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Slide 1: Adolph 1997 Coors Annual Company Report 125 Years of Brewing Excellence
Slide 2: A MESSAGE FROM BILL COORS ABOUT THE COVER Look behind the rich heritage of brewing excellence at Coors and you’ll find today’s portfolio of refreshing malt beverages. During our 125th anniversary, Coors is celebrating this tradition of quality, one that is recognized by our customers and fundamental to our success. his year, 1998, is Adolph Coors Company’s 125th anniversary. That’s a rather remarkable achievement, and a tribute to the many talented people who have worked at Coors throughout our history. There’s no simple explanation why Coors succeeded while many hundreds of other breweries doing business back in 1873 did not. But the first place to look is at the vision and values established by my grandfather, Adolph Coors, when he opened his little brewery in Golden three years before Colorado became the 38th state. Our founder had learned the business and craft of brewing starting as a 14-year-old brewer’s apprentice in Germany. He knew that success in the beer industry required total dedication to superior quality, prudent management and exceptional service to the customer. He also had a strong, personal belief in the promise of the individual – for himself, his family and his employees. Clearly, it takes the right people to provide the caring leadership, innovation, skills and commitment needed to run a prosperous business. Together, these heartfelt convictions formed the values that brought our company early success and sustained us through both good times and bad. These values have been passed down ever since, through my family and through generations of Coors employees. T Of course, nature gets the credit for that unique attribute that has defined Coors from the start and is the envy of our competitors – our Rocky Mountain heritage. The snow-capped Colorado Rockies just beyond Golden provide Coors with a solid and enduring advantage in the marketplace because consumers know that the connection between the mountains and our products is genuine. Putting these pieces together begins to explain why Coors, despite our late arrival as a national brand, is now one of the nation’s “Big 3” brewers and a growing force internationally. That’s pretty good for a company started by a 26-year-old entrepreneur who had come to the United States on his own as a penniless stowaway. Our future success is now in the very capable hands of my nephew Pete, Coors Brewing Company President Leo Kiely and their exceptional management team. They are focusing the entire organization on the fundamentals of the beer business and tapping into the skills and dedication of the wonderful people who work at Coors to make us the best brewing company in the world. They are building on the vision and values that began with Adolph Coors in 1873 and that, I believe, provide the cornerstone for even greater success at Coors in the years to come.
Slide 4: CORPORATE PROFILE TABLE OF CONTENTS Adolph Coors Company, founded in 1873, throughout the United States and in more than FINANCIAL TRENDS & HIGHLIGHTS 3 LETTER TO SHAREHOLDERS 4 A CONVERSATION WITH LEO KIELY 8 FINANCIAL REVIEW & TRENDS 16 MANAGEMENT’S DISCUSSION & ANALYSIS 17 REPORTS FROM MANAGEMENT & INDEPENDENT ACCOUNTANTS 22 CONSOLIDATED FINANCIAL STATEMENTS 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28 SELECTED FINANCIAL DATA 38 DIRECTORS & OFFICERS CORPORATE INFORMATION 40 is ranked among the 675 largest publicly traded 40 international markets. In 1996, Business Ethics corporations in the United States. Its principal magazine ranked Coors second in its list of “The subsidiary is Coors Brewing Company, the nation’s 100 Best Corporate Citizens” in the United States. third-largest brewer. Throughout its 125-year The corporate headquarters and primary brewery history, Coors has provided consumers with high- are in Golden, Colorado, with other major brewing quality malt beverages produced using an all-natural and packaging facilities in Elkton, Virginia; Memphis, brewing process and the finest ingredients available. Tennessee; and Zaragoza, Spain. In addition, Coors The company’s portfolio of products includes owns major aluminum can and end manufacturing Coors Light – the fourth-largest-selling beer in the facilities near Golden and is a partner in the joint country – Original Coors and more than a dozen venture that operates these plants. Coors is also a other malt-based beverages, primarily premium and partner in a joint venture that owns and operates superpremium beers. Coors products are available 2 a glass bottle manufacturing plant in Colorado.
Slide 5: FINANCIAL T R E N D S* Adolph Coors Company and Subsidiaries MALT BEVERAGE SALES VOLUME (In millions of barrels) 21 SALES FROM CONTINUING OPERATIONS** (In billions) $2.5 INCOME FROM CONTINUING OPERATIONS (In millions) $70 $60 RETURN ON INVESTED CAPITAL*** 9% 8% 7% 20 $2.0 $50 6% 5% 4% 3% 19 $1.5 $40 $30 $20 18 $1.0 17 $0.5 $10 2% 1% 0% 93 94 95 96 97 93 94 95 96 97 0 93 94 95 96 97 $0 93 94 95 96 97 $0 * From continuing operations only, excluding net special credits (in 1997, 1995 and 1994) and special charges (in 1996 and 1993). ** The difference between gross sales and net sales represents beer excise taxes. *** Defined as after-tax income before interest expense and any unusual income or expense items (including special credits and charges), divided by the sum of average total debt and shareholders’ equity. The 1996 and 1995 return on invested capital rates include gains related to changes in non-pension postretirement benefits. FINANCIAL HIGHLIGHTS For the years ended December 28, December 29, 1997 1996 (Dollars in thousands, except per share data) Percentage Change 2.7% 4.6% 89.4% (9.9%) 3.6% 2.9% 8.1% — (35.6%) — (2.9%) 93.9% 89.5% 4.6% 10% 3 Barrels of beer and other malt beverages sold Net sales Net income Properties – net Total assets Shareholders’ equity Dividends Number of full-time employees Number of shareholders of record Number of Class A common shares outstanding Number of Class B common shares outstanding Per share of common stock: Net income – basic – diluted Net book value Dividends 20,581,000 $ 1,822,151 $ 82,260 $ 733,117 $ 1,412,083 $ 736,568 $ 20,523 5,800 3,227 1,260,000 35,599,356 $2.21 $2.16 $19.79 $0.55 20,045,000 $ 1,742,056 $ 43,425 $ 814,102 $ 1,362,536 $ 715,487 $ 18,983 5,800 5,007 1,260,000 36,662,404 $1.14 $1.14 $18.83 $0.50
Slide 6: LETTER TO SHAREHOLDERS birthday. The fascinating story of Adolph Coors Company and our Rocky Mountain heritage, history and success is told through the achievements, milestones and talents of many people who have contributed to more than a century of brewing excellence at Coors. Maintaining that legacy continues to be our objective for building a strong company for the future. During the past couple of years, we have been guided by our long-term goal to establish a solid business foundation of consistent, profitable growth. In 1996, our results demonstrated substantial progress toward that goal, and in 1997 we capitalized on our momentum, strengthened our position in the industry and achieved earnings growth that outpaced our major competitors. Overall, 1997 was a very good year for Coors Brewing Company. Breakthrough Performance in 1997 Our 1997 results included important breakthrough improvements in margins, profitability and operating cash flow, as well as other critical performance measures for our business. Despite an extraordinarily tough competitive environment, in 1997 we: • gained market share, • significantly increased our investments in the marketplace, • achieved higher pricing, • increased and diversified income in the international sector, and 4 D ear Fellow Shareholders: This year, our company celebrates its 125th • grew overall pretax profits, even excluding the positive impact of our settlement with Molson Breweries of Canada Limited (Molson). Unit volume for Coors beers and other malt beverages achieved a record in 1997, with a total of 20.6 million barrels sold, a 2.7% increase over the previous year. This was driven primarily by another great year for Coors Light, which remained a solid brand in the biggest growth segment of the industry – premium light beers. Sales growth for Keystone Light and George Killian’s Irish Red also contributed to the overall volume gain. We were pleased as well to achieve noteworthy improvements in Zima and Original Coors volume trends, especially in the second half of the year. Net sales grew by 4.6% to set a new record at $1.82 billion. Net sales per barrel increased 1.9% due in part to our ability to achieve some positive domestic pricing. Our prudent and selective use of price promotions helped make Coors unique among our major competitors, which generally saw declines in revenue per barrel during the year. Financial results showed the most dramatic improvements of all. The company achieved 1997 after-tax income of $68.3 million, a 44% increase from the previous year excluding special items previously reported for 1996 and the first two quarters of 1997. Basic earnings per share (excluding special items) increased to $1.84 in 1997, up 47% from $1.25 a year earlier. Diluted earnings per share increased to $1.80, rising 45% from $1.24 per share in 1996. Reported 1997 net
Slide 7: EMPLOYEES THROUGHOUT COORS ARE DRIVING PRODUCTIVITY GAINS THAT REDUCE COSTS WHILE INCREASING PRODUCT QUALITY. ENGAGING AND DEVELOPING OUR PEOPLE ARE ESSENTIAL TO GREATER PROFITABILITY AND MAINTAINING COORS’ LONG TRADITION OF PRODUCING THE FINEST-TASTING BEERS. Packaging area at the Golden brewery. Front: Specialist Rick McCloskey and operator Becky Martin. Back: (right to left) Operator Rayfield Harper Jr., specialist Larry Valdez and loader Jeff Cramer. 5
Slide 8: we will continue to focus on the fundamentals of making great beer, amazing our customers, making money, and tapping and developing the unequaled creativity and potential of our people. Of course, ongoing investment in our core brands is critical to maintaining the momentum that Coors has achieved in the marketplace. Our unique Rocky Mountain heritage and ability to excite consumers with marketing and packaging innovations continue to differentiate Coors products and support the company’s tradition of quality. Focusing on the fundamentals will help us meet the challenges and capitalize on the opportunities in the beer business. For example, the pricing environment in 1998 is expected to be at least as challenging as it has been in recent years. This is perhaps the Peter Coors, Leo Kiely and Bill Coors next to a 1930s-era refrigerated Coors railcar at the Colorado Railroad Museum near Golden. most difficult dimension of our industry – and one of the hardest to predict. However, we will continue to be prudent and creative in the pricing arena as we strive to outperform our competitors. Another fundamental area critical to the business is our cost structure. To date, Coors has achieved significant productivity gains through the vigorous efforts of a talented and dedicated work force. Coors people at every level have worked hard over the years to streamline brewing, packaging, transportation, administration and other areas of our business. We also made substantial investments in systems to strengthen our technology infrastructure and prepare the company for the new millennium. Year 2000 projects will require further resources through 1999. We believe that more opportunities for improved income (including special items) was $82.3 million, 89% higher than a year earlier. We believe that our successes during the past two years, and particularly in 1997, demonstrate the positive direction our company is taking as we enjoy our 125th year in the brewing business. The company’s achievements during the year were broad-based, reaching nearly all areas that are vital to sustainable, high-quality earnings growth. Continuing Our Focus on the Fundamentals Our business priorities, identified five years ago as essential to maximizing shareholder value, guided us through a successful 1997. In 1998 and beyond, 6
Slide 9: productivity exist, and we will pursue them to further boost the efficiency and reliability of our operations. We will also continue to pursue promising international sales opportunities. During 1997, Coors substantially increased and diversified earnings from international operations. Canadian income from our interim agreement with Molson was significantly higher in 1997 than the year before. Although income from the company’s Canadian business in 1998 is expected to be somewhat lower per barrel than in 1997, we see considerable growth potential for Coors products in Canada in the future. The popularity of Coors Light in the Caribbean once again fueled double-digit growth in this market, with Puerto Rico leading the way. Coors will continue to increase its presence and potential in international markets through a prudent, selective approach to these opportunities. Staying the Course The health of our business and breadth of our most recent performance improvements are cause for considerable optimism in the year ahead. Achievements in 1997 were the result of many years of hard work by a great team of people whose pursuit of quality has made Coors the great company that it continues to be, 125 years after its founding. We would like to acknowledge the contributions that your Board of Directors has made to the company’s past and continued success. We also are announcing the retirement of an outstanding member of our board, Bruce Llewellyn. The experience and leadership that Bruce has brought to our business are reflected in the progress we’ve made since he joined the board in 1989. We will miss Bruce’s good counsel and wish him the very best in his future pursuits. In closing, we know that 1998 will be another very challenging and competitive year in the beer industry. We will continue to focus on the fundamentals and stay the course to advance the progress that Coors has made on quality, customer service and productivity. These priorities form the foundation and strengths needed to consistently grow profitability and shareholder value. We thank you, our shareholders, for your continued support and commitment to the future of our company. BILL COORS Chairman, President and Chief Executive Officer Adolph Coors Company PETER COORS Vice Chairman and Chief Executive Officer Coors Brewing Company LEO KIELY President and Chief Operating Officer Coors Brewing Company 7
Slide 10: A CONVERSATION WITH LEO KIELY QA & Leo Kiely joined Coors on our tradition of innovation in the way we brew, package, ship and sell our products. And we have to make even more progress on what we’ve achieved in productivity and in the strengthening of our distributor network. There are many more specific things that we need to Coors Brewing Company President Leo Kiely How does a company like Coors succeed in the Brewing Company in March 1993 as the company’s first president and chief operating officer who is not a member of the Coors family. Working closely with CEO Pete Coors, Leo challenged the entire organization to focus all of its energies on the fundamentals of the beer business and to “amaze our customers” with ever-improving quality in both products and service. After a very good year for Coors in 1997, Leo reviews the company’s operations and discusses current and future challenges. do to remain successful, but it basically comes down to maintaining top-line growth and, at the same time, reducing and leveraging our cost structure. beer business today? By sticking to the basics and executing them better than everybody else in the industry. To do this, we need to stay focused on the quality of our beer, amazing our customers, making money, and tapping into and developing the talents of our people. We’ll continue investing in our premium-and-above brands to keep the volume momentum moving in the right direction. We also have to keep building What can Coors expect to achieve as the number-three brewer? Does Coors have any advantages over Anheuser-Busch and Miller? Our goal is to grow our business profitably and consistently over the long term. When you look at the playing field, it’s obvious that we can’t outspend or outmuscle our competitors. 8
