,381 9,861
Purchases of stock -- (9,117)
Dividends paid (14,796) (14,539)
Proceeds from issuance of debt 2,391,935 --
Payments on short-term and long-term debt (926,000) --
Overdraft balances (54,112) (43,403)
Other -- 3,737
----------- -----------
Net cash provided by (used in) financing
activities 1,408,408 (53,461)
----------- -----------
Cash and cash equivalents:
Net increase (decrease) in cash and cash
equivalents 58,006 (41,073)
Effect of exchange rate changes on
cash and cash equivalents 2,967 (759)
Balance at beginning of year 77,133 119,761
----------- -----------
Balance at end of quarter $ 138,106 $ 77,929
=========== ===========
See notes to unaudited condensed consolidated financial statements.
7
ADOLPH COORS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 30, 2002
1. BUSINESS
We are the third-largest producer of beer in the United States based on volume
and revenues. Following our acquisition of the majority of the former Bass
Brewers business and other assets from Interbrew in February 2002, which we now
collectively call Coors Brewers Limited, we are the eighth largest brewer in the
world based on volume. Including Coors Brewers Limited, the number-two brewer in
the United Kingdom based on volume, we expect to produce in excess of 32 million
barrels of beer and other beverages per year. Since our founding in 1873, we
have been committed to producing the highest quality beers and other beverages.
2. SIGNIFICANT ACCOUNTING POLICIES
Unaudited condensed consolidated financial statements
In our opinion, the accompanying unaudited financial statements reflect all
adjustments, consisting of normal recurring accruals, and certain other
adjustments as discussed in Note 5, which are necessary for a fair presentation
of the financial position, results of operations and cash flows for the periods
presented. The accompanying financial statements include our accounts and the
accounts of our majority-owned and controlled domestic and foreign subsidiaries.
All significant intercompany transactions and balances have been eliminated in
consolidation. These financial statements should be read in conjunction with the
notes to the consolidated financial statements contained in our Annual Report on
Form 10-K for the year ended December 30, 2001. Also, these financial statements
should be read in conjunction with the financial statements of our acquired
business and the pro forma financial information included in our Form 8-K/A
filed with the Securities and Exchange Commission on April 18, 2002. The results
of operations for the twenty-six weeks ended June 30, 2002, are not necessarily
indicative of the results that may be achieved for the full fiscal year and
cannot be used to indicate financial performance for the entire year.
The results of Coors Brewers Limited operations have been included in the
consolidated financial statements since February 2, 2002, the date of
acquisition.
The year-end condensed balance sheet data was derived from audited financial
statements.
Significant non-cash transactions
During the first twenty-six weeks of 2002 and 2001, we issued restricted common
stock under our management incentive program. The non-cash impact of these
issuances, net of forfeitures and tax withholding, was $0.2 million and $1.2
million, respectively. Also during the second quarter of 2002 and 2001, equity
was increased by the tax benefit on the exercise of stock options under our
stock plans of $0.3 million and $4.2 million, respectively.
8
Recent accounting pronouncements
In 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the lability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is still studying this standard to determine, among other things,
whether it has any asset retirement obligations that are covered under the
scope of SFAS No. 143, and the effect, if any, to the Company of adopting this
standard has not yet been determined. The Company will implement SFAS No. 143
no later than January 1, 2003.
On October 3, 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," (SFAS
144) which is applicable to financial statements issued for fiscal years
beginning after December 15, 2001. This standard provides a single accounting
model for long-lived assets to be disposed of by sale and establishes additional
criteria that would have to be met to classify an asset as held-for-sale.
Classification as held-for-sale is an important distinction since such assets
are not depreciated and are stated at the lower of fair value or carrying
amount. This standard also requires expected future operating losses from
discontinued operations to be recorded in the period(s) in which the losses are
incurred, rather than as of the measurement date, as previously required. Our
adoption of SFAS No. 144 on January 1, 2002 did not have a material effect on
our operating results or financial position.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," (SFAS 145). This statement
eliminates the automatic classification of gain or loss on extinguishment of
debt as an extraordinary item, and requires that such gain or loss be evaluated
for extraordinary classification under the criteria of Accounting Principles
Board No. 30, "Reporting Results of Operations." This statement also requires
sales-leaseback accounting for certain lease modifications that have economic
effects that are similar to sales-leaseback transactions and makes various other
technical corrections to existing pronouncements. This statement will be
effective for us for the year ending December 28, 2003. Our adoption of SFAS 145
will not have a material effect on our operating results or financial position.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement requires that a liability for a cost that is associated with an exit
or disposal activity be recognized when the liability is incurred. It nullifies
the guidance of the Emerging Issues Task Force (EITF) in EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under
EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the
date that the entity committed itself to an exit plan. SFAS 146 acknowledges
that an entity's commitment to a plan does not, by itself, create a present
obligation to other parties that meets the definition of a liability. SFAS 146
also establishes that fair value is the objective for the initial measurement of
the liability. SFAS 146 will be effective for exit or disposal activities that
are initiated after December 31, 2002, and we are evaluating the impact, if any,
that the implementation will have on our financial statements.
9
Reclassifications
Certain reclassifications have been made to the 2001 financial statements to
conform with the 2002 presentation.
3. COORS BREWERS LIMITED ACQUISITION
On February 2, 2002, we acquired 100% of the outstanding shares of Bass Holdings
Ltd. and certain other intangible assets from Interbrew S.A. and paid off
certain intercompany loan balances with Interbrew, for a total purchase price of
Pound Sterling1.2 billion (approximately $1.7 billion), plus associated fees and
expenses. This acquisition resulted in us obtaining the United Kingdom (U.K.)
based Carling business.
The Carling Brewers business, renamed Coors Brewers Limited, includes the
majority of the assets that previously made up Bass Brewers, including the
Carling, Worthington and Caffrey's brand beers; the U.K. distribution rights to
Grolsch (via a joint venture with Royal Grolsch N.V.); several other beer and
flavored-alcohol beverage brands; related brewing and malting facilities in the
U.K.; and a 49.9% interest in the distribution logistics provider, Tradeteam.
Coors Brewers Limited is the second-largest brewer in the U.K. based on volume,
and Carling lager is the best-selling beer brand in the U.K. The brand rights
for Carling, which is the largest acquired brand by volume, are mainly for
territories in Europe. The addition of Coors Brewers Limited creates a broader,
more diversified company in a consolidating global beer market.
As noted in Footnote 2, Significant Accounting Policies, the results of Coors
Brewers Limited operations have been included in the consolidated financial
statements since February 2, 2002, the date of acquisition.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition. We are in the process of
finalizing the purchase price accounting, including evaluation of the pension
plan actuarial valuation and certain restructuring plans of the
10
acquired business. Accordingly, the allocation of the purchase price is
subject to further adjustments.
AS OF FEBRUARY 2, 2002
----------------------
(In millions)
Current assets $ 553
Property, plant and equipment 445
Other assets 401
Intangible assets 415
Goodwill 568
----------
Total assets acquired 2,382
----------
Current liabilities (416)
Non-current liabilities (229)
----------
Total liabilities assumed (645)
----------
Net assets acquired $ 1,737
==========
Of the $415 million of acquired intangible assets, approximately $389 million
has been assigned to brand names and distribution rights. The remaining $26
million was assigned to patents and technology and distribution channels.
Approximately $284 million of the $389 million brand name and distribution
rights value has been determined to have an indefinite life and accordingly will
not be amortized. The remaining $105 million brand name and distribution right
value will be amortized over a weighted average useful life of approximately
11.6 years. The $26 million value for patents and technology and distribution
channels will be amortized over a weighted average useful life of approximately
8.4 years.
The $568 million of goodwill was assigned to the Europe and Americas segments in
the amounts of approximately $442 million and $126 million, respectively. It is
currently expected that none of the goodwill will be deductible for tax
purposes, however, we are in the process of finalizing our tax structure. A
valuation allowance of approximately $40 million was recorded against deferred
tax assets arising from the acquisition in accordance with our accounting
policies as discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
In March 2002, we announced plans to close our Cape Hill brewery and Alloa
malting facility. A majority of the production at the Cape Hill brewery relates
to brands that were retained by Interbrew. The production at the Alloa malting
facility will be moved to one of the other existing malting facilities. The
alternative use value for these sites, and the associated exit costs, have been
reflected in the purchase price allocation above.
The following unaudited, pro forma information shows the results of our
operations for the three months ended March 31, 2002, and April 1, 2001, as if
the business combination with Coors Brewers Limited and us had occurred at the
beginning of each period. The pro forma information has been revised from that
previously included in our quarterly report on Form 10-Q for the thirteen weeks
ended March 31, 2002, to reflect changes in estimates based upon more recent
information and to adjust the pro forma interest expense on the debt used to
fund the acquisition. These pro forma results are not necessarily indicative of
the results of operations that would have occurred if the business combinations
had occurred at the beginning of the
11
respective periods and is not intended to be indicative of future results of
operations (in thousands, except per share data).
THREE MONTHS ENDED
---------------------
MARCH 31, APRIL 1,
2002 2001
--------- --------
Net sales $820,593 $805,636
Pretax income $ 23,199 $ 9,546
Net income $ 14,002 $ 5,775
Net income per common share:
Basic $ 0.39 $ 0.16
Diluted $ 0.39 $ 0.15
The following unaudited, pro forma information shows the results of our
operations for the thirteen and twenty-six weeks ended June 30, 2002, and July
1, 2001, as if the business combination with Coors Brewers Limited and us had
occurred at the beginning of each period. These pro forma results are not
necessarily indicative of the results of operations that would have occurred if
the business combination had occurred at the beginning of the respective
periods and is not intended to be indicative of future results of operations (in
thousands, except per share data).
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------ ----------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net Sales $1,023,969 $1,063,909 $1,844,562 $1,869,545
Pretax income $ 106,725 $ 92,053 $ 129,924 101,599
Net income $ 67,616 $ 57,354 $ 81,618 $ 63,129
Net income per
common share:
Basic $ 1.87 $ 1.54 $ 2.26 $ 1.70
Diluted $ 1.84 $ 1.53 $ 2.23 $ 1.68
We funded the acquisition with approximately $150 million of cash on hand and
approximately $1.55 billion of combined debt as described below at the
prevailing exchange rate:
FACILITY
CURRENCY BALANCE
TERM DENOMINATION (IN MILLIONS)
- ------- ------------ -------------
5 year Amortizing term loan USD $ 478
5 year Amortizing term loan (Pound Sterling 228 million) GBP 322
9 month Bridge facility USD 750
-------
$ 1,550
=======
In conjunction with the term loan and bridge facility, we incurred financing
fees of approximately $9 million and $500,000, respectively. These fees are
amortized over the respective terms of the borrowings. On May 7, 2002, we repaid
our nine month bridge facility and $91 million of outstanding term borrowings
through the issuance of long-term financing (See Debt footnote 10).
12
4. BUSINESS SEGMENTS
Prior to our acquisition of Coors Brewers Limited, we reported results of
operations in one segment. We now categorize our operations into the two
geographical regions: the Americas and Europe. These segments are managed by
separate operating teams, even though both consist primarily of the manufacture,
marketing, and sale of beer and other beverage products.
The Americas malt beverage segment primarily consists of our production,
marketing, and sale of the Coors family of brands in the U.S. and its
territories. This segment also includes the Coors Light business in Canada that
is conducted through a partnership investment with Molson, Inc. and the sale of
Molson products in the U.S. that is conducted through a joint venture investment
with Molson, Inc. The Americas segment also includes the small amount of Coors
products that are exported and sold outside of the U.S. and its possessions,
excluding Europe.
The Europe segment consists of our production and sale of the Coors Brewers
Limited brands throughout the world, our joint venture arrangement in the U.K.
Grolsch business, and our joint venture arrangement for the distribution of
products throughout the U.K. It also includes the sale of Coors Light in the
U.K. and the Republic of Ireland.
The Corporate segment currently includes interest, taxes and certain other
corporate costs in both the U.S. and the U.K. The large majority of these
corporate costs relate to finance and other administrative costs.
No single customer accounted for more than 10% of our sales.
