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 27, 1999
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 4, 1999:
Class A Common Stock - 1,260,000 shares
Class B Common Stock - 35,548,244 shares
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Thirteen weeks ended
June 27, June 28,
1999 1998
(In thousands, except per share data)
Sales - domestic and international $690,691 $654,893
Less: beer excise taxes 115,123 112,949
Net sales 575,568 541,944
Cost of goods sold 315,220 309,788
Gross profit 260,348 232,156
Marketing, general and administrative 186,638 167,507
Operating income 73,710 64,649
Other income - net 1,769 167
Income before income taxes 75,479 64,816
Income tax expense 29,248 25,278
Net income $ 46,231 $ 39,538
Net income per common share - basic $ 1.26 $ 1.09
Net income per common share - diluted $ 1.23 $ 1.06
Weighted average number of outstanding
common shares - basic 36,741 36,158
Weighted average number of outstanding
common shares - diluted 37,435 37,320
Cash dividends declared and paid per
common share $ 0.165 $ 0.150
See notes to consolidated financial statements.
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Twenty-six weeks ended
June 27, June 28,
1999 1998
(In thousands, except per share data)
Sales - domestic and international $1,216,525 $1,155,907
Less: beer excise taxes 201,095 199,818
Net sales 1,015,430 956,089
Cost of goods sold 587,602 572,117
Gross profit 427,828 383,972
Marketing, general and administrative 335,996 304,327
Operating income 91,832 79,645
Other income - net 3,209 1,214
Income before income taxes 95,041 80,859
Income tax expense 36,828 31,535
Net income $ 58,213 $ 49,324
Net income per common share - basic $ 1.59 $ 1.36
Net income per common share - diluted $ 1.55 $ 1.32
Weighted average number of outstanding
common shares - basic 36,700 36,288
Weighted average number of outstanding
common shares - diluted 37,495 37,368
Cash dividends declared and paid per
common share $ 0.315 $ 0.300
See notes to consolidated financial statements.
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 27, December 27,
1999 1998
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 215,405 $ 160,038
Short-term marketable investments 31,038 96,190
Accounts and notes receivable, net 190,652 126,609
Inventories:
Finished 49,576 38,520
In process 26,567 24,526
Raw materials 9,998 34,016
Packaging materials 8,753 5,598
Total inventories 94,894 102,660
Other assets 73,410 63,494
Total current assets 605,399 548,991
Properties, at cost and net 721,809 714,441
Long-term marketable investments 26,426 31,444
Other assets 225,161 165,722
Total assets $ 1,578,795 $ 1,460,598
See notes to consolidated financial statements. (Continued)
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 27, December 27,
1999 1998
(In thousands)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 222,907 $ 143,899
Accrued expenses and other liabilities 226,202 200,013
Current portion of long-term debt 15,000 40,000
Total current liabilities 464,109 383,912
Long-term debt 105,000 105,000
Deferred tax liability 61,025 65,779
Other long-term liabilities 129,847 131,109
Total liabilities 759,981 685,800
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: 35,516,406 in
1999 and 35,395,306 in 1998) 8,456 8,428
Total capital stock 9,716 9,688
Paid-in capital 10,453 10,505
Retained earnings 802,986 756,531
Accumulated other comprehensive loss (4,341) (1,926)
Total shareholders' equity 818,814 774,798
Total liabilities and shareholders' equity $ 1,578,795 $ 1,460,598
See notes to consolidated financial statements. (Concluded)
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six weeks ended
June 27, June 28,
1999 1998
(In thousands)
Cash flows from operating activities:
Net income $ 58,213 $ 49,324
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of joint ventures (15,897) (16,526)
Depreciation and amortization 64,366 57,771
Loss on sale or abandonment of
properties 2,194 1,462
Deferred income taxes (5,610) (3,159)
Change in operating assets and liabilities (7,253) 6,781
Net cash provided by operating
activities 96,013 95,653
Cash flows from investing activities:
Purchases of investments (4,170) (13,165)
Sales and maturities of investments 74,009 35,342
Capital expenditures (79,259) (37,439)
Proceeds from sales of properties 210 404
Distributions from joint ventures 8,485 4,969
Other 753 (343)
Net cash provided by (used in)
investing activities 28 (10,232)
Cash flows from financing activities:
Issuances of stock under stock plans 8,937 2,814
Purchases of stock (13,308) (25,582)
Dividends paid (11,607) (10,920)
Payment of current portion of long-term debt (25,000) (27,500)
Other 506 (76)
Net cash used in financing activities (40,472) (61,264)
Cash and cash equivalents:
Net increase in cash and cash equivalents 55,569 24,157
Effect of exchange rate changes on
cash and cash equivalents (202) (127)
Balance at beginning of year 160,038 168,875
Balance at end of quarter $ 215,405 $ 192,905
See notes to consolidated financial statements.
