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 March 28, 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 May 5, 1999:
Class A Common Stock - 1,260,000 shares
Class B Common Stock - 35,624,070 shares
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Thirteen weeks ended
March 28, March 29,
1999 1998
(In thousands, except per share data)
Sales - domestic and international $525,834 $501,014
Less: beer excise taxes 85,972 86,869
Net sales 439,862 414,145
Cost of goods sold 272,382 262,329
Gross profit 167,480 151,816
Marketing, general and administrative 149,358 136,820
Operating income 18,122 14,996
Other income - net 1,440 1,047
Income before income taxes 19,562 16,043
Income tax expense 7,580 6,257
Net income 11,982 9,786
Other comprehensive expense, net of tax:
Foreign currency translation adjustments (2,181) (1,104)
Unrealized gain on securities and derivative
instruments, net of reclassification
adjustment (247) --
Comprehensive income $ 9,554 $ 8,682
Net income per common share - basic $ 0.33 $ 0.27
Net income per common share - diluted $ 0.32 $ 0.26
Weighted average number of outstanding
common shares - basic 36,659 36,418
Weighted average number of outstanding
common shares - diluted 37,552 37,415
Cash dividends declared and paid per
common share $ 0.15 $ 0.15
See notes to consolidated financial statements.
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 28, December 27,
1999 1998
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 139,058 $ 160,038
Short-term marketable investments 37,086 96,190
Accounts and notes receivable, net 138,586 126,609
Inventories:
Finished 31,771 38,520
In process 29,646 24,526
Raw materials 21,525 34,016
Packaging materials 8,146 5,598
Total inventories 91,088 102,660
Other assets 59,037 63,494
Total current assets 464,855 548,991
Properties, at cost and net 712,067 714,441
Long-term marketable investments 31,444 31,444
Other assets 215,943 165,722
Total assets $ 1,424,309 $ 1,460,598
See notes to consolidated financial statements. (Continued)
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 28, December 27,
1999 1998
(In thousands)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 130,612 $ 143,899
Accrued expenses and other liabilities 181,866 200,013
Current portion of long-term debt 25,000 40,000
Total current liabilities 337,478 383,912
Long-term debt 105,000 105,000
Deferred tax liability 61,854 65,779
Other long-term liabilities 132,992 131,109
Total liabilities 637,324 685,800
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: 35,534,659 in
1999 and 35,395,306 in 1998) 8,488 8,428
Total capital stock 9,748 9,688
Paid-in capital 18,585 10,505
Retained earnings 763,006 756,531
Accumulated other comprehensive loss (4,354) (1,926)
Total shareholders' equity 786,985 774,798
Total liabilities and shareholders' equity $ 1,424,309 $ 1,460,598
See notes to consolidated financial statements. (Concluded)
ADOLPH COORS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirteen weeks ended
March 28, March 29,
1999 1998
(In thousands)
Cash flows from operating activities:
Net income $ 11,982 $ 9,786
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of joint ventures (7,054) (6,893)
Depreciation and amortization 30,574 28,462
Loss on sale or abandonment of
properties 617 792
Deferred income taxes (4,218) (1,014)
Change in operating assets and liabilities (70,303) (8,778)
Net cash (used in) provided by
operating activities (38,402) 22,355
Cash flows from investing activities:
Purchases of investments -- (12,165)
Sales and maturities of investments 58,955 15,134
Capital expenditures (28,366) (15,944)
Proceeds from sales of properties 181 60
Distributions from joint ventures 3,790 500
Other 728 (166)
Net cash provided by (used in)
investing activities 35,288 (12,581)
Cash flows from financing activities:
Issuances of stock under stock plans 6,941 1,149
Purchases of stock (3,496) (22,697)
Dividends paid (5,527) (5,477)
Payment of current portion of long-term debt (15,000) --
Other (515) (703)
Net cash used in financing activities (17,597) (27,728)
Cash and cash equivalents:
Net decrease in cash and cash equivalents (20,711) (17,954)
Effect of exchange rate changes on
cash and cash equivalents (269) (156)
Balance at beginning of year 160,038 168,875
Balance at end of quarter $ 139,058 $ 150,765
See notes to consolidated financial statements.