13
Summarized financial information concerning our reportable segments is shown in
the following table:
AMERICAS EUROPE CORPORATE TOTAL
----------- ----------- ----------- -----------
(In thousands)
THIRTEEN WEEKS ENDED 6/30/2002
Gross sales $ 791,531 $ 547,694 $ -- $ 1,339,225
Excise taxes (114,955) (200,301) -- (315,256)
----------- ----------- ----------- -----------
Net sales 676,576 347,393 -- 1,023,969
Cost of goods sold (400,473) (215,747) -- (616,220)
Marketing, general and
administrative (197,220) (89,091) -- (286,311)
Special credits (charges) 1,644 -- (570) 1,074
----------- ----------- ----------- -----------
Operating income (loss) 80,527 42,555 (570) 122,512
Interest income -- 5,011 1,336 6,347
Interest expense -- -- (19,563) (19,563)
Other income (expense) - net 142 (1,117) (1,596) (2,571)
----------- ----------- ----------- -----------
Earnings (loss) before income
taxes $ 80,669 $ 46,449 $ (20,393) $ 106,725
=========== =========== =========== ===========
Other financial data:
Depreciation, depletion,
amortization $ 33,194 $ 30,816 $ -- $ 64,010
Capital expenditures and
additions to intangibles $ 26,631 32,891 $ -- $ 59,522
AMERICAS EUROPE CORPORATE TOTAL
--------- --------- --------- ---------
(In thousands)
THIRTEEN WEEKS ENDED 7/1/2001
Gross sales $ 808,282 $ 1,447 $ -- $ 809,729
Excise taxes (117,032) 3 -- (117,029)
--------- --------- --------- ---------
Net sales 691,250 1,450 -- 692,700
Costs of goods sold (424,810) (70) -- (424,880)
Marketing, general and
administrative (192,388) (2,230) -- (194,618)
Special charges (1,084) -- -- (1,084)
--------- --------- --------- ---------
Operating income(loss) 72,968 (850) -- 72,118
Gain on sale of distributorship 2,900 -- -- 2,900
Interest income -- -- 4,387 4,387
Interest expense -- -- (328) (328)
Other income - net 1,010 -- 133 1,143
--------- --------- --------- ---------
Earnings(loss) before
income taxes $ 76,878 $ (850) $ 4,192 $ 80,220
========= ========= ========= =========
Other financial data:
Depreciation, depletion,
amortization $ 29,483 $ 14 $ -- $ 29,497
Capital expenditures and
additions to intangibles $ 59,753 $ 13 $ -- $ 59,766
14
YEAR-TO DATE INFORMATION:
AMERICAS EUROPE CORPORATE TOTAL
----------- ----------- ----------- -----------
(In thousands)
TWENTY-SIX WEEKS ENDED 6/30/2002
Gross sales $ 1,428,500 $ 848,481 $ -- $ 2,276,981
Excise taxes (206,948) (306,742) -- (513,690)
----------- ----------- ----------- -----------
Net sales 1,221,552 541,739 -- 1,763,291
Cost of goods sold (743,805) (348,259) -- (1,092,064)
Marketing, general and
administrative (359,461) (142,264) -- (501,725)
Special credits (charges) 840 -- (2,642) (1,802)
----------- ----------- ----------- -----------
Operating income (loss) 119,126 51,216 (2,642) 167,700
Interest income -- 7,431 3,177 10,608
Interest expense -- -- (28,973) (28,973)
Other (expense) income - net (7) 761 1,602 2,356
----------- ----------- ----------- -----------
Earnings (loss) before income
taxes $ 119,119 $ 59,408 $(26,836) $ 151,691
=========== =========== =========== ===========
Other financial data:
Depreciation, depletion,
amortization $ 64,070 $ 44,650 $ -- $ 108,720
Capital expenditures and
additions to intangibles $ 63,959 $ 40,544 $ -- $ 104,503
AMERICAS EUROPE CORPORATE TOTAL
----------- ----------- ----------- -----------
(In thousands)
TWENTY-SIX WEEKS ENDED 7/1/2001
Gross sales $ 1,445,291 $ 2,266 $ -- $ 1,447,557
Excise taxes (211,157) -- -- (211,157)
----------- ----------- ----------- -----------
Net sales 1,234,134 2,266 -- 1,236,400
Costs of goods sold (775,214) (819) -- (776,033)
Marketing, general and
administrative (361,033) (3,543) -- (364,576)
Special charges (1,084) -- -- (1,084)
----------- ----------- ----------- -----------
Operating income(loss) 96,803 (2,096) -- 94,707
Gain on sale of distributorship 2,900 -- -- 2,900
Interest income -- -- 8,999 8,999
Interest expense -- -- (1,139) (1,139)
Other income - net 1,228 -- 3,087 4,315
----------- ----------- ----------- -----------
Earnings(loss) before
income taxes $ 100,931 $ (2,096) $ 10,947 $ 109,782
=========== =========== =========== ===========
Other financial data:
Depreciation, depletion,
amortization $ 59,984 $ 35 $ -- $ 60,019
Capital expenditures and
additions to intangibles $ 90,505 $ 13 $ -- $ 90,518
15
AMERICAS EUROPE CORPORATE TOTAL
---------- ---------- --------- ----------
BALANCE SHEET DATA: (In thousands)
TWENTY-SIX WEEKS ENDED 6/30/2002
Total Assets $1,595,007 $2,375,128 $ -- $3,970,135
Equity Investments $ 105,065 $ 95,971 $ -- $ 201,036
YEAR ENDED DECEMBER 30, 2001
Total Assets $1,719,448 $ 20,244 $ -- $1,739,692
Equity Investments $ 94,785 $ -- $ -- $ 94,785
The following table represents sales by geographic segment:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- ----------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands)
Net sales to unaffiliated customers (1):
United States and its
territories $ 639,002 $ 675,473 $1,170,921 $1,204,966
United Kingdom 365,865 999 560,211 1,815
Other foreign countries 19,102 16,228 32,159 29,619
---------- ---------- ---------- ----------
Net sales $1,023,969 $ 692,700 $1,763,291 $1,236,400
========== ========== ========== ==========
FOR THE PERIOD ENDED
----------------------------
JUNE 30, DECEMBER 30,
2002 2001
---------- ------------
(In thousands)
Long-lived assets (2):
United States and its territories $ 971,677 $ 955,615
United Kingdom 1,504,639 231
Other foreign countries 274 153
---------- ----------
Total long-lived assets $2,476,590 $ 955,999
========== ==========
(1) Net sales attributed to geographic areas is based on the location of the
customer.
(2) Long-lived assets include tangible and intangible assets physically located
in foreign countries.
5. CHANGE IN ACCOUNTING PRINCIPLE
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141, "Business Combinations," (SFAS 141)
and No. 142, "Goodwill and Other Intangible Assets," (SFAS 142). SFAS 141
requires that all business combinations be accounted for using the purchase
method of accounting and that certain intangible assets acquired in a business
combination be recognized as assets apart from goodwill. SFAS 141 was effective
for all business combinations initiated after June 30, 2001. SFAS 142 requires
goodwill to be tested for impairment under certain circumstances, and written
down when impaired, rather than being amortized as previously required.
Furthermore, SFAS 142 requires purchased intangible assets other than goodwill
to be amortized over their useful lives unless those lives are determined to be
indefinite. Purchased intangible assets are carried at cost less accumulated
amortization.
16
SFAS 142 is effective for fiscal years beginning after December 15, 2001 and
accordingly we adopted the provisions of the standard effective the beginning of
fiscal 2002. In accordance with SFAS 142, we ceased amortizing goodwill totaling
$69.2 million, including $62.2 million related to our U.S. joint venture
investment with Molson, Inc., as of the beginning of fiscal 2002. We also ceased
amortizing approximately $7.2 million of other net intangible assets that we
considered to have indefinite lives. We also have $21.1 million of other
intangible assets that have indefinite lives that were previously not amortized.
As a result, during the three month period ended June 30, 2002, we did not
recognize pre-tax amortization of goodwill and other intangibles totaling $0.4
million and $0.1 million, respectively, that would have been recognized had the
previous standards still been in effect. Further, during the six month period
ended June 30, 2002, we did not recognize pre-tax amortization of goodwill and
other intangibles totaling $0.8 million and $0.2 million, respectively.
17
There was no impairment of goodwill upon adoption of SFAS 142. We are required
to perform goodwill impairment tests on at least an annual basis and more
frequently in certain circumstances. We plan to perform our required annual
impairment test during the second half of 2002.
The following tables present details of our intangible assets as of June 30,
2002 (in millions):
USEFUL ACCUMULATED
LIFE GROSS AMORTIZATION NET
--------- ------- ------------ -------
(YEARS)
Intangible assets subject to amortization:
Brand names and distribution
rights 2-20 $ 113.9 $ (6.1) $ 107.8
Patents and technology and
distribution channels 3-10 27.6 (1.8) 25.8
Other 5-34 22.5 (5.7) 16.8
Intangible assets not subject to amortization:
Brand names Indefinite 307.4 -- 307.4
Pension N/A 48.3 -- 48.3
Other Indefinite 28.8 (0.5) 28.3
We engaged third-party business valuation appraisers to help us determine the
fair value of the intangible assets in connection with our acquisition of what
is now called Coors Brewers Limited. The allocation of purchase price for the
Coors Brewers Limited acquisition is subject to further adjustments. We are
evaluating the pension plan actuarial valuation and certain restructuring plans
of the acquired business. Note that the amounts reflected in the table above as
of June 30, 2002, have fluctuated from the original purchase price allocation at
February 2, 2002, due to the change in the pound sterling exchange rate between
these dates.
Based on average foreign exchange rates, the estimated future amortization
expense of intangible assets is as follows (in millions):
FISCAL YEAR AMOUNT
----------- --------
2003 $ 18.4
2004 $ 16.7
2005 $ 11.5
2006 $ 11.1
2007 $ 7.4
Amortization expense of intangible assets was $11.7 million and $1.0 million for
the six months ended June 30, 2002 and July 1, 2001, respectively.
18
The following table presents the changes in goodwill during the first six months
of fiscal 2002 allocated to the reportable segments (in millions):
BALANCE AT
DECEMBER 31, JUNE 30,
SEGMENT 2001 ACQUIRED ADJUSTMENTS 2002
- ------------ ------------ -------- ----------- ----------
Americas $ 69.2 $ 115.1 $ 9.5 $ 193.8
Europe -- 453.2 36.3 489.5
The adjustments during the first six months of fiscal 2002 include $1.1 million
related to purchase price accounting adjustments and $44.7 million resulting
from the foreign currency exchange rate change between February 2, 2002, the
date of our acquiring Coors Brewers Limited, and June 30, 2002. Americas
goodwill includes approximately $62.2 million related to our joint venture
investment in Molsen USA LLC
6. SPECIAL CREDIT (CHARGE)
In the thirteen weeks ended June 30, 2002, we recorded a special credit of $1.6
million related to the cash settlement of a legal dispute with our former
partner in a brewing business in South Korea. We are expecting to receive
additional payments in 2002 and 2003. As we are continuing to assess the
collectibility, we have not recognized any additional amounts owed us in our
accounts receivable balance at June 30, 2002. The special credit was offset by
$0.5 million of transition expenses related to the newly acquired U.K. business,
including accounting, appraisal and legal fees. During the twenty-six weeks
ended June 30, 2002, we recorded a special charge of $1.8 million primarily
related to transition expenses noted above offset by the special credit recorded
in the second quarter of 2002. In the second quarter of 2001, we recorded a
special charge of $1.1 million for incremental consulting, legal and other costs
incurred in preparations to restructure and outsource our information technology
infrastructure with EDS.
7. OTHER COMPREHENSIVE INCOME
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------- ------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands)
Net income $ 67,616 $ 49,852 $ 94,819 $ 68,180
Other comprehensive income
(expense), net of tax:
Foreign currency translation
adjustments 42,049 603 42,201 522
Unrealized (loss) gain on
available-for-sale securities
and derivative instruments (374) (175) (1,667) 933
Reclassification adjustment
for net loss (gains) realized
in net income on derivative
instruments 1,669 (855) 2,202 (2,878)
-------- -------- -------- --------
Comprehensive income $110,960 $ 49,425 $137,555 $ 66,757
======== ======== ======== ========
19
8. EARNINGS PER SHARE (EPS)
Basic and diluted net income per common share were arrived at using the
calculations outlined below:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------- -----------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
-------- ------- -------- -------
(In thousands, except per share data)
Net income available to
common shareholders $67,616 $49,852 $94,819 $68,180
======= ======= ======= =======
Weighted average shares
for basic EPS 36,117 37,284 36,045 37,244
Effect of dilutive securities:
Stock options 546 230 411 353
Contingent shares not
included in shares
outstanding for basic EPS 21 6 21 7
------- ------- ------- -------
Weighted average shares
for diluted EPS 36,684 37,520 36,477 37,604
======= ======= ======= =======
Basic EPS $ 1.87 $ 1.34 $ 2.63 $ 1.83
======= ======= ======= =======
Diluted EPS $ 1.84 $ 1.33 $ 2.60 $ 1.81
======= ======= ======= =======
The dilutive effects of stock options were determined by applying the treasury
stock method, assuming we were to purchase common shares with the proceeds from
stock option exercises. Stock options to purchase 1,399 shares of common stock
were not included in the computation of first quarter 2002 earnings per share
because the stock options' exercise prices were greater than the average market
price of the common shares.
9. COMMITMENTS AND CONTINGENCIES
We were one of a number of entities named by the Environmental Protection Agency
(EPA) as a potentially responsible party (PRP) at the Lowry Superfund site. This
landfill is owned by the City and County of Denver (Denver), and was managed by
Waste Management of Colorado, Inc. (Waste Management). In 1990, we recorded a
special pretax charge of $30 million, a portion of which was put into a trust in
1993 as part of an agreement with Denver and Waste to settle the outstanding
litigation related to this issue.
Our settlement was based on an assumed cost of $120 million (in 1992 adjusted
dollars). It requires us to pay a portion of future costs in excess of that
amount.