ADOLPH COORS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 27, 1999
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 27, 1999, and
the results of its operations and its cash flows for the thirteen and twenty-
six weeks ended June 27, 1999. 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 27, 1998. The results of operations for the thirteen and
twenty-six weeks ended June 27, 1999 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.
Hedging transactions - In the normal course of business, the Company is
exposed to changes in interest rates, fluctuations in the value of foreign
currencies and fluctuations in production and packaging materials prices. The
Company has established policies and procedures that govern the management of
these exposures through the use of a variety of financial instruments. The
Company employs various financial instruments including forward exchange
contracts, options and swap agreements to manage certain of the exposures that
it considers practical to do so. By policy, the Company does not enter into
such contracts for the purpose of speculation or use leveraged financial
instruments.
The Company's objective in managing its exposure to changes in interest rates,
fluctuations in foreign currency exchange rates and fluctuations in production
and packaging materials prices is to decrease the volatility of earnings and
cash flows associated with changes in the applicable rates and prices. To
achieve this objective, the Company primarily enters into forward exchange
contracts, options and swap agreements whose values change in the opposite
direction of the anticipated cash flows. Derivative instruments related to
forecasted transactions are considered to hedge future cash flows, and the
effective portion of any gains or losses are included in other comprehensive
income until earnings are affected by the variability of cash flows. Any
remaining gain or loss is recognized currently in earnings. The cash flows of
the derivative instruments are expected to be highly effective in achieving
offsetting cash flows attributable to fluctuations in the cash flows of the
hedged risk. If it becomes probable that a forecasted transaction will no
longer occur, the derivative will continue to be carried on the balance sheet
at fair value, and gains and losses that were accumulated in other
comprehensive income will be recognized immediately in earnings. If the
derivative instruments are terminated prior to their expiration dates, any
cumulative gains and losses are deferred and recognized in income over the
remaining life of the underlying exposure. If the hedged assets or liabilities
were to be sold or extinguished, the Company would recognize the gain or loss
on the designated financial instruments currently in income. Instruments
entered into that relate to existing foreign currency assets and liabilities
do not qualify for hedge accounting in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (FAS 133) as they relate to existing assets and
liabilities denominated in a foreign currency. The gains and losses on both
the derivatives and the foreign-currency-denominated assets and liabilities
are recorded currently in earnings.
To manage its exposures, the Company has entered into various financial
instruments including forward exchange contracts, options and swap agreements.
The Company has designated these instruments as cash flow hedges. The Company
has partially hedged its exposure to the variability in future cash flows
relating to fluctuations in interest rates, foreign exchange rates and certain
production and packaging materials prices for terms extending from July 1999
through March 2002.
The Company adopted FAS 133 as of January 1999. The impact on the Company's
financial position and results of operations are considered to be immaterial.
Statements of cash flows - Cash paid for interest for the six months ended
June 27, 1999 and June 28, 1998, was $5.9 million and $7.6 million,
respectively. Cash paid for income taxes for the six months ended June 27,
1999 and June 28, 1998, was $5.3 million and $22.3 million, respectively.
During the six month periods ended June 27, 1999 and June 28, 1998, ACC issued
restricted common stock under its management incentive program resulting in
non-cash increases to the equity accounts of $0.3 million and $2.5 million,
respectively. Also during the second quarter of 1999 and 1998, equity was
increased by the non-cash tax effects of the issuances of stock under the
Company's stock plans of $5.5 million and $6.7 million, respectively.
Reclassifications - Certain reclassifications have been made to the 1998
financial statements to conform with the 1999 presentation.