ADOLPH COORS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 28, 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 March 28, 1999, and the results of
its operations and its cash flows for the three months ended March 28, 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 three months ended March 28, 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 and fluctuations in the value of foreign
currencies. 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 foreign
currency exchange rates is to decrease the volatility of earnings and cash
flows associated with changes in exchange rates. To achieve this objective,
the Company primarily enters into forward exchange contracts and options 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 any gains or losses are included in other
comprehensive income until earnings are affected by the variability of cash
flows. 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. Instruments related to existing
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 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.
The Company's objective in managing its exposure to interest rates is to limit
the adverse impact that changes in interest rates might have on earnings and
cash flows. To achieve this objective, the Company primarily uses interest rate
swaps whose value changes in the opposite direction to the value of the
underlying assets or cash flows. The Company designates these instruments as
cash flow hedges. The cash flows of the swap will directly offset those of the
underlying exposures. Any gains or losses recognized upon early termination of
the swaps 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.
The Company has adopted all of the provisions of FAS 133 for the quarter ended
March 28, 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 during the first quarter of
1999 and 1998 was $4.4 million and $3.9 million, respectively. Cash paid for
income taxes during the first quarter of 1999 and 1998 was $1.2 million and
$1.5 million, respectively. During the first quarter of 1999 and 1998, ACC
issued restricted common stock under its management incentive program resulting
in non-cash increases to the equity accounts of $.1 million and $2.5 million,
respectively. Also during the first 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 $4.6 million and $.4 million, respectively.
Reclassifications - Certain reclassifications have been made to the 1998
financial statements to conform with the 1999 presentation.
3. COMMITMENTS AND CONTINGENCIES
Supply contracts - In April 1999, the Company entered into a long-term starch
supply contract with an unaffiliated third-party to purchase starch used in
production. The contract does not commence until fiscal 2000 and provides for
the Company to purchase certain minimum levels of material for a five-year
term. The agreement also has a successive automatic renewal for 10 years,
unless canceled in any year at the election of either party. With the addition
of this contract, the approximate total future purchase commitments under all
the third-party supply contracts are $680 million for contract terms expiring
in 2001 through 2005.
4. EARNINGS PER SHARE (EPS)
Basic and diluted net income per common share were arrived at using the
calculations outlined below:
Thirteen weeks ended
March 28, March 29,
1999 1998
(In thousands, except per share data)
Net income available to
common shareholders $11,982 $ 9,786
Weighted average shares
for basic EPS 36,659 36,418
Basic EPS $0.33 $0.27
Effect of dilutive securities:
Stock options 773 883
Contingent shares not included
in shares outstanding
for basic EPS 120 114
Weighted average shares
for diluted EPS 37,552 37,415
Diluted EPS $0.32 $0.26
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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Consolidated Results of Continuing Operations
Sales and volume - ACC reported net sales of $439.9 million for the three
months ended March 28, 1999, representing an increase of 6.2% over the same
period of 1998. Net sales for the three months ended March 28, 1999, were
impacted favorably by a unit volume increase of 0.9%; CBC sold 4,734,000
barrels of malt beverages in the first quarter of 1999 compared to sales of
4,691,000 barrels in the first quarter of 1998. The increase in volume was
primarily a result of increased export sales, partially offset by decreased
sales in a few key domestic markets. Net sales for the three months ended March
28, 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.
Gross profit - Gross profit in the first quarter of 1999 was $167.5 million up
10.3% from the first quarter of 1998. As a percentage of net sales, gross
profit increased to 38.1% from 36.7% in the three months ended March 28, 1999.
The increase was due to the increased net revenue per barrel, as discussed
above, partially offset by increased cost of goods sold. Cost of goods sold
per barrel increased as a result of a shift in product demand towards more
expensive products and packages, as well as increased production and labor
costs incurred in the packaging areas. These increases were partially offset
by decreases primarily due to production leverage and reduced packaging
materials costs for certain materials. A portion of the incremental production
and labor costs incurred in the packaging areas was due to difficulties
encountered with glass bottle supply quality and retraining associated with the
restructuring initiated in the fall of 1998. Some of the incremental
production and labor costs are not expected to recur in future quarters.
Operating income - Operating income was $18.1 million for the three months
ended March 28, 1999, compared to $15.0 million for the same period a year
earlier. This increase was primarily due to the increase in gross profit, as
discussed above, offset in part by increases in marketing, general and
administrative expenses. Marketing, general and administrative expenses rose
in the first quarter of 1999 primarily due to higher spending on marketing and
promotions. Other information technology and Year 2000 systems remediation
related expenses were also higher in the first quarter of 1999 compared to the
same period in 1998.
Non-operating income and expense - Net non-operating income for the three
months ended March 28, 1999, improved from the same period 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 and lower outstanding principal balances of ACC's medium-
term notes.
Effective tax rate - The consolidated effective tax rate for the three months
ended March 28, 1999 was 38.75% compared to 39.0% for the same period in 1998.
Net income - Net earnings for the three months ended March 28, 1999, were
$12.0 million, or $0.33 per basic share ($0.32 per diluted share). This
compares to net earnings of $9.8 million, or $0.27 per basic share ($0.26 per
diluted share), for the three months ended March 29, 1998.
Liquidity and Capital Resources
Liquidity - The Company's primary sources of liquidity are cash provided by
operating activities and external borrowings. As of March 28, 1999, ACC had
working capital of $127.4 million, and its net cash position was $139.1
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 $37.1 million
as of March 28, 1999, compared to $96.2 million as of December 27, 1998. ACC
also had $31.4 million of marketable securities with maturities exceeding one
year as of March 28, 1999 and 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 near-term capital expenditures and
potential repurchases of its common stock under the previously-announced stock
repurchase plan.
Operating activities - Net cash used by operating activities was $38.4 million
for the three months ended March 28, 1999, compared to net cash provided of
$22.4 million for the same period of 1998. The decrease in operating cash is
primarily due to a $48-million contribution to the Company's defined benefit
pension plan made in January 1999, which is reflected in Other assets on the
balance sheet. This contribution was made as a result of changes approved by
the ACC board of directors, which will result in an amendment to the Company's
defined benefit pension plan. The amendment will be effective July 1, 1999,
and will result in an increase to the projected benefit obligation of
approximately $48 million.
Investing activities - During the first three months of 1999, ACC received
$35.3 million from net investing activities compared to spending $12.6 million
during the first three months of 1998. The net impact of ACC's marketable
investment activities was a cash inflow of $59.0 million during the first three
months of 1999, compared to $3.0 million during the same period of 1998. This
increase is mainly due to a larger balance of securities maturing in the first
quarter of 1999 compared to the same period in 1998. Capital expenditures
increased to $28.4 million for the three months ended March 28, 1999, from
$15.9 million a year earlier. ACC received $3.8 million in distributions from
joint ventures during the first three months of 1999, compared to $0.5 million
during the same period of 1998.
Financing activities - ACC spent $17.6 million on financing activities during
the three months ended March 28, 1999, compared to $27.7 million in 1998. Cash
was used primarily for similar purposes in both 1999 and 1998. The 1999 uses
were primarily for purchases of $2.4 million of Class B common stock under the
stock repurchase program, dividend payments of $5.5 million and principal
payments on debt of $15 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 work 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 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 three months of 1999 benefited from
export volume gains, which are expected to continue throughout 1999 and 2000,
although, not necessarily at the same rates experienced in the first quarter
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 and packaging costs per barrel are expected to
be up slightly due to a shift in product demand to higher-cost products and
packages, while freight and fixed 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
similar to 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 its 1998 financial position. Net interest could
be less favorable than expected if the Company invests a substantial portion
of its cash balances in non-interest-bearing assets 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 three months of
the year. The level and mix of pretax income for 1999 could affect the actual
rate for the year.
In 1999, CBC has planned capital expenditures (including contributions to its
container joint ventures for capital improvements, which will be recorded on
the books of the joint ventures) in the range of $90 to $100 million. Recently,
there has been a rapid expansion in market place demand for longneck bottles
and value-pack cans. To effectively meet the increasing demand for these
packages, the Company may accelerate certain planned capital expenditures into
fiscal 1999 to increase capacity and flexibility at its current facilities. If
the Company determines that such projects will be undertaken in 1999, capital
spending will exceed the range discussed above. 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 March 28, 1999, the Application Remediation element is on schedule, with
92% of the analysis completed, 85% of the remediation completed and 61% of the
testing completed. Remediation of systems considered critical to ACC's
business is expected to be completed by June 1999, and 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
initiated.
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 are generally on schedule and are expected to be completed by
June 1999. 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. The total amount expended on the Year 2000
project through March 28, 1999, was approximately $27 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 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
Exposures, Policies and Procedures
In the normal course of business, the Company is exposed to changes in interest
rates and fluctuations in the value of foreign currencies. 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 interest rates
is to limit the adverse impact that changes in interest rates might have on
earnings and cash flow. To achieve this objective, the Company primarily uses
interest rate swaps whose value changes in the opposite direction to the value
of the underlying assets or cash flow.
The Company's objective in managing its exposure to fluctuations in foreign
currency exchange rates is to decrease the volatility of earnings and cash
flows associated with changes in exchange rates. By policy, the Company enters
into hedges to limit the potential loss due to fluctuations in currency
exchange rates below a maximum amount of earnings. The Company has entered
into forward contracts and options whose value changes as the foreign currency
exchange rates change to protect the value of its foreign currency commitments
and revenues. The gains and losses in those contracts offset changes in the
value of the related exposures. The primary currencies hedged are the Canadian
dollar, the Japanese yen and the Spanish peseta. The Company does not hedge the
value of net investments in foreign-currency-denominated operations and
translated earnings of foreign subsidiaries.
Interest Rates
As of March 28, 1999, the fair value of the Company's debt is estimated at
$132.1 million. This exceeded its carrying value by approximately $2.1 million.
The estimated market risk, defined as the potential change in fair value of the
debt resulting from a hypothetical 10% adverse change in interest rates,
amounted to $2.2 million as of March 28, 1999. The Company also had $5.0
million of variable rate debt outstanding as of March 28, 1999. A 10% adverse
change in interest rates would not have a material adverse impact on the
Company's earnings or cash flows.
The Company's cash and short-term investments are primarily floating rate
instruments. A 10% adverse change (decline) in interest rates would decrease
the Company's 1999 pretax earnings by approximately $0.6 million. This amount
is net of the offsetting positive impact of the interest rate hedges entered
into to effectively fix interest on variable rate investments. The notional
amount of interest rate swaps outstanding as of March 28, 1999, was $20.0
million.
Other Assets
The Company also has certain other long-term assets with a book value of $16.5
million. Due to the long-term nature of these investments, the Company has not
currently entered into any related derivative instruments. While the Company
does not currently anticipate suffering any losses related to these assets,
the potential loss in fair value from a hypothetical 10% adverse change
amounted to $1.7 million as of March 28, 1999.
Foreign Currency Exchange Rates
The Company has entered into foreign currency forwards and options for terms
generally less than one year. The primary currencies hedged in this manner
include the Canadian dollar, Japanese yen and Spanish peseta. The notional
amount of forward contracts and options purchased was $20.3 million as of
March 28, 1999. The potential loss in fair value for net currency positions of
outstanding foreign currency contracts resulting from a hypothetical 10%
adverse change in all foreign currency exchange rates was $2.1 million.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
No significant legal proceedings.
Item 5. Other Information
None.
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)
May 12, 1999
17
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