Use these links to rapidly review the document ADOLPH COORS COMPANY AND SUBSIDIARIES INDEX
UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
Commission File Number: 1-14829
ADOLPH COORS COMPANY (Exact name of registrant as specified in its charter)
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 ý NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of July 30, 2004:
Class A Common Stock—1,260,000 sharesClass B Common Stock—36,121,728 shares
ADOLPH COORS COMPANY AND SUBSIDIARIES INDEX
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(IN THOUSANDS, EXCEPT PER SHARE DATA)(UNAUDITED)
See notes to unaudited condensed consolidated financial statements.
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ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(IN THOUSANDS)
(Continued)
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ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(Concluded)
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ADOLPH COORS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
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ADOLPH COORS COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWENTY-SIX WEEKS ENDED JUNE 27, 2004
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise noted in this report, any description of us includes Adolph Coors Company (ACC), principally a holding company; its principal operating subsidiaries, Coors Brewing Company (CBC) and Coors Brewers Limited (CBL); and our other corporate entities.
Unaudited condensed consolidated financial statements
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The accompanying condensed consolidated financial statements include our accounts, the accounts of our majority-owned domestic and foreign subsidiaries, and, effective December 29, 2003, certain variable interest entities of which we are the primary beneficiary (See Note 2). All significant intercompany transactions and balances have been eliminated in consolidation. These condensed consolidated 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 28, 2003. The results of operations for the twenty-six weeks ended June 27, 2004, 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 year-end condensed balance sheet data was derived from audited financial statements.
Use of estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements are affected.
Reclassifications
Certain reclassifications have been made to the 2003 financial statements to conform to 2004 presentation.
Stock-based compensation
We use the intrinsic value method when accounting for options issued to employees in accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related interpretations. Accordingly, we do not recognize compensation expense related to employee stock options, since options are always granted at a price equal to the market price on the day of grant. Compensation expense recorded in the financial statements relates to grants of restricted stock, and beginning in the second quarter of 2004, contingently issuable shares of stock granted to key executives, whose issuance is considered probable on December 31, 2004. The following table illustrates the effect on net income and earnings per share if we had applied the fair value provisions of
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Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS No. 123) to stock-based compensation using the Black-Scholes valuation model:
We adjusted the expected term for stock options issued in 2004 to 7.0 years for options granted to Section 16B officers and to 3.5 years for other option grantees, from 5.4 years in 2003. We amortize proforma expense over the option-vesting period of three years.
2. VARIABLE INTEREST ENTITIES
The FASB finalized FASB Interpretation No. 46R, Consolidation of Variable Interest Entities—An Interpretation of ARB51 (FIN 46R) in December 2003, making the new guidance applicable to us in the first quarter of 2004. FIN 46R expands the scope of ARB51 and can require consolidation of legal structures, called "variable interest entities (VIEs)." Once an entity is determined to be a VIE, the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. We have investments in VIEs, of which we are the primary beneficiary. Accordingly, we have consolidated three joint ventures in our 2004 results, effective December 29, 2003, and financial position as of June 27, 2004. These include Rocky Mountain Metal Container (RMMC), Rocky Mountain Bottle Company (RMBC) and Grolsch UK Limited (Grolsch). The impacts to our balance sheet included the addition of net fixed assets of RMMC and RMBC totaling approximately $69 million, and RMMC debt of approximately $45 million. The most significant impact to our cash flow statement for the twenty-six weeks ended June 27, 2004, was to increase depreciation expense by approximately $5.8 million. The impact to our income statement was to reduce Americas segment cost of goods sold, reclassify Europe segment costs out of cost of goods sold into marketing, general and administrative expense and to increase corporate interest expense in the quarter. Our partners' share of the operating results of the ventures is eliminated in the minority interest in net income of consolidated joint ventures line of the accompanying statement of income. Results of operations and financial position from prior periods are not being restated as a result of the adoption of FIN 46R.
Rocky Mountain Bottle Company
RMBC is a joint venture with Owens-Brockway Glass Container, Inc. (Owens) in which we hold a 50% interest. RMBC produces glass bottles at our glass manufacturing facility for use at our Golden brewery. Under this agreement, RMBC supplies our bottle requirements, and Owens has a contract to supply the majority of our bottle requirements not met by RMBC. In 2003, our share of pre-tax joint venture profits for this venture, totaling $3.6 million and $6.3 million in the thirteen and twenty-six weeks ended June 29, 2003, respectively, was included in cost of goods sold in our Condensed
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Consolidated Statements of Income. RMBC is a non-taxable entity. Accordingly, income tax expense on the accompanying statements of income only includes taxes related to our share of the joint venture income.
Rocky Mountain Metal Container
RMMC, a Colorado limited liability company, is a joint venture with Ball Corporation (Ball) in which we hold a 50% interest. We have a can and end supply agreement with RMMC. Under this agreement, RMMC supplies us with substantially all of the can and end requirements for our Golden brewery. RMMC manufactures these cans and ends at our manufacturing facilities, which RMMC is operating under a use and license agreement. In 2003, our share of pre-tax joint venture profits, totaling $0.40 million and $0.04 million in the thirteen and twenty-six weeks ended June 29, 2003, respectively, was included in cost of goods sold in our Condensed Consolidated Statements of Income. RMMC is a non-taxable entity. Accordingly, income tax expense on the accompanying statements of income only includes taxes related to our share of the joint venture income. Upon consolidation of RMMC, debt of approximately $45 million was added to our balance sheet. As of June 27, 2004, this debt was non-recourse to Coors.