3. EARNINGS PER SHARE (EPS)
Basic and diluted net income per common share were arrived at using the
calculations outlined below:
Thirteen weeks ended Twenty-six weeks ended
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
(In thousands, except per share data)
Net income available to
common shareholders $46,231 $39,538 $58,213 $49,324
Weighted average shares
for basic EPS 36,741 36,158 36,700 36,288
Basic EPS $1.26 $1.09 $1.59 $1.36
Effect of dilutive securities:
Stock options 618 1,030 696 957
Contingent shares not
included in shares
outstanding for basic EPS 76 132 99 123
Weighted average shares
for diluted EPS 37,435 37,320 37,495 37,368
Diluted EPS $1.23 $1.06 $1.55 $1.32
The dilutive effects of stock options were determined by applying the treasury
stock method, assuming the Company was to purchase common shares with the
proceeds from stock option exercises.
4. OTHER COMPREHENSIVE INCOME
Thirteen weeks ended Twenty-six weeks ended
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
(In thousands)
Net Income $46,231 $39,538 $58,213 $49,324
Other comprehensive income
(expense), net of tax:
Foreign currency translation
adjustments (792) 237 (2,973) (867)
Unrealized gain on available-
for-sale securities and
derivative instruments,
net of reclassification
adjustments 805 204 558 204
Comprehensive income $46,244 $39,979 $55,798 $48,661
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Consolidated Results of Continuing Operations
Sales and volume - Adolph Coors Company (ACC or the Company), the holding
company for Coors Brewing Company (CBC), reported net sales of $575.6 million
and $1,015.4 million for the second quarter and first half of 1999,
respectively, representing an increase of 6.2% over each of the same periods
of 1998. Net sales for the three months ended June 27, 1999, were impacted
favorably by a unit volume increase of 2.4%; CBC sold 6,181,000 barrels of
malt beverages in the second quarter of 1999 compared to sales of 6,036,000
barrels in the second quarter of 1998. Net sales per barrel for the three
months ended June 27, 1999, were also impacted favorably by higher export
sales, which generate greater net revenue per barrel than domestic volume, and
by improved domestic gross realizations per barrel due to increased pricing,
reduced discounting and mix improvement toward higher-net-revenue product
sales. Net sales per barrel for the six months ended June 27, 1999, were
impacted by essentially the same factors, with unit volume up 1.8% over the
same period of 1998.
Gross profit - Gross profit in the second quarter of 1999 rose 12.1% to $260.3
million over the second quarter of 1998, while gross profit in the first half
of 1999 rose 11.4% to $427.8 million, compared to the same period of 1998. As
a percentage of net sales, gross profit increased to 45.2% and 42.1% in the
second quarter and first half of 1999, respectively, from 42.8% and 40.2% for
the same periods a year earlier. These improvements were attributable to the
increases in net sales per barrel, as discussed above, offset by significantly
smaller increases in cost of goods sold of 1.8% in the second quarter of 1999
and 2.7% in the first half of 1999 versus the prior year. Cost of goods sold
per barrel for the second quarter of 1999 decreased due to lower unit costs
for certain packaging materials, which more than offset a shift in product
demand towards more expensive products and packages and higher unit costs for
certain other packaging materials. Some of the lower unit packaging costs were
non-recurring due to certain long-term supply contracts that were renegotiated
and revised. Cost of goods sold per barrel for the six months ended June 27,
1999, increased as a result of a shift in product demand towards more
expensive products and packages, higher unit costs for certain packaging
materials, as well as increased production and labor costs incurred in the
packaging areas during the first quarter of 1999. These increases were
partially offset by decreases primarily due to production leverage and reduced
packaging material costs for certain other materials.
Operating income - Operating income was $73.7 million and $91.8 million for
the second quarter and first half of 1999, respectively, compared to $64.6
million and $79.6 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.
Marketing, general and administrative expenses rose primarily because of
higher spending on marketing and promotions. Information technology expenses
were also higher in the second quarter and first half of 1999 compared to the
same periods in 1998.
Non-operating income and expense - Net non-operating income for the second
quarter and first half of 1999 improved from the same periods of 1998
primarily because of reductions in net interest expense. The decrease in net
interest expense in 1999 compared to 1998 was attributable to an increase in
capitalized interest due to increased capital spending and lower outstanding
principal balances of ACC's medium-term notes.
Effective tax rate - The consolidated effective tax rate for the second quarter
and first half of 1999 was 38.75% compared to 39.0% for the same periods in
1998.
Net income - Net income for the second quarter and first half of 1999 were
$46.2 million, or $1.26 per basic share ($1.23 per diluted share), and $58.2
million, or $1.59 per basic share ($1.55 per diluted share), respectively.