Slide 11: BY EVERY KEY QUALITY MEASURE, COORS DISTRIBUTORS STRENGTHENED THEIR OPERATIONS DRAMATICALLY IN 1997. WHILE GETTING COORS BEERS TO CONSUMERS HAS CHANGED OVER THE YEARS, COORS AND ITS DISTRIBUTORS REMAIN COMMITTED TO GROWING SALES TOGETHER AS PARTNERS IN THE BEER BUSINESS. Shore Point Distributing Co. in Freehold, New Jersey. Front: Warehouse manager Jim Arillo (left) and shop steward Rob Vetrano. Back: Steve Morales and Craig Ward. 9
Slide 12: Nonetheless, we believe that we have considerable competitive strength in the areas of quality, brand portfolio, talented people and track record for marketing and technical innovation. Coors has a unique brand equity, includCOORS LIGHT REMAINS Finally, you have to remember that Coors has a special heritage in our industry. This year we’re celebrating the brewery’s 125th anniversary. Few domestic brewers have been in business that long. Our longevity and history reinforce Coors’ reputation as a brewer that is experienced, innovative and committed to producing quality beers. brands – Coors Light, Original Coors and Killian’s – in markets where we’re strongest. During 1997, Coors Light achieved 10% or better growth in 52 of our top 200 markets, driven by excellent advertising, breakthrough promotions, innovative packaging and enthusiastic distributor support. In addition, our revitalization programs for ing our strong association with the Rocky Mountains, which is something our customers say is a A SOLID PLAYER WITH GREAT MOMENTUM IN THE INDUSTRY’S LARGEST CATEGORY PREMIUM LIGHT BEERS. – substantial and very positive point of difference in the marketplace. Most important, the momentum of our largest brand continues. Coors Light posted its thirdstraight summer of mid-singledigit growth in 1997. The Silver Bullet is a great brand with solid demographics in the biggest growth segment in the industry. Another good example is George Killian’s Irish Red, which still is recognized as the first and leading red beer in the United States. How will Coors meet its goal of beating the annual industry volume growth rate by 1% to 2%? Original Coors returned this brand to growth as sales to retailers improved in the second half of 1997. And Killian’s has become a year-round beer, not just a St. Patrick’s Day beer, which is evident from its revitalized sales. Achieving incremental growth also will be key to our success, both domestically and internationally. This will be done by selectively investing to grow high-opportunity geographies, THE NATION’S FOURTH-BEST-SELLING BEER CONTINUED ITS IMPRESSIVE RUN OF STRONG, STEADY GROWTH IN We are focused on driving both baseline and incremental growth. Let me explain what we mean when we use those two terms. First, we’ll drive baseline growth by profitably growing key brands and key markets, in essence, capitalizing on the strong equities of our frontline 1997. 10
Slide 13: retail channels, ethnic markets and new brands. We’ve developed a discipline to identify opportunity and growth markets through a cross-functional effort by Sales, Marketing, Distributor Development, International and Finance. Last year, incremental growth was achieved by innovative, uniquely developed programs with high levels of local distributor support. The distributor element is critical. That’s why we’re continuing to enhance our wholesaler organization to make it even stronger than it is today. in 1996. We’ve made significant progress since then, but we have a ways to go to recapture Original Coors’ historical consumer base of 21- to 29-year-old men. It’s our first and most enduring brand, so obviously it has special status for the company and among consumers. And it carries many of our company’s equities. We’re confident we can make more progress by capitalizing on Original Coors’ history and quality, and by continuing to support the brand with captivating marketing executions. Zima was a noteworthy contributor to the volume growth innovative product that offers consumers something refreshing and unique. Zima is good for our bottom line because it continues to provide attractive margins and incremental sales volume. ETHNIC MARKETS PROVIDE EXCITING OPPORTUNITIES What kinds of investments is the company planning FOR INCREMENTAL GROWTH FOR OUR FRONTLINE BRANDS. AS WITH to make in core brands to ensure that Coors’ market share position is strong and growing? ALL OF OUR MARKETING PROGRAMS, COORS’ EFFORTS IN ETHNIC MARKETS ARE DIRECTED TO ADULT CONSUMERS AND PROMOTE ONLY LEGAL AND RESPONSIBLE CONSUMPTION OF OUR PRODUCTS. We have to make sure that we continue to be innovative in the way we brew, package, market and sell our core brands. Innovations in packaging such as our baseball bat bottle, Widemouth Can opening and John Wayne cans are critical in keeping us ahead of the curve in the marketplace. Do you see positive trends for Original Coors and Zima? we achieved in the second half of 1997. Zima continues to have many fans in the marketplace, and the brand responded well to our new “refreshment” positioning last year. It’s an Original Coors celebrates its 125th anniversary this year. We renewed our emphasis on Original Coors with the brand’s relaunch 11
Slide 14: They’re also examples of the customer focus that we need to maintain to keep captivating and motivating consumers. Our new “Hey. Beer. Man.” advertising has been very successful in broadening our appeal among the important market segment of young adult males, those 21 to 29 years old. We need to be sure that our advertising copy is both strategically sound and “talked about.” We’ll also continue making investments in our domestic and international sales organizations, particularly those related to geographic and demographic areas of opportunity. presence and diversifying the income stream from this part of our business. Sales from export operations were up double digits in 1997, led by sales in the Carribean, and represented approximately 5% of our reported volume last year. In addition, we now have a new joint-venture arrangement in Canada where we believe prospects for continued growth are very positive. Beyond that, opportunities for international growth are exciting in both Europe and Asia, and we’ll continue to be selective and prioritize our investments. Killian’s Family of Brands sales as a whole were flat during 1997, Killian’s Irish Red was up in low-single digits and remains a profitable and attractive contributor to our brand portfolio. While the domestic micro or “craft” brewing industry has slowed considerably, the segment is expected to continue offering growth opportunities to quality brands in the future. Our Blue Moon Brewing Company brands continue to show growth potential, but on a small base. Specialty brands are important to Coors because the above-premium category, including domestic and imported specialty brands, is What is Coors doing in international markets? Is the specialty beer segment still an attractive one for Coors? growing well and is a very profitable piece of the business. We have a big opportunity to grow our share in this category. In addition, specialty brands represent just one more way we can demonstrate our ability to innovate and International markets continue to present opportunities for us to grow volume and profitability. Over the years, we’ve been building our international Yes, but here, too, we need to be focused and selective. Killian’s remains the top-selling brand in its category. Though 12
Slide 15: FOCUSING ON THE FUNDAMENTALS OF RETAIL EXECUTION HELPED COORS BEAT THE VOLUME GROWTH RATE FOR THE INDUSTRY AND THE OTHER MAJOR U.S. BREWERS IN 1997. WITH THE RIGHT PROMOTIONAL MATERIALS FOR TODAY’S ADULT CONSUMERS, COORS PRODUCT DISPLAYS ARE DRIVING RETAIL SALES. Safeway in Lakewood, Colorado. 13
Slide 16: satisfy a wide variety of consumer tastes. That’s why we feature our SandLot microbrewery at Coors Field in Denver. And the specialty beer segment remains profitable for us, too, despite the relatively GEORGE KILLIAN’S IRISH RED LAGER IS We can’t control, or even predict, the pricing environment, but we can continue to improve productivity, balance our spending decisions, invest in brands that maximize the profitability of our product mix, and strengthen our wholesaler network. These For example, we recently increased the level of leadership and experience on both our International and Information Technology teams. We will keep refining our leadership capabilities in all areas, especially those where we must excel to achieve our goals. In addition, we believe that we can continuously improve our business performance by engaging and developing all the people who work at Coors. Over the years, we have made solid progress toward our goal of creating an environ- small volume. ONE OF THE NATION’S MOST RECOGNIZED AND POPULAR PRODUCTS IN THE SPECIALTY CATEGORY. Will pricing continue to be an obstacle to growth and profitability? key points of focus will help mitigate the potential effects of pricing factors in the short run and, most important, will strengthen the value of our franchise for the long haul. With no frontline pricing increase going into 1998, the environment looks at least as tough as last year. The key for the year will be the depth of dealing during the peak season this summer. The price environment will be the most volatile factor in how effectively we grow earnings in 1998. Clearly, our goal is to continue achieving a premium compared to our major competitors by staying focused on brand building for our major franchises – Coors Light, Original Coors and Killian’s. BREWED SINCE BY COORS 1981, KILLIAN’S ESTABLISHED THE COMPANY AS A LEADER IN PRODUCING HIGHQUALITY AND PROFITABLE SPECIALTY BEERS. What is Coors doing to ensure it has the organization and leadership to accomplish the company’s goals? ment in which people with diverse backgrounds, styles, cultures and functions work together to assure the long-term success of our company. Our people represent a unique resource for Coors. We will continue our efforts to ensure that our company remains a place where people are valued, trusted, respected and rewarded for their contributions. To be the best beer company in the world, we must build the best team in the business. I truly believe that we’ve assembled an outstanding leadership team at Coors. In my mind, it’s the best team in the industry. Nevertheless, we continue to refine our top team. 14
Slide 17: Are there any special challenges in the industry today due to renewed focus on health, underage drinking and responsibility issues? Given the attention to tobacco industry issues, does Coors believe alcohol beverages are next? Research Foundation in its efforts to understand the social and biomedical aspects of alcohol consumption. Clearly, beer is different from tobacco and may even provide some consumers with health benefits. We’ve taken the “high road” on how we’re marketing our products. Sure, some people may try to construct similarities between tobacco and alcohol, but we believe such moves would be misdirected and, worst of all, counterproductive in our industry’s voluntary efforts to promote responsible behavior. OUR No, we don’t. There are more than 80 million beer consumers, and the vast majority of them drink legally and responsibly. We believe that consumers and public policymakers understand the difference and recognize our efforts, and those of other brewers, to promote responsible consumption of alcohol and to prevent alcohol abuse. Coors has been in the forefront of efforts to prevent underage drinking, drunk driving and overconsumption by supporting education and prevention efforts that work. We follow strict industry and company policies to ensure responsible advertising targeted to adult consumers. We work closely with our distributors and retailers encouraging responsible serving and sale. And we support the Alcohol Beverage Medical Our focus in 1998 and beyond can be summarized by the following business priorities – our six planks – that will help Coors deliver consistent, quality earnings growth: 1 BASELINE GROWTH 6 SIX PLANKS As in the past, we will continue to demonstrate responsibility in how we market and sell our products and in how we support the communities in which we do business. Coors has a history of promoting responsible decisions. Fifteen years ago, Coors voluntarily launched community prevention and education campaigns and responsibility advertising. Today, we’ve integrated messages that promote responsible decision making into our advertising. In fact, both Magic Johnson and Kareem Abdul-Jabbar are appearing in our advertising to promote legal and responsible decisions about drinking. Bottom line, we are well-positioned to address alcohol issues at a national, state and local level. We will profitably grow key brands and key markets. 2 INCREMENTAL GROWTH We will selectively invest to grow high-potential markets, channels, demographics and brands. 3 PRODUCT QUALITY We will continuously elevate consumer-perceived quality by improving taste, freshness, package integrity and package appearance at point of purchase. 4 DISTRIBUTOR SERVICE We will significantly enhance distributor service as measured by improved freshness, less damage, increased on-time arrivals and accurate order fill at a lower cost to Coors. 5 PRODUCTIVITY GAINS We will continuously lower total company costs per barrel so Coors can balance improved profitability, investments to grow volume, share and revenues, and funding for the resources needed to drive long-term productivity and success. 6 PEOPLE We will continuously improve our business performance through engaging and developing our people. 15
Slide 18: FINANCIAL REVIEW 1997 was an important year financially for Adolph Coors Also of note is the company’s overall financial flexibility. With significantly improved liquidity, including greater cash resources, a stronger and more flexible Coors Brewing Company is now better positioned to achieve the next higher level of financial performance. We are aware of and energized by the challenges we confront as the number-three brewer in a highly competitive industry. The great improvement in our cash flow during the past two years makes us a much more competitive number-three. With the solid accomplishments of 1997, our financial condition is the strongest it has been this decade, providing the flexibility and resources for further improvements in our company’s performance. Going forward, strengthening our margins, lowering costs and managing both our balance sheet and use of working capital are priorities for our financial plan. Our objective is to make consistent and sustainable progress by pursuing those opportunities that offer substantial long-term benefits. Achieving this objective will help make Coors successful for another 125 years. Company. It was important because we achieved solid and broad-based progress, as discussed earlier in this annual report. Margins, productivity, earnings, cash flow, dividends, market capitalization and returns to shareholders all improved in 1997. Additionally, through our repurchase program, the company bought back almost a million shares of Coors Class B common stock, which we believe has proven to be a sound investment. As the hallmark of our progress in 1997, return on invested capital (ROIC) climbed to 8.3% and return on average shareholders’ equity grew to 9.4%. (Both ratios exclude the impact of a net special credit in 1997.) While we are mindful that these are below competitive returns and below what we believe Coors is capable of achieving, the improvements in these benchmarks are noteworthy. In 1993, we established a medium-term goal of bringing ROIC into an operating range of 8% to 12%. We achieved that important objective for the first time in 1997, making it a significant year for the company’s efforts to improve financial performance. Adolph Coors Company and Subsidiaries FINANCIAL NET SALES PER BARREL T R E N D S* GROSS MARGIN (% of net sales) OPERATING MARGIN (% of net sales) AND CASH FROM OPERATING INVESTING ACTIVITIES** (In millions) CAPITAL EXPENDITURES/ DEPRECIATION, DEPLETION AND AMORTIZATION (In millions) $200 $90 40% 35% 7% 6% 5% 4% $240 $200 $160 $120 $85 30% $80 25% 20% $75 3% 15% 10% $70 5% $0 93 94 95 96 97 0% 93 94 95 96 97 1% 0% 93 94 95 96 97 $0 -$40 93 94 95 96 97 $0 93 94 95 96 97 2% $40 $50 $80 $100 $150 16 * From continuing operations only, excluding net special credits (in 1997, 1995 and 1994) and special charges (in 1996 and 1993). ** Excluding purchases, sales and maturities of marketable investments in 1997 and 1996.