Grolsch
Grolsch is a joint venture between CBL and Royal Grolsch NV in which we hold a 49% interest. The Grolsch joint venture markets Grolsch® branded beer in the United Kingdom and the Republic of Ireland. The majority of the Grolsch branded beer is produced by CBL under a contract brewing arrangement with the joint venture. CBL and Grolsch NV sell beer to the joint venture, which sells the beer back to CBL (for onward sale to customers) for a price equal to what it paid, plus a marketing and overhead charge and a profit margin. In 2003, our share of after-tax profits for this venture, totaling $1.0 million and $ 1.6 million in the thirteen and twenty-six weeks ended June 29, 2003, respectively, was included in cost of goods sold in our Condensed Consolidated Statements of Income. Grolsch is a taxable entity in the United Kingdom. Accordingly, income tax expense on the accompanying statements of income includes taxes related to the entire income of the venture. Upon consolidation, net fixed assets of approximately $4 million and net intangibles of approximately $21 million were added to our balance sheet.
The following summarizes the relative size of our consolidated joint ventures (including minority interests):
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3. EQUITY INVESTMENTS
The following summarizes information regarding our other equity investments that we have determined are not required to be consolidated under FIN 46R:
Non-Majority-Owned Equity Investments:
Molson USA, LLC
In January 2001, we entered into a joint venture partnership agreement with Molson Inc. (Molson), and paid $65.0 million for a 49.9% interest in the joint venture. The joint venture, Molson USA, LLC, was formed to import, market, sell and distribute Molson's brands of beer in the United States. We account for this joint venture by using the equity method of accounting. We recognize our share of the joint venture results in the other income (expense), net, line in our Condensed Consolidated Statements of Income, given the immateriality of its results. We believe our maximum exposure to loss over the required ownership period to be $41 million. We have determined that, while Molson USA is a variable interest entity as defined by FIN 46R, we are not the primary beneficiary of the entity.
Tradeteam
Tradeteam was formed in 1995 by CBL (then Bass Brewers Limited) and Exel Logistics. CBL has a 49.9% interest in this joint venture. The joint venture operates a system of satellite warehouses and a transportation fleet for deliveries between CBL breweries and customers. Tradeteam also delivers products for other UK brewers. Our share of pre-tax joint venture results has been included in the other income (expense), net, line of our Condensed Consolidated Statements of Income given the immateriality of its results. We do not believe there is a significant exposure to loss in our current relationship over our expected ownership period. We have determined that Tradeteam is not a variable interest entity as defined in FIN 46R.
Majority-Owned, Non-Consolidated Equity Investment:
Coors Canada, Inc. (CCI), a wholly-owned subsidiary, formed a partnership, Coors Canada, with Molson to market and sell our products in Canada beginning in 1998. CCI and Molson have a 50.1% and 49.9% interest, respectively, in Coors Canada. Under the partnership agreement, Coors Canada is responsible for marketing our products in Canada, while the partnership contracts with Molson for brewing, distribution and sales of these brands. In December 2000, the partnership and licensing agreements between Molson and Coors were extended for an indefinite period and included the addition of Molson performance standards for the Coors brand. Coors Canada receives an amount
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from Molson generally equal to net sales revenue generated from our brands less production, distribution, sales and overhead costs related to these sales. Our share of pre-tax income from this partnership is included in net sales in our Condensed Consolidated Statements of Income. We do not believe that there is a significant exposure to loss in our current relationship over the expected ownership period. Although we believe Coors Canada is a variable interest entity, we have determined that we are not the primary beneficiary of the entity.
4. OTHER COMPREHENSIVE INCOME
5. EARNINGS PER SHARE (EPS)
Basic and diluted net income per common share were determined using the calculations outlined below:
The dilutive effects of stock options and restrictive shares were determined by applying the treasury stock method, assuming we were to purchase common shares with the proceeds from stock option exercises. Anti-dilutive stock options totaling 1.3 million and 3.8 million in the thirteen weeks and 2.6 million and 1.8 million in the twenty-six weeks ended June 27, 2004 and June 29, 2003, respectively, were not included in our calculation because the stock options' exercise prices were greater than the average market price of the common shares.
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6. BUSINESS SEGMENTS
The Americas segment is focused on the production, marketing, and sales of the Coors portfolio of brands in the United States and its territories, including the results of the RMMC and RMBC joint ventures consolidated in 2004 under FIN 46R. This segment also includes the Coors Light® business in Canada that is conducted through a joint venture with Molson, Coors Canada, and the sale of Molson products in the United States that is conducted through a joint venture, Molson USA. The Americas also include the small amount of volume that is sold outside of the United States and its territories and Europe.
The Europe segment consists of our production and sale of the CBL brands, principally in the United Kingdom but also in other parts of the world; our joint venture arrangement relating to the production and distribution of Grolsch in the United Kingdom and Republic of Ireland; (consolidated under FIN 46R in 2004) and our joint venture arrangement for the physical distribution of products throughout Great Britain (Tradeteam). It also includes the sale of Coors Fine Light Beer® in the United Kingdom and Coors Light in the Republic of Ireland.
No single customer accounted for more than 10% of our sales. Inter-segment revenues are insignificant.
Summarized financial information concerning our reportable segments is shown in the following table:
Following is a reconciliation of amounts shown as income before income taxes, after minority interests, to income before income taxes and net income shown on the condensed consolidated
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statements of income. Minority interests exist in 2004 due to the consolidation of certain variable interest entities as a result of the adoption of FIN 46R (Note 2).
7. CAPE HILL BREWERY SALE
We sold our Cape Hill brewery property in May 2004 for £26 million (approximately $46 million at current exchange rates), with £6 million payable to us in 2004 and £20 million due in 2005. We received an initial payment of £500 thousand at closing and expect the sale to result in a one-time pretax gain of £4 million (approximately $7 million). We recorded an insignificant portion of the ultimate gain in the second quarter of 2004 under the installment method. We anticipate recording the remaining gain on sale in the fourth quarter of 2004 after the remaining 2004 payment has been received.
In 2002, we recorded charges related to the closing of our Cape Hill brewery, which were included in our purchase of CBL. Closure of the Cape Hill brewery commenced in July 2002 with the shut down of the kegging line. All production ceased in December 2002, at which time the assets were reclassified as held-for-sale. No impairment was taken on the assets, as their market value exceeded their carrying value. The payment of severance and other termination benefits started in July 2002 and will be completed in December 2004. We will reduce goodwill for unpaid restructuring liabilities upon completion of sale recognition in 2004.