This compares to net income of $39.5 million, or $1.09 per basic share ($1.06
per diluted share), and $49.3 million, or $1.36 per basic share ($1.32 per
diluted share), respectively, for the second quarter and first half of 1998.
Liquidity and Capital Resources
Liquidity - The Company's primary sources of liquidity are cash provided by
operating activities and external borrowings. As of June 27, 1999, ACC had
working capital of $141.3 million, and its cash position was $215.4 million
compared to $160.0 million as of December 27, 1998. In addition to its cash
resources, ACC had short-term, highly liquid investments of $31.0 million at
June 27, 1999, compared to $96.2 million at December 27, 1998. ACC also had
$26.4 million of marketable securities with maturities exceeding one year at
June 27, 1999, compared to $31.4 million at December 27, 1998. 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 has remained
relatively consistent at $96.0 million for the first half of 1999 compared to
$95.7 million for the first half of 1998. This is primarily due to
fluctuations in operating activities that offset each other. Operating cash
decreased $48-million as a result of the contribution made to the Company's
defined benefit pension plan in January 1999, which is reflected in Other
assets on the balance sheet. This contribution was made as a result of benefit
improvements to the Company's defined benefit pension plan, which were
effective July 1, 1999, and resulted in an increase to the projected benefit
obligation of approximately $48 million. The decrease in operating cash due to
the pension contribution was offset by working capital changes and an increase
to depreciation and amortization. The fluctuations in working capital changes
are primarily due to increased operating activity and timing of payments
between the two years. Depreciation and amortization has increased over the
same period of 1998 mainly due to an increase in capitalized assets in the
current year.
Investing activities - During the first six months of 1999, ACC received $0.1
million on net investing activities compared to spending $10.2 million for the
first six months of 1998. The net impact of ACC's marketable investment
activities was a cash inflow of $69.8 million during the first half of 1999,
compared to an inflow of $22.2 million during the same period of 1998. This
increase is mainly due to a larger balance of securities maturing in the first
half of 1999 compared to the same period in 1998. Capital expenditures
increased to $79.3 million for the six months ended June 27, 1999, from $37.4
million a year earlier. The increased capital spending during the first half
of 1999 compared to the same period in 1998 is primarily due to increased
spending on information technology upgrades, packaging capacity and
investments by Coors-owned distributors in non-Coors brands. ACC received $8.5
million in distributions from joint ventures during the first half of 1999,
compared to $5.0 million during the same period of 1998.
Financing activities - ACC spent $40.5 million on financing activities during
the six months ended June 27, 1999, compared to $61.3 million in 1998. Cash
use was similar in both 1999 and 1998. The 1999 uses were primarily for
principal payments on debt of $25 million, purchases of $13.3 million of Class
B common stock under the stock repurchase program and dividend payments of
$11.6 million.
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 the
federal securities laws. These forward-looking statements may include, among
others, statements concerning the Company's outlook for 1999; overall volume
trends; pricing trends and industry forces; cost reduction strategies and
their results; the Company's expectations for funding its 1999 capital
expenditures and operations; the Company's expectations for funding
expenditures on computer software to make it compliant with Year 2000; and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that
are not historical facts. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those expressed in or implied by the statements.
To improve its financial performance, the Company must grow premium beverage
volume, achieve modest price increases for its products and reduce its overall
cost structure. The most important factors that could influence the
achievement of these goals -- and cause actual results to differ materially
from those expressed in the forward-looking statements -- include, but are not
limited to, the following:
- - the inability of the Company and its distributors to develop and execute
effective marketing and sales strategies for Coors and non-Coors products;
- - the potential erosion of sales revenues through discounting or a higher
proportion of sales in value-packs;
- - a potential shift in consumer preferences toward lower-priced products;
- - a continued shift in consumer preferences away from products packaged in
aluminum cans, which are more profitable, toward bottled products;
- - a potential shift in consumer preferences towards products and packages that
would require additional capacity;
- - the potential reduction in sales revenues due to decreases in sales volumes
in certain key domestic and export markets;
- - the intensely competitive, slow-growth nature of the beer industry;
- - demographic trends and social attitudes that can reduce beer sales;
- - the continued growth in the popularity of imports and other specialty beers;
- - increases in the cost of aluminum, paper packaging and other raw materials;
- - a continued shift in the competitive environment towards increased marketing
and advertising spending and significant increases in the costs of marketing
and advertising;
- - the Company's inability to reduce manufacturing, freight and overhead costs
to more competitive levels;
- - changes in significant laws and government regulations affecting
environmental compliance and income taxes;
- - the inability to achieve targeted improvements in CBC's distribution system;
- - the imposition of restrictions on advertising (e.g., media, outdoor ads or
sponsorships);
- - labor issues, including union activities that could require a substantial
increase in cost of goods sold or lead to a strike;
- - significant increases in federal, state or local beer or other excise taxes;
- - increases in rail transportation rates or interruptions of rail service;
- - the potential impact of further industry consolidation and the change in the
competitive environment given the sale of Stroh;
- - the impact on CBC's distribution system of the acquisition of Stroh and
Pabst brands by Miller;
- - risks associated with investments and operations in foreign countries,
including those related to foreign regulatory requirements; exchange rate
fluctuations; and local political, social and economic factors;
- - significant increases in the estimated costs of the Year 2000 project and/or
planned capital expenditures; and
- - the risk that computer systems of the Company or its significant suppliers
or customers may not be Year 2000 compliant.
These and other risks and uncertainties affecting the Company are discussed in
greater detail in the Company's 1998 Form 10-K filed with the Securities and
Exchange Commission.
Outlook
The Company's performance in the first six months of 1999 benefited from
export volume gains. The Company experienced a decrease in sales volume in a
few key domestic markets during the first quarter of 1999. The domestic volume
trends improved in the second quarter, resulting in an overall gain in
domestic volume for the first half of 1999. Both the export and domestic
volume gains are expected to continue throughout 1999, although not
necessarily at the same rates experienced in the first half of 1999. The
pricing environment is expected to continue to be favorable in comparison to
the past few years. Continuing value-pack activity or an increase in price
discounting could have an unfavorable impact on top-line performance due to
lower margins.
For fiscal year 1999, product, packaging and fixed costs per barrel are
expected to be up slightly due to a shift in product demand to higher-cost
products and packages, while freight costs are expected to be down slightly.
Significant changes in market prices of these items could alter this outlook.
CBC continues to pursue improvements in its operations and technology
functions to achieve cost reductions over time.
Marketing, general and administrative costs are expected to increase at a rate
slightly higher than the 1998 increase. Management continues to monitor CBC's
market opportunities and to invest behind its brands and sales efforts
accordingly. Incremental sales and marketing spending will be determined on an
opportunity-by-opportunity basis. The competitive battleground has shifted to
marketing and advertising, which may result in the incremental revenue
generated by price increases being spent on advertising.
See the item titled Year 2000 under Contingencies, below, for a discussion of
the expected financial impact of this issue.
Net interest should continue its favorable trends based on CBC's lower
outstanding debt relative to 1998. Net interest could be less favorable than
expected if the Company invests a substantial portion of its cash balances in
operating related assets or investments with longer-term returns. Also, cash
may be used to repurchase additional outstanding common stock as approved by
the ACC board of directors in November 1998.
The effective tax rate for the rest of 1999 is not expected to differ
significantly from the rate applied to income during the first six months of
the year. The level and mix of pretax income for 1999 could affect the actual
rate for the year.
Recently, there has been a rapid expansion in market place demand for longneck
bottles and value-packs. To effectively meet the increasing demand for these
packages, the Board of Directors approved, in May 1999, incremental capital
spending of $30 to $45 million, (including contributions to its container
joint ventures for capital improvements, which will be recorded on the books
of the joint ventures) increasing the Company's capital spending plan for 1999
to a range of $120 to $135 million. In addition to CBC's 1999 planned capital
expenditures, incremental strategic investments will be considered on a case-
by-case basis.
Contingencies
Year 2000 - Some computers, software and other equipment include programming
code in which calendar year data is abbreviated to only two digits. As a
result of this design decision, some of these systems could fail to operate or
fail to produce correct results if '00' is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the Year 2000 approaches.
ACC recognizes the need to ensure that its operations will not be adversely
impacted by Year 2000 software failures. The Company is addressing this issue
to ensure the availability and integrity of its financial systems and the
reliability of its operational systems. ACC has established processes for
evaluating and managing the risks and costs associated with the Year 2000
problem. This project has two major elements -- Application Remediation and
Extended Enterprise (third-party suppliers, customers and others).