In January 2002, in response to the EPA's five-year review conducted in 2001,
Waste Management provided us with updated annual cost estimates through 2032. We
have reviewed these cost estimates in the assessment of our accrual related to
this issue. In determining that the current accrual is adequate, we eliminated
certain costs included in Waste Management's estimates, primarily trust
management costs that will be accrued as incurred, certain remedial costs for
which technology has not yet been developed and income taxes which we do not
believe to be an included cost in the determination of when the $120 million
threshold is reached. We generally used a 2% inflation rate for future costs,
and discounted certain operations and maintenance costs at the site that we
deemed to be determinable, at a 5.46% risk-free rate of return. Based on these
assumptions, the present value and gross amount of discounted costs are
approximately $1 million and $4 million, respectively. We did not assume any
future recoveries from insurance companies in the estimate of our liability.
20
There are a number of uncertainties at the site, including what additional
remedial actions will be required by the EPA, and what costs are included in the
determination of when the $120 million threshold is reached. Because of these
issues, the estimate of our liability may change as facts further develop, and
we may need to increase the reserve. While we cannot predict the amount of any
such increase, an additional accrual of as much as $25 million is reasonably
possible based on our preliminary evaluation, with additional cash contributions
possibly beginning no earlier than 2013.
We were one of several parties named by the EPA as a PRP at the Rocky Flats
Industrial Park site. In September 2000, the EPA entered into an Administrative
Order on Consent with certain parties, including our company, requiring
implementation of a removal action. Our projected costs to construct and monitor
the removal action are approximately $300,000. The EPA will also seek to recover
its oversight costs associated with the project which are not possible to
estimate at this time. However, we believe they would be immaterial to our
operating results, cash flows and financial position.
From time to time, we have been notified that we are or may be a PRP under the
Comprehensive Environmental Response, Compensation and Liability Act or similar
state laws for the cleanup of other sites where hazardous substances have
allegedly been released into the environment. We cannot predict with certainty
the total costs of cleanup, our share of the total cost, the extent to which
contributions will be available from other parties, the amount of time necessary
to complete the cleanups or insurance coverage.
In addition, we are aware of groundwater contamination at some of our properties
in Colorado resulting from historical, ongoing or nearby activities. There may
also be other contamination of which we are currently unaware.
While we cannot predict our eventual aggregate cost for our environmental and
related matters in which we are currently involved, we believe that any
payments, if required, for these matters would be made over a period of time in
amounts that would not be material in any one year to our operating results,
cash flows or our financial or competitive position. We believe adequate
reserves have been provided for losses that are probable and estimable.
21
10. DEBT
6 3/8% Senior Notes due 2012
On May 7, 2002, Coors Brewing Company completed a private placement of $850
million principal amount of 6 3/8% Senior notes, due 2012, with interest payable
semi-annually. The notes were priced at 99.596% of par for a yield to maturity
of 6.43%, are unsecured, are not subject to any sinking fund provision and
include a redemption provision (make-whole provision) which allows us to retire
the notes at whole or any time at a redemption price. The redemption price is
equal to the greater of (1) 100% of the principal amount of the notes plus
accrued and unpaid interest and (2) the make whole amount of the notes being
redeemed, which is equal to the present value of the principal amount of the
notes and interest to be redeemed. The notes were issued with registration
rights and are guaranteed by Adolph Coors Company and certain domestic
subsidiaries. Net proceeds from the sale of the notes, after deducting estimated
expenses and underwriting fees, were approximately $841 million. The net
proceeds and cash on hand were used to (1) repay the $750 million of loans
outstanding under our senior unsecured bridge facility which we entered into in
connection with our acquisition of Coors Brewers Limited and (2) to repay
approximately $91 million of outstanding term borrowings under our senior
unsecured credit facilities.
Senior Private Placement Notes
At June 30, 2002, we had $100 million in unsecured Senior notes at fixed
interest rates ranging from 6.76% to 6.95% per annum. Interest on the notes is
due semi-annually in January and July. At the end of the second quarter 2002,
$80 million was classified as current in the current portion of long-term debt.
The remaining principal amount outstanding is due in July of 2005 and
appropriately classified as long-term debt. In July 2002, we made an $80 million
principal payment related to the current portion (see Subsequent Event
footnote). Our private placement notes require that we conduct our business with
certain restrictions on indebtedness, liens, mergers, consolidations, asset
sales and certain other types of business activities in which we can engage. We
were in compliance with these requirements at June 30, 2002.
Senior Credit Facility
At June 30, 2002, we had $651.6 million in unsecured Senior Credit facilities
consisting of a U.S. dollar amortizing term loan in an aggregate principal
amount of $302.0 million and a 228.0 million British pound amortizing term loan.
Based on foreign exchange rates at June 30, 2002, aggregate principal amounts
outstanding related to the 228.0 British pound amortizing term loan were $349.6
million.
Amounts outstanding under our term loan bear interest, at our option, at a rate
per annum equal to either an adjusted LIBOR or an alternate rate, in each case
plus an additional margin. The additional margin is set based upon our
investment grade debt rating which is BBB+ (S&P) and Baa2 (Moody's). If our debt
rating changes, the additional margin is subject to adjustment. Interest is
payable quarterly unless the selected LIBOR is for a time period less than 90
days, in which case the interest is payable in the time period corresponding to
the selected LIBOR.
22
Our term loan is payable quarterly in arrears beginning June 27, 2003, and
matures February 1, 2007. During the thirteen weeks ended June 30, 2002, we
repaid approximately $l76 million on our five year amortizing term loan. On July
24, 2002, we made an additional $10 million payment (See Subsequent Event
footnote 13).
We and all of our existing and future, direct and indirect, domestic
subsidiaries, other than immaterial domestic subsidiaries, have guaranteed our
term loan.
Our term loan requires us to meet certain periodic financial tests, including
maximum total leverage ratio and minimum interest coverage ratio. There are also
certain restrictions on indebtedness, liens and guarantees; mergers,
consolidations and some types of acquisitions and assets sales; and certain
types of business in which we can engage. As of June 30, 2002, we were in
compliance with all of these restrictions. We expect to timely repay this
facility in accordance with its terms.
Our total long-term borrowings as of June 30, 2002, were composed of the
following:
AS OF AS OF
DESCRIPTION JUNE 30, 2002 DECEMBER 30, 2001
- ---------------------------- ------------- -----------------
(In thousands)
Private placement $ 100,000 $ 100,000
6 3/8% Senior notes due 2012 846,616 --
USD amortizing term loan 302,000 --
GBP 228 amortizing term loan 349,638 --
Other 21,829 5,000
---------- ---------
Total debt 1,620,083 105,000
Less current portion of long-term debt (106,708) (85,000)
---------- ---------
Total long-term debt $ 1,513,375 $ 20,000
========== =========
23
The aggregate principal debt maturities of long-term debt for the next five
fiscal years are as follows:
AMOUNT
--------------
(In thousands)
2002 $ --
2003 43,875
2004 128,094
2005 204,005
2006 215,985
2007 71,766
Thereafter 849,650
----------
Total $1,513,375
==========
11. DERIVATIVE INSTRUMENTS
In the normal course of business, we are exposed to fluctuations in interest
rates, the value of foreign currencies and production and packaging materials
prices. We have established policies and procedures that govern the management
of these exposures through the use of a variety of financial instruments. By
policy, we do not enter into such contracts for trading purposes or for the
purpose of speculation.
Our objective in managing our exposure to fluctuations in interest rates,
foreign currency exchange rates and production and packaging materials prices is
to decrease the volatility of earnings and cash flows associated with changes in
the underlying rates and prices. To achieve this objective, we enter into
foreign currency forward contracts, commodity swaps, interest rate swaps and
cross currency swaps, the values of which change in the opposite direction of
the anticipated cash flows. We do not hedge the value of net investments in
foreign-currency-denominated operations or translated earnings of foreign
subsidiaries. Our primary foreign currency exposures are the British pound
(GBP), the Canadian dollar (CAD) and the Japanese yen (YEN).
Derivatives are either exchange-traded instruments that are highly liquid, or
over-the-counter instruments with highly rated financial institutions. No credit
loss is anticipated because the counterparties to over-the-counter instruments
generally have long-term ratings from S&P or Moody's that are no lower than A or
A2, respectively. In some instances we and our counterparties have reciprocal
collateralization agreements with regard to fair value positions in excess of
certain thresholds. These agreements call for the posting of collateral in the
form of cash, treasury securities or letters of credit if a fair value loss
position to us or our counterparties exceeds a certain amount. At June 30, 2002,
no collateral was posted by us or our counterparties.
All derivatives are recognized on the balance sheet at their fair value.
Unrealized gain positions are recorded as other current assets or other
non-current assets. Unrealized loss positions are recorded as accrued
liabilities or other non-current liabilities.
24
Substantially all derivatives entered into by the Company qualify for and are
designated as foreign-currency, commodity cash flow and fair value hedges,
including those hedging foreign currency denominated firm commitments.
The Company considers whether any provisions in non-derivative contracts
represent "embedded" derivative instruments as described in SFAS 133. As of June
30,2002, we have concluded that no "embedded" derivative instruments warrant
separate fair value accounting under SFAS 133.
Changes in fair values of outstanding derivatives that are highly effective are
recorded in other comprehensive income, until earnings are affected by the
variability of cash flows of the hedged transaction. In most cases amounts
recorded in other comprehensive income will be released to earnings at maturity
of the related derivative. The consolidated statement of income classification
of effective hedge results is the same as that of the underlying exposure.
We formally document all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking
hedge transactions. This process includes linking all derivatives that are
designated as foreign-currency and commodity cash flow hedges to either specific
assets and liabilities on the balance sheet or specific firm commitments or
forecasted transactions. We also formally assess, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions have been highly effective in offsetting changes in the cash flows
of hedged items and whether those derivatives may be expected to remain highly
effective in future periods. When it is determined that a derivative is not, or
has ceased to be, highly effective as a hedge, we discontinue hedge accounting
prospectively, as discussed below.
We discontinue hedge accounting prospectively when (1)the derivative is no
longer highly effective in offsetting changes in the cash flows of a hedged item
(including hedged items such as firm commitments or forecasted
transactions);(2)the derivative expires or is sold, terminated, or
exercised;(3)it is no longer probable that the forecasted transaction will
occur; or(4)management determines that designating the derivative as a hedging
instrument is no longer appropriate.
When we discontinue hedge accounting because it is no longer probable that the
forecasted transaction will occur in the originally expected period, the gain or
loss on the derivative remains in accumulated other comprehensive income and is
reclassified into earnings when the forecasted transaction affects earnings.
However, if it is probable that a forecasted transaction will not occur by the
end of the originally specified time period or within an additional two-month
period of time thereafter, the gains and losses that were accumulated in other
comprehensive income will be recognized immediately in earnings. In all
situations in which hedge accounting is discontinued and the derivative remains
outstanding, we will carry the derivative at its fair value on the balance sheet
until maturity, recognizing future changes in the fair value in current-period
earnings.
Any hedge ineffectiveness is recorded in current-period earnings. In the quarter
ended June 30, 2002, we recorded in other expense an insignificant loss relating
to such ineffectiveness of all derivatives. Effectiveness is assessed based on
forward rates.
25
As of June 30, 2002, $4.4 million of deferred net losses (net of tax) on both
outstanding and matured derivatives accumulated in other comprehensive income
are expected to be reclassified to earnings during the next twelve months as a
result of underlying hedged transactions also being recorded in earnings. Actual
amounts ultimately reclassified to earnings are dependent on the applicable
rates in effect when derivatives contracts that are currently outstanding
mature. As of June 30, 2002, the maximum term over which we are hedging
exposures to the variability of cash flows for all forecasted and recorded
transactions is 10 years.
We are exposed to credit-related losses in the event of non-performance by
counterparties to hedging instruments and do not enter into master netting
arrangements. The counterparties to derivative transactions are major financial
institutions with high investment grade credit ratings and, additionally,
counterparties to derivatives three years or greater are A or better rated.
However, this does not eliminate our exposure to credit risk with these
institutions. This credit risk is generally limited to the unrealized gains in
such contracts should any of these counterparties fail to perform as contracted.
To manage this risk, we have established counterpary credit guidelines that are
continually monitored and reported to senior management according to prescribed
guidelines. We utilize a portfolio of financial institutions either
headquartered or operating in the same countries we conduct our business. As a
result of the above considerations, we consider the risk of counterparty default
to be minimal.
On May 7, 2002, we entered into certain cross currency swaps totaling Pound
Sterling 530 million (approximately $774 million). The swaps included an initial
exchange of principal on the date of the private placement of our 6 3/8% fixed
rate debt (see Debt footnote 10) and will require final principal exchange 10
years later. The swaps also call for an exchange of fixed British pound interest
payments for fixed U.S. dollar interest receipts. At the initial principal
exchange, we paid U.S. dollars to a counterparty and received British pounds.
Upon final exchange, we will provide British pounds to the counterparty and
receive U.S. dollars. The cross currency swaps have been designated as cash flow
hedges of the changes in value of the future British pound interest and
principal receipts on an intercompany loan between us and our Europe subsidiary
that results from changes in the U.S. dollar to British pound exchange rates.
On the same day as the settlement of our private placement offering and initial
exchange of principal amounts associated with our swap transactions, we were
required to settle our previously established forward sale of 530 million
British pounds. The settlement of all these transactions in aggregate resulted
in a foreign exchange loss of approximately $30 million, almost all of which was
offset by a foreign exchange gain on our intercompany loan.