8. CONTAINER OUTSOURCING ARRANGEMENT
CBL outsourced the ownership, procurement and tracking of its approximately 1.2 million kegs and casks with TrenStar, Inc. in the second quarter of 2004. TrenStar acquired CBL's keg and cask inventory and will provide ongoing container management services for Coors in the United Kingdom, including installation of radio frequency identification tags on each container and the use of container tracking technology under a 15-year service agreement. We received a cash payment of approximately £28 million ($50 million at current exchange rates) for our UK keg and cask inventory. An insignificant loss was recognized on the sale.
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9. GOODWILL AND OTHER INTANGIBLES
The following tables present details of our intangible assets as of June 27, 2004:
Based on average foreign exchange rates for the thirteen weeks ended June 27, 2004, the estimated future amortization expense of intangible assets is as follows:
Amortization expense of intangible assets was $11.8 million and $13.0 million for the twenty-six weeks ended June 27, 2004 and June 29, 2003, respectively.
As of June 27, 2004, goodwill was allocated between our reportable segments as follows:
Goodwill balances fluctuated from December 28, 2003, solely due to changes in currency rates.
Goodwill related to our joint venture investment with Molson in the United States was evaluated during the third quarter of 2003 under Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, (APB No. 18), and found not to be impaired. Since our acquisition of the joint venture interest, the venture has seen significant volume gains, but its operating results have not met our original expectations. Our partners and we continue to evaluate and refine the venture's strategy for 2004 and beyond, along with the implications that future assumptions for volume, costs and profit may have on our investment valuation. This goodwill is included in investments in joint ventures in the accompanying Condensed Consolidated Balance Sheet.
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10. DEBT
Our total long-term borrowings as of June 27, 2004, and December 28, 2003, were composed of the following:
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11. EMPLOYEE RETIREMENT PLANS
We implemented FASB Statement No. 132 (SFAS 132) Employers' Disclosures about Pensions and Other Postretirement Benefits (Revised 2003) in the fourth quarter of 2003 and incorporated its changes into our 2003 Annual Report on Form 10-K. SFAS 132 does not change the accounting and measurement for pensions and other postretirement benefits. It does add new disclosures for the footnotes to the financial statements, including quarterly reporting on Form 10-Q. We are required to include the following disclosures regarding our retirement plan benefit expenses:
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12. CHANGES IN CAPITAL STOCK AND PAID-IN CAPITAL
The following summarizes the changes in our capital stock and paid-in capital accounts during the first six months of 2004:
13. SUBSEQUENT EVENTS
Molson Coors Merger Agreement
On July 22, 2004, we announced that we had entered into a definitive agreement with Molson Inc. to combine in a merger of equals that will result in the world's fifth-largest brewing company by volume, with estimated combined beer sales of 51 million US barrels annually. The proposed merger is subject to approval by shareholders of both companies, the Supreme Court of Quebec, appropriate regulators and other authorities, as well as customary closing conditions.
Interest Rate Swap
On July 1, 2004, we entered into interest rate swap agreements related to $125 million of our 63/8% senior notes due 2012. The interest rate swaps converted $125 million notional amount from fixed rates to floating rates and mature in 2012. We will receive fixed US dollar interest payments semi-annually at a rate of 63/8% per annum and pay a rate to our counterparty based on a credit spread of 1.623% plus
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the six-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 $125 million of our 63/8% senior notes due 2012 attributable to changes in the LIBOR swap rates.
CBL Purchase Price Adjustment
In July 2004, we received £14 million (approximately $26 million at current exchange rates) from Interbrew, related to representations made by Interbrew when CBL was purchased in 2002. We are evaluating the accounting required in the third quarter related to our purchase price accounting at the time of the CBL acquisition.
Pub Dispense Equipment Outsourcing Agreement
CBL reached an agreement with Service Dispense Equipment Ltd. (SDE) to outsource the management and servicing of CBL's on-trade dispense equipment on August 2, 2004. Under the technical services agreement, which includes a ten year notice to terminate, SDE will acquire CBL's on-trade beverage dispense equipment for approximately £53 million in cash (approximately $95 million at current exchange rates) and provide ongoing maintenance and procurement services on such equipment in the United Kingdom. We expect to record a pretax loss of approximately £12 million (approximately $22 million at current exchange rates) from the sale of the assets.
CBL, Scottish Courage and Carlsberg UK will each own an equal voting interest in SDE, which will own and service the dispense equipment of all three brewers. SDE will contract with a separate business, Innserve Ltd., to perform day-to-day technical services, including on-trade cellar services, maintenance and installation of fonts, lines, coolers and other equipment used to dispense on-trade beverages.
The agreement is subject to the approval of the Office of Fair Trading (OFT) in the United Kingdom. If the agreement is approved by the OFT, the company expects the majority of its current technical services staff of 320 employees to join the workforce of Innserve Ltd. and the new technical services business to be fully operational by early 2005.
14. CONTINGENCIES
Environmental
When we determine that it is probable that a liability for environmental matters or other legal actions exists 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 are capitalized if they 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. Other environmental costs are expensed when incurred.
Lowry Superfund Site
We are 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 is managed by Waste Management of Colorado, Inc. (Waste Management). In 1990, we recorded a pretax charge of $30 million, a portion of which was put into a trust in 1993 as part of a settlement with Denver and Waste Management regarding the then outstanding litigation. Our settlement was based on an assumed cost of $120 million (in 1992 adjusted dollars). We are obligated to pay a portion of future costs in excess of that amount.
In January 2004, Waste Management provided us with updated annual cost estimates through 2032. We reviewed these cost estimates, in conjunction with a third-party expert, in the assessment of our
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accrual related to this issue. We used certain assumptions that differ from Waste Management's estimates to assess our expected liability. Our expected liability is based on our and the third-party's best estimates available.