Slide 19: Adolph Coors Company and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction Adolph Coors Company (ACC or the Company) is the holding company for Coors Brewing Company (CBC), which produces and markets high-quality malt-based beverages. This discussion summarizes the significant factors affecting ACC’s consolidated results of operations, liquidity and capital resources for the three-year period ended December 28, 1997, and should be read in conjunction with the financial statements and the notes thereto included elsewhere in this report. ACC’s fiscal year is a 52- or 53-week year that ends on the last Sunday in December. The 1997 and 1996 fiscal years were 52 weeks long, while fiscal 1995 was 53 weeks long. Certain unusual or non-recurring items impacted ACC’s financial results for 1997, 1996 and 1995; restatement of results excluding special items permits clear evaluation of its ongoing operations. These special items are summarized below. Summary of operating results: For the years ended Dec. 28, Dec. 29, 1997 1996 $147,399 $115,882 $ 82,260 $ 68,309 $2.21 $2.16 $1.84 $1.80 $81,019 $87,360 $43,425 $47,299 $1.14 $1.14 $1.25 $1.24 Dec. 31, 1995 $80,378 $65,178 $43,178 $33,944 $1.13 $1.13 $0.89 $0.89 1996: For the 52-week fiscal year ended December 29, 1996, ACC reported net income of $43.4 million, or $1.14 per basic and diluted share. During 1996, the Company received royalties and interest from Molson in response to the October 1996 arbitration ruling that Molson had underpaid royalties from January 1, 1991, to April 1, 1993. Further, ACC recorded a gain from the 1995 curtailment of certain postretirement benefits, charges for Molson-related legal expenses and severance expenses for a limited work force reduction. These special items amounted to a pretax charge of $6.3 million, or $0.11 per basic share ($0.10 per diluted share), after tax. Without this net special charge, ACC would have reported net earnings of $47.3 million, or $1.25 per basic share ($1.24 per diluted share). 1995: For the 53-week fiscal year ended December 31, 1995, ACC reported net income of $43.2 million, or $1.13 per basic and diluted share. In the fourth quarter, the Company recorded a gain from the curtailment of certain postretirement benefits and a severance charge for a limited work force reduction. These special items amounted to a pretax credit of $15.2 million, or $0.24 per basic and diluted share, after tax. ACC would have reported net income of $33.9 million, or $0.89 per basic and diluted share, without this net special credit. Trend summary – percentage increase (decrease) for 1997, 1996 and 1995: The following table summarizes trends in operating results, excluding special items. 1997 Volume Net sales Average base price increase Gross profit Operating income Advertising expense Selling, general and administrative 2.7% 4.6% 1.7% 14.2% 32.6% 8.5% 15.6% 1996 (1.3%) 3.0% 2.1% 5.2% 34.0% 0.5% 13.5% 1995 (0.3%) 1.0% 1.0% (2.6%) (30.8%) 0.9% 2.2% (In thousands, except earnings per share) Operating income: As reported Excluding special items Net income: As reported Excluding special items Earnings per share: As reported – basic – diluted Excluding special items – basic – diluted 1997: For the 52-week fiscal year ended December 28, 1997, ACC reported net income of $82.3 million, or $2.21 per basic share ($2.16 per diluted share). During 1997, the Company received a $71.5 million payment from Molson Breweries of Canada Limited (Molson) to settle legal disputes with ACC and CBC, less approximately $3.2 million in related legal expenses. ACC also recorded a $22.4 million reserve related to the recoverability of CBC’s investment in Jinro-Coors Brewing Company (JCBC) of Korea, as well as a $14.4 million charge related to CBC’s brewery in Zaragoza, Spain, for the impairment of certain long-lived assets and goodwill and for severance costs for a limited work force reduction. These special items amounted to a credit of $31.5 million to pretax income, or $0.37 per basic share ($0.36 per diluted share), after tax. Without this special credit, ACC would have reported net earnings of $68.3 million, or $1.84 per basic share ($1.80 per diluted share). Consolidated Results of Continuing Operations – 1997 vs. 1996 and 1996 vs. 1995 (Excluding special items) 1997 vs. 1996: Net sales increased 4.6% driven primarily by an increase in unit volume of 2.7%. This increase in net sales was also attributable to increased international sales, which generate higher revenue per barrel than domestic sales; greater revenues related to the Canadian business due to the favorable impact of the interim agreement in effect during the year with Molson; and net price increases. Gross profit in 1997 rose 14.2% to $701.4 million from 1996 due to the 4.6% increase in net sales, as discussed above, along with a 0.6% reduction in cost of goods sold. Increases in cost of goods caused by higher sales volume were offset by reduced can costs; higher income recognized from CBC’s joint ventures that produce bottles and cans; lower costs related to fixed asset write-offs; lower costs for employee benefits; and less depreciation expense. 17
Slide 20: Operating income increased 32.6% to $115.9 million in 1997 as a result of the higher gross profit discussed above, offset by an 11.1% increase in marketing, general and administrative expenses. Advertising costs increased 8.5% over 1996, with increased marketing investment in premium brands and international advertising costs. General and administrative (G&A) costs increased primarily due to incentive compensation, continued investment in both domestic and international sales organizations, higher costs of operating distributorships (a distributorship was acquired in mid-1997) and increases in administrative and start-up costs for certain foreign operations. Net non-operating expenses in 1997 declined significantly from 1996 because of a 62.1% decrease in net interest expense partially offset by a 26.7% decrease in miscellaneous income. Increased cash and investment balances attributed to improved cash flow resulted in higher interest income on investments, causing the change in net interest expense. Decreased royalties earned on certain can production technologies caused the decrease in miscellaneous income. The Company’s effective tax rate decreased to 40.8% in 1997 from 41.8% in 1996 primarily due to higher tax-exempt income and foreign tax credits. The 1997 effective tax rate exceeded the statutory rate primarily because of the effects of certain foreign investments. Net earnings for 1997 were $68.3 million, or $1.84 per basic share ($1.80 per diluted share), compared to $47.3 million, or $1.25 per basic share ($1.24 per diluted share) for 1996, representing increases of 47.2% (basic) and 45.2% (diluted) in earnings per share. 1996 vs. 1995: Even though unit volume decreased 1.3%, net sales increased 3.0% in 1996 from 1995. The decrease in unit volume was caused by a shorter fiscal year in 1996 (1996 consisted of 52 weeks versus 53 weeks in 1995). On a comparablecalendar basis, 1996 sales volume essentially was unchanged from 1995. Net sales increased in 1996 from 1995 due to price increases; lower price promotion expenses; reduced freight charges as a result of direct shipments to certain markets; increased international and export sales, which generate higher revenue per barrel than domestic sales; the impact of CBC’s interim agreement with Molson Breweries, which became effective in the fourth quarter; and the slight reductions in excise taxes related to the increase in export sales. Lower Zima and Artic Ice volumes and greater proportionate Keystone volumes negatively impacted net sales per barrel in 1996. Gross profit in 1996 rose 5.2% to $614.4 million from 1995 due to the 3.0% increase in net sales, as discussed above, offset in part by a 1.9% increase in cost of goods sold. Cost of goods sold increased due to cost increases in paper and glass packaging materials; abandonments of certain capital projects; cost increases for certain new contract-brewing arrangements; and cost increases for Japanese operations, which began in the fourth quarter of 1995. The increase in cost of goods sold was partially offset by the favorable impact of decreases in brewing material costs; changes in brand mix (specifically, increases in Coors Light volume offset in part by decreases in Zima volume and increases in Keystone volume); and slightly favorable labor costs. Additionally, 1995 gross profit included the cost of the Zima Gold termination and withdrawal. Operating income increased 34.0% to $87.4 million in 1996 from 1995 primarily due to a 5.2% increase in gross profit discussed earlier and a 6.1% decrease in research and development expenses, offset partially by a 13.5% increase in G&A 18 expenses. Marketing expenses were relatively unchanged from 1995. G&A expenses increased due to continued investments in domestic and foreign sales organizations; increases in officers’ life insurance expenses; increases in costs of operating distributorships (a distributorship was acquired in 1995); and increases in administrative costs for certain foreign operations. Research and development expenses decreased due to the planned reduction in the number of capital projects in 1996. Net non-operating expenses in 1996 declined 14.9% from 1995 because of a 47.5% increase in net miscellaneous income offset in part by a 5.4% increase in net interest expense. Increased royalties earned on certain can-decorating technologies drove the increase in miscellaneous income. Additionally, net interest expense increased due to interest incurred on the Senior Notes and reductions in the amount of interest capitalized on capital projects. The Company’s effective tax rate increased to 41.8% in 1996 from 41.6% in 1995 primarily due to changes in cash surrender values of officers’ life insurance. Further, the 1996 effective tax rate exceeded the statutory rate because of the effects of certain non-deductible expenses and foreign investments. Net earnings for 1996 were $47.3 million, or $1.25 per basic share ($1.24 per diluted share), compared to $33.9 million, or $0.89 per basic and diluted share, for 1995, representing a 40.4% increase in basic earnings per share. Liquidity and Capital Resources The Company’s primary sources of liquidity are cash provided by operating activities and external borrowings. As of December 28, 1997, ACC had working capital of $158.0 million, and its net cash position was $168.9 million compared to $110.9 million as of December 29, 1996, and $32.4 million as of December 31, 1995. In addition to its cash resources, ACC had short-term investments of $42.2 million at December 28, 1997, compared to $6.0 million at December 29, 1996. ACC also had $47.1 million of marketable investments with maturities exceeding one year at December 28, 1997, and no comparable investments at December 29, 1996. ACC had no marketable investments other than cash equivalents at December 31, 1995. 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; costs to make computer software Year 2000 compliant; and anticipated capital expenditures in the range of $75 to $85 million for production equipment, information systems, repairs and upkeep, and environmental compliance. Operating activities: Net cash provided by operating activities was $260.6 million for 1997, $189.6 million for 1996 and $92.4 million for 1995. The increase in cash flows provided by operating activities in 1997 compared to 1996 was attributable primarily to higher net income; decreases in inventories and other assets; and increases in accounts payable and accrued expenses and other liabilities, partially offset by increases in accounts and notes receivable. The decrease in inventories primarily resulted from lower levels of packaging supplies inventories on hand. The decrease in other assets is due to a reduction in other supplies. The increase in accounts payable and accrued expenses and other liabilities relative to 1996 reflects
Slide 21: accruals for incentive compensation and increased payables for excise taxes. The increase in accounts and notes receivable reflects higher sales volumes and higher amounts due from container joint venture partners. The 1996 increase in cash flows from operations was primarily due to decreases in inventories; moderate decreases in accounts payable and accrued expenses and other liabilities (relative to significant decreases in 1995); and decreases in accounts and notes receivable. The decrease in inventories primarily resulted from a higher proportion of shipments directly to distributors rather than shipments through to satellite redistribution centers. The moderate decreases in accounts payable and accrued expenses and other liabilities, compared to 1995, reflects the significant payment of obligations to various suppliers, including advertising agencies, in 1995. Accounts and notes receivable declined because sales were lower during the last 12 to 16 days of 1996 than during the same period of 1995. CBC’s credit terms are generally 12 to 16 days. Investing activities: During 1997, ACC spent $127.9 million on investing activities compared to $51.4 million in 1996 and $118.5 million in 1995. The 1997 increase was due primarily to ACC’s investments in marketable securities with extended maturities that are not considered cash equivalents. The net of purchases over sales of these securities was $83.3 million in 1997. Capital expenditures decreased to $60.4 million in 1997 from $65.1 million in 1996 and $157.6 million in 1995. In 1997, capital expenditures focused on enhancing packaging operations, while 1996 expenditures focused on information systems and expansion of packaging capacity. In 1995, capital expenditures focused on upgrades and expansion of Golden-based facilities – particularly bottling capacity. Proceeds from property sales were $3.3 million in 1997 compared to $8.1 million in 1996 and $44.4 million in 1995. Proceeds from property sales in 1995 were unusually high because of the sale of the power plant equipment and support facilities for $22.0 million and the sale of certain bottleline machinery and equipment under a sale-leaseback transaction for $17.0 million. Financing activities: Net cash used in financing activities was $72.0 million during 1997 attributable to principal payments on ACC’s medium-term notes of $20.5 million, net purchases of Class B common stock for $35.6 million and dividend payments of $20.5 million. ACC spent $59.3 million on financing activities during 1996 due primarily to principal payments on its medium-term notes of $38.0 million, purchases of Class B common stock for $3.0 million and dividend payments of $19.0 million. During 1995, the Company generated $31.0 million of cash from financing activities due to the receipt of $100 million from a private placement of Senior Notes, which was offset by principal payments on medium-term notes of $44 million, purchases of Class B common shares of $9.9 million and dividend payments of $19.1 million. Debt obligations: As of December 28, 1997, ACC had $67.5 million outstanding in medium-term notes. With cash on hand, the Company repaid principal of $20.5 million and $38 million on these notes in 1997 and 1996, respectively. Principal payments of $44 million in 1995 were funded by a combination of cash on hand and borrowings. Fixed interest rates on these notes range from 8.63% to 9.05%. Aggregate annual maturities on outstanding notes