26
On June 28, 2002, we entered into an interest rate swap agreement related to our
6.375% fixed rate debt. The interest rate swap converted $76.2 million notional
amount from fixed rates to floating rates and mature in 2012. We will receive
fixed U.S. dollar interest payments semi-annually at a rate of 6.375% per annum
and pay a rate to our counterparty based on a credit spread of 0.789% plus the
three-month LIBOR rate, thereby exchanging a fixed interest obligation for a
floating interest rate obligation. There was no exchange of principal at the
inception of the swap. We designated the interest rate swap as a fair value
hedge of the changes in the fair value of the $76.2 million fixed rate debt
attributable to changes in the LIBOR swap rates.
27
12. SUPPLEMENTAL GUARANTOR INFORMATION
On May 7, 2002, our wholly owned subsidiary, Coors Brewing Company("Issuer of
Notes"), completed a private placement of $850 million principal amount of 6
3/8% Senior notes due 2012. The notes were issued with registration rights and
are jointly and severally guaranteed on a senior and unsecured basis by Adolph
Coors Company("Parent Guarantor") and certain domestic subsidiaries("Subsidiary
Guarantors"). A significant amount of the Issuers income and cash flow is
generated by its subsidiaries. As a result, funds necessary to meet the Issuer's
debt service obligations are provided in large part by distributions or advances
from its subsidiaries. Under certain circumstances, contractual and legal
restrictions, as well as our financial condition and operating requirements and
those of certain domestic subsidiaries, could limit the Issuer's ability to
obtain cash from us and certain subsidiaries for the purpose of meeting its debt
service obligation including the payment of principal and interest on the notes.
The following information sets forth our condensed consolidating balance sheet
as of June 30, 2002, and the condensed consolidating statements of operations
and cash flows for the twenty-six weeks and thirteen weeks ended June 30, 2002
and July 1, 2001. Investments in our subsidiaries are accounted for on the
equity method; accordingly, entries necessary to consolidate the Parent
Guarantor, Issuer of Notes, and all of its subsidiaries are reflected in the
elimination column. Separate complete financial statements of the Issuer and the
Subsidiary Guarantors would not provide additional material information that
would be useful in assessing the financial composition of the Guarantors.
28
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the thirteen-weeks ended June 30, 2002
(In thousands)
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ----------- ------------ ------------
Sales - domestic and international $ -- $ 720,107 $ 18,288 $ 600,830 $ -- $ 1,339,225
Beer excise taxes -- (111,785) (549) (202,922) -- (315,256)
----------- ----------- ----------- ----------- ----------- -----------
Net sales -- 608,322 17,739 397,908 -- 1,023,969
Cost of goods sold -- (371,844) (8,569) (235,807) -- (616,220)
Equity in subsidiary earnings 60,562 33,407 -- -- (93,969) --
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 60,562 269,885 9,170 162,101 (93,969) 407,749
Marketing, general and --
administrative (81) (180,002) (6,986) (99,242) -- (286,311)
Special charges -- 1,074 -- -- -- 1,074
----------- ----------- ----------- ----------- ----------- -----------
Operating income 60,481 90,957 2,184 62,859 (93,969) 122,512
Gain on sale of distributorship -- -- -- -- -- --
Interest income 4,508 93 -- 1,746 -- 6,347
Interest expense (1,735) (3,797) 15,826 (29,857) -- (19,563)
Other income (expense) 8,741 (9,371) 11,750 (13,691) -- (2,571)
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes 71,995 77,882 29,760 21,057 (93,969) 106,725
Income tax expense (4,379) (17,034) (11,378) (6,318) -- (39,109)
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 67,616 $ 60,848 $ 18,382 $ 14,739 $ (93,969) $ 67,616
=========== =========== =========== =========== =========== ===========
29
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the thirteen-weeks ended July 1, 2001
(In thousands)
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Eliminations Consolidated
--------- --------- ---------- ---------- ------------ ------------
Sales - domestic and international $ -- $ 758,392 $ 37,068 $ 14,269 $ -- $ 809,729
Beer excise taxes -- (112,548) (1,506) (2,975) -- (117,029)
--------- --------- --------- --------- --------- ---------
Net sales -- 645,844 35,562 11,294 -- 692,700
Cost of goods sold -- (404,461) (26,045) 5,626 -- (424,880)
Equity in subsidiary earnings 48,704 5,126 -- -- (53,830) --
--------- --------- --------- --------- --------- ---------
Gross profit 48,704 246,509 9,517 16,920 (53,830) 267,820
Marketing, general and
administrative 78 (180,926) (8,366) (5,404) -- (194,618)
Special charges -- (1,084) -- -- -- (1,084)
--------- --------- --------- --------- --------- ---------
Operating income $ 48,782 $ 64,499 $ 1,151 $ 11,516 $ (53,830) $ 72,118
Gain on sale of distributorship -- -- 2,900 -- -- 2,900
Interest income 3,388 885 -- 114 -- 4,387
Interest expense (1,767) 1,439 -- -- -- (328)
Other income (expense) 133 8,416 218 (7,624) -- 1,143
--------- --------- --------- --------- --------- ---------
Income before income taxes 50,536 75,239 4,269 4,006 (53,830) 80,220
Income tax expense (684) (26,542) (1,619) (1,523) -- (30,368)
--------- --------- --------- --------- --------- ---------
Net income $ 49,852 $ 48,697 $ 2,650 $ 2,483 $ (53,830) $ 49,852
========= ========= ========= ========= ========= =========
30
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the twenty-six weeks ended June 30, 2002
(In thousands)
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ----------- ------------ ------------
Sales - domestic and international $ -- $ 1,299,888 $ 33,708 $ 943,385 $ -- $ 2,276,981
Beer excise taxes -- (201,724) (992) (310,974) -- (513,690)
----------- ----------- ----------- ----------- ----------- -----------
Net sales -- 1,098,164 32,716 632,411 -- 1,763,291
Cost of goods sold -- (691,250) (19,820) (380,994) -- (1,092,064)
Equity in subsidiary earnings 80,970 48,430 -- -- (129,400) --
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 80,970 455,344 12,896 251,417 (129,400) 671,227
Marketing, general and
administrative (165) (330,106) (12,838) (158,616) -- (501,725)
Special charges -- (1,802) -- -- -- (1,802)
----------- ----------- ----------- ----------- ----------- -----------
Operating income 80,805 123,436 58 92,801 (129,400) 167,700
Gain on sales of distributorships -- -- -- -- -- --
Interest income 8,376 454 30 1,748 -- 10,608
Interest expense 323 (9,510) 10,283 (30,069) -- (28,973)
Other income (expense) 14,960 (5,220) 23,059 (30,443) -- 2,356
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes 104,464 109,160 33,430 34,037 (129,400) 151,691
Income tax expense (9,645) (21,398) (15,398) (10,431) -- (56,872)
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 94,819 $ 87,762 $ 18,032 $ 23,606 $ (129,400) $ 94,819
=========== =========== =========== =========== =========== ===========
31
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the twenty-six weeks ended July 1, 2001
(In thousands)
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ----------- ------------ ------------
Sales - domestic and international $ -- $ 1,357,792 $ 62,205 $ 27,560 $ -- $ 1,447,557
Beer excise taxes -- (202,419) (3,048) (5,690) -- (211,157)
----------- ----------- ----------- ----------- ----------- -----------
Net sales -- 1,155,373 59,157 21,870 -- 1,236,400
Cost of goods sold -- (734,309) (43,120) 1,396 -- (776,033)
Equity in subsidiary earnings 63,845 1,246 -- -- (65,091) --
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 63,845 422,310 16,037 23,266 (65,091) 460,367
Marketing, general and --
administrative (109) (336,040) (16,143) (12,284) -- (364,576)
Special charges -- (1,084) -- -- -- (1,084)
----------- ----------- ----------- ----------- ----------- -----------
Operating income 63,736 85,186 (106) 10,982 (65,091) 94,707
Gain on sale of distributorship -- -- 2,900 -- -- 2,900
Interest income 7,778 1,041 -- 180 -- 8,999
Interest expense (3,784) 2,645 -- -- -- (1,139)
Other income (expense) 3,087 13,473 218 (12,463) -- 4,315
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes 70,817 102,345 3,012 (1,301) (65,091) 109,782
Income tax expense (2,637) (38,317) (1,142) 494 -- (41,602)
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 68,180 $ 64,028 $ 1,870 $ (807) $ (65,091) $ 68,180
=========== =========== =========== =========== =========== ===========
32
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
As of June 30, 2002
(In thousands)
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ----------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 42,600 $ 2,029 $ 1,995 $ 91,482 $ -- $ 138,106
Accounts receivable, net -- 138,252 13,660 337,475 -- 489,387
Notes receivable, net 78 41,265 1,130 59,221 -- 101,694
Total inventories -- 95,142 9,065 100,665 -- 204,872
Total Other current assets -- 63,367 1,960 31,453 -- 96,780
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 42,678 340,055 27,810 620,296 -- 1,030,839
Properties, at cost and net -- 827,929 25,668 467,543 -- 1,321,140
Goodwill -- 122,055 (103,736) 602,736 -- 621,055
Other Intangibles, net -- 76,751 86,049 371,595 -- 534,395
Investments in joint ventures -- 99,622 -- 101,414 -- 201,036
Net investment in and advances to subs 1,043,052 1,808,477 -- -- (2,851,529) --
Other assets 4,813 79,691 136,771 172,691 -- 393,966
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 1,090,543 $ 3,354,580 $ 172,562 $ 2,336,275 $(2,851,529) $ 4,102,431
=========== =========== =========== =========== =========== ===========
Liabilities and Shareholders' Equity
[GRAPH]
Current liabilities:
Accounts payable $ -- 212,166 $ 2,325 $ 112,202 -- $ 326,693
Accrued salaries and vacations -- 46,979 1,129 5,554 -- 53,662
Taxes, other than income taxes -- 33,703 709 110,478 -- 144,890
Accrued expenses and other liabilities (77,446) 198,857 38,184 213,560 -- 373,155
Current portion of long-term debt 80,000 22,109 -- 4,599 -- 106,708
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities 2,554 513,814 42,347 446,393 -- 1,005,108
Long-term debt -- 1,513,375 -- -- -- 1,513,375
Deferred tax liability (3,630) 64,762 (666) 171,223 -- 231,689
Other long-term liabilities 6,753 220,728 4 39,908 -- 267,393
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities 5,677 2,312,679 41,685 657,524 -- 3,017,565
----------- ----------- ----------- ----------- ----------- -----------
Total shareholders' equity 1,084,866 1,041,901 130,877 1,678,751 (2,851,529) 1,084,866
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,090,543 $ 3,354,580 $ 172,562 $ 2,336,275 $(2,851,529) $ 4,102,431
=========== ============ =========== =========== =========== ===========
33
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the twenty-six weeks ended June 30, 2002
(In thousands)
(Unaudited)
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantor Guarantor Consolidated
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
operating activities $ 8,851 $ 32,063 $ 18,637 $ 36,735 $ 96,286
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Sales and maturities of securities 232,758 -- -- -- 232,758
Additions to properties and
intangible assets (185) (76,332) 93,655 (121,641) (104,503)
Acquisition of Coors Brewers Limited,
net of cash acquired -- (115,105) (93,396) (1,379,847) (1,588,348)
Proceeds from sales of properties -- 496 -- 12,662 13,158
Other -- 201 (331) 377 247
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities 232,573 (190,740) (72) (1,488,449) (1,446,688)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Issuances of stock under stock plans 11,381 -- -- -- 11,381
Proceeds from long-term debt -- 2,391,955 -- (20) 2,391,935
Payments on short-term and long-term debt (5,000) (925,599) -- 4,599 (926,000)
Dividends paid (14,796) -- -- -- (14,796)
Overdraft balances -- (54,112) -- -- (54,112)
Net activity in investment in and advances
(to) from subsidiaries (248,974) (1,256,328) (17,294) 1,522,596 --
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
financing activities (257,389) 155,916 (17,294) 1,527,175 1,408,408
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents:
Net increase (decrease) in cash and cash
equivalents (15,965) (2,761) 1,271 75,461 58,006
Effect of exchange rate changes on cash
and cash equivalents -- -- -- 2,967 2,967
Balance at beginning of year 58,565 4,790 724 13,054 77,133
----------- ----------- ----------- ----------- -----------
Balance at end of quarter $ 42,600 $ 2,029 $ 1,995 $ 91,482 $ 138,106
----------- ----------- ----------- ----------- -----------
34
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the twenty-six weeks ended July 1, 2001
(In thousands)
(Unaudited)
Subsidiary
Parent Issuer Subsidiary Non
Guarantor of Notes Guarantor Guarantor Consolidated
--------- --------- ---------- ---------- ------------
Net cash provided by (used in) operating activities $ (22,763) $ 144,038 $ (4,508) $ (7,480) $ 109,287
Cash flows from investing activities:
Purchases of securities (171,174) -- -- -- (171,174)
Sales and maturities of securities 207,925 -- -- -- 207,925
Additions to properties and intangible assets -- (86,652) (3,904) 38 (90,518)
Proceeds from sales of properties -- 60 8,253 -- 8,313
Investment in Molson USA, LLC -- (65,000) -- -- (65,000)
Other -- 13,271 -- 284 13,555
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities 36,751 (138,321) 4,349 322 (96,899)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Issuances of stock under stock plans 9,861 -- -- -- 9,861
Purchases of stock (9,117) -- -- -- (9,117)
Dividends paid (14,539) -- -- -- (14,539)
Overdraft balances -- (43,403) -- -- (43,403)
Net activity in investment in and advances (to) from subsidiaries (42,040) 40,298 1,321 421 --
Other -- -- -- 3,737 3,737
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities (55,835) (3,105) 1,321 4,158 (53,461)
--------- --------- --------- --------- ---------
Cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents (41,847) 2,612 1,162 (3,000) (41,073)
Effect of exchange rate changes on cash and cash equivalents -- -- -- (759) (759)
Balance at beginning of year 114,545 (2,111) 2,322 5,005 119,761
--------- --------- --------- --------- ---------
Balance at end of quarter $ 72,698 $ 501 $ 3,484 $ 1,246 $ 77,929
--------- --------- --------- --------- ---------
35
13. SUBSEQUENT EVENTS
On July 1, 2002, Rocky Mountain Metal Container(RMMC), our can and end joint
venture with Ball Corporation ("Ball") as planned increased its debt obligations
to $50 million. The debt obligation at June 30, 2002, is the maximum
contemplated under the private placement agreement. The debt proceeds will be
used to finance planned capital improvements. RMMC's debt is secured by the
joint venture's various supply and access agreements with no recourse to either
us or Ball. This debt is not included in our financial statements as the joint
venture is accounted for under the equity method.
On July 15, 2002 we repaid $80 million of outstanding term borrowings under our
unsecured Senior Private Placement Notes.
On July 24, 2002, we repaid $l0 million of our outstanding term borrowing under
our five year Senior Credit Facility.
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
We acquired the Carling business in England and Wales from Interbrew S.A. on
February 2, 2002. Since the acquisition was finalized in 2002, the operating
results and financial position of the Carling business are not included in our
second quarter 2001 results discussed below. This acquisition will have a
significant impact on our future operating results and financial condition. The
Carling business, which was subsequently renamed Coors Brewers Limited,
generated sales volume of approximately 9 million barrels in 2001. Since 1995,
the business has, on average, grown its volumes by 1.9% per year, despite an
overall decline in the U.K. beer market over the same period. This acquisition
was funded through cash and third-party debt as reflected in our consolidated
balance sheet. The borrowings will have a significant impact on our
capitalization, interest coverage and free cash flow trends. See further
discussion of this impact in the Liquidity section below.
CRITICAL ACCOUNTING POLICIES
Our discussions and analysis of financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. On an on-going basis, we evaluate the continued appropriateness of
our accounting policies and estimates, including those related to customer
programs and incentives, bad debts, inventories, product retrieval, investments,
intangible assets, income taxes, pension and other post-retirement benefits and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant estimates and judgments used in the preparation of our consolidated
financial statements:
Revenue recognition
Revenue is recognized upon shipment of our product to distributors in the
Americas segment. In the Europe segment, revenue is recognized upon shipment of
our product to retailers. If we believe that our products do not meet our high
quality standards, we retrieve those products and they are destroyed. Any
revenue related to products sold and subsequently returned is recognized as a
reduction of sales at the value of the original sales price and is recorded at
the time of the retrieval. Using historical results and production volumes, we
estimate the costs that are probable of being incurred for product retrievals
and record those costs in Cost of goods sold in the Consolidated Income
Statements each period.
37
Valuation allowance
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we consider future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event we were to determine that we
would be able to realize our deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise, should we determine
that we would not be able to realize all or part of our net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.
Allowance for obsolete inventory
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about historic usage, future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Reserves for insurance deductibles
We carry deductibles for workers' compensation, automobile and general liability
claims up to a maximum amount per claim. The undiscounted estimated liability is
accrued based on an actuarial determination. This determination is impacted by
assumptions made and actual experience.
Contingencies, environmental and litigation reserves
When we determine that it is probable that a liability for environmental matters
or other legal actions has been incurred and the amount of the loss is
reasonably estimable, an estimate of the future costs are recorded as a
liability in the financial statements. Costs that extend the life, increase the
capacity or improve the safety or efficiency of company-owned assets or are
incurred to mitigate or prevent future environmental contamination may be
capitalized. Other environmental costs are expensed when incurred.
Goodwill and intangible asset valuation
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141, "Business Combinations," (SFAS 141)
and No. 142, "Goodwill and Other Intangible Assets," (SFAS 142). SFAS 141
requires that all business combinations be accounted for using the purchase
method of accounting and that certain intangible assets acquired in a business
combination be recognized as assets apart from goodwill. SFAS 141 was effective
for all business combinations initiated after June 30, 2001. SFAS 142 requires
goodwill to be tested for impairment under certain circumstances, and written
down when impaired, rather than being amortized as previously required.
Furthermore, SFAS 142 requires purchased intangible assets other than goodwill
to be amortized over their useful lives unless those lives are determined to be
indefinite. Purchased intangible assets are carried at cost less accumulated
amortization.
38
Trade loans
Coors Brewers Limited extends loans to retail outlets that sell our brands.
These loans typically provide for a very low or zero interest rate. In return,
the retail outlets receive fewer discounts on beer purchased from us, with the
net result being Coors Brewers Limited attaining a market return on the
outstanding loan balance. Under U.K. GAAP, the price paid for beer remains in
margin, and there is no imputed interest income included on the books for the
outstanding loan balance.
In order to comply with U.S. GAAP, we have reclassified a portion of the beer
revenue into interest income. In the thirteen and twenty-six weeks ended June
30, 2002, this amount was $5.0 million and $7.4 million, respectively.
There is no difference in the net income reported under U.K. or U.S. GAAP
related to this reclassification, and we have determined that this interest
income will continue to be reflected in the European segment since it is so
closely related to the European business, even though all other interest income
and expense is reflected in the Corporate segment.
Equity Method Accounting
We generally apply the equity method of accounting to 20%-50% owned investments.
Equity accounting involves recognizing our pro rata share of the earnings of
investee companies as one line item in the income statement. We have an equity
ownership in, and conduct business with various joint ventures, most of which
directly relate to our core activities. Our accounting for joint ventures
depends on the substance of the joint venture's activities. The Coors Canada
joint venture's earnings are considered a royalty and this amount is reflected
in revenues in the income statement. Rocky Mountain Metal Container, Rocky
Mountain Bottle Co., along with Coors Brewers Limited's Tradeteam and Grolsch
joint ventures were formed with companies which have the key core competencies
sought by us to reduce costs. Accordingly, our share of joint venture profits
are offset against cost of goods sold to reduce the above-market cost paid to
the joint venture for services. The Molson USA joint venture is accounted for by
the traditional equity accounting method, with their share of profit or loss
reflected as one line item in the income statement (currently grouped with other
income, due to immateriality).
39
CONSOLIDATED RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------------------- -------------------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
----------------- --------------- ----------------- -----------------
(In thousands, except percentages)
(Unaudited)
% of % of % of % of
Net Net Net Net
Sales Sales Sales Sales
----- ----- ----- -----
Net Sales $ 1,023,969 100% $ 692,700 100% $ 1,763,291 100% $ 1,236,400 100%
Cost of goods sold (616,220) 60% (424,880) 61% (1,092,064) 62% (776,033) 63%
----------- --- --------- --- ----------- --- ----------- ---
Gross profit 407,749 40% 267,820 39% 671,227 38% 460,367 37%
Other operating
expenses:
Marketing, general
and administrative
expenses (286,311) 28% (194,618) 28% (501,725) 28% (364,576) 29%
Special credits
(charges) 1,074 -- (1,084) -- (1,802) -- (1,084) --
----------- --- --------- --- ----------- --- ----------- ---
Operating income 122,512 12% 72,118 10% 167,700 10% 94,707 8%
Gain on sale of
Distributorship -- -- 2,900 -- -- -- 2,900 --
Interest income 6,347 1% 4,387 1% 10,608 1% 8,999 1%
Interest expense (19,563) 2% (328) -- (28,973) 2% (1,139) --
Other (expense)
income - net (2,571) -- 1,143 -- 2,356 -- 4,315 --
----------- --- --------- --- ----------- --- ----------- ---
Income before taxes 106,725 10% 80,220 12% 151,691 9% 109,782 9%
Income tax expense (39,109) 4% (30,368) 4% (56,872) 3% (41,602) 3%
----------- --- --------- --- ----------- --- ----------- ---
Net income $ 67,616 7% $ 49,852 7% $ 94,819 5% $ 68,180 6%
=========== === ========= === =========== === =========== ===
Sales and volume
Second quarter 2002 net sales were $1,024.0 million compared to net sales of
$692.7 million in the second quarter of 2001. The increase of $33l.3 million, or
47.8%, was due to the acquisition of the Carling business portion of Bass
Brewers on February 2, 2002, which is now called Coors Brewers Limited and is
included in the Europe segment.
We sold 8,881,000 barrels of beverages in the second quarter of 2002 versus
6,424,000 barrels in the second quarter of 2001.
Year-to-date net sales of $1,763.3 million increased 42.6% as compared to net
sales of $1,236.4 million during the same period last year. During the
twenty-six weeks ended June 30, 2002, unit volume increased 3,851,000 barrels to
15,387,000 barrels. The increase in unit volume in the second quarter of 2002
and twenty-six weeks ended June 30,2002 was also attributable to the acquisition
of Coors Brewers Limited.
During the second quarter of 2002, there was a continued mix shift away from
some of our higher-net-revenue products and geographies. The increase in volume
due to our acquisition of the Carling portion of Bass Brewers, positive domestic
price increases and reduced domestic price promotion expense taken during the
quarter contributed to our consolidated results.
40
Cost of goods sold
Cost of goods sold was $616.2 million for the second quarter of 2002 compared to
$424.9 million for the same period last year. Cost of goods sold was 60.2% of
net sales in the second quarter 2002 compared to 61.3% for the same periods in
2001. On a per barrel basis, cost of goods sold increased 4.9% over 2001.
Year-to-date cost of goods sold was $1,092.1 million, representing a 40.7%
increase from $776.0 million during the twenty-six weeks ending July 1, 2001.
The increase was due to the acquisition of Coors Brewers Limited. Other factors
contributing to the increase in the second quarter cost of goods per barrel
include higher capacity costs partially offset by lower domestic packaging and
raw material costs as well as operations efficiency initiatives in the Americas
segment.
Marketing, general and administrative expenses
Marketing, general and administrative expenses of $286.3 million in the second
quarter of 2002 increased $91.7 million, or 47.1%, compared to the same period
last year. During the twenty-six weeks ended June 30,2002, marketing, general
and administrative expenses were $501.7 million as compared to $364.6 million
during the same period last year. The increases are due to investing more per
barrel in the Americas advertising and sales promotion and the acquisition of
Coors Brewers Limited. As a percentage of net sales, marketing, general and
administrative expenses were 28% in the second quarter of 2002 and 2001.
Year-to-date marketing, general and administrative expenses as a percentage of
net sales were 28.5% in 2002 and 29.5% in 2001, respectively.
Special credit (charge)
In the second quarter of 2002, we recorded a special credit of $1.6 million
related to the cash settlement of a legal dispute with our former partner in a
brewing business in South Korea, offset by $0.5 million of transition expenses
related to the newly acquired U.K. business, including accounting, appraisal and
legal fees.
During the twenty-six weeks ended June 30, 2002, we recorded special charges of
$1.8 million related to transition expenses incurred due to our newly acquired
U.K. business, offset by the $1.1 million credit recorded in the second quarter.
In the second quarter and year-to-date 2001, we recorded a special charge of
$1.1 million for incremental consulting, legal and other costs incurred in
preparations to restructure and outsource our information technology
infrastructure with EDS.
Operating income
As a result of the factors noted above, operating income, including special
charges, was $122.5 million for the second quarter of 2002 compared to $72.1
million reported in the second quarter of 2001. Excluding special charges and
gain on sale of distributorship, operating income increased 65.9% to $121.4
million in the second quarter of 2002 compared to $73.2 million for the same
period last year.
41
Including special charges, year-to-date operating income of $167.7 million
increased 77.1% from $94.7 million, due to the acquisition of Coors Brewers
Limited. Excluding special charges and gains on sale of distributorships,
operating income increased 76.9% to $169.5 million in 2002 compared to $95.8
million last year.
Interest income
Interest income of $6.3 million in the second quarter of 2002 increased $2.0
million over the prior year, due to trade loan interest in the current year
associated with the acquisition of Coors Brewers Limited. Year-to-date interest
income was $10.6 million as compared to $9.0 million for the same period last
year. The year-to-date increase was also due to trade loan interest income,
partially offset by a decrease in interest income on previously held cash
positions because we sold the majority of our marketable securities to help fund
the acquisition of Coors Brewers Limited.
Interest expense
Interest expense of $19.6 million in the second quarter of 2002 increased $19.2
million over the same period last year while year-to-date interest expense
increased $27.8 million to $29.0 million due to a significant increase in debt
associated with the acquisition of the Carling business portion of Bass Brewers
on February 2, 2002.
Other (expense) income - net
Net other expense of $2.6 million in the second quarter of 2002 decreased $6.6
million over the same period last year. Contributing to the decrease are
amortization expense related to a call option purchased to limit our foreign
exchange exposure related to the settlement of a forward sale agreement and
gains realized in 2001 on the sale of company-owned distributorships.
Year-to-date other income of $2.4 million decreased $4.9 million due to same
reasons noted above. .
Consolidated effective tax rate
Our second quarter 2002 effective tax rate was 36.6%, down from 37.9% from the
second quarter of 2001 mainly because of the effects of purchase accounting
associated with the acquisition of Coors Brewers Limited. Year-to-date, our
effective tax rate was 37.5% versus 39.5% at the end of the first quarter 2002.
Our first quarter tax rate was higher because we had not yet completed the
purchase accounting and tax structuring related to the acquisition of Coors
Brewers Limited.
42
Net income
Net income for the second quarter of 2002 was $67.6 million, or $1.87 per basic
share ($1.84 per diluted share), compared to $49.9 million, or $1.34 per basic
share ($1.33 per diluted share), for the second quarter of 2001. Excluding
special items, after-tax earnings were $67.0 million, or $1.85 per basic share
($1.83 per diluted share), in the second quarter of 2002, up 37.5% from
after-tax earnings of $48.7 million, or $1.32 per basic share ($1.30 per diluted
share), in the second quarter of 2001. Including special charges, year-to-date
net income of $94.8 million increased 39.1%, or $26.6 million, from $68.2
million in the prior year twenty-six weeks ended July 1, 2001.
THE AMERICAS SEGMENT RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------------------- -------------------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
--------------- --------------- ----------------- -----------------
(In thousands, except percentages)
(Unaudited)
% of % of % of % of
Net Net Net Net
Sales Sales Sales Sales
----- ----- ----- -----
Net Sales $ 676,576 100% $ 691,250 100% $ 1,221,552 100% $ 1,234,134 100%
Cost of goods sold (400,473) 59% (424,810) 61% (743,805) 61% (775,214) 63%
--------- --- --------- --- ----------- --- ----------- ---
Gross profit 276,103 41% 266,440 39% 477,747 39% 458,920 37%
Other operating
expenses:
Marketing, general
and administrative
expenses (197,220) 29% (192,388) 28% (359,461) 29% (361,033) 29%
Special charges 1,644 -- (1,084) -- 840 -- (1,084) --
--------- --- --------- --- ----------- --- ----------- ---
Operating income 80,527 12% 72,968 11% 119,126 10% 96,803 8%
Gain on sale of
Distributorship -- -- 2,900 -- -- -- 2,900 --
Interest income -- -- -- -- -- -- -- --
Interest expense -- -- -- -- -- -- -- --
Other (expense)
income - net 142 -- 1,010 -- (7) -- 1,228 --
--------- --- --------- --- ----------- --- ----------- ---
Income before taxes $ 80,669 12% $ 76,878 11% $ 119,119 10% $ 100,931 8%
========= === ========= === =========== === =========== ===
Sales and volume
Net sales decreased 2.1% in the second quarter of 2002 and 1.0% in the first
twenty-six weeks of 2002, compared to the same periods last year. Second quarter
2002 net sales of $676.6 million were $14.7 million lower than second quarter
2001 net sales of $691.3 million due primarily to a decrease in revenues per
barrel and due to a slight decrease in unit volume. Revenues per barrel
decreased 1.5% and 1.0% in the second quarter of 2002 and the twenty-six weeks
ended June 30,2002, respectively, due to the sale of three company-owned
distributorships and a shift in our sales mix away from some of our
higher-net-revenue products and geographies. These decreases were partially
offset by domestic price increases and reduced price promotion expense versus a
year ago.
43
Our unit volume sales were down 0.7% in the second quarter of 2002 compared to
the second quarter of 2001. Lower volume was driven by competitive market
conditions. We sold 6,371,000 barrels of beverages in the second quarter of 2002
versus 6,413,000 barrels in the second quarter of 2001.
Year-to-date net sales of $1,221.5 million decreased $12.6 million over the same
period last year, due to the same factors that impacted the second quarter of
2002. We sold 11,501,000 barrels in the first half of 2002 compared to
11,519,000 in same period last year. Our year-to-date volume declined 0.2% over
the same period last year due to the same factors that impacted the second
quarter of 2002.
Cost of goods sold
Cost of goods sold was $400.5 million in the second quarter of 2002 and $743.8
million year-to-date, compared to $424.8 million and $775.2 million,
respectively, for the same periods last year. As a percentage of net sales, cost
of goods sold was 59.2% for the second quarter and 60.9% year-to-date
2002,respectively, compared to 61.5% and 62.8% for the same periods last year.
On a per barrel basis, cost of goods sold decreased 5.1% in the second quarter
of 2002 compared to the same period last year.
Year-to-date cost of goods sold per barrel decreased 3.9% compared to the same
period last year. The decreases in the thirteen and twenty-six weeks ended June
30, 2002, are primarily attributable to lower packaging and raw material costs,
the result of operations efficiency initiatives and the sale of three
company-owned distributorships during 2001. The raw material savings were
primarily attributable to improved purchasing arrangements and business process
improvements. The decrease in cost per barrel was partially offset by higher
capacity costs.
Gross profit
As a result of the factors noted above, gross profit increased 3.6% to $276.1
million in the second quarter of 2002, from $266.4 million in the second quarter
of 2001. Year-to-date gross profit increased 4.1% to $477.7 million compared to
$458.9 million for the same period last year also as a result of cost
reductions.
Marketing, general and administrative expenses
Marketing, general and administrative expenses increased 2.5% to $197.2 million
for the second quarter of 2002, from $192.4 million for the same period last
year. In the second quarter of 2002, we incurred higher marketing expense as a
result of investing more per barrel in advertising and sales promotion. General
and administrative expenses were flat in the second quarter of 2002 compared to
the second quarter of 2001. Although we increased spending to improve our
infrastructure, the general and administrative expense increases were completely
offset by the sale of three company owned distributorships last year.
44
Year-to-date marketing, general and administrative expenses decreased 0.4% to
$359.5 million for the twenty-six weeks ended June 30, 2002, from $361.0 million
for the same period last year primarily due to the sale of company owned
distributorships and certain one time reductions in overhead expense realized
during the first quarter of 2002, partially offset by higher advertising and
sales promotion spending.
Special credit (charge)
In the second quarter of 2002, we recorded a special credit of $1.6 million
related to the settlement of a legal dispute with our former partner in a
brewing business in South Korea. We are expecting to receive additional payments
in 2002 and 2003. As we are continuing to assess the collectibility, we have not
recognized any amounts owed us in our accounts receivable balance at June 30,
2002. In the second quarter of 2001, we recorded a special charge of $1.1
million for incremental consulting, legal and other costs incurred in
preparations to restructure and outsource our information technology
infrastructure with EDS. Year to date special credits include the above
mentioned settlement partially offset by a charge related to the dissolution of
our former can and end joint venture.
Operating income
As a result of the factors noted above,including special items, operating income
was $80.6 million for the second quarter of 2002, representing a 10.4% increase
from $73.0 million in the second quarter of 2001. Year-to-date, operating income
including special items increased 23.1% to $119.1 million compared to $96.8
million for the same period last year.
Excluding special items, operating income for the second quarter of 2002 was
$78.9 million, representing a 6.5% increase over the same period last year.
Year-to-date operating income, excluding special items, increased 20.8% to
$118.3 million compared to $97.9 million for the same period last year.
Other income(expense) - net
Net other income of $0.1 million in the second quarter of 2002 decreased $3.8
million from $3.9 million in the second quarter of 2001. The decrease was
primarily due to a $2.9 million gain realized in the second quarter 2001 on the
sale of one of our company owned distributorships. Year-to-date net other
expense was $7 million in 2002 compared with income of in 2001. The reduction
in income from last year was primarily due to a gain realized from the sale of
our company-owned distributorships in 2001 and higher 2002 losses from our joint
venture with Molson, Inc.
45
THE EUROPE SEGMENT RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------------------- --------------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
--------------- --------------- ---------------- -------------
(In thousands, except percentages)
(Unaudited)
% of % of % of % of
Net Net Net Net
Sales Sales Sales Sales
----- ----- ----- -----
Net Sales $ 347,393 100% $ 1,450 100% $ 541,739 100% $ 2,266 100%
Cost of goods sold (215,747) 62% (70) 5% (348,259) 64% (819) 36%
--------- --- ------- ----- --------- --- ------- ---
Gross profit 131,646 38% 1,380 95% 193,480 36% 1,447 64%
Other operating
expenses:
Marketing, general
and administrative
expenses (89,091) 26% (2,230) 154% (142,264) 26% (3,543) 156%
Special charges -- -- -- -- -- -- -- --
--------- --- ------- ----- --------- --- ------- ---
Operating income 42,555 12% (850) 59% 51,216 9% (2,096) 92%
Gain on sale of
Distributorship -- -- -- -- -- -- -- --
Interest income 5,011 1% -- -- 7,431 1% -- --
Interest expense -- -- -- -- -- -- -- --
Other (expense)
income - net (1,117) -- -- -- 761 -- -- --
--------- --- ------- ----- --------- --- ------- ---
Income before taxes $ 46,449 13% $ (850) 59% $ 59,408 11% $(2,096) 92%
========= === ======= ===== ========= === ======= ===
We acquired the Coors Brewers Limited business on February 2, 2002, and began
reporting results of our new business in a new Europe operating segment. The
Coors Brewers Limited business represents nearly all of our new Europe segment.
Since we did not own Coors Brewers Limited prior to February 2, 2002, we did not
report historical financial results relative to this business. Accordingly, the
historical Europe results include only our pre-acquisition European operation
which generated minimal volume and revenue. Our discussion on the results of
operations for the Europe segment has been condensed for these purposes, as
comparative results are generally not meaningful. Comparative results for our
Europe segment will be more meaningful beginning February 2, 2003, at which time
we will have owned Coors Brewers Limited for a full year.
Sales and volume
The Europe segment achieved net sales of $347.4 million in the second quarter of
2002 and $541.7 million in the first twenty-six weeks of 2002. Unit volume to
retail was 2,510,000 barrels for the second quarter of 2002 and 3,886,000
barrels year-to-date.
Cost of goods sold
Cost of goods sold was $215.7 million in the second quarter of 2002 and $348.3
million year-to-date. As a percentage of net sales, cost of goods sold was 62.1%
and 64.3% for the second quarter and year-to-date 2002, respectively.
46
Gross profit
Gross profit was $131.6 million in the second quarter of 2002 and $193.5 million
through the twenty six weeks ended June 30, 2002.
Marketing, general and administrative expenses
Marketing, general and administrative expenses were $89.1 million for the second
quarter of 2002 or 25.6% of net sales. Year-to-date marketing, general and
administrative expenses were $142.3 million, or 26.3% of net sales.
Operating income
As a result of the factors noted above, operating income was $42.6 million for
the second quarter of 2002. Year-to-date operating income was $51.2 million.
Interest income
During the second quarter of 2002, the Europe segment recognized $5.0 million of
interest income associated with trade loans to retail outlets. During the
twenty-six weeks ended June 30,2002 interest income was $7.4 million.
Other (expense) income - net
Year-to-date other income was $0.8 million related to royalties and other
miscellaneous revenues.
Earnings before income tax
The Europe segment contributed $46.4 million and $59.4 million in the second
quarter and year-to-date of 2002, respectively, to consolidated earnings before
income taxes. As a percent of consolidated earnings before income tax during the
second quarter and year-to-date of 2002, the Europe segment earnings represented
43.5% and 39.2%, respectively.
47
THE CORPORATE SEGMENT RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------------- ------------------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
2002 2001 2002 2001
------------- ------------ ------------- -------------
(In thousands, except percentages)
(Unaudited)
% of % of % of % of
Net Net Net Net
Sales Sales Sales Sales
----- ----- ----- -----
Net Sales $ -- -- $ -- -- $ -- -- $ -- --
Cost of goods sold -- -- -- -- -- -- -- --
-------- -- ------- -- -------- -- -------- --
Gross profit -- -- -- -- -- -- -- --
Other operating
expenses:
Marketing, general
and administrative
expenses -- -- -- -- -- -- -- --
Special charges (570) -- -- -- (2,642) -- -- --
-------- -- ------- -- -------- -- -------- --
Operating income (570) -- -- -- (2,642) -- -- --
Gain on sale of
Distributorship -- -- -- -- -- -- -- --
Interest income 1,336 -- 4,387 -- 3,177 -- 8,999 --
Interest expense (19,563) -- (328) -- (28,973) -- (1,139) --
Other (expense)
income - net (1,596) -- 133 -- 1,602 -- 3,087 --
-------- -- ------- -- -------- -- -------- --
Income before taxes $(20,393) -- $ 4,192 -- $(26,836) -- $ 10,947 --
======== == ======= == ======== == ======== ==
The Corporate segment includes interest and certain corporate office costs in
both the Americas and Europe. The majority of these corporate costs relate to
interest expense, certain legal and finance costs and other miscellaneous
expenses not attributable to the Americas or Europe operating segments.