As of June 27, 1999, the Application Remediation element is on schedule, with
100% of the analysis completed, 99% of the remediation completed and 87% of
the testing completed. The remediation of all but one system considered
critical to ACC's business has been completed. The remediation of this
remaining one critical system will be completed in early September 1999.
Remediation of non-critical systems is planned to be completed by September
1999.
The Extended Enterprise element consists of the evaluation of third-party
suppliers, customers, joint venture partners, transportation carriers and
others. Detailed evaluations of the most critical third parties have been
completed.
The Company has made and will continue to make certain investments in its
information systems and applications to ensure that they are Year 2000
compliant. These investments also include hardware and operating systems
software, which have been completed and tested. The financial impact to ACC is
anticipated to be in the range of approximately $12 million to $15 million for
1999. The anticipated expenditures in 2000 are minimal. As the Year 2000
expenditures decrease, some of these resources will likely be used for other
investments and will not directly increase net income in future years. The
total amount expended on the Year 2000 project through June 27, 1999, was
approximately $31.5 million.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, customers and
others, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on its results
of operations, liquidity or financial condition. The efforts undertaken with
the Company's Year 2000 project are expected to significantly reduce ACC's
level of uncertainty about the Year 2000 problem and provide greater assurance
about the Year 2000 readiness of its Extended Enterprise.
Contingency planning for the Application Remediation and the Extended
Enterprise elements began in October 1998, with initial plans completed in
March 1999. The Company will continue to review these contingency plans
throughout the year. The Company will monitor third-party distributors for
Year 2000 readiness and will develop a contingency plan if a distributor is
deemed critical to the Company's operations.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, the Company is exposed to interest rates,
foreign currency exchange rates and commodity prices through investments and
financing arrangements, sales to foreign customers, purchases from foreign
suppliers and the acquisition of production and packaging materials from both
domestic and foreign suppliers. The Company has established policies and
procedures that govern the management of these exposures through the use of a
variety of financial instruments. The Company employs various financial
instruments including forward exchange contracts, options and swap agreements
to manage certain of the exposures that it considers practical to do so. By
policy, the Company does not enter into such contracts for the purpose of
speculation or use leveraged financial instruments.
The Company's objective in managing its exposure to fluctuations in interest
rates, foreign currency exchange rates and commodity prices is to decrease the
volatility of earnings and cash flows associated with changes in the
corresponding rates and prices. The Company does not hedge the value of net
investments in foreign-currency-denominated operations and translated earnings
of foreign subsidiaries. The Company's primary foreign currency exposures are
the Canadian dollar, the Japanese yen and the Spanish peseta.
A sensitivity analysis has been prepared to estimate the Company's exposure to
market risk of interest rates, foreign currency exchange rates and commodity
prices. The sensitivity analysis reflects the impact of a hypothetical 10%
adverse change in the applicable market interest rates, foreign currency
exchange rates and commodity prices. The volatility of the applicable rates
and prices are dependent on many factors that cannot be forecasted with
reliable accuracy. Therefore, actual changes in fair values could differ
significantly from the results presented in the table below.
The following table presents the results of the sensitivity analysis of the
Company's derivative portfolio:
As of
Estimated Fair Value Volatility June 27, 1999
(In millions)
Foreign Currency Risk: Forwards, Options (3.3)
Interest Rate Risk: Swaps (3.1)
Commodity Price Risk: Swaps (5.0)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
No significant legal proceedings.
Item 5. Other Information
Adolph Coors Company (the Company) has withdrawn from the bidding process
for the purchase of Jinro-Coors Brewing Company (JCBC) in South Korea.
Pursuant to a Korean bankruptcy court auction for the sale of JCBC, the
Company previously submitted a bid to purchase JCBC by the June 25, 1999
bidding deadline. However, the Company learned that another bidder,
Oriental Brewery Co., submitted a second bid package three days after the
bidding deadline. Creditors of JCBC decided to cancel the first auction
and hold a new one. The Company filed an application for an injunction to
prevent the new auction. A ruling by the Chongju District Court, in the
provincial city of Chongju, South Korea, on July 29, 1999 denied the
injunction. Because the Company believes the integrity of the process has
been compromised, it decided not to participate in the second auction.
The Company has appealed the bankruptcy court's decision. A ruling on the
appeal is expected in due course.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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/ Olivia M. Thompson
Olivia M. Thompson
Vice President, Controller
(Principal Accounting Officer)
August 11, 1999