are $27.5 million in 1998 and $40 million in 1999. In the third quarter of 1995, ACC completed a $100 million private placement of Senior Notes at fixed interest rates ranging from 6.76% to 6.95% per annum. The repayment schedule is $80 million in 2002 and $20 million in 2005. The proceeds from this borrowing were used primarily to reduce debt under the revolving line of credit and to repay principal on the medium-term notes. The Company’s debt to total capitalization ratio was 19.0% in 1997, 21.2% at the end of 1996 and 24.9% at the end of 1995. Revolving line of credit: In addition to the medium-term notes and the Senior Notes, the Company has an unsecured, committed credit arrangement totaling $200 million and as of December 28, 1997, had all $200 million available. This line of credit has a five-year term that expires in 2002, with two optional one-year extensions. A facilities fee is paid on the total amount of the committed credit. The only restriction for withdrawal is a debt to total capitalization covenant, with which the Company was in compliance at year-end 1997. CBC’s distribution subsidiary in Japan has two revolving lines of credit that it uses in normal operations. Each of these facilities provides up to 500 million yen (approximately $4.0 million each) in short-term financing. As of December 28, 1997, the approximate yen equivalent of $4.5 million was outstanding under these arrangements and included in accrued expenses and other liabilities in the consolidated balance sheets. Hedging activities: As of December 28, 1997, hedging activities consisted exclusively of hard currency forward contracts to directly offset hard currency exposures. These irrevocable contracts reduced the risk to financial position and results of operations of changes in the underlying foreign exchange rate. Any variation in the exchange rate accruing to the contract would be offset by a similar change in the related obligation. Therefore, after execution of the contract, variations in exchange rates would not impact the Company’s financial statements. ACC’s hedging activities and hard currency exposures are minimal. The Company does not enter into derivative financial instruments for speculation or trading purposes. Stock repurchase plan: On November 13, 1997, the board of directors authorized the extension of the Company’s stock repurchase program through 1998. The program authorizes repurchases of up to $40 million of ACC’s outstanding Class B common stock during 1998. Repurchases will be financed by funds generated from operations or possibly from short-term borrowings. The Company spent approximately $25 million in 1997 to repurchase common stock, primarily in purchasing almost 1 million shares of outstanding Class B common stock under the previously approved stock repurchase program. Investment in Jinro-Coors Brewing Company: CBC invested approximately $22 million for a 33% interest in JCBC in 1992. CBC has accounted for this investment under the cost basis of accounting, given that CBC has not had the ability to exercise significant influence over JCBC and that CBC’s investment in JCBC has 19
Slide 22: been considered temporary. This investment included a put option that was exercised by CBC in December 1997. The put option entitled CBC to require Jinro Limited (the 67% owner of JCBC) to purchase CBC’s investment at the greater of cost or market value (both measured in Korean won). Beginning in April 1997, Jinro Limited, a publicly traded subsidiary of Jinro Group, missed debt payments and began attempting to restructure. In response to its financial difficulties and those of its subsidiaries (including JCBC), Jinro Group has been working with its creditors and the government to restructure its debts and has begun selling real estate and merging and/or selling businesses. The financial difficulties of JCBC and Jinro Limited, the guarantor of the put option discussed above, called into question the recoverability of CBC’s investment in JCBC. Therefore, during the second quarter of 1997, CBC fully reserved for its investment in JCBC. This reserve was classified as a special charge in the accompanying statements of income. CBC exercised its put option in December 1997. Since Jinro Limited’s obligation under the put option is measured in Korean won and given the current significant devaluation of that currency, the full amount received from Jinro Limited would be significantly less (approximately half as of December 28, 1997) than the value of CBC’s original investment. Jinro Limited, which is operating under protection from its creditors under the Korean composition law, has until June 1998 to perform its obligation under the put option. Given Jinro Limited’s current financial condition and the volatility of the Korean economy, CBC cannot predict whether Jinro Limited will be able to perform under this obligation. 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 include, among others, statements concerning the Company’s outlook for 1998; overall and brand-specific volume trends; pricing trends and industry forces; cost reduction strategies and their results; targeted goals for return on invested capital; the Company’s expectations for funding its 1998 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 forwardlooking 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 in response to price increases; • a potential shift in consumer preferences away from the premium light beer category, including Coors Light; • 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; • 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 excise or other taxes; • restrictions on advertising (e.g., media, outdoor ads or sponsorships); • labor issues, including union activities that required a substantial increase in cost of goods sold or led to a strike, impairing production and decreasing sales; • 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 industry consolidation; • 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; and • the risk that computer systems of the Company’s significant suppliers and customers may not be Year 2000 compliant. These and other risks and uncertainties affecting the Company are discussed in greater detail in this report and in the Company’s other filings with the Securities and Exchange Commission. Outlook for 1998 Volume gains are expected to increase net sales in 1998; however, the pricing environment is expected to be extremely competitive, restraining expectations of net sales per barrel. Also, increased value-pack activity may have an unfavorable impact on top-line performance due to lower margins. Income from the Company’s Canadian business is expected to be 25% to 30% lower per barrel in 1998 than in 1997, based on current sales trends and 1998 plans for marketing investments. Revenue received under the Company’s interim agreement with Molson, which expired at year-end 1997, provided higher earnings per barrel than those expected as a result of the new partnership with The Molson Companies Ltd. and Carling O’Keefe Breweries of Canada Ltd. On the other hand, the partners of Coors Canada see considerable growth potential for Coors products in Canada in the future. For fiscal year 1998, raw material costs are expected to be up slightly, but fixed costs and freight costs are expected to be down slightly. This outlook could change if aluminum or paper cost trends change during the first nine months of 1998. CBC continues to pursue improvements in its operations and technology functions to achieve cost reductions over time. 20
Slide 23: Advertising and other G&A costs are expected to increase but at a lower rate than in 1997. 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. See the item titled Year 2000 under “Contingencies” of this section for a discussion of the expected financial impact of this issue. Total net interest expense is expected to be lower in 1998 based on CBC’s more favorable cash position and its lower outstanding debt relative to its 1997 financial position. Net interest expense could be less favorable than expected if the Company decides to invest a substantial portion of its cash balances. Additional outstanding common stock may be repurchased in 1998 as approved by the ACC board of directors in November 1997. The effective tax rate for 1998 is not expected to differ significantly from the 1997 effective tax rate applied to income excluding special items. The level and mix of pretax income for 1998 could affect the actual rate for the year. In 1998, 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 venture) in the range of $75 to $85 million. In addition to CBC’s 1998 planned capital expenditures, incremental strategic investments will be considered on a case-by-case basis. Contingencies From time to time, ACC also is notified that it is or may be a PRP under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or similar state laws for the cleanup of other sites where hazardous substances have allegedly been released into the environment. The Company cannot predict with certainty the total costs of cleanup, its share of the total cost or the extent to which contributions will be available from other parties, the amount of time necessary to complete the cleanups or insurance coverage. However, based on investigations to date, the Company believes that any liability would be immaterial to its financial position and results of operations for these sites. There can be no certainty, however, that the Company will not be named as a PRP at additional CERCLA sites in the future, or that the costs associated with those additional sites will not be material. While it is impossible to predict the Company’s eventual aggregate cost for environmental and related matters, management believes 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 the Company’s results of operations or its financial or competitive position. The Company believes adequate disclosures have been provided for losses that are reasonably possible. Further, as the Company continues to focus on resource conservation, waste reduction and pollution prevention, it believes that potential future liabilities will be reduced. Year 2000: As the Year 2000 approaches, ACC recognizes the need to ensure 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 this problem. The Company has and will continue to make certain investments in its software systems and applications to ensure that it is Year 2000 compliant. The financial impact to ACC of Year 2000 remediation costs is anticipated to be in the range of $10 to $15 million in each of 1998 and 1999. In addition, ACC is working with its suppliers and customers to ensure their compliance with Year 2000 issues in order to avoid any interruptions in its business. While ACC does not at this time anticipate significant problems with suppliers and customers, it is developing contingency plans with these third parties due to the possibility of compliance issues. Accounting Changes Environmental: The Company was one of numerous parties named by the Environmental Protection Agency (EPA) as a “potentially responsible party” (PRP) for the Lowry site, a legally permitted landfill owned by the City and County of Denver. In 1990, the Company recorded a special pretax charge of $30 million for potential cleanup costs of the site. The City and County of Denver, Waste Management of Colorado, Inc. and Chemical Waste Management, Inc. brought litigation in 1991 in U.S. District Court against the Company and 37 other PRPs to determine the allocation of costs of Lowry site remediation. In 1993, the Court approved a settlement agreement between the Company and the plaintiffs, resolving the Company’s liabilities for the site. The Company agreed to initial payments based on an assumed present value of $120 million in total site remediation costs. Further, the Company agreed to pay a specified share of costs if total remediation costs exceeded this amount. The Company remitted its agreed share of $30 million, based on the $120 million assumption, to a trust for payment of site remediation, operating and maintenance costs. The City and County of Denver, Waste Management of Colorado, Inc. and Chemical Waste Management, Inc. are expected to implement site remediation. The EPA’s projected costs to meet the announced remediation objectives and requirements are currently below the $120 million assumption used for ACC’s settlement. The Company has no reason to believe that total remediation costs will result in additional liability to the Company. In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (SOP 98-1). SOP 98-1 requires that specified costs incurred in developing or obtaining internal use software, as defined by SOP 98-1, be capitalized once certain criteria have been met and amortized in a systematic and rational manner over the software’s estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998, and stipulates that costs incurred prior to initial application of the statement not be adjusted according to the statement’s provisions. Adoption of SOP 98-1 is not expected to have a significant impact on the Company’s financial position or results of operations. 21
Slide 24: Adolph Coors Company and Subsidiaries MANAGEMENT’S FOR FINANCIAL RESPONSIBILITY STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS The management of Adolph Coors Company and its subsidiaries has the responsibility for the preparation, integrity and fair presentation of the accompanying financial statements. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and, in management’s opinion, are fairly presented. The financial statements include amounts that are based on management’s best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements. In order to meet these responsibilities, the Company maintains a system of internal control, which is designed to provide reasonable assurance to management and to the Board of Directors regarding the preparation and publication of reliable and accurate financial statements; over safeguarding of assets; the effectiveness and efficiency of operations; and compliance with applicable laws and regulations. The system includes, among other things, division of responsibility, a documented organization structure, established policies and procedures that are communicated throughout the Company, and careful selection and training of our people. In addition, the Company maintains an internal auditing program that assesses the effectiveness of the internal controls and recommends possible improvements. Management has considered the internal control recommendations and has taken actions that we believe are cost-effective to respond appropriately to these recommendations. The Board of Directors, operating through its Audit Committee, which is composed of outside directors, provides oversight to the financial reporting process. To the Board of Directors and Shareholders of Adolph Coors Company: In our opinion, the accompanying consolidated balance sheets and related consolidated statements of income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Adolph Coors Company and its subsidiaries at December 28, 1997, and December 29, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Denver, Colorado February 12, 1998 William K. Coors Chairman, President and Chief Executive Officer Timothy V. Wolf Senior Vice President and Chief Financial Officer Coors Brewing Company 22