The assumptions used are as follows:
Based on these assumptions, the present value and gross amount of the discounted costs are approximately $1.4 million and $3.3 million, respectively. We did not assume any future recoveries from insurance companies in the estimate of our liability. We believe that the existing accrual is adequate as of June 27, 2004.
Considering that the estimates extend through the year 2032 and the related uncertainties at the site, including what additional remedial actions may be required by the EPA, new technologies, and what costs are included in the determination of when the $120 million threshold is reached, the estimate of our liability may change as facts further develop. We cannot predict the amount of any such change, but additional accruals in the future are possible.
Other Environmental
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.
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.
While we cannot predict the eventual aggregate cost for 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.
Litigation and Other Disputes
Coors and many other brewers and distilled spirits manufacturers have been sued in several courts regarding advertising practices and underage consumption. The suits have all been brought by the same law firm and allege that each defendant intentionally marketed its products to "children and other underage consumers." In essence, each suit seeks, on behalf of an undefined class of parents and guardians, an injunction and unspecified money damages. We will vigorously defend this litigation and it is not possible at this time to estimate the possible loss or range of loss, if any, in these lawsuits.
We are involved in other disputes and legal actions arising in the ordinary course of our business. While it is not feasible to predict or determine the outcome of these proceedings, in our opinion, based on a review with legal counsel, none of these disputes and legal actions is expected to have a material impact on our consolidated financial position, results of operations or cash flows. However, litigation is
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subject to inherent uncertainties, and an adverse result in these or other matters, including the above-described advertising practices case, may arise from time to time that may harm our business.
Golden Brewery Accident
In February 2004, we experienced an accident at our Golden brewery operation that resulted in injuries to three employees, extensive property damage, and a shutdown of the brewery operation for a short amount of time. We maintain insurance coverage for these types of events; including coverage for costs we incurred to avoid any business interruption. We recorded a loss of $2.0 million during the first quarter of 2004 for cleanup, repairs, and losses from the impairment of long-lived assets. We continued our cleanup and repair efforts in the second quarter of 2004. Our costs and losses are fully insured, but we anticipate that our full-year 2004 financial results will be negatively impacted by approximately $2.0 million, representing our insurance deductibles. These costs will be offset in the Condensed Consolidated Statements of Income by gains associated with insurance recoveries for costs that are being capitalized to property, plant and equipment. FASB Interpretation No. 30, Accounting for Involuntary Conversions of Nonmonetary Assets to Monetary Assets, clarifies that if insurance reimbursements are collected for costs that were capitalized to the balance sheet, those reimbursements are to be treated as gains, as opposed to reducing that book basis of the related assets. We anticipate that we will recognize gains in the current year of $2.0 million to $4.0 million from the insurance proceeds we receive for costs incurred for capital assets purchased as a part of the project to restore the damaged area.
15. SUPPLEMENTAL GUARANTOR INFORMATION
On May 7, 2002, a wholly-owned subsidiary of ours, CBC (Issuer), completed a private placement of $850 million principal amount of 63/8% Senior notes due 2012. The notes were issued with registration rights and were guaranteed on a senior and unsecured basis by Adolph Coors Company (Parent Guarantor) and certain domestic subsidiaries (Subsidiary Guarantors). The guarantees are full and unconditional and joint and several. A significant amount of the Issuer's 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 for the purpose of meeting its debt service obligation including the payment of principal and interest on the notes.
Simultaneously with the private placement, we entered into a registration rights agreement pursuant to which we registered the exchange of the notes for substantially identical notes. The exchange of all the notes was completed on September 16, 2002.
The following information sets forth our Condensed Consolidating Balance Sheets as of June 27, 2004, and December 28, 2003, and the Condensed Consolidating Statements of Income for the thirteen and twenty-six weeks ended June 27, 2004, and June 29, 2003, and the Condensed Consolidating Statements of Cash Flows for the twenty-six weeks ended June 27, 2004, and June 29, 2003. Investments in our subsidiaries are accounted for on the equity method; accordingly, entries necessary to consolidate the Parent Guarantor, Issuer, and all of its subsidiaries are reflected in the eliminations column. Separate complete financial statements of the Issuer and the Subsidiary Guarantors would not provide additional material information that would be useful in assessing their financial composition.
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ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF INCOMEFOR THE THIRTEEN WEEKS ENDED JUNE 27, 2004 (IN THOUSANDS, UNAUDITED)
ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF INCOMEFOR THE THIRTEEN WEEKS ENDED JUNE 29, 2003 (IN THOUSANDS, UNAUDITED)
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ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF INCOMEFOR THE TWENTY-SIX WEEKS ENDED JUNE 27, 2004 (IN THOUSANDS, UNAUDITED)
ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF INCOMEFOR THE TWENTY-SIX WEEKS ENDED JUNE 29, 2003 (IN THOUSANDS, UNAUDITED)
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ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEETSAS OF JUNE 27, 2004(In thousands, unaudited)
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ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEETSAS OF DECEMBER 28, 2003(In thousands, unaudited)
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ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE TWENTY-SIX WEEKS ENDED JUNE 27, 2004(In thousands, unaudited)
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ADOLPH COORS COMPANY AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE TWENTY-SIX WEEKS ENDED JUNE 29, 2003(In thousands, unaudited)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
Overall, our second quarter results showed improving trends in several key areas of the business, but a few, largely temporary, factors negatively impacted our overall results. Improved pricing in our major markets, solid margin and profit growth in the United Kingdom, continued strong performance of our Coors Light business in Canada, and favorable foreign exchange rates drove higher operating income in the quarter. These positive factors were partially offset by the negative impacts of US distributor inventory dynamics and higher logistics-related costs in our Americas business.
In the Americas, while our sales to retail declined slightly in the first half of the year, our sales to wholesalers declined 5.2% in the second quarter and 3.0% in the first half of the year, due to a significant year-over-year shift in distributor inventory patterns. US retail volume declines were focused in select markets—particularly in Pennsylvania and Texas—where we face unique local issues. Sales to retail grew during the quarter in five of our seven largest states, including California and New Jersey, where trends rebounded from declines early in the year.
In our Europe segment, volume growth in the second quarter was challenged by the lapping of heavy off-trade price discounting last year, along with a retailer inventory load-in during the first quarter this year ahead of a U.K excise tax increase. Nevertheless, we grew volume during the quarter, led by high-single-digit growth of Carling®, the number-one selling UK beer brand.
In addition, our consolidated earnings per share were negatively impacted by a higher tax rate this year versus a one-time reduction in our effective tax rate last year, as well as higher diluted shares outstanding this year.
Results of Operations
This discussion summarizes the significant factors affecting our consolidated results of operations, liquidity, and capital resources for the thirteen and twenty-six week periods ended June 27, 2004, and June 29, 2003, respectively, and should be read in conjunction with the financial statements and notes thereto included elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 28, 2003. Our results in the first half of 2004 are affected by the adoption of FIN 46R, which required consolidation of some of our joint ventures. (See Note 2 in the accompanying financial statements.)
THE AMERICAS SEGMENT RESULTS OF OPERATIONS
The Americas segment is focused on the production, marketing, and sales of the Coors portfolio of brands in the United States and its territories, including the results of the RMMC and RMBC joint ventures consolidated in 2004 under FIN 46R. This segment also includes the Coors Light business in Canada that is conducted through a partnership with Molson, Coors Canada, and the sale of Molson products in the United States that is conducted through a joint venture, Molson USA. The Americas also include the small amount of Coors brand volume that is sold outside of the United States and its territories and Europe. During the second quarter of 2004, Cerveceria Cuauhtemoc Moctezuma, S.A.
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de C.V., a subsidiary of FEMSA Cerveza, was appointed the sole and exclusive importer, marketer, seller and distributor of Coors Light in Mexico.
Foreign Currency Impact on 2004 Results
In the first half of 2004, our Americas segment benefited from a 6.8% year-over-year increase in the value of the Canadian dollar (CAD) against the US dollar. In the second quarter of 2004, the increase was 2.6%. As a result of this exchange-rate fluctuation, income before income taxes deriving from the Coors Canada partnership is higher by approximately $1.8 million year-to-date and approximately $0.3 million for the quarter.
Net sales and volume
For the thirteen weeks ended June 27, 2004, net sales in the Americas totaled $679 million, 1.8% lower than the same period in 2003. For the twenty-six weeks ended June 27, 2004, net sales in the Americas were flat against the comparable period in the prior year. Barrel sales were 5.2% and 3.0% lower quarter-over-quarter and year-over-year, respectively. For the first half of 2004, sales to retail have declined less than 1%. The 5.2% decline in sales to wholesalers during the second quarter of 2004, compared to the second quarter of 2003, was due primarily to a 300,000-barrel swing in distributor inventory patterns. Our distributors started the second quarter of 2004 approximately 150,000 barrels higher than a year earlier, and they ended the quarter approximately 150,000 barrels lower than a year ago. This year-over-year inventory shift impacted second quarter Americas results by approximately $15 million through lower sales and fixed-cost inefficiency. Volume has been the primary challenge to sales revenue and profit growth in 2004. We have introduced new products to meet the demand for low-carbohydrate beers. Our net sales per barrel have increased 3.6% in the second quarter of 2004 and 3.1% for the year-to-date due to successful price increases and lower price promotion activity, positive brand mix, and strong results from the Coors Canada business.
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Cost of goods sold and gross profit
Cost of goods sold decreased 2.9% to $390 million in the second quarter of 2004 from $401 million in the second quarter of 2003. Year-to-date in 2004, cost of goods sold has decreased 2% compared to the first half of 2003. However, on a per-barrel basis, cost of goods sold increased 2.4% quarter-over-quarter and 1.1% year-over-year. The increase per barrel in 2004 is driven by the de-leveraging of fixed costs from lower volumes, higher outbound freight costs and costs related to the retrieval and disposal of finished goods inventory, which were about $7 million higher in the second quarter of 2004 than a year ago. These costs were, in part, the result of our focus on improving customer service through the first half of the year following our supply chain disruptions late last year. To ensure high order-fill rates, we deployed unusually high levels of inventory—particularly of our new products—throughout our distribution system earlier in the year. We continue to realize cost savings from our operations costs initiatives, offset by higher freight, pension, healthcare and other overhead costs in 2004.
Gross profit decreased less than 1% in the quarter compared to last year, primarily due to factors discussed above, but is 3.0% higher than prior year-to-date, due to lower relative costs on a year-to- year basis.
Marketing, general and administrative expenses
Marketing, general and administrative expenses decreased 0.7% to $200 million in the second quarter of 2004 from $201 million in 2003. We account for advertising spending according to the sales curve method, under which expense is spread throughout the year in relation to expected annual sales volume. The decline in marketing, general and administrative expenses in the quarter is the result of the significant US volume decline which, in turn, was the result of changes in inventory patterns. Year-to-date in 2004, marketing, general and administrative expenses have increased 2.3%, compared to 2003. The overall increase is mainly due to additional marketing investments in Coors Light and Aspen Edge™, in addition to higher pension, healthcare and information systems depreciation.
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THE EUROPE SEGMENT RESULTS OF OPERATIONS
The Europe segment consists of our production and sale of the CBL brands (principally in the United Kingdom but also in other parts of the world), our joint venture arrangement relating to the distribution of Grolsch in the United Kingdom and Republic of Ireland (consolidated under FIN 46R in 2004), and our joint venture arrangement for the physical distribution of products throughout Great Britain (Tradeteam). It also includes the sale of Coors Fine Light Beer in the United Kingdom and Coors Light in the Republic of Ireland.
Foreign currency impact on 2004 results
In the second quarter of 2004, our Europe segment benefited from an 11.6% year-over-year increase in the value of the British pound sterling (GBP) against the US dollar. In the first half of 2004, our Europe segment benefited from a 13.1% increase in the GBP. Partially as a result of this exchange rate fluctuation, all results from our Europe segment in 2004 are significantly higher than in
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the prior year. The following table summarizes the approximate effect this change in exchange rate had on the Europe segment pre-tax results in 2004:
Net sales from the Europe segment totaled $471 million in the second quarter of 2004, 15.4% higher than the same period last year. Net sales year-to-date are higher by 20.5%, compared to 2003. Per barrel net sales increased 14.5% in the quarter and 16.7% for the year. Volume grew 0.8% quarter-over-quarter and 3.2% year-to-date. Second quarter volume was relatively flat against 2003 as a result of the load-in of retail inventories in advance of an excise tax increase late in the first quarter of 2004 and the comparison to a high-growth quarter in 2003, driven in part by aggressive off-trade discounting in the first half of last year. Revenues per barrel increased as a result of currency appreciation, increases in pricing in both the on- and the off-trade, and an increase in the level of factored brand sales, which are included within our net sales and cost of goods sold figures, but not recorded within our reported volumes. While the factored brand volume increase had a positive impact on net sales, there was a small negative impact on margin as a result of a mix shift to lower margin customers.
Cost of goods sold was $313 million in the second quarter of 2004, 11.2% higher than last year's second quarter. Cost of good sold for the first half of 2004 was 17.3% higher than last year. On a per-barrel basis, cost of goods sold increased 10.3% in the quarter and 13.6% year-to-date. Increases in cost of goods sold are due to currency appreciation, the increased factored brand volume, and the implementation of FIN 46R in 2004 (See Note 2 in the accompanying financial statements).
Gross profit increased 24.8% to $158.2 million compared to the second quarter last year and 28.3% year-to-date, as a result of the factors noted above.
Second quarter 2004 marketing, general and administrative expenses were $111.3 million, an increase of approximately 21.7% over second quarter 2003. Year-over-year, marketing, general and administrative expenses increased 21.6%. This increase was as a result of the currency appreciation, the implementation of FIN 46R in 2004 and spending related to restructuring our sales organization.
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Other income (expense), net
Second quarter other income decreased $1.7 million, largely as a result of non-recurring gains on the sale of assets last year. Year-to-date, we experienced losses from our Tradeteam venture related to the write-off of equipment in the first quarter of 2004, as compared to income reflected in 2003.
CORPORATE
Corporate includes interest and certain other general and administrative costs that are not allocated to either the Americas or Europe operating segments. Corporate contains no sales or cost of goods sold, although certain royalty income and intangible administrative costs are absorbed by Corporate. The majority of these corporate costs relates to worldwide finance and administrative functions, such as corporate affairs, legal, human resources, insurance and risk management.
Marketing, general and administrative expenses increased 51.3% to $10.9 million in the second quarter of 2004, compared to the second quarter of 2003. Year-to-date, marketing, general and administrative expenses increased 41.9%. Increases are primarily due to higher pension, healthcare, incentive compensation and other labor costs in 2004.
Interest expense
Interest expense decreased $5.1 million in the second quarter of 2004 versus the comparable 2003 period. Year-to-date, interest expense decreased $6.0 million or 13.9%. The decrease is largely due to lower debt balances, partially offset by the negative impact of the British pound exchange rate and the effect of FIN 46R discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary sources of liquidity are cash provided by operating activities and external borrowings. As of June 27, 2004, primarily because of the seasonalilty of our major businesses, we had negative
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working capital of $47.4 million compared to negative working capital of $54.9 million at December 28, 2003. We had total cash of $36.2 million at June 27, 2004, compared to $19.4 million at December 28, 2003, mainly due to cash acquired when our joint ventures were consolidated in the first quarter of 2004.
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. However, our liquidity could be impacted significantly by a decrease in demand for our products, which could arise from competitive circumstances, a decline in the acceptability of alcohol beverages, or any of the other factors we describe in the section entitled "Risk Factors."
We continue to evaluate opportunities to supplement our operating cash flow through potential monetizations of assets. During the second quarter of 2004, CBL outsourced the ownership, procurement and tracking of its approximately 1.2 million kegs and casks with TrenStar, Inc. in the second quarter of 2004. As a result, we received a cash payment of approximately £28 million ($50 million at current exchange rates). We are evaluating other such efforts, both in the United States and in the United Kingdom, involving either an outsourcing of services which combines a superior long-run business model for a given activity with an asset monetization, or simply sales of idle assets, such as real estate. Success in accomplishing these types of efforts results in faster reduction of outstanding debt. We also have credit facilities that contain financial and operating covenants, and provide for scheduled repayments, that could impact our liquidity on an ongoing basis. During the six months ended June 27, 2004, we made debt repayments of approximately $168 million.
Operating activities
Net cash provided by operating activities of $154.6 million for the twenty-six weeks ended June 27, 2004, decreased $7.0 million from the comparable period last year. The decrease was primarily attributable to higher current taxes paid in 2004 versus the prior year due to the finalization of various tax audits to our favor in 2003.
Investing activities
During the thirteen weeks ended June 27, 2004, net cash used in investing activities was $9.2 million compared to $98.7 million net cash used in the same period last year. This improvement was attributable to reduced capital spending in 2004 and the sale of the kegging assets in the United Kingdom. Also, we presented as an investing activity the inclusion of the opening cash balances of the joint ventures we began consolidating during the first quarter of 2004 as a result of implementing FIN 46R (see Note 2).
Financing activities
Net cash used in financing activities was $130.3 million for the twenty-six weeks ended June 27, 2004, compared to $109.4 million net cash used for the same period last year. The change is mainly the result of increased repayments of debt in 2004, offset by increased stock option exercises in the first half of 2004. We have also included a new item, "Dividends paid to minority interest holders," in the Financing activities section of our Condensed Consolidated Statements of Cash Flows. This item represents distributions from our joint ventures consolidated as a result of FIN 46R to the minority interest holders in those joint ventures. There is no net impact to cash flows as a result of the adoption of FIN 46R. However, from a year-over-year comparison standpoint, cash flows from operating activities have been increased and cash flows from financing activities have been decreased as a result of classifying dividends paid to minority interest holders in financing activities.