Special charges
Special charges of $0.6 million and $2.6 million were recognized during the
thirteen and twenty-six weeks ended June 30, 2002, respectively, for transition
expenses related to the U.K. business, including accounting, appraisal and legal
fees. No special charges were recognized in the thirteen or twenty-six weeks
ended July 1, 2001.
Interest income
Interest income of $1.3 million during the second quarter of 2002 represents a
$3.1 million decrease from a year ago because we sold the majority of our
marketable securities to help fund the acquisition of Coors Brewers Limited.
Year-to-date, interest income decreased $5.8 million to $3.2 million for the
same reason.
48
Interest expense
Interest expense of $19.6 million during the second quarter 2002 represents a
$19.2 million increase from a year ago. Interest expense was $29.0 million
compared to $1.1 million during the twenty-six weeks ended July 1, 2001. The
increases in 2002 was the result of increased debt associated with the
acquisition of Coors Brewers Limited.
Other (expense) income - net
Other expense of $1.6 million during the second quarter of 2002 represents a
$1.7 million increase as compared to 2001. This increase is primarily due to
foreign exchange losses recognized during the second quarter of 2002.
Year-to-date, other income decreased $1.5 million to $1.6 million due to the
same reason.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary sources of liquidity are cash provided by operating activities and
external borrowings. As of June 30, 2002, we had working capital of $25.7
million compared to working capital of $89.0 million at December 30, 2001. Cash
and short-term and long-term securities totaled $138.1 million at June 30, 2002,
compared to $309.7 million at December 30, 2001. The significant decrease in
working capital was primarily due to a decrease in marketable securities of
$232.6 million and increases in accounts payable and accrued liabilities, and
taxes. Our cash and short-term and long-term securities balances also
decreased due to the sale of marketable securities in the first quarter of 2002.
A portion of the cash provided by the sale of marketable securities was used to
fund our acquisition of Coors Brewers Limited. We believe that cash flows from
operations and cash provided by short-term borrowings, when necessary, will be
sufficient to meet our ongoing operating requirements, scheduled principal and
interest payments on debt, dividend payments and anticipated capital
expenditures. In July 2002, we repaid $90 million of outstanding borrowings.
Operating activities
Net cash provided by operating activities of $96.3 million for the twenty-six
weeks ended June 30, 2002, decreased $13.0 million compared to net cash provided
by operating activities of $109.3 million for the same period last year. The
change in cash flows from operating activities was primarily attributable to an
increase in accounts receivable, partially offset by an increase in net income,
and depreciation and amortization expense.
49
Investing activities
During the twenty-six weeks ended June 30, 2002, net cash used in investing
activities was $1.4 billion compared to $96.9 million in the same period last
year. Cash used in the current year includes the $1.6 billion payment, net of
cash acquired, made to acquire Coors Brewers Limited and includes year-to-date
additions to properties and intangible assets of $104.5 million. However,
excluding our $1.6 billion payment, net of cash acquired, to acquire Coors
Brewers Limited and our $65 million payment, made in January, 2001, for our
49.9% interest in Molson USA, LLC, total cash provided by investing activities
increased $173.6 million compared to the same period last year, due to more
proceeds from sales of marketable securities in 2002 and less cash used to
purchase marketable securities. In 2002, our net cash proceeds from marketable
securities activity was $232.8 million compared to $207.9 million last year. In
2002, we sold all of our marketable securities. Also, we did not purchase any
new marketable securities in the first half of 2002 compared to purchases of
$171.2 million in the first half of 2001.
Financing activities
Net cash provided by financing activities was $1.4 billion for the twenty-six
weeks ended June 30, 2002, compared to net cash used in financing activities of
$53.5 million for the same period last year. The increase was due to our
proceeds from issuance of debt in the first half of 2002 to fund our acquisition
of Coors Brewers Limited, partially offset by payments on outstanding
borrowings.
DEBT OBLIGATIONS
On July 1, 2002, Rocky Mountain Metal Container(RMMC), our can and end joint
venture with Ball Corporation ("Ball") as planned increased its debt obligations
to $50 million. The debt obligation at June 30, 2002, is the maximum
contemplated under the private placement facility. The debt proceeds are used to
finance planned capital improvements. RMMC's debt is secured by the joint
venture's various supply and access agreements with no recourse to either us or
Ball. This debt is not included in our financial statements as the joint venture
is accounted for under the equity method. (see Subsequent Event footnote 13).
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Contractual cash obligations as of June 30, 2002:
Payments due by period
--------------------------------------------------
Less than 1-3 4-5 After
Total 1 year years years 5 years
---------- -------- -------- -------- --------
(in thousands)
Long term debt $1,620,083 $106,708 $274,143 $353,870 $885,362
Capital lease
obligations 7,032 4,688 2,344 -- --
Operating leases 80,584 10,394 24,823 17,523 27,844
Other long term
obligations (1) 1,396,529 682,880 507,404 189,745 16,500
---------- -------- -------- -------- --------
Total obligations $3,104,228 $804,670 $808,714 $561,138 $929,706
========== ======== ======== ======== ========
50
Other commercial commitments:
Amount of commitment expiration per period
-----------------------------------------------------
Total amounts Less than 1-3 4-5 After
committed 1 year years years 5 years
------------- --------- ----- ----- -------
(in thousands)
Standby letters of
credit $ 776 $ 776 -- -- --
----- ----- ----- ----- -------
Total commercial
commitments $ 776 $ 776 $ -- $ -- $ --
===== ===== ===== ===== =======
(1) The amounts consist largely of long-term supply contracts with our joint
ventures and unaffiliated third parties to purchase material used in
production and packaging, such as cans and bottles, in addition to various
long-term commitments for advertising and promotions.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. You can identify these statements by forward-looking words such as
"expect," "anticipate," "plan," "believe," "seek," "estimate," "outlook,"
"trends," "industry forces," "strategies," "goals" and similar words. Statements
that we make in this report that are not statements of historical fact may also
be forward-looking statements.
In particular, statements that we make under the headings "Narrative Description
of Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Outlook for 2002" relating to our overall volume
trends, consumer preferences, pricing trends and industry forces, cost reduction
strategies and anticipated results, our expectations for funding our 2002
capital expenditures and operations, debt service capabilities, shipment levels
and profitability, increased market share and the sufficiency of capital to meet
working capital, capital expenditures requirements and our strategies are
forward-looking statements.
Forward-looking statements are not guarantees of our future performance and
involve risks, uncertainties and assumptions that may cause our actual results
to differ materially from the expectations we describe in our forward-looking
statements. There may be events in the future that we are not able to predict
accurately, or over which we have no control. You should not place undue
reliance on forward-looking statements. We do not promise to notify you if we
learn that our assumptions or projections are wrong for any reason. You should
be aware that the factors we discuss in "Risk Factors" and elsewhere in this
report could cause our actual results to differ from any forward-looking
statements.
51
Our actual results for future periods could differ materially from the opinions
and statements expressed with respect to future periods. In particular, our
future results could be affected by factors related to our acquisition of the
Coors Brewers Limited business in the U.K., including integration problems,
unanticipated liabilities and the substantial amount of indebtedness incurred to
finance the acquisition, which could, among other things, hinder our ability to
adjust rapidly to changing market conditions, make us more vulnerable in the
event of a downturn and place us at a competitive disadvantage relative to less
leveraged competitors.
To improve our financial performance, we must grow premium beverage volume,
achieve modest price increases for our products and control and reduce costs.
The most important factors that could influence the achievement of these goals
and cause actual results to differ materially from those expressed in the
forward looking statements, include, but are not limited to, the following:
RISK FACTORS
These and other risks and uncertainties affecting us are discussed in greater
detail in our other filings with the Securities and Exchange Commission,
including our December 30, 2001 report on Form 10-K. You should carefully
consider the following factors and the other information contained within this
document:
- -- We have a substantial amount of indebtedness.
- -- Because our primary production facility in the U.S. and the Coors Brewers
Limited production facilities in the U.K. are each located at a single site, we
are more vulnerable than our competitors to transportation disruptions and
natural disasters.
- -- We are significantly smaller than our two primary competitors in the U.S.,
and we are more vulnerable than our competitors to cost and price fluctuations.
- -- We are vulnerable to the pricing actions of our primary competitors, which
are beyond our control.
- -- If any of our suppliers are unable or unwilling to meet our requirements, we
may be unable to promptly obtain the materials we need to operate our business.
- -- The government of markets in which we operate may adopt regulations that
could increase our costs or our liabilities or could limit our business
activities.
- -- If the social acceptability of our products declines, or if litigation is
directed at the alcohol beverage industry, our sales volumes could decrease and
our business could be materially adversely affected.
- -- Any significant shift in packaging preferences in the beer industry could
disproportionately increase our costs and could limit our ability to meet
consumer demand.
52
- -- We depend on independent distributors in the United States to sell our
products, and we cannot provide any assurance that these distributors will
effectively sell our products.
- -- Because our sales volume is more concentrated in a few geographic areas in
the U.S. and United Kingdom, any loss of market share in the markets where we
are concentrated would have a material adverse effect on our results of
operations.
- -- We are subject to environmental regulation by federal, state and local
agencies, including laws that impose liability without regard to fault.
- -- Our ability to successfully integrate the Coors Brewers Limited business and
to implement our business strategy with respect to the Coors Brewers Limited
business could have a material adverse effect on our financial results.
- -- Loss of key members of the Coors Brewers Limited management team could
negatively impact our ability to successfully operate the U.K. business.
- -- Our success depends largely on the success of one product in the U.S. and in
the U.K. the failure of which would materially adversely affect our financial
results.
- -- Consolidation of pubs and growth in the size of pub chains in the U.K. could
result in less bargaining strength on pricing.
- -- We may experience labor disruptions in the U.K.
OUTLOOK FOR 2002
With the acquisition of the Carling business, subsequently renamed Coors Brewers
Limited, early in 2002, we anticipate that net sales; cost of goods sold;
marketing, general & administrative expense; operating income; and interest
expense will increase substantially. As such, the following outlook discussion
will focus primarily on performance factors related to our Americas business
segment and our Europe segment, where appropriate.
Sales and Volume
Second quarter and year-to-date net sales benefited from U.S. pricing and
reductions in price promotions, partially offset by a sales mix shift away from
higher-net-revenue products domestically and internationally. We remain
cautiously optimistic that these favorable pricing trends will continue through
the balance of the year. The net sales impact in the second quarter and
year-to-date of 2002 related to the sale of three company-owned distributorships
during 2001 is likely to continue until early in the fourth quarter of 2002.
Although we have not seen significant volume benefits from our sales and
marketing efforts, we are encouraged by new brand-building initiatives led by
new marketing, including our new sponsorship deal that makes Coors Light the
Official Beer of the National Football League. The large excise tax increase in
Puerto Rico, which took effect during June 2002, could adversely affect Americas
sales volume during the remainder of 2002.
53
Our Europe business has achieved strong volume growth in the twenty-six weeks
ended June 30, 2002. Although we achieved strong volume year-to-date, volumes
benefited from special events. Also, in the same period last year, volume was
effected by hoof and mouth disease, which limited access to the country side. We
implemented some price increases earlier this year in Europe, however, we have
seen more competitive off-premise price discounting, along with a continuing
shift of the market toward the off-premise channel. We will continue to monitor
promotional discounting, value-pack activity and volume shifts between the
off-trade and on-trade channels.
Cost of goods sold
We currently expect full-year Americas cost of goods sold per barrel to be lower
versus last year primarily because of the impact of selling company-owned U.S.
distributorships during 2001. We also expect to lower cost of goods sold in the
Americas due to continued operating efficiencies. We have realized cost
decreases due to lower distribution costs and related supply chain work. Other
factors we expect to see contribute to lower cost of goods sold in the Americas
include slightly lower costs for cans, paper packaging and agricultural
commodities, partially offset by modestly higher glass bottle costs. Fuel costs
are difficult to project, and significant changes in oil or natural gas prices
could alter our cost outlook. We expect fuel costs to be the same as 2001 or
slightly higher. Cost of sales in the second quarter and year-to-date of 2002
benefited from the sale of three company-owned distributorships during 2001.
We will continue to benefit from this until early in the fourth quarter of 2002.
Our outlook could also change because cost of goods sold per barrel is dependant
on actual sales volume and the related volume leverage that we are able to
achieve.
In Europe, we continue to achieve modest savings from operating and purchasing
efficiencies.
Marketing, general and administrative expenses
Our sponsorships with the National Football League and other properties offer
significant opportunities to effectively invest behind our brands. Full-year
marketing, general and administrative expenses for the Americas are expected to
be higher than last year due to incremental spending in advertising and sales
promotion and increased spending to improve our infrastructure.
Interest Income(Expense)
Consolidated 2002 interest income is likely to be consistent with 2001 due to
U.K. trade-loan interest income offset by lower balances of cash and marketable
securities.
Interest expense will continue to increase significantly in 2002 as compared to
2001 as a result of new debt issued to finance our acquisition of the Carling
business.
54
Taxes
Our tax rate for the rest of 2002 is expected to be consistent with the rate
applied to income during the first twenty-six weeks of 2002. The first quarter
tax rate of 39.5% was higher because we had not yet completed our purchase
and tax accounting for the acquisition of Coors Brewers Limited.
Earnings Before Income Taxes
Our Europe business usually posts a loss in January after a big holiday period.
As a result, earnings before income taxes for the twenty-one weeks beginning
February 2, 2002 and ended June 30, 2002, that we owned Coors Brewers Limited
was higher than it would have been if we had owned this business for the entire
first half of 2002. Also, earnings before income taxes would have been lower due
to an increase in interest expense due to the full year impact of the debt
incurred on February 2, 2002 to help fund our acquisition of Coors Brewers
Limited.
Other
As disclosed in our Form 10-K for 2001, our pension asset investment return
assumption was 10.5%. We feel this rate is appropriate since the actual average
annual return that has been achieved by our pension investments over the last 25
years, including the negative returns through the date of this writing, is in
excess of 11%. In light of the current long-term outlook for capital markets, we
will closely reevaluate this return assumption for 2003. Lowering the long-term
assumption by 0.5% would result in an increase in pension expense annually of
approximately $2.5 million.
We expect full-year 2002 capital expenditures (excluding capital improvements
for our existing joint ventures, which will be recorded on the respective books
of the joint ventures) to be approximately $225 to $235 million, excluding
approximately $5 million of capitalized interest. The range of capital spending
will be impacted by the foreign exchange rate of the British pound on the Coors
Brewers Limited portion of our capital spending. In addition to our planned
capital expenditures, incremental strategic investments will be considered on a
case-by-case basis.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to fluctuations in interest
rates, the value of foreign currencies and production and packaging materials
prices. We have established policies and procedures to govern the management of
these exposures through the use of a variety of financial instruments. By
policy, we do not enter into such contracts for trading purposes or for the
purpose of speculation.
Our objective in managing our exposure to fluctuations in interest rates,
foreign currency exchange rates and production and packaging materials prices is
to decrease the volatility of earnings and cash flows associated with changes in
the underlying rates and prices. To achieve this objective, we enter into
foreign currency forward contracts, commodity swaps, interest rate swaps and
cross currency swaps, the values of which change in the opposite direction of
the anticipated cash flows. We do not hedge the value of net investments in
foreign-currency-denominated operations or translated earnings of foreign
subsidiaries. Our primary foreign currency exposures are the British pound
(GBP), the Canadian dollar (CAD) and the Japanese yen (YEN).
Derivatives are either exchange-traded instruments that are highly liquid, or
over-the-counter instruments with highly rated financial institutions. No credit
loss is anticipated because the counterparties to over-the-counter instruments
generally have long-term ratings from S&P or Moody's that are no lower than A or
A2, respectively. Additionally, some counterparty fair-value positions favorable
to us and in excess of certain thresholds are collateralized with cash, U.S.
Treasury securities or letters of credit. In some instances we have reciprocal
collateralization responsibilities for fair value positions unfavorable to us
and in excess of certain thresholds. At June 30, 2002, we had zero counterparty
collateral and had none outstanding.
55
On February 2, 2002, we acquired 100% of the outstanding shares of Bass Holdings
Ltd. and certain other intangible assets from Interbrew S.A. We also paid off
certain intercompany loan balances with Interbrew for a total purchase price of
Pound Sterling 1.2 billion (approximately $1.7 billion), plus associated fees
and expenses and a restructuring provision. This business was subsequently
renamed Coors Brewers Limited. As part of our strategy to limit the possible
effects of foreign exchange on our acquisition of Coors Brewers Limited and the
subsequent financial structure implemented for the acquisition, we evaluated and
entered into a number of derivative instruments.
In December 2001, we entered into a commitment with lenders for the financing of
the acquisition of Coors Brewers Limited assets. Embedded in the commitment
letter was a foreign currency option, purchased by us, which limited our maximum
amount of U.S. dollars required to fund the acquisition. At the time our bid was
accepted we entered into a foreign currency forward sale agreement to fix the
British pound value of some of our cash on hand that was used to fund the
acquisition. The option in the loan commitment expired on February 11, 2002, and
the foreign currency forward sale settled on January 12, 2002. These two
transactions resulted in a combined loss and amortization expense of $1.2
million realized during the first quarter of 2002.
In connection with our acquisition of the Coors Brewers Limited business, we
entered into new senior unsecured credit facilities under which we borrowed $800
million of 5 year term debt and $750 million of bridge financing. All the funds
were subsequently exchanged for British pounds and used to close the
transaction. In order to better match our assets and liabilities the $750
million of bridge financing was recorded as an intercompany loan of 530 million
British pounds.
Upon establishing the intercompany loan, we entered into a forward sale
agreement for 530 million British pounds. The forward sale agreement was entered
into in order to hedge the effect of fluctuations in the British pound exchange
rates on the remeasurement of the intercompany loan. The forward sale agreement
expired on May 7, 2002. The change in fair value of the forward sale was
primarily offset by increases or decreases in the value of the intercompany
loan. (See Derivative footnote 11 to the consolidated financial statements).
Since the underlying financing associated with the intercompany loan was
short-term in nature (the bridge loan), and because our forward sale agreements
established as hedges of the intercompany loan expired on May 7, 2002, we were
exposed to fluctuations of the British pound exchange rate on our cash
requirement to settle the forwards and repay the bridge loan. Therefore, on
February 2, 2002, we paid approximately $1.7 million for a 530 million British
pound call option with a strike rate of 1.48 U.S. dollars to British pounds.
This option expired May 7, 2002. This option limited the maximum amount of U.S.
dollars required to settle our forward sale agreement and repay our bridge loan
obligations. The cash needed for these transactions was satisfied by our private
placement of $850 million principal amount of 6 3/8% Senior notes, due 2012 (See
Derivative footnote 11 to the consolidated financial statements) and cash on
hand. Amortization expense of approximately $1.7 million related to the call
option was recognized in the first quarter of 2002.
56
On May 7, 2002, we entered into certain cross currency swaps totaling Pound
Sterling530 million (approximately $774 million). The swaps include an initial
exchange of principal on the date of the private placement and will require
final principal exchange 10 years later. The swaps also call for an exchange of
fixed British pound interest payments for fixed U.S. dollar interest receipts.
At the initial principal exchange, we paid U.S. dollars to a counterparty and
received British pounds. Upon final exchange, we will provide British pounds to
the counterparty and receive U.S. dollars. The cross currency swaps have been
designated as cash flow hedges of the changes in value of the future British
pound interest and principal receipts on an intercompany loan between us and our
Europe subsidiary that results from changes in the U.S. dollar to British pound
exchange rates.
On June 28, 2002, we entered into an interest rate swap agreement related to
$76.2 million of our 6 3/8% Senior notes due 2012. The interest rate swap
converted $76.2 million notional amount from fixed rates to floating rates and
matures in 2012. We will receive fixed U.S. dollar interest payments
semi-annually at a rate of 6 3/8% per annum and pay a rate to our counterparty
based on a credit spread of 0.789% plus the three-month LIBOR rate, thereby
exchanging a fixed interest obligation for a floating interest rate obligation.
There was no exchange of principal at the inception of the swap. We designated
the interest rate swap as a fair value hedge of the changes in the fair value of
$76.2 million of our 6 3/8% Senior Notes due 2012 attributable to changes in the
LIBOR swap rates.
We monitor foreign exchange risk, interest rate risk and related derivatives
using two techniques - sensitivity analysis and Value-at-Risk. Our
market-sensitive derivative and other financial instruments, as defined by the
SEC, are foreign currency forward contracts, commodity swaps, interest rate
swaps, and cross currency swaps.
We use Value-at-Risk to monitor the foreign exchange and interest rate risk of
our cross-currency swaps. The Value-at-Risk provides an estimate of the level of
a one-day loss that may be equaled or exceeded within due to changes in the fair
value of these foreign exchange rate and interest rate-sensitive financial
instruments. The type of Value-at-Risk model used to estimate the maximum
potential one-day loss in the fair value is a variance/covariance method. The
Value-at-Risk model assumes normal market conditions and a 95% confidence level.
There are various modeling techniques that can be used to compute value at risk.
The computations used to derive our values take into account various
correlations between currency rates and interest rates. The correlations have
been determined by observing foreign exchange currency market changes and
interest rate changes over the most recent one-year period. We have excluded
anticipated transactions, firm commitments, cash balances, and accounts
receivable and payable denominated in foreign currencies from the Value-at-Risk
calculation, some of which these instruments are intended to hedge.
57
The Value-at-Risk calculation is a statistical measure of risk exposure based on
probabilities and is not intended to represent actual losses in fair value that
we may incur. The calculated Value-at-Risk result does not represent the full
extent of the possible loss that may occur. It attempts to represent the most
likely measure of potential loss that may be experienced 95 times out of 100 due
to adverse market events that may occur. Actual future gains and losses will
differ from those estimated by Value-at-Risk because of changes or differences
in market rates and interrelationships, hedging instruments, hedge percentages,
timing and other factors.
The estimated maximum one-day loss in fair value on our cross-currency swaps,
derived using the Value-at-Risk model, was $9.0 million at June 30, 2002. As we
did not enter into the cross currency swaps until the second quarter of 2002,
there is no comparable one-day loss in fair value at December 31, 2001. Such a
hypothetical loss in fair value is a combination of the foreign exchange and
interest rate components of the cross currency swap. Value changes due to the
foreign exchange component would be offset completely by increases in the value
of the underlying transaction being hedged, our inter-company loan. The
hypothetical loss in fair value attributable to the interest rate component
would be deferred until termination or maturity.
Details of all other market-sensitive derivative and other financial
instruments, including their fair values, are included in the table below. These
instruments include foreign currencies, commodity swaps, interest rate swap and
cross-currency swaps.
Notional
principal
amounts(USD) Fair values Maturity
------------ ----------- -----------
June 30, 2002
- -------------
Foreign currency management
Forwards 20,483 (89) 07/02-05/03
Cross currency swap 773,800 (37,078) 05/12
Commodity pricing management
Swaps 130,768 (4,347) 08/02-08/04
Interest rate pricing management
Interest rate swap 76,200 1,316 05/12
December 30, 2001
- -----------------
Foreign currency management
Option(l) 1,705,000 (1,023) 02/02
Forwards 228,650 2,336 01/02-04/03
Commodity pricing management
Swaps 132,477 (10,563) 02/02-02/04
(1) The foreign exchange option for $1.7 billion notional was purchased to
hedge our exposure to fluctuations in the British pound exchange rate
related to acquisition of certain Coors Brewers assets. This option was
settled in May 2002.
58
Maturities of derivative financial instruments held on June 30, 2002, are as
follows (in thousands):
2002(2) 2003 2004 and thereafter
-------- -------- -------------------
$(3,414) $(1,189) $(35,594)
(2) Amount includes the estimated deferred net loss of $4.4 million that is
expected to be recognized over the next 12 months, on certain forward foreign
exchange contracts and production and packaging materials derivative contracts,
when the underlying forecasted cash flow transactions occur.
Inter-company loans are generally hedged against foreign exchange risk through
the use of cross-currency swaps with third parties.
A sensitivity analysis has been prepared to estimate our exposure to market risk
of interest rates, foreign exchange rates, and commodity prices. The sensitivity
analysis reflects the impact of a hypothetical 10% adverse change in the
applicable market interest rates, foreign exchange rates, and commodity prices.
The volatility of the applicable rates and prices are dependent on many factors
that cannot be forecast with reliable accuracy. Therefore, actual changes in
fair values could differ significantly from the results presented in the table
below.
The following table presents the results of the sensitivity analysis of our
derivative and debt portfolio:
AS OF AS OF
ESTIMATED FAIR VALUE VOLATILITY JUNE 30, 2002 DECEMBER 30, 2001
- ------------------------------- -------------- -----------------
(In millions)
Foreign currency risk:
forwards, options $ (1.5) $ (22.2)
Interest rate risk: debt,swaps $ (39.2) $ (0.4)
Commodity price risk: swaps $ (12.6) $ (12.2)
PART II. OTHER INFORMATION
ITEM 1. LEGAL
We are subject to claims and lawsuits arising in the ordinary course of
business. We believe that the outcome of any such proceedings to which we are a
party will not have a material adverse effect on us.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 2002 Amendment to Adolph Coors Company Equity
Incentive Plan
Exhibit 10.2 Form of change in control agreements for Chairman and
for Chief Executive Officer
Exhibit 10.3 Form of change in control agreements for other
officers.
(b) Reports on Form 8-K
Current Report on Form 8-K/A dated April 18, 2002
Current Report on Form 8-K dated May 2, 2002
59
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADOLPH COORS COMPANY
By /s/ Ronald A. Tryggestad
---------------------------
Ronald A. Tryggestad
Vice President and Controller
(Chief Accounting Officer)
August 14, 2002
EXHIBIT INDEX
Exhibit 10.1 2002 Amendment to Adolph Coors Company Equity Incentive Plan
Exhibit 10.2 Form of change in control agreements for Chairman and for Chief
Executive Officer
Exhibit 10.3 Form of change in control agreements for other officers.