Slide 25: Adolph Coors Company and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME For the years ended December 28, December 29, 1997 1996 Sales – domestic and international Less – beer excise taxes Net sales Costs and expenses: Cost of goods sold Marketing, general and administrative Special (credits) charges (Note 9) Total operating expenses Operating income Other income (expense): Interest income Interest expense Miscellaneous – net Total Income before income taxes Income tax expense (Note 5) Net income Net income per common share – basic Net income per common share – diluted Weighted-average number of outstanding common shares – basic common shares – diluted See notes to consolidated financial statements. December 31, 1995 $2,075,917 385,216 1,690,701 1,106,635 518,888 (15,200) 1,610,323 80,378 1,345 (11,863) 3,418 (7,100) 73,278 30,100 43,178 $1.13 $1.13 38,164 38,283 (in thousands, except per share data) $2,208,231 386,080 1,822,151 1,120,778 585,491 (31,517) 1,674,752 147,399 9,360 (13,560) 3,694 (506) 146,893 64,633 $ 82,260 $2.21 $2.16 37,218 38,056 $2,121,367 379,311 1,742,056 1,127,689 527,007 6,341 1,661,037 81,019 2,821 (13,907) 5,042 (6,044) 74,975 31,550 43,425 $1.14 $1.14 37,966 38,219 $ $ 23
Slide 26: Adolph Coors Company and Subsidiaries CONSOLIDATED BALANCE SHEETS Assets Current assets: Cash and cash equivalents Short-term investments Accounts and notes receivable: Trade, less allowance for doubtful accounts of $557 in 1997 and $275 in 1996 Affiliates Other, less allowance for certain claims of $1,500 in 1997 and $0 in 1996 Inventories: Finished In process Raw materials Packaging materials, less allowance for obsolete inventories of $1,049 in 1997 and $1,046 in 1996 Total inventories Other supplies, less allowance for obsolete supplies of $4,165 in 1997 and $2,273 in 1996 Prepaid expenses and other assets Deferred tax asset (Note 5) Total current assets Properties, at cost and net (Note 2) Excess of cost over net assets of businesses acquired, less accumulated amortization of $5,726 in 1997 and $4,778 in 1996 Other assets (Note 10) Total assets See notes to consolidated financial statements. December 28, 1997 December 29, 1996 (In thousands) $ 168,875 42,163 $ 110,905 5,958 89,731 19,677 15,077 44,729 20,119 35,654 5,977 106,479 32,362 18,224 24,606 517,194 733,117 22,880 138,892 $1,412,083 86,421 14,086 13,836 43,477 23,157 40,737 13,699 121,070 36,103 18,836 9,427 416,642 814,102 21,374 110,418 $1,362,536 24
Slide 27: Adolph Coors Company and Subsidiaries CONSOLIDATED BALANCE SHEETS Liabilities and Shareholders’ Equity Current liabilities: Current portion of long-term debt (Note 4) Accounts payable: Trade Affiliates Accrued salaries and vacations Taxes, other than income taxes Federal and state income taxes (Note 5) Accrued expenses and other liabilities Total current liabilities Long-term debt (Note 4) Deferred tax liability (Note 5) Postretirement benefits (Note 8) Other long-term liabilities Total liabilities Commitments and contingencies (Notes 3, 4, 5, 6, 7, 8, 10 and 12) Shareholders’ equity (Notes 6 and 11): 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) Class B common stock, non-voting, no par value, $0.24 stated value (authorized: 100,000,000 shares; issued: 35,599,356 in 1997 and 36,662,404 in 1996) Total capital stock Paid-in capital Retained earnings Foreign currency translation adjustment Total shareholders’ equity Total liabilities and shareholders’ equity See notes to consolidated financial statements. December 28, 1997 December 29, 1996 (In thousands) $ 27,500 113,864 18,072 58,257 52,805 13,660 74,988 359,146 145,000 76,219 71,908 23,242 675,515 $ 17,000 110,696 12,424 39,482 30,976 8,983 72,887 292,448 176,000 76,083 69,773 32,745 647,049 — 1,260 — 1,260 8,476 9,736 — 730,628 (3,796) 736,568 $1,412,083 8,729 9,989 31,436 671,972 2,090 715,487 $1,362,536 25
Slide 28: Adolph Coors Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS December 28, 1997 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in net earnings of joint ventures Reserve for joint venture investment Depreciation, depletion and amortization Loss on sale or abandonment of properties and intangibles Impairment charge Deferred income taxes Change in operating assets and liabilities: Accounts and notes receivable Inventories Other assets Accounts payable Accrued expenses and other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of investments Sales and maturities of investments Additions to properties and intangible assets Proceeds from sale of properties and intangibles Distributions from joint ventures Other Net cash used in investing activities Cash flows from financing activities: Issuance of stock under stock plans Purchases of stock Dividends paid Proceeds from long-term debt Payments of long-term debt Other Net cash (used in) provided by financing activities Cash and cash equivalents: Net increase in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Balance at beginning of year Balance at end of year 26 See notes to consolidated financial statements. For the years ended December 29, December 31, 1996 1995 (in thousands) $ 82,260 (15,893) 21,978 117,166 5,594 10,595 (15,043) (10,971) 14,051 3,742 9,599 37,475 260,553 (122,800) 39,499 (60,373) 3,273 12,500 (25) (127,926) 24,588 (60,151) (20,523) — (20,500) 4,544 (72,042) 60,585 (2,615) 110,905 $ 168,875 $ 43,425 (11,467) — 121,121 12,535 — 17,696 2,232 18,076 (2,128) (8,175) (3,712) 189,603 (5,958) — (65,112) 8,098 5,000 6,569 (51,403) 4,674 (6,975) (18,983) — (38,000) — (59,284) 78,916 (397) 32,386 $110,905 $ 43,178 (13,687) — 122,830 1,274 — 3,610 (9,952) 2,135 (655) (32,180) (24,139) 92,414 — — (157,599) 44,448 — (5,338) (118,489) 4,117 (9,936) (19,066) 100,000 (44,000) (116) 30,999 4,924 294 27,168 $ 32,386
Slide 29: Adolph Coors Company and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Common stock issued Class A Class B Balances, December 25, 1994 Shares issued under stock plans Purchase of stock Other Net income Cash dividends – $0.50 per share Balances, December 31, 1995 Shares issued under stock plans Purchase of stock Other Net income Cash dividends – $0.50 per share Balances, December 29, 1996 Shares issued under stock plans Purchase of stock Other Net income Cash dividends – $0.55 per share Balances, December 28, 1997 See notes to consolidated financial statements. Paid-in capital $ 39,460 4,058 (9,799) Retained earnings $ 623,418 Foreign currency translation adjustment $ 1,238 Total $ 674,201 4,117 (9,936) 2,522 43,178 (19,066) 695,016 4,674 (6,975) (1,670) 43,425 (18,983) 715,487 25,381 (60,151) (5,886) 82,260 (20,523) (in thousands, except per share data) $ 1,260 $ 8,825 59 (137) 2,522 43,178 (19,066) 1,260 8,747 61 (79) 33,719 4,613 (6,896) 647,530 3,760 (1,670) 43,425 (18,983) 1,260 8,729 236 (489) 31,436 25,145 (56,581) 671,972 (3,081) (5,886) 82,260 (20,523) $1,260 $8,476 $ — $730,628 2,090 $(3,796) $736,568 27
Slide 30: Adolph Coors Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Summary of Significant Accounting Policies Principles of consolidation: The consolidated financial statements include the accounts of Adolph Coors Company (ACC); its principal subsidiary, Coors Brewing Company (CBC); and the majority-owned and controlled domestic and foreign subsidiaries of both ACC and CBC (collectively referred to as the Company). All significant intercompany accounts and transactions have been eliminated. The equity method of accounting is used for the Company’s 50% or less owned affiliates over which the Company has the ability to exercise significant influence (see Note 10). The Company has other investments that are accounted for at cost. Nature of operations: The Company is a multinational brewer and marketer of beer and other malt-based beverages. The vast majority of the Company’s volume is sold in the United States to independent wholesalers. The Company’s international volume is produced, marketed and distributed under varying business arrangements including export, direct investment, joint ventures and licensing. Fiscal year: The fiscal year of the Company is a 52- or 53-week period ending on the last Sunday in December. Fiscal years for the financial statements included herein ended December 28, 1997, a 52-week period; December 29, 1996, a 52-week period; and December 31, 1995, a 53-week period. Investments in marketable securities: ACC invests excess cash on hand in interestbearing debt securities. At December 28, 1997, $42.2 million of these securities were classified as current assets and $47.1 million were classified with longer term assets as their maturities exceeded one year. All of these securities were considered to be available-for-sale. The fair value of these securities at December 28, 1997, approximated their amortized cost. Concentration of credit risk: The majority of the accounts receivable balances are from malt beverage distributors. The Company secures substantially all of this credit risk with purchase money security interests in inventory and proceeds, personal guarantees and/or letters of credit. Inventories: Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for substantially all inventories. Current cost, as determined principally on the first-in, first-out method, exceeded LIFO cost by $43.4 million and $43.1 million at December 28, 1997, and December 29, 1996, respectively. Properties: Land, buildings and equipment are stated at cost. Depreciation is provided principally on the straight-line method over the following estimated useful lives: buildings and improvements, 10 to 45 years; and machinery and equipment, 28 3 to 20 years. Accelerated depreciation methods are generally used for income tax purposes. Expenditures for new facilities and improvements that substantially extend the capacity or useful life of an asset are capitalized. Start-up costs associated with manufacturing facilities, but not related to construction, are expensed as incurred. Ordinary repairs and maintenance are expensed as incurred. Hedging transactions: The Company periodically enters into short-term forward contracts for foreign currency to hedge its exposure to exchange rate fluctuations. The gains and losses on these contracts are deferred and recognized in income when realized. As of December 28, 1997, hedging activities consisted exclusively of hard currency forward contracts to directly offset hard currency exposures. These irrevocable contracts reduced the risk to financial position and results of operations of changes in the underlying foreign exchange rate. Any variation in the exchange rate accruing to the contract would be offset by a similar change in the related obligation. Therefore, after the execution of the contract, variations in exchange rates would not impact the Company’s financial statements. The Company’s hedging activities and hard currency exposures are minimal. The Company does not enter into derivative financial instruments for speculation or trading purposes. Excess of cost over net assets of businesses acquired: The excess of cost over the net assets of businesses acquired in transactions accounted for as purchases is being amortized on a straight-line basis, generally over a 40-year period. Impairment policy: The Company periodically evaluates its assets to assess their recoverability from future operations using undiscounted cash flows. Impairment would be recognized in operations if permanent diminution in value occurs. Advertising: Advertising costs, included in marketing, general and administrative, are expensed when the advertising first takes place. Advertising expense was $360.0 million, $331.9 million and $330.4 million for years 1997, 1996 and 1995, respectively. The Company had $9.6 million and $10.9 million of prepaid advertising production costs reported as assets at December 28, 1997, and December 29, 1996, respectively. Research and development: Research and project development costs, included in marketing, general and administrative, are expensed as incurred. These costs totaled $14.6 million, $15.3 million and $16.3 million in 1997, 1996 and 1995, respectively. Environmental expenditures: Environmental expenditures that relate to current operations are expensed or capitalized, as appropriate. Expenditures that relate to an existing condition caused by past operations, which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be estimated reasonably.
Slide 31: Statement of Cash Flows: The Company defines cash equivalents as highly liquid investments with original maturities of 90 days or less. The fair value of these investments approximates their carrying value. The Company’s 1995 investment in the Rocky Mountain Bottle Company was a $16.2 million non-cash transaction that is not reflected as an investing activity in the Statement of Cash Flows. During 1997, ACC issued $0.8 million in restricted common stock under its management incentive compensation plan. Income taxes paid were $66.8 million in 1997, $13.2 million in 1996 and $15.8 million in 1995. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications: Certain reclassifications have been made to the 1996 and 1995 financial statements to conform with the 1997 presentation. Note 2: Interest incurred, capitalized, expensed and paid was as follows: For the years ended (In thousands) Dec. 28, 1997 $15,460 (1,900) $13,560 $14,643 Dec. 29, 1996 $17,057 (3,150) $13,907 $17,711 Dec. 31, 1995 $18,433 (6,570) $11,863 $16,613 Interest costs Interest capitalized Interest expensed Interest paid Note 3: Properties The cost of properties and related accumulated depreciation, depletion and amortization consists of the following: Dec. 28, 1997 $ 97,117 482,939 1,516,034 8,906 39,941 2,144,937 1,411,820 $ 733,117 $ Dec. 29, 1996 98,666 477,184 1,511,665 10,423 29,873 2,127,811 1,313,709 $ 814,102 Leases The Company leases certain office facilities and operating equipment under cancelable and non-cancelable agreements accounted for as operating leases. At December 28, 1997, the minimum aggregate rental commitment under all noncancelable leases was (in thousands): 1998, $5,403; 1999, $4,578; 2000, $3,124; 2001, $2,353; and $15,021 for years thereafter. Total rent expense was (in thousands) $13,870, $11,680 and $10,376 for years 1997, 1996 and 1995, respectively. Note 4: (In thousands) Debt Long-term debt consists of the following: Dec. 28, 1997 Carrying Fair value value $ 67,500 $ 70,000 100,000 101,000 5,000 5,000 172,500 27,500 176,000 27,500 Dec. 29, 1996 Carrying Fair value value $ 88,000 100,000 5,000 193,000 17,000 $176,000 $ 94,000 101,000 5,000 200,000 17,000 $183,000 Land and improvements Buildings Machinery and equipment Natural resource properties Construction in progress Less accumulated depreciation, depletion and amortization Net properties (In thousands) Medium-term notes Senior Notes Industrial development bonds Total Less current portion Long-term debt In March 1994, CBC, through its subsidiary Coors Brewing Iberica, S.A. (Coors Iberica), purchased a 500,000-hectoliter brewery in Zaragoza, Spain. During 1997, Coors Iberica addressed certain capacity issues at its brewery, as well as certain employment matters. Coors Iberica negotiated severance terms with labor unions during the second quarter of 1997, which prompted CBC management to update its evaluation of the recoverability of Coors Iberica’s long-lived assets and related goodwill. Certain of these assets were deemed impaired in light of expected future, undiscounted cash flows. During the second quarter of 1997, CBC recorded an impairment charge of approximately $10.6 million and severance costs of approximately $3.8 million, which have been classified as special charges in the accompanying statements of income. The impairment charge represented a reduction of the carrying amounts of the impaired assets to their estimated fair market values, which were determined with the aid of an independent, third-party appraisal. $145,000 $148,500 Fair values were determined using discounted cash flows at current interest rates for similar borrowings. As of December 28, 1997, the Company had outstanding $67.5 million of unsecured medium-term notes. Interest is due semiannually in April and October at fixed interest rates ranging from 8.63% to 9.05% per annum. Aggregate annual maturities for the notes issued are $27.5 million in 1998 and $40 million in 1999. On July 14, 1995, the Company completed a $100 million private placement of unsecured Senior Notes at fixed interest rates ranging from 6.76% to 6.95% per annum. Interest on the Notes is due semiannually in January and July. The Notes are payable as follows: $80 million in 2002 and $20 million in 2005. 29
