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 Quarter ended June 29, 1997 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) Golden, Colorado 80401 (Address of principal executive offices) (Zip Code) 303-279-6565 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Class B Common Stock (non-voting), no par value (Title of class) 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 [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant: All voting shares are held by Adolph Coors, Jr. Trust. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of August 8, 1997: Class A Common Stock - 1,260,000 shares Class B Common Stock - 35,786,833 shares PART I. FINANCIAL INFORMATION (UNAUDITED) Item 1. Financial Statements ADOLPH COORS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Thirteen weeks ended June 29, June 30, 1997 1996 (In thousands, except per share data) Sales - domestic and international $630,094 $616,916 Less: beer excise taxes (109,268) (111,824) Net sales 520,826 505,092 Costs and expenses: Cost of goods sold 300,663 308,333 Marketing, general and administrative 156,307 144,719 Research and project development 3,560 3,277 Special (credit) charge - net (32,515) 5,200 Total operating expenses 428,015 461,529 Operating income 92,811 43,563 Other income (expense) - net (977) (2,613) Income before income taxes 91,834 40,950 Income tax expense (40,816) (17,154) Net income $ 51,018 $ 23,796 Net income per common share $ 1.36 $ 0.63 Weighted average number of outstanding common shares 37,392 38,013 Cash dividends declared and paid per common share $ 0.125 $ 0.125 See notes to consolidated financial statements. ADOLPH COORS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Twenty-six weeks ended June 29, June 30, 1997 1996 (In thousands, except per share data) Sales - domestic and international $1,113,469 $1,068,286 Less: beer excise taxes (193,648) (191,523) Net sales 919,821 876,763 Costs and expenses: Cost of goods sold 555,830 572,752 Marketing, general and administrative 281,605 252,131 Research and project development 6,376 5,640 Special (credit) charge - net (31,517) 5,200 Total operating expenses 812,294 835,723 Operating income 107,527 41,040 Other income (expense) - net (2,057) (5,197) Income before income taxes 105,470 35,843 Income tax expense (46,407) (15,054) Net income $ 59,063 $ 20,789 Net income per common share $ 1.57 $ 0.55 Weighted average number of outstanding common shares 37,552 38,013 Cash dividends declared and paid per common share $ 0.250 $ 0.250 See notes to consolidated financial statements. ADOLPH COORS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 29, December 29, 1997 1996 (In thousands) Assets Current assets: Cash and cash equivalents $ 178,501 $ 110,905 Accounts and notes receivable, net 167,048 114,343 Inventories: Finished 47,415 43,477 In process 27,383 23,157 Raw materials 14,791 40,737 Packaging materials 8,426 13,699 Total inventories 98,015 121,070 Other assets 96,817 70,324 Total current assets 540,381 416,642 Properties, at cost, less accumulated depreciation and amortization of $1,359,117 in 1997 and $1,313,709 in 1996 758,123 814,102 Other assets 116,667 131,792 Total assets $ 1,415,171 $ 1,362,536 See notes to consolidated financial statements. ADOLPH COORS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 29, December 29, 1997 1996 (In thousands) Liabilities and shareholders' equity Current liabilities: Accounts payable $ 128,272 $ 123,120 Accrued expenses and other liabilities 195,373 152,328 Current portion of long-term debt 31,000 17,000 Total current liabilities 354,645 292,448 Long-term debt 145,000 176,000 Deferred tax liability 69,761 76,083 Other long-term liabilities 106,019 102,518 Total liabilities 675,425 647,049 Shareholders' equity: Capital stock: Preferred stock, non-voting, $1 par value (authorized: 25,000,000 shares; issued: none) -- -- Class A common stock, voting, $1 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: 100,000,000 shares; issued: 35,883,833 in 1997 and 36,662,404 in 1996) 8,544 8,729 Total capital stock 9,804 9,989 Paid-in capital 9,700 31,436 Retained earnings 721,626 671,972 Foreign currency translation adjustment (1,384) 2,090 Total shareholders' equity 739,746 715,487 Total liabilities and shareholders' equity $ 1,415,171 $ 1,362,536 See notes to consolidated financial statements. ADOLPH COORS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Twenty-six weeks ended June 29, June 30, 1997 1996 (In thousands) Cash flows from operating activities: Net income $ 59,063 $ 20,789 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net earnings of joint ventures (9,590) (6,095) Reserve for joint venture investment 22,378 -- Depreciation and amortization 59,163 59,387 Loss on sale or abandonment of properties and intangibles 3,752 8,829 Impairment charge 10,595 -- Deferred income taxes (6,304) (2,687) Change in current assets and current liabilities 29,586 (5,979) Net cash provided by operating activities 168,643 74,244 Cash flows from investing activities: Purchases of short-term investments (33,861) -- Additions to properties and intangible assets (22,414) (32,389) Proceeds from sale of properties and intangibles 2,479 1,866 Other (145) 6,351 Net cash used in investing activities (53,941) (24,172) Cash flows from financing activities: Purchases of stock (23,029) (26) Issuances of stock under stock plans 316 261 Dividends paid (9,409) (9,502) Payment of current portion of long-term debt (14,000) (31,000) Net cash used in financing activities (46,122) (40,267) Cash and cash equivalents: Net increase in cash and cash equivalents 68,580 9,805 Effect of exchange rate changes on cash and cash equivalents (984) (1,632) Balance at beginning of year 110,905 32,386 Balance at end of quarter $ 178,501 $ 40,559 See notes to consolidated financial statements. ADOLPH COORS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 29, 1997 1. BUSINESS Founded in 1873 and incorporated in Colorado in 1913, Adolph Coors Company (ACC or the Company) is the holding company for Coors Brewing Company (CBC), the third-largest U.S. brewer. 