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EFFECTIVE TAX RATE VOLATILITY
We do not provide deferred taxes on all outside basis differences in our acquired UK subsidiaries stock in accordance with SFAS 109 paragraph 31(a). Outside basis differences arise from differences in the US GAAP accounting ("Book") and US tax accounting ("Tax") for investments in foreign subsidiaries. Some examples of significant Book/Tax differences at our acquired UK subsidiaries include pension expense, goodwill amortization, depreciation and gain or loss on sale of assets. Fluctuations in these Book/Tax differences cause our tax rate to be volatile. For example, a UK asset sale in which the tax gain is $10 million more than the Book gain would cause our full year tax rate for 2004 to increase by 1.3%, assuming EBIT and UK taxes remain unchanged. The impact on the quarterly tax rate from such a sale would be significantly greater in the quarter in which it occurred.
Other factors that can significantly impact our tax rate include permanent reinvestment of earnings, changes in the levels of foreign deferred taxes, unutilized foreign tax credits, and a lack of tax benefits for losses at foreign subsidiaries. In computing our tax rate, we use our best estimate of annual EBIT, but do not include an estimate of future discrete events that may or may not occur during the year.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Contractual cash obligations as of June 27, 2004:
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Other commercial commitments:
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. From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by forward-looking words such as "expect," "anticipate," "plan," "believe," "seek," "estimate," "outlook," "trends," "future benefits," "strategies," "goals" and similar words. In addition, 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Outlook for 2004" including, but not limited to, statements relating to our overall volume trends, consumer preferences, pricing trends and industry forces, cost reduction strategies and anticipated results, our expectations for funding our 2004 capital expenditures and operations, debt service capabilities, shipment levels and profitability, market share and the sufficiency of capital to meet working capital, 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. In particular, our future results could be affected by the substantial amount of indebtedness remaining from financing the acquisition of the CBL business in the United Kingdom, 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 in our business and place us at a competitive disadvantage relative to less leveraged competitors. 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. We do not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. 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.
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 28, 2003, report on
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Form 10-K. You should consider carefully the following factors and the other information contained within this document. The most important factors that could influence the achievement of our goals and could cause actual results to differ materially from those expressed in the forward-looking statements, include, but are not limited to, the following:
Risks specific to the Americas Segment
Risks specific to the Europe Segment
The foregoing list of important factors is not all-inclusive.
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OUTLOOK FOR 2004
Americas
In the Americas, our focus is solidly on reinvigorating US volume growth, both of our portfolio in general, and of Coors Light, specifically. We have new creative advertising for both Coors Light and Aspen Edge to air in the second half of 2004, and we have targeted initiatives designed to drive growth in our core markets. Positive factors for the balance of the year include strong pricing in the United States and an expectation of continued solid performance in our Canadian business.
For the balance of the year, we believe that the effects of inventory dynamics are largely behind us, although inventory patterns are hard to predict, as we are still in the first year of our new supply-chain systems. Our wholesale customers, taking advantage of our new ordering tools and more reliable product supply, appear to be comfortable with modestly lower inventories than they have had in the past. Finished goods losses were a significant factor in the second quarter, accounting for a year-on-year cost increase of approximately $7 million. While we believe this issue is largely behind us, we are still learning to use and optimize our new supply-chain systems and look for continued improvements as the year progresses. Our cost outlook for the balance of the year will continue to be impacted by increases in transportation rates and packaging materials costs, which are often hard to predict.
During second half of 2004, we are expecting MG&A spending to trend higher due to investments in sales efforts and support for Aspen Edge.
Europe
We anticipate volume trends to soften significantly in the third quarter as we lap unusually hot weather in the United Kingdom last year, combined with a drop off in volume after the Euro 2004 football tournament in June. Fourth quarter volume trends in the off-trade, however, should improve due to easier comparisons from the prior year.
Year-over-year margin trends in the on-trade are anticipated to improve for the balance of the year; while year-over-year margins in the off-trade will slow as we start to lap the better balance of volume and pricing achieved in the second half of 2003.
We believe that the impact of movements in factored brand sales will continue to have a negative impact on profits in the second half of the year.
The implementation of FIN46R will continue to reduce cost of goods sold and increase marketing, general and administrative expenses in the second half of the year.
We expect marketing, general and administrative costs to continue to increase as a result of the implementation of FIN 46R, increases in marketing support for our brands, including the continued roll out of Coors Fine Light Beer, increased depreciation and maintenance costs on the dispense equipment supporting our on-trade growth, and increased information systems costs.
In the third quarter we will be lapping a $3.5 million gain on the 2003 sale of the rights to our Hooper's Hooch brand in Russia. In the fourth quarter we expect to book a one-time pretax gain of approximately $7 million from the sale of our Cape Hill brewery site.
The results for the Europe segment will also continue to be highly susceptible to fluctuations in the value of the British pound versus the US dollar.
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Corporate Outlook
We estimate that the new FIN46R accounting standard will have no significant impact on our full-year earnings. Above the bottom line, however, operating and pretax income will tend to be higher because the minority owners' share of joint venture income is now included in these totals, while in prior years, only our share was included. The quarterly impact on cost of goods sold, marketing, general and administrative and interest expense will also be significant, with the magnitude dependent on the performance of our container and Grolsch operating ventures.
Molson Coors Merger
We believe we must broaden and strengthen our business on a global basis. With this imperative in mind, we announced in July our definitive agreement to merge with Molson Inc. By combining these two great brewing organizations, we are creating a stronger, more diversified company that will have the organizational scale and financial strength to compete effectively in the consolidating global beer industry and build value for our shareholders. The proposed merger is subject to approval by shareholders of both companies, the Supreme Court of Quebec, appropriate regulators and other authorities, as well as customary closing conditions.
We are on track to achieve debt reduction in excess of $250 million in 2004. This does not include any monetization projects completed in the back half of the year which, if completed, could raise our 2004 debt reduction performance. We also currently estimate capital spending in the range of $220 to $235 million for the year.
We entered into interest rate swap agreements related to $125 million of our 63/8% senior notes due 2012 in July. The interest rate swaps converted the $125 million notional amount from fixed rates to floating rates and mature in 2012.
Income Taxes
We anticipate that our 2004 effective tax rate will be in the range of 21% to 23%, after taking into account the tax impact of the recently announced sale of UK pub dispense equipment. Our effective tax rate is approximately 10% less than our 2003 rate due to the tax effect of the sale of the pub equipment. Future events—including similar asset monetizations—could alter our tax-rate outlook for 2004 and later years.
Earnings Per Share
Basic and diluted shares outstanding continue to trend higher so far this year due to the combination of new issuances of options, option exercises and a higher stock price.
CBL reached an agreement with Service Dispense Equipment Ltd. (SDE) to outsource the management and servicing of CBL's on-trade dispense equipment on August 2, 2004. Under the technical services agreement, which includes a ten year notice to terminate, SDE will acquire CBL's
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on-trade beverage dispense equipment for approximately £53 million (approximately $95 million at current exchange rates) in cash and provide ongoing maintenance and procurement services on such equipment in the United Kingdom. We expect to record a pretax loss of approximately £12 million (approximately $22 at current exchange rates) from the sale of the assets.
The agreement is subject to the approval of the Office of Fair Trading (OFT) in the United Kingdom. If the agreement is approved by the OFT, the company expects the majority of its current technical services staff of 320 employees to join the workforce of Innserve Ltd. And the new technical services business to be fully operational by early 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to fluctuations in interest rates, foreign currencies and the prices of production and packaging materials. We have established policies and procedures to govern the strategic management of these exposures through a variety of financial instruments. By policy, we do not enter into any contracts for the purpose of trading or 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 our earnings and cash flows affected by potential changes in 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. Our primary foreign currency exposures are British pound sterling (GBP), Canadian dollar (CAD) and Japanese yen (YEN).
Derivatives are either exchange-traded instruments, or over-the-counter agreements entered into with highly rated financial institutions. No losses on over-the-counter agreements due to counterparty credit issues are anticipated. All over-the-counter agreements are entered into with counterparties rated no lower than A (S&P) or A2 (Moody's). In some instances, our counterparties and we have reciprocal collateralization agreements regarding 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 our counterparties or us exceeds a certain amount. At June 27, 2004, no collateral was posted by our counterparties or us.
At June 27, 2004, we were a party to certain cross currency swaps totaling 530 million GBP (approximately $774 million at original prevailing foreign currency exchange rates). The swaps included an initial exchange of principal on May 7, 2002, and will require final principal exchange 10 years later. The swaps also call for an exchange of fixed GBP interest payments for fixed US dollar interest receipts. At the initial principal exchange, we paid US dollars to a counterparty and received GBP. Upon final exchange, we will provide GBP to the counterparty and receive US dollars. The cross currency swaps have been designated as cash flow hedges of the changes in value of the future GBP interest and principal receipts that results from changes in the US dollar to GBP exchange rates on an intercompany loan between two of our subsidiaries.
At June 27, 2004, we were a party to an interest rate swap agreement related to our 6?% fixed rate debt. The interest rate swap converted $76.2 million notional amount from fixed rates to floating rates and matures in 2012. We will receive fixed US dollar interest payments semi-annually at a rate of 6?% per annum and pay a rate to our counterparty based on a credit spread of 0.789% plus the three-
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month LIBOR rate, thereby exchanging a fixed interest obligation for a floating 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 fixed-rate debt attributable to changes in the LIBOR swap rates. On July 1, 2004, we entered into another interest rate swap agreement related to our 6?% senior notes due 2012. We designated the interest rate swap as a fair value hedge of the changes in the fair value of $125 million of our 6?% 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 Securities and Exchange Commission (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 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.
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 $5.4 million and $5.9 million at June 27, 2004, and December 28, 2003, respectively. 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 our inter-company loan, the underlying transaction being hedged. The hypothetical loss in fair value attributable to the interest rate component would be deferred until termination or maturity.
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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.
Maturities of derivative financial instruments held on June 27, 2004, are as follows (in thousands):
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.
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The following table presents the results of the sensitivity analysis of our derivative and debt portfolio:
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of June 27, 2004, and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
Changes in internal control over financial reporting
There were no changes in internal controls in the second quarter that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting. We are well into the process of identifying and testing controls that will form the basis for management's evaluation of our internal control over financial reporting for the year ending December 26, 2004. Although this process is not complete, management is continuing to evaluate the company's internal controls for gaps and potential deficiencies.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in certain disputes and legal actions arising in the ordinary course of our business. While it is not feasible to predict or determine the outcome of these proceedings, in our opinion, based on a review with legal counsel, none of these disputes and legal actions is expected to have a material impact on our consolidated financial or other position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and an adverse result in these matters, including the advertising practices case described below, could arise that may harm our business.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following are filed as a part of this Report on Form 10-Q:
Condensed Consolidated Statements of Income for the quarterly and semi-annual periods ended June 27, 2004 and June 29, 2003
Condensed Consolidated Balance Sheets at June 27, 2004 and December 28, 2003
Condensed Consolidated Statements of Cash Flows for the semi-annual periods ended June 27, 2004 and June 29, 2003
Notes to Condensed Consolidated Financial Statements
The Company filed a Current Report on Form 8-K dated April 9, 2004, regarding the proposed candidacy of Peter H. Coors for the United States Senate.
The Company filed a Current Report on Form 8-K dated April 22, 2004, regarding expected earnings for the first quarter of fiscal year 2004 ended March 28, 2004.
The Company filed a Current Report on Form 8-K dated May 21, 2004, regarding the outsourcing agreement with TrenStar, Inc.
The Company filed a Current Report on Form 8-K dated June 9, 2004, regarding the sale of the property related to the former Cape Hill brewery.
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.
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Exhibit Index
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