Slide 32: The Company is obligated to pay the principal, interest and premium, if any, on the $5 million, City of Wheat Ridge, Colorado Industrial Development Bonds (Adolph Coors Company Project) Series 1993. The bonds mature in 2013 and are secured by a letter of credit. They are currently variable rate securities with interest payable on the first of March, June, September and December. The interest rate on December 28, 1997, was 4.3%. The Company has an unsecured, committed credit arrangement totaling $200 million and as of December 28, 1997, had all $200 million available. This line of credit has a five-year term that expires in 2002, with two optional one-year extensions. A facilities fee is paid on the total amount of the committed credit. The only restriction for withdrawal is a debt to total capitalization covenant, with which the Company was in compliance at year-end 1997. CBC’s distribution subsidiary in Japan has two revolving lines of credit that it utilizes in its normal operations. Each of these facilities provides up to 500 million yen (approximately $4.0 million each) in short-term financing. As of December 28, 1997, the approximate yen equivalent of $4.5 million was outstanding under these arrangements and included in accrued expenses and other liabilities in the accompanying balance sheets. Note 5: The Company’s income tax expense varies from the amount expected by applying the statutory federal corporate tax rate to income as follows: For the years ended Dec. 28, 1997 Expected tax rate State income taxes, net of federal benefit Effect of foreign investments (Non-taxable income) non-deductible expenses and losses Effect of reserve for joint venture investment Other, net Effective tax rate 35.0% 3.9 0.8 (0.4) 4.8 (0.1) 44.0% Dec. 29, 1996 35.0% 4.3 1.6 1.9 — (0.8) 42.0% Dec. 31, 1995 35.0% 4.7 0.6 0.8 — — 41.1% The Company’s deferred taxes are composed of the following: Dec. 28, 1997 Dec. 29, 1996 $ 11,865 9,051 2,054 — 22,970 4,545 8,998 13,543 $ 9,427 $ 7,077 9,006 27,724 2,308 — 3,403 49,518 123,855 1,746 125,601 $ 76,083 Income Taxes Income tax expense (benefit) includes the following current and deferred provisions: For the years ended (In thousands) (In thousands) Dec. 28, 1997 Dec. 29, 1996 $ 8,878 4,976 13,854 12,154 5,542 17,696 $31,550 Dec. 31, 1995 $24,275 2,215 26,490 6,062 (2,452) 3,610 $30,100 Current: Federal $ 68,435 State and foreign 11,241 Total current tax expense 79,676 Deferred: Federal (12,935) State and foreign (2,108) Total deferred tax (benefit) expense (15,043) Total income tax expense $ 64,633 Current deferred tax assets: Deferred compensation and other employee related $ 11,773 Balance sheet reserves and accruals 18,560 Other 1,560 Valuation allowance (7,002) Total current deferred tax assets 24,891 Current deferred tax liabilities: Balance sheet reserves and accruals 285 Other — Total current deferred tax liabilities 285 Net current deferred tax assets $ 24,606 Non-current deferred tax assets: Deferred compensation and other employee related $ 2,999 Balance sheet reserves and accruals 2,784 Other employee postretirement benefits 28,158 Environmental accruals 1,469 Deferred foreign losses 2,142 Other 1,583 Total non-current deferred tax assets 39,135 Non-current deferred tax liabilities: Depreciation and capitalized interest Other Total non-current deferred tax liabilities Net non-current deferred tax liabilities 115,226 128 115,354 $ 76,219 30
Slide 33: The deferred tax assets have been reduced by a valuation allowance because management believes it is more likely than not that such benefits will not be fully realized. The Internal Revenue Service (IRS) has completed its examination of the Company’s federal income tax returns through 1992. The IRS currently is examining the federal income tax returns for fiscal years 1993 through 1995. In the opinion of management, adequate accruals have been provided for all income tax matters and related interest. The Company and ACX Technologies, Inc. (ACX) are parties to a tax sharing agreement that provides for, among other things, the treatment of tax matters for periods prior to the distribution of ACX stock at the end of 1992 and the assignment of responsibility for adjustments as a result of audits by taxing authorities and is designed to preserve the status of the distribution as tax-free (see Note 12). Note 6: The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997 and 1996, respectively: dividend yield of 2.47% and 2.535%; expected volatility of 36.06% and 26.7%; risk-free interest rates of 6.52% and 5.74% for the 1990 Plan options; and expected lives of 10 years for both years. 1983 Plan: The 1983 non-qualified Adolph Coors Company Stock Option Plan, as amended, (the 1983 Plan) provides for options to be granted at the discretion of the board of directors. These options expire 10 years from date of grant. No options have been granted under this plan since 1989. At this time, the board of directors has decided not to grant additional options under this plan. A summary of the status of the Company’s 1983 Plan as of December 28, 1997, December 29, 1996, and December 31, 1995, and changes during the years ending on those dates is presented below: Options exercisable at year-end Weightedaverage exercise Shares price Outstanding at Dec. 25, 1994 Exercised Forfeited Outstanding at Dec. 31, 1995 Exercised Forfeited Outstanding at Dec. 29, 1996 Exercised Forfeited Outstanding at Dec. 28, 1997 411,101 228,636 13,811 168,654 100,231 18,908 49,515 45,627 3,888 — $15.92 15.24 18.02 16.66 16.54 21.97 14.85 14.55 18.36 N/A Weightedaverage exercise Shares price 411,101 $15.92 Stock Option, Restricted Stock Award and Employee Award Plans At December 28, 1997, the Company had four stock-based compensation plans, which are described in greater detail below. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, as the exercise prices upon grant are equal to quoted market values, no compensation cost has been recognized for the stock option portion of the plans. Had compensation cost been determined for the Company’s stock option portion of the plans based on the fair value at the grant dates for awards under those plans consistent with the alternative method set forth under Financial Accounting Standards Board Statement No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below: (In thousands, except per share data) 1997 $82,260 $78,077 $2.21 $2.10 1996 $43,425 $42,793 $1.14 $1.13 $1.14 $1.12 1995 $43,178 $41,799 $1.13 $1.09 $1.13 $1.09 168,654 16.66 Net income As reported Pro forma Net income per common share – basic As reported Pro forma 49,515 14.85 — N/A Net income per common share – diluted As reported $2.16 Pro forma $2.05 The weighted-average fair value of options granted under the 1990 Equity Incentive Plan during the year is: Common stock available for options under the 1983 Plan as of December 28, 1997, December 29, 1996, and December 31, 1995, was 716,886 shares, 712,998 shares and 694,090 shares, respectively. 1990 Plan: The 1990 Equity Incentive Plan (1990 EI Plan) that became effective January 1, 1990, as amended, provides for two types of grants: stock options and restricted stock awards. The stock options have a term of 10 years with exercise prices equal to fair market value on the day of the grant. For grants during 1997, one-third of the stock option grant vests in each of the three successive years after the date of grant. For grants during 1994 through 1996, stock options vested at 10% for each $1 increase in fair market value of ACC stock from date of grant, with a one-year holding period, or vest 100% after nine years. Once a portion has vested, it is not forfeited even if the fair market value drops. 31 $8.78 $7.21 $6.21
Slide 34: A summary of the status of the Company’s 1990 EI Plan as of December 28, 1997, December 29, 1996, and December 31, 1995, and changes during the years ending on those dates is presented below: Options exercisable at year-end Weightedaverage exercise Shares price Outstanding at Dec. 25, 1994 Granted Exercised Forfeited Outstanding at Dec. 31, 1995 Granted Exercised Forfeited Outstanding at Dec. 29, 1996 Granted Exercised Forfeited Outstanding at Dec. 28, 1997 775,248 600,561 25,190 64,567 1,286,052 614,674 107,327 70,035 1,723,364 1,573,742 901,834 143,093 2,252,179 $16.02 16.75 14.98 16.57 16.35 21.27 16.26 18.84 18.01 20.23 17.71 19.21 19.61 Weightedaverage exercise Shares price 232,635 $15.44 1995 Supplemental Compensation Plan: In 1995, the Company adopted a supplemental compensation plan that covers substantially all its employees. Under the plan, management is allowed to recognize employee achievements through awards of Coors Stock Units (CSUs) or cash. CSUs are a measurement component equal to the fair market value of the Company’s Class B common stock. CSUs have a one-year holding period after which the recipient may redeem the CSUs for cash, or, if the holder has 100 or more CSUs, shares of the Company’s Class B common stock. Prior to 1997, the CSUs had a six-month holding period. Awards under the plan in 1997 and 1996 were immaterial. Common stock available under this plan as of December 28, 1997, was 83,707 shares. Note 7: 512,708 15.95 846,273 16.30 769,202 18.25 Common stock available for options under the 1990 EI Plan as of December 28, 1997, December 29, 1996, and December 31, 1995, was 4,675,195 shares, 3,105,844 shares and 3,650,483 shares, respectively. In 1997, 40,201 shares of restricted stock were issued under the 1990 EI Plan. Vesting in the restricted stock award is one year from the date of grant. The compensation cost associated with these awards was immaterial. In 1996, 45,390 shares of restricted stock were issued under the 1990 EI Plan. Vesting in the restricted stock awards is over a three-year period from the date of grant. The compensation cost associated with these awards is amortized to expense over the vesting period. Compensation cost associated with these awards was immaterial in 1997 and 1996. 1991 Plan: In 1991, the Company adopted the Equity Compensation Plan for Non-Employee Directors (EC Plan). The EC Plan provides for two grants of the Company’s stock: the first grant is automatic and equals 20% of the director’s annual retainer, and the second grant is elective and covers all or any portion of the balance of the retainer. A director may elect to receive his remaining 80% retainer in cash, restricted stock or any combination of the two. Grants of stock vest after completion of the director’s annual term. The compensation cost associated with the EC Plan is amortized over the director’s term. Compensation cost associated with this plan was immaterial in 1997 and 1996. Common stock reserved for this plan as of December 28, 1997, was 47,810 shares. 32 Employee Retirement Plans The Company maintains several defined benefit pension plans for the majority of its employees. Benefits are based on years of service and average base compensation levels over a period of years. Plan assets consist primarily of equity, interest-bearing investments and real estate. The Company’s funding policy is to contribute annually not less than the ERISA minimum funding standards, nor more than the maximum amount that can be deducted for federal income tax purposes. Total expense for all these plans was $14.1 million in 1997, $24.8 million in 1996 and $22.7 million in 1995. These amounts include the Company’s matching for the savings and investment (thrift) plan of $5.8 million in 1997 and $5.7 million each for 1996 and 1995. The decrease in 1997 pension expense versus 1996 was caused primarily by an improvement in the funded position of the Coors Retirement Plan and an increase in the discount rate (settlement rate) used to compute 1997 pension cost to 7.75% from the rate used for 1996 pension cost of 7.25%. The increase in 1996 pension expense versus 1995 was caused primarily by a decrease in the 1996 discount rate (settlement rate) to 7.25% from the 1995 rate of 8.5%. Note that the settlement rates shown in the table on the following page were selected for use at the end of each of the years shown. Actuaries calculate pension expense annually based on data available at the beginning of each year, which includes the settlement rate selected and disclosed at the end of the previous year. For the years ended (In thousands) Dec. 28, 1997 $ 11,234 32,730 (75,242) 39,539 $ 8,261 Dec. 29, 1996 $ 12,729 31,162 (65,504) 40,691 $ 19,078 Dec. 31, 1995 $ 9,858 29,285 (69,346) 47,005 $ 16,802 Service cost – benefits earned during the year Interest cost on projected benefit obligations Actual gain on plan assets Net amortization and deferral Net pension cost