2. SIGNIFICANT ACCOUNTING POLICIES Unaudited consolidated financial statements - In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring accruals, which are necessary for a fair presentation of the financial position of the Company at June 29, 1997, and the results of its operations for the thirteen and twenty-six weeks ended June 29, 1997. The accompanying financial statements include the accounts of ACC, CBC and the majority-owned and controlled domestic and foreign subsidiaries of both ACC and CBC. 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 the Company's Form 10-K for the year ended December 29, 1996. Statements of cash flows - Cash paid for interest for the six months ended June 29, 1997, and June 30, 1996, was $8,342,000 and $10,240,000, respectively. Cash paid for income taxes for the six months ended June 29, 1997, and June 30, 1996, was $12,619,000 and $541,000, respectively. During the six-month period ended June 29, 1997, ACC issued $792,000 in restricted common stock under its management incentive program. Reclassifications - Certain reclassifications have been made to the 1996 financial statements to conform with the 1997 presentation. Accounting changes - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share (FAS 128). FAS 128 changes the computation, presentation and disclosure requirements of earnings (loss) per share that have previously been followed by the Company. FAS 128 is effective for years ending after December 15, 1997, and early adoption is not permissible. If the provisions of FAS 128 were adopted for the three and six months ended June 29, 1997, and June 30, 1996, the Company's pro forma basic and diluted earnings per share would have been as follows: Three months Three months Six months Six months ended ended ended ended June 29, 1997 June 30, 1996 June 29, 1997 June 30, 1996 Basic $1.37 $0.63 $1.58 $0.55 Diluted $1.34 $0.62 $1.56 $0.54 3. JINRO-COORS BREWING COMPANY CBC invested approximately $22 million in Jinro-Coors Brewing Company (JCBC) in 1992 for a 33% interest. This investment includes a put option and is exercisable by CBC through March 1999. The put option entitles CBC to require Jinro Limited (the 67% owner of JCBC) to purchase CBC's investment at the greater of cost or market value (both measured in Korean Won). JCBC achieved positive operating income in 1996 but has not yet been profitable due to debt service costs. In April 1997, Jinro Limited, a publicly-traded subsidiary of Jinro Group, missed a debt payment. In response to its financial difficulties and those of its subsidiaries, Jinro Group is working with its creditors and the government to restructure its debts and is in the process of selling real estate and merging and/or selling businesses. The financial difficulties of Jinro Limited, the guarantor of the put option discussed above, call into question the recoverability of CBC's investment in JCBC. As such, during the second quarter of 1997, CBC fully reserved for its investment in JCBC. This reserve has been classified as a special charge in the accompanying statements of income. 4. COORS BREWING IBERICA, S.A. In March 1994, CBC, through its subsidiary, Coors Brewing Iberica, S.A. (Coors Iberica), purchased a 500,000-hectoliter brewery in Zaragoza, Spain. CBC's total investment in Spain exceeds $50 million, which includes the initial purchase price and funding of operating and marketing expenditures. Coors Iberica has recently addressed certain capacity issues at its brewery as well as certain employment matters. Coors Iberica negotiated severance terms with labor unions during the second quarter of 1997, which prompted CBC management to update its evaluation of the recoverability of Coors Iberica's long-lived assets and related goodwill. Certain of these assets were deemed impaired in light of future, undiscounted cash flows. During the second quarter of 1997, CBC recorded an impairment charge of approximately $10.6 million and severance costs of approximately $3.8 million, which have been classified as special charges in the accompanying statements of income. The impairment charge represents a reduction of the carrying amounts of the impaired assets to their estimated fair market values, which were determined with the aid of an independent, third-party appraisal. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Special (Credit) Charge In the second quarter of 1997, ACC recorded a net special credit of $32.5 million, which is composed of the following items: a $71.5-million payment from Molson Breweries (Molson) to settle legal disputes with CBC, less approximately $2.2 million in related legal expenses; a $22.4-million reserve related to the recoverability of CBC's investment in JCBC; and a $14.4-million charge related to CBC's brewery in Zaragoza, Spain, for the impairment of certain long-lived assets and goodwill and for severance costs for a limited workforce reduction. In the second quarter of 1996, the Company recorded a special charge of $5.2 million related to the cost of ongoing legal proceedings with Molson and affiliates and the severance component of restructuring CBC's engineering and construction operations. The Company's operating results including and excluding these special items is summarized as follows: Thirteen weeks ended Twenty-six weeks ended June 29, June 30, June 29, June 30, 1997 1996 1997 1996 (In thousands, except per share data) Operating income: As reported $92,811 $43,563 $107,527 $41,040 Excluding special items 60,296 48,763 76,010 46,240 Net income: As reported 51,018 23,796 59,063 20,789 Excluding special items 36,456 26,956 45,111 23,949 Earnings per share: As reported $ 1.36 $0.63 $1.57 $0.55 Excluding special items $ 0.97 $0.71 $1.20 $0.63 Consolidated Results of Continuing Operations Sales and volume - ACC reported net sales of $520.8 million and $919.8 million for the second quarter and first half of 1997, respectively, representing increases of 3.1% and 4.9% over the same periods of 1996. Net sales for the three months ended June 29, 1997, were impacted favorably by net price increases; higher export sales, which generate greater net revenue per barrel than domestic volume; and increased Canadian income under an interim agreement with Molson. For the second quarter of 1997, these positive factors were offset in part by unfavorable brand and package mixes. Net sales for the six months ended June 29, 1997, were impacted favorably by higher domestic and export volume, net price increases, lower excise taxes because of higher export sales, and increased Canadian income. These factors were partially offset in the first half of 1997 by unfavorable package mix. Gross profit - Gross profit in the second quarter of 1997 rose 11.9% to $220.2 million over the second quarter of 1996, while gross profit in the first half of 1997 rose 19.7% to $364.0 million compared to the same period of 1996. As a percentage of net sales, gross profit increased to 42.3% and 39.6% in the second quarter and first half of 1997, respectively, from 39.0% and 34.7% for the same periods a year earlier. These improvements were attributable to the increases in net sales, as discussed above, and decreases in cost of goods sold of 2.5% in the second quarter of 1997 and 3.0% in the first half of 1997. Cost of goods sold decreased primarily because of lower packaging material costs and improved efficiencies in operations. These positive factors were offset in part by unfavorable brand and package mixes. Operating income - Operating income, excluding special items, was $60.3 million and $76.0 million for the second quarter and first half of 1997, respectively, compared to $48.8 million and $46.2 million for the same periods a year earlier. These increases were primarily due to the increases in gross profit, as discussed above, offset in part by increases in marketing, general and administrative expenses and by slight increases in research and project development costs. Marketing, general and administrative expenses rose because of greater advertising spending and higher reserves for employee incentives. Research and project development costs increased because of expenditures for certain production support and information technology projects. Non-operating expenses - Net non-operating expenses for the second quarter and first half of 1997 declined 62.6% and 60.4%, respectively, from the same periods of 1996 primarily because of reductions in net interest expense. The decrease in net interest expense in 1997 compared to 1996 was attributable to lower outstanding principal balances of ACC's medium-term notes and increased interest income. These factors were offset by a decrease in capitalized interest due to fewer capital projects. Effective tax rate - The consolidated effective tax rates for the second quarter and first half of 1997, excluding special items, were 38.5% and 39.0%, respectively, compared to 41.6% for both these periods of 1996. Net income - Net earnings for the second quarter and first half of 1997, excluding special items, were $36.5 million, or $0.97 per share, and $45.1 million, or $1.20 per share, respectively. This compares to net earnings, excluding special items, of $27.0 million, or $0.71 per share, and $23.9 million, or $0.63 per share, respectively, for the second quarter and first half of 1996. Liquidity and Capital Resources Liquidity - The Company's primary sources of liquidity are cash provided by operating activities and external borrowings. As of June 29, 1997, ACC had working capital of $185.7 million, and its net cash position was $178.5 million compared to $110.9 million as of December 29, 1996. The Company believes that cash flows from operations and short-term borrowings will be sufficient to meet its ongoing operating requirements, scheduled principal and interest payments on indebtedness, dividend payments, anticipated capital expenditures and potential repurchases of its common stock under the previously-announced stock repurchase plan. Operating activities - Net cash provided by operating activities was $168.6 million for the first half of 1997 compared to $74.2 million for the first half of 1996. The increase in cash provided by operating activities was attributable to an increase in net income, increases in the changes in accounts payable and accrued expenses and other liabilities and a decrease in the change in other assets. These cash inflows from operating activities were offset partially by increases in the change in accounts and notes receivable and inventories. The increases in the changes in accounts payable and accrued expenses and other liabilities for the six-month period ended June 29, 1997, from the same period a year earlier were primarily attributable to volume increases and an increase in accrued taxes related to the Company's settlement with Molson. The decrease in the change in other assets was due to a reduction in prepaid advertising, primarily due to the timing of such expenditures. Accounts and notes receivable increased for the six-month period ended June 29, 1997, over the six-month period ended June 30, 1996, primarily because sales were lower during the last 12 to 16 days of 1996 than during the same period of 1995; CBC's credit terms to its distributors are generally 12 to 16 days. The increase in inventories for the first half of 1997 compared to the same period a year earlier was attributable to reduced inventory levels at December 29, 1996, when compared to such levels at December 31, 1995, because of the Company's plant shut-down at the end of 1996 (which did not occur in 1995). In addition, there were reductions in finished goods resulting from an increase in the amount of inventory shipped directly to distributors compared to the prior year. Investing activities - During the first six months of 1997, ACC spent $53.9 million on investing activities compared to $24.2 million for the first six months of 1996. The Company purchased $33.9 million in short-term cash investments during the first half of 1997 as a result of its improved cash position. Capital expenditures decreased to $22.4 million for the six months ended June 29, 1997, from $32.4 million a year earlier. Capital expenditures for the first half of 1997 focused on information systems and upgrades and other efficiency-improvements to Golden-based facilities. Financing activities - ACC spent $46.1 million on financing activities during the six months ended June 29, 1997, primarily on purchases of Class B common stock for $23.0 million, dividend payments of $9.4 million and principal payments on its debt of $14.0 million. Outlook - Results for the first half of 1997 benefited from favorable comparisons in domestic and export volume and certain improved efficiencies in operations. The Company cannot predict the degree to which volume trends will continue. Consistent with industry pricing trends, the Company raised prices in most of its U.S. markets in the first half of 1997. However, several key markets are experiencing some aggressive value-pack and pricing activity. The Company cannot predict the degree to which pricing will be eroded by value-packing, discounting or the impact that higher prices will have on total volume or sales mix. The Company expects its interim agreement with Molson to be in place at least through the end of the third quarter of 1997. After that, income from the Canadian business will depend on whether the previously-announced contingent agreement is finalized. Trends for the first half of 1997 indicate that packaging costs are likely to be flat for the rest of the year. Movement in spot prime aluminum between now and the end of the third quarter of 1997 could change these trends. Total annual net interest expense in 1997 is expected to be lower than in 1996 because of the increased investment activity and interest income because of the Company's improved cash position. Cautionary statement - The "Outlook" section of this report contains "forward-looking statements" within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements. The most important factors that could influence the achievement of these goals - and cause actual results to differ materially from those expressed in forward-looking statements - include, but are not limited to, the following: - the failure to obtain all required consents to the previously disclosed conditional partnership arrangement with The Molson Companies Limited and Foster's Brewing Group; - the potential erosion of recent price increases through discounting or a higher proportion of sales in value-packs; - a potential shift in consumer preferences toward lower- priced products in response to price increases; - a potential shift in consumer preferences away from the premium light beer category, including Coors Light; - increases in the cost of aluminum, paper packaging and other raw materials; - the Company's inability to reduce manufacturing, freight and overhead costs to more competitive levels; - changes in significant government regulations affecting environmental compliance, income taxes and advertising or other marketing efforts for the Company's products; - increases in federal or state beer excise taxes; - increases in rail transportation rates or interruptions of rail service; - potential impact of industry consolidation; and - risks associated with investment and operations in foreign countries, including those related to foreign regulatory requirements; exchange rate fluctuations; and local political, social and economic factors. These and other risks and uncertainties affecting the Company are discussed in greater detail in the Company's 1996 Form 10-K filed with the Securities and Exchange Commission. PART II. OTHER INFORMATION Item 1. Legal Proceedings See the Company's Form 10-Q for the quarter ended March 30, 1997, for a discussion of CBC's April 16, 1997, settlement of legal disputes involving Molson Breweries and its affiliates and its U.S. litigation with Miller Brewing Company. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits None (b) Reports on Form 8-K A report on Form 8-K dated April 30, 1997 was submitted announcing the settlement of all legal disputes between CBC and the Molson Breweries and related parties (Molson Breweries). Plans for a new partnership were also disclosed to manage Coors brands in Canada. Please see Form 8-K filed on April 30, 1997. 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/ Timothy V. Wolf Timothy V. Wolf Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) August 13, 1997