Slide 35: The funded status of the pension plans and amounts recognized in the accompanying balance sheets are as follows: Dec. 28, 1997 Dec. 29, 1996 Net periodic postretirement benefit cost included the following: For the years ended (In thousands) (In thousands) Dec. 28, 1997 $1,408 4,775 (353) $5,830 Dec. 29, 1996 $2,065 5,082 (310) $6,837 Dec. 31, 1995 $2,281 6,426 (560) $8,147 Actuarial present value of accumulated plan benefits, including vested benefits of $368,288 in 1997 and $332,444 in 1996 Projected benefit obligations for services rendered to date Plan assets available for benefits Plan assets (more than) less than projected benefit obligations Unrecognized net gain Prior service cost not yet recognized Unrecognized net assets being recognized over 15 years Net accrued pension liability $385,989 $465,229 465,494 (265) 21,560 (16,577) 4,110 $ 8,828 $350,506 $422,516 394,206 28,310 2,359 (18,851) 5,800 $ 17,618 Service cost – benefits attributed to service during the period Interest cost on accumulated postretirement benefit obligation Amortization of net (gain) Net periodic postretirement benefit cost Effective November 29, 1995, changes were made to postretirement life insurance and medical benefits which resulted in a curtailment gain of $3.3 million and $18.6 million in 1996 and 1995, respectively. The 1996 decrease in plan expense resulted principally from the curtailment of these benefits. The 1997 decrease in expense was a result of an increase in the discount rate used to 7.75% in 1997 from 7.25% in 1996. The status of the postretirement benefit plan was as follows: Dec. 28, 1997 $43,087 5,411 19,418 67,916 7,188 434 75,538 3,630 $71,908 Dec. 29, 1996 $39,780 5,014 17,883 62,677 8,452 2,209 73,338 3,565 $69,773 Significant assumptions used in determining the valuation of the projected benefit obligations as of the end of 1997, 1996 and 1995 were: (In thousands) 1997 Settlement rate Increase in compensation levels Rate of return on plan assets Note 8: 1996 7.75% 5.00% 10.25% 1995 7.25% 5.00% 9.75% 7.25% 4.50% 10.25% Retirees Fully eligible active plan participants Other active plan participants Accumulated postretirement obligation Unrecognized net gain Unrecognized prior service cost Accrued postretirement benefit obligation Less current portion Long-term postretirement benefit Note 9: Non-Pension Postretirement Benefits The Company has postretirement plans that provide medical benefits and life insurance for retirees and eligible dependents. The plans are not funded. The obligation under these plans was determined by the application of the terms of medical and life insurance plans, together with relevant actuarial assumptions and health care cost trend rates ranging ratably from 9.0% in 1997 to 4.5% in the year 2007. The effect of an annual 1% increase in trend rates would increase the accumulated postretirement benefit obligation by approximately $3.5 million and $3.2 million in 1997 and 1996, respectively. The effect of a 1% increase in trend rates also would have increased the ongoing annual cost by $0.5 million and $0.6 million in 1997 and 1996, respectively. The discount rate used in determining the accumulated postretirement benefit obligation was 7.25% and 7.75% at December 28, 1997, and December 29, 1996, respectively. Special (Credits) Charges The annual results for 1997 included a pretax net special credit of $31.5 million, which resulted in after-tax income of $0.37 per basic share ($0.36 per diluted share). First quarter results included a $1.0 million pretax charge for Molson Breweries of Canada Limited (Molson) legal proceedings. Second quarter results included a $71.5 million special credit relating to a payment from Molson to settle legal disputes with the Company, less approximately $2.2 million in related legal expenses. Also in the second quarter, CBC recorded a $22.4 million reserve related to the recoverability of its investment in Jinro-Coors Brewing Company (JCBC) of 33
Slide 36: Korea (see Note 10), as well as a $14.4 million charge related to CBC’s brewery in Zaragoza, Spain, (see Note 2) for the impairment of certain long-lived assets and goodwill and for severance costs for a limited work force reduction. The annual results for 1996 included a pretax net special charge of $6.3 million which resulted in after-tax expense of $0.11 per basic share ($0.10 per diluted share). Second quarter results included a $5.2 million pretax charge for the ongoing Molson legal proceedings and severance costs for restructuring the Company’s engineering and construction operations. Results of the third quarter included a $6.7 million pretax credit for underpaid past royalties and interest from Molson (net of related legal expenses) and income from the continuing effect of changes made in payrollrelated practices during 1995. Fourth quarter results included a $7.9 million pretax charge for Molson-related legal expenses, partially offset by underpaid past royalties from Molson and the continuing effect of changes made in payroll-related practices during 1995. Fourth quarter results for 1995 included a pretax net special credit of $15.2 million which resulted in after-tax income of $0.24 per basic and diluted share. The net credit was primarily the result of a gain for the curtailment of certain postretirement benefits other than pensions (see Note 8). Offsetting a portion of this curtailment gain are severance charges for limited reductions of the Company’s work force. Note 10: Summarized condensed statements of operations For the years ended (In thousands) Dec. 28, 1997 $372,479 39,459 22,384 15,893 Dec. 29, 1996 $357,273 37,372 19,289 11,467 Dec. 31, 1995 $363,864 44,890 32,039 13,687 Net sales Gross profit Operating income Company’s equity in operating income Investments Equity method investments: The Company has 50% or less owned investments in affiliates that are accounted for using the equity method of accounting. These investments aggregated $51.7 million and $47.6 million at December 28, 1997, and December 29, 1996, respectively. These investment amounts are included in other assets on the Company’s consolidated balance sheets. Summarized condensed balance sheet and income statement information for the Company’s equity method investments are as follows: Summarized condensed balance sheets (In thousands) Current assets Non-current assets Current liabilities Non-current liabilities Dec. 28, 1997 $76,260 78,829 40,859 4,437 Dec. 29, 1996 $69,975 79,162 38,186 4,236 The Company’s share of operating income of these non-consolidated affiliates is included primarily in cost of goods sold on the Company’s consolidated statements of income. In 1995, CBC and Anchor Glass Container Corporation (Anchor) formed a 50/50 joint venture to produce glass bottles at the CBC glass manufacturing facility for sale to CBC and outside customers. In 1996, Owens-Brockway Glass Container, Inc. (Owens) purchased certain Anchor assets and assumed Anchor’s role in the partnership. The agreement has an initial term of 10 years and can be extended for additional two-year periods. Under the terms of the agreement, CBC agreed to contribute machinery, equipment and certain personal property with an approximate net book value of $16.2 million, and Owens agreed to contribute technology and capital to modernize and expand the capacity of the plant. Also under the agreement, CBC agreed to reimburse certain annual operating costs of the facility and to purchase an annual quantity of bottles, which together represent a 1998 commitment of approximately $59 million. The expenditures under this agreement in 1997, 1996 and 1995 were approximately $59 million, $54 million and $23 million, respectively. Additionally, the companies entered into another 10-year agreement that made Owens a long-term, preferred supplier for CBC, satisfying 100% of CBC’s other glass requirements. In 1994, CBC and American National Can Company (ANC) formed a 50/50 joint venture to produce beverage cans and ends at CBC manufacturing facilities for sale to CBC and outside customers. The agreement has an initial term of seven years and can be extended for two additional three-year periods. Additionally, the agreement requires CBC to purchase 100% of its can and end needs from the joint venture at contracted unit prices and to pay an annual fee for certain operating costs. The aggregate amount paid to the joint venture for cans and ends in 1997, 1996 and 1995 was approximately $227 million, $217 million and $238 million, respectively. The estimated cost in 1998 under this agreement for cans and ends is $231 million. Additionally, during 1997 CBC received a $12.5 million distribution from this joint venture. 34
Slide 37: Cost investments: Included in other assets is $47.1 million of investments in debt securities with maturities greater than one year. The fair value of these investments approximates their amortized cost, and they are considered to be available for sale. CBC invested approximately $22 million in JCBC in 1992 for a 33% interest. CBC has accounted for the investment under the cost basis of accounting, given that CBC has not had the ability to exercise significant influence over JCBC and that CBC’s investment in JCBC has been considered temporary. This investment included a put option which, as discussed below, was exercised by CBC in December 1997. The put option entitled CBC to require Jinro Limited (the 67% owner of JCBC) to purchase CBC’s investment at the greater of cost or market value (both measured in Korean won). Beginning in April 1997, Jinro Limited, a publicly traded subsidiary of Jinro Group, missed debt payments and began attempting to restructure. In response to its financial difficulties and those of its subsidiaries (including JCBC), Jinro Group has been working with its creditors and the Korean government to restructure its debts and has begun selling real estate and merging and/or selling businesses. The financial difficulties of JCBC and Jinro Limited, the guarantor of the put option discussed above, called into question the recoverability of CBC’s investment in JCBC. Therefore, during the second quarter of 1997, CBC fully reserved for its investment in JCBC. This reserve was classified as a special charge in the accompanying statements of income. CBC exercised its put option in December 1997. Since Jinro Limited’s obligation under the put option is measured in Korean won and given the current significant devaluation of that currency, the full amount received from Jinro Limited would be significantly less (by approximately half as of December 28, 1997) than the value of CBC’s original investment. Jinro Limited, which is operating under protection from its creditors under the Korean composition law, has until June 1998 to perform its obligation under the put option. Given Jinro Limited’s current financial condition and the volatility of the Korean economy, CBC cannot predict whether Jinro Limited will be able to perform under this obligation. ACX: CBC is a limited partner in a partnership in which a subsidiary of ACX is the general partner. The partnership owns, develops, operates and sells certain real estate previously owned directly by CBC or ACC. Each partner is obligated to make additional contributions of up to $500,000 upon call of the general partner. Distributions are allocated equally between the partners until CBC recovers its investment and thereafter 80% to the general partner and 20% to CBC. Currently distributions are still being split equally between the partners. Colorado Baseball Partnership: In 1991, CBC entered into an agreement with Colorado Baseball Partnership 1993, Ltd. for an equity investment and multiyear signage and advertising package. This commitment, totaling approximately $30 million, was finalized upon the awarding of a National League baseball franchise to Colorado in 1991. The initial investment as a limited partner has been paid. The carrying value of this investment approximates its fair value at December 28, 1997, and December 29, 1996. The recognition of liability under the multiyear signage and advertising package began in 1995 with the opening of Coors Field. Note 11: Stock Activity and Earnings per Share Capital stock: Both classes of common stock have the same rights and privileges, except for voting, which (with certain limited exceptions) is the sole right of the holder of Class A stock. Activity in the Company’s Class A and Class B common stock for each of the three years ended December 28, 1997, December 29, 1996, and December 31, 1995, is summarized below: Common stock Class A Class B Balances at Dec. 25, 1994 Shares issued under stock plans Purchase of stock Balances at Dec. 31, 1995 Shares issued under stock plans Purchase of stock Balances at Dec. 29, 1996 Shares issued under stock plans Purchase of stock Balances at Dec. 28, 1997 1,260,000 — — 1,260,000 — — 1,260,000 — — 1,260,000 37,066,940 248,778 (579,206) 36,736,512 256,897 (331,005) 36,662,404 989,857 (2,052,905) 35,599,356 At December 28, 1997, December 29, 1996, and December 31, 1995, 25 million shares of $1 par value preferred stock were authorized but unissued. On December 20, 1996, the board of directors authorized the repurchase during 1997 of up to $40 million of ACC’s outstanding Class B common stock on the open market. During 1997, the Company repurchased 969,500 shares for approximately $24.9 million under this stock repurchase program. In November 1997, the board of directors authorized repurchases of up to $40 million of stock during 1998. As of March 20, 1998, ACC had repurchased 647,000 shares for approximately $20.5 million under this program. Also during 1997, the Company purchased shares under the right-of-firstrefusal provision of its stock option plans and purchased shares from one of its directors and various other sources. Earnings per share: ACC adopted Statement of Financial Accounting Standards No. 128, “Earnings per Share” (SFAS 128), effective with year-end 1997 reporting. SFAS 128 requires mandatory presentation of both a basic and diluted earnings per share. All per share amounts have been restated to comply with the requirements of SFAS 128. Basic and diluted net income per common share were arrived at using the calculations that follow: 35
Slide 38: For the years ended (In thousands, except per share data) Dec. 28, 1997 Dec. 29, 1996 $43,425 37,966 $1.14 225 28 38,219 $1.14 Dec. 31, 1995 $43,178 38,164 $1.13 113 6 38,283 $1.13 Net income available to common shareholders $82,260 Weighted-average shares for basic EPS 37,218 Basic EPS $2.21 Effect of dilutive securities: Stock options 751 Contingent shares not included in shares outstanding for basic EPS 87 Weighted-average shares for diluted EPS 38,056 Diluted EPS $2.16 In September 1995, CBC concluded the sale of its power plant and support facilities to Trigen. In conjunction with this sale, CBC agreed to purchase the electricity and steam needed to operate the brewery’s Golden facilities. CBC’s financial commitment under this agreement is divided between a fixed, noncancelable cost of approximately $12.5 million for 1998, which adjusts annually for inflation, and a variable cost, which is generally based on fuel cost and CBC’s electricity and steam use. ACX: At the end of 1992, the Company distributed to its shareholders the common stock of ACX. ACX was formed in 1992 to own the ceramics, aluminum, packaging and technology-based development businesses that were then owned by ACC. William K. Coors, a director of both ACC and ACX during 1997, and Peter H. Coors are trustees of one or more family trusts that collectively own all of ACC’s voting stock and approximately 47% of ACX’s common stock. Joseph Coors, a director of ACC, resigned as director of ACX in July 1996. ACC and ACX or their subsidiaries have certain business relationships and have engaged, or proposed to engage, in certain transactions with one another, as described below. When ACX was spun off in 1992, CBC entered into market-based, long-term supply agreements with certain ACX subsidiaries to provide CBC packaging, aluminum and starch products. Under the packaging supply agreement, CBC agreed to purchase all of its paperboard (including composite packages, labels and certain can wrappers) from an ACX subsidiary through 1997. In early 1997, this contract was modified and extended until at least 1999. In early 1997, ACX’s aluminum manufacturing business was sold to a third party. The aluminum contracts were canceled in 1995. Since late 1994, ANC has been the purchasing agent for the joint venture between ANC and CBC and has ordered limited quantities of can, end and tab stock from the now-former ACX subsidiary. Additionally, ANC purchased a small quantity of tab stock from this subsidiary for the joint venture in early 1997. Under the starch supply agreement, CBC agreed to purchase 100 million pounds of refined corn starch annually from an ACX subsidiary through 1997. In early 1997, this agreement was renegotiated, at slightly higher rates, and extended through 1999. CBC’s total purchases under these agreements in 1997 were approximately $118 million. Purchases in 1998 under the packaging and starch supply agreements are estimated to be approximately $120 million. Environmental: In 1991, the City and County of Denver, Waste Management of Colorado, Inc. and Chemical Waste Management, Inc. brought litigation in U.S. District Court against the Company and 37 other “potentially responsible parties” (PRPs) to determine the allocation of costs of Lowry site remediation. In 1993, the Court approved a settlement agreement between the Company and the plaintiffs, resolving the Company’s liabilities for the site. The Company agreed to initial payments based on an assumed present value of $120 million in total site remediation costs. Further, the Company agreed to pay a specified share of costs if total remediation costs exceeded this amount. The Company remitted its agreed share, based on the $120 million assumption, to a trust for payment of site remediation, operating and maintenance costs. None of these payments was material to the Company’s results of operations or financial position. The dilutive effects of stock options were arrived at by applying the treasury stock method, assuming the Company was to purchase common shares with the proceeds from stock option exercises. Note 12: Commitments and Contingencies Insurance: It is the Company’s policy to act as a self-insurer for certain insurable risks consisting primarily of employee health insurance programs and general liability contract deductibles. During 1997, the Company fully insured future risks for workers’ compensation and long-term disability, but maintains a self-insured position for claims incurred prior to the inception of the insurance coverage. In 1991, the Company became aware that Mutual Benefit Life Insurance Company (MBLIC) had been placed under the control of the State of New Jersey. The Company is a holder of several life insurance policies and annuities through MBLIC. The cash surrender value under these policies is approximately $7.5 million. Policyholders have been notified that all claims, benefits and annuity payments will continue to be paid in full; however, at this time, policyholders are unable to redeem the full value of their policies for cash. A moratorium charge would be applied to policies that are redeemed. Letters of credit: As of December 28, 1997, the Company had approximately $17 million outstanding in letters of credit with certain financial institutions. These letters generally expire within 12 months from the dates of issuance, which range from March 1998 to October 1998. These letters of credit are being maintained as security for performance on certain insurance policies, operations of underground storage tanks, as parent guarantees for bank financing and overdraft protection of a foreign subsidiary and payments of liquor and duty taxes and energy billings. Power supplies: In 1995, Coors Energy Company (CEC), a subsidiary of CBC, sold a portion of its coal reserves to Bowie Resources Ltd. (Bowie). CEC also entered into a 10-year agreement to purchase 100% of the brewery’s coal requirements from Bowie. The coal then is sold to Trigen-Nations Energy Corporation, L.L.L.P. (Trigen). 36
Slide 39: The City and County of Denver, Waste Management of Colorado, Inc. and Chemical Waste Management, Inc. have implemented site remediation. The Environmental Protection Agency’s projected costs to meet the announced remediation objectives and requirements are currently below the $120 million assumption used for ACC’s settlement. The Company has no reason to believe that total remediation costs will result in additional liability to the Company. Litigation: The Company also is named as defendant in various actions and proceedings arising in the normal course of business. In all of these cases, the Company is denying the allegations and is vigorously defending itself against them and, in some instances, has filed counterclaims. Although the eventual outcome of the various lawsuits cannot be predicted, it is management’s opinion that these suits will not result in liabilities that would materially affect the Company’s financial position or results of operations. Restructuring liability: At December 28, 1997, the Company had a $3.4 million liability related to personnel accruals as a result of a restructuring of operations that occurred in 1993. These accruals relate to obligations under deferred compensation arrangements and postretirement benefits other than pensions. Labor: Approximately 7% of the Company’s work force, located principally at the Memphis brewing and packaging facility, is represented by a labor union with whom the Company engages in collective bargaining. A labor contract prohibiting strikes took effect in early 1997 and extends to 2001. Rail transportation: The Company relies heavily upon rail transportation to ship approximately half of its products to satellite redistribution centers and to distributors throughout the country. A major disruption in the railroad industry would impact CBC significantly. However, the risk of such a disruption at the current time appears to be low. Year 2000 (unaudited): As the Year 2000 approaches, ACC recognizes the need to ensure 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 this problem. The Company has and will continue to make certain investments in its software systems and applications to ensure that it is Year 2000 compliant. The financial impact to ACC of Year 2000 remediation costs is anticipated to be in the range of $10 to $15 million in each of 1998 and 1999. In addition, ACC is working with its suppliers and customers to ensure their compliance with Year 2000 issues in order to avoid any interruptions in its business. While ACC does not at this time anticipate significant problems with suppliers and customers, it is developing contingency plans with these third parties due to the possibility of compliance issues. Note 13: Quarterly Financial Information (Unaudited) The following summarizes selected quarterly financial information for each of the two years in the period ended December 28, 1997. In the first and second quarters of 1997 and the second, third and fourth quarters of 1996, certain adjustments were made that were not of a normal and recurring nature. As described in Note 9, income in 1997 was increased by a special pretax credit of $31.5 million, or $0.37 per basic share ($0.36 per diluted share) after tax, and income in 1996 was decreased by a special pretax charge of $6.3 million, or $0.11 per basic share ($0.10 per diluted share) after tax. Refer to Note 9 for a further discussion of special (credits) charges. First Second $520,826 $220,163 $ 51,018 $1.37 $1.34 $504,000 1,092 $505,092 $196,759 $ 23,796 $0.63 $0.63 Third $489,699 $190,930 $ 17,439 $0.47 $0.46 $454,857 1,093 $455,950 $164,856 $ 18,675 $0.49 $0.49 Fourth $412,631 $146,452 $ 5,758 $0.16 $0.15 $401,719 7,624 $409,343 $145,500 $ 3,961 $0.10 $0.10 Year $1,822,151 $ 701,373 $ 82,260 $2.21 $2.16 $1,730,989 11,067 $1,742,056 $ 614,367 $ 43,425 $1.14 $1.14 37 (In thousands, except per share data) 1997 Net sales Gross profit Net income Net income per common share – basic Net income per common share – diluted 1996 Net sales without certain international income International income Net sales, as currently reported Gross profit Net (loss) income Net (loss) income per common share – basic Net (loss) income per common share – diluted $398,995 $143,828 $ 8,045 $0.21 $0.21 $370,413 1,258 $371,671 $107,252 ($ 3,007) ($0.08) ($0.08)
Slide 40: Adolph Coors Company and Subsidiaries SELECTED FINANCIAL DATA (In thousands, except per share) 1997 20,581 $1,822,151 1,120,778 585,491 (31,517) 1,674,752 147,399 506 146,893 64,633 $ 82,260 $2.21 $2.16 4.5% $ 158,048 $ 733,117 $1,412,083 $ 145,000 $ 23,242 $ 736,568 $19.79 19.0% 11.3% 20,523 $0.55 $ 701,373 $ 60,373 $ 117,166 5,800 $41 1 4 / $17 1 2 / $ 1996 20,045 $1,742,056 1,127,689 527,007 6,341 1,661,037 81,019 6,044 74,975 31,550 $ 43,425 $1.14 $1.14 2.5% $ 124,194 $ 814,102 $1,362,536 $ 176,000 $ 32,745 $ 715,487 $18.83 21.2% 6.2% 18,983 $0.50 $ 614,367 $ 65,112 $ 121,121 5,800 $24 1/ 4 $16 3/ 4 $ 1995* 20,312 $1,690,701 1,106,635 518,888 (15,200) 1,610,323 80,378 7,100 73,278 30,100 $ 43,178 $1.13 $1.13 2.6% $ 36,530 $ 887,409 $1,384,530 $ 195,000 $ 33,435 $ 695,016 $18.21 24.9% 6.3% 19,066 $0.50 $ 584,066 $ 157,599 $ 122,830 6,200 $23 1/ 4 $15 1/ 8 $ 1994 20,363 $1,673,252 1,073,370 505,668 (13,949) 1,565,089 108,163 3,943 104,220 46,100 $ 58,120 $1.52 $1.51 3.5% $ (25,048) $ 922,208 $1,371,576 $ 131,000 $ 30,884 $ 674,201 $17.59 20.6% 8.9% $ 19,146 $0.50 $ 599,882 $ 160,314 $ 120,793 6,300 7 $20 / 8 3 $14 / 4 Barrels of Malt Beverages Sold Summary of Operations: Net sales Cost of goods sold Marketing, general and administrative Special (credits) charges Total operating expenses Operating income (loss) Other expense – net Income (loss) before income taxes Income tax expense (benefit) Income (loss) from continuing operations Per share of common stock Basic Diluted Income (loss) from continuing operations as a percentage of net sales Financial Position: Working capital Properties – net Total assets Long-term debt Other long-term liabilities Shareholders’ equity Net book value per share of common stock Total debt to total capitalization Return on average shareholders’ equity Other Information: Dividends Per share of common stock Gross profit Capital expenditures Depreciation, depletion and amortization Full-time employees Market price range of common stock: High Low Note: Numbers in italics include results of discontinued operations. * 53-week year versus 52-week year. ** Reflects the dividend of ACX Technologies, Inc. to shareholders during 1992. 38
Slide 41: 1993 19,828 $1,595,597 1,050,650 467,138 122,540 1,640,328 (44,731) 12,099 (56,830) (14,900) $ (41,930) ($1.10) ($1.10) (2.6%) $ 7,197 $ 884,102 $1,350,944 $ 175,000 $ 34,843 $ 631,927 $16.54 26.3% (6.4%) 19,003 $0.50 $ 544,947 $ 120,354 $ 118,955 6,200 $23 1/ 8 $15 1/ 8 $ 1992 19,569 $1,566,606 1,051,362 441,943 — 1,493,305 73,301 14,672 58,629 22,900 $ 35,729 $0.95 $0.95 2.3% $ 112,302 $ 904,915 $1,373,371** $ 220,000 $ 52,291 $ 685,445** $18.17** 24.3% (0.2%) 18,801 $0.50 $ 515,244 $ 115,450 $ 114,780 7,100 $22 7/ 8 $15 1/ 2 $ 1991 19,521 $1,543,007 1,052,228 448,393 29,599 1,530,220 12,787 4,403 8,384 (8,700) $ 17,084 $0.46 $0.46 1.1% $ 110,443 $ 933,692 $ 1,844,811 $ 220,000 $ 53,321 $ 1,099,420 $29.33 19.5% 2.3% 18,718 $0.50 $ 490,779 $ 241,512 $ 108,367 7,700 $24 1/4 $17 3/8 $ 1990 19,297 $1,483,873 986,352 409,085 30,000 1,425,437 58,436 5,903 52,533 20,300 $ 32,233 $0.87 $0.87 2.2% $ 201,043 $ 1,171,800 $ 1,761,664 $ 110,000 $ 58,011 $ 1,091,547 $29.20 9.2% 3.6% 18,591 $0.50 $ 497,521 $ 183,368 $ 98,081 7,000 $27 3/8 $17 1/8 $ 1989* 17,698 $1,372,373 913,994 397,844 41,670 1,353,508 18,865 2,546 16,319 9,100 $ 7,219 $0.20 $0.20 0.5% $ 193,590 $ 1,012,940 $ 1,530,783 — $ 16,138 $ 1,060,900 $28.75 2.0% 1.2% 18,397 $0.50 $ 458,379 $ 149,616 $ 122,439 6,800 $24 3/8 $17 3/8 $ 1988 16,534 $1,278,097 829,423 380,131 — 1,209,554 68,543 (6,471) 75,014 28,700 $ 46,314 $1.26 $1.26 3.6% $ 196,687 $ 1,033,012 $ 1,570,765 — $ 19,367 $ 1,062,064 $29.00 1.7% 4.5% 18,311 $0.50 $ 448,674 $ 157,995 $ 111,432 6,900 $21 1/2 $16 1/2 $ 1987 15,658 $ 1,170,098 751,056 340,418 — 1,091,474 78,624 (6,022) 84,646 33,500 $ 51,146 $1.40 $1.40 4.4% $ 242,406 $ 975,781 $ 1,456,493 — $ 26,376 $ 1,031,811 $28.19 0.4% 4.8% 18,226 $0.50 $ 419,042 $ 199,541 $ 99,422 6,800 $30 1/2 $16 1/4 $ 39
Slide 42: DIRECTORS AND OFFICERS Boards of Directors Adolph Coors Company and Coors Brewing Company WILLIAM K. COORS Chairman, Adolph Coors Company and Coors Brewing Company. Director since 1940. JOSEPH COORS Vice Chairman, Adolph Coors Company. Director since 1942. PETER H. COORS Vice Chairman and Chief Executive Officer, Coors Brewing Company. Director since 1973. J. BRUCE LLEWELLYN Chairman and Chief Executive Officer, The Philadelphia Coca-Cola Bottling Company. Director since 1989. (Retiring May 1998.) LUIS G. NOGALES President, Nogales Partners. Director since 1989. PAMELA H. PATSLEY President, Chief Executive Officer and a Director, Paymentech Inc. Director since 1996. WAYNE R. SANDERS Chairman and Chief Executive Officer, KimberlyClark Corporation. Director since 1995. Officers Coors Brewing Company WILLIAM K. COORS Chairman of the Board Adolph Coors Company ROBERT W. EHRET Senior Vice President, Human Resources and Communications KATHERINE L. MACWILLIAMS Vice President and Treasurer WILLIAM K. COORS Chairman of the Board, President and Chief Executive Officer PETER H. COORS Vice Chairman and Chief Executive Officer MICHAEL A. MARRANZINO JOHN R. FAWCETT General Manager, On-Premise Sales and Marketing Senior Vice President and Chief Information Officer PETER H. COORS Vice President W. LEO KIELY III President and Chief Operating Officer PATRICIA J. SMITH PETER M. R. KENDALL Senior Vice President and Chief International Officer Secretary W. LEO KIELY III Vice President Other Senior Officers M. CAROLINE TURNER Senior Vice President, General Counsel and Assistant Secretary KATHERINE L. MACWILLIAMS Vice President and Treasurer CARL L. BARNHILL Senior Vice President, Sales ROBERT D. KLUGMAN Senior Vice President, Corporate Development WILLIAM H. WEINTRAUB Senior Vice President, Marketing PATRICIA J. SMITH Secretary L. DON BROWN Senior Vice President, Operations and Technology NORMAN E. KUHL Senior Vice President, Container Business Units TIMOTHY V. WOLF Senior Vice President and Chief Financial Officer M. CAROLINE TURNER Vice President and Assistant Secretary TIMOTHY V. WOLF Vice President and Chief Financial Officer 40
Slide 43: CORPORATE INFORMATION Annual Shareholders’ Meeting Stock Information The company will hold its Annual Meeting of Shareholders starting at 10:30 a.m. on Thursday, May 14, 1998, in the Sixth-floor Auditorium, located in the Brewery Office Complex, Coors Brewing Company, Golden, Colorado. Shareholder Relations Questions about stock ownership and dividends should be directed to Ann Boe in Shareholder Relations, (303) 277-3466. Shareholders may obtain a copy of the Company’s 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission by writing to the Coors Consumer Information Center, Mail No. NH475, Adolph Coors Company, P.O. Box 4030, Golden, Colorado 80401, or by calling (800) 642-6116. Shareholders holding stock in street-name accounts who wish to receive Adolph Coors Company financial reports may contact Investor Relations to be placed on the mailing list. Investor Relations Adolph Coors Company Class B common stock is traded on the over-thecounter market and is included in the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market (NNM) listings under the symbol “ACCOB.” Daily stock prices are listed in major newspapers, generally alphabetically under “CoorsB.” Dividends on common stock have historically been paid in the months of March, June, September and December to shareholders of record on the last day of the preceding month. Shareholders of record as of March 16, 1998: 3,334 Class B common shares outstanding as of March 16, 1998: 35.02 million The range of the high and low quotations and the dividends paid per share for each quarter of the past two years are shown in the following tables: 1997 Market Price High Low 221⁄8 171⁄2 3 28 ⁄8 187 ⁄8 1 39 ⁄4 255 ⁄8 1 41 ⁄4 303 ⁄4 1996 Market Price High Low 241⁄4 173⁄4 7 19 ⁄8 163⁄4 3 23 ⁄4 171⁄2 3 22 ⁄4 171⁄2 Securities analysts, investment professionals and shareholders with businessrelated inquiries or requests for financial information regarding Adolph Coors Company should contact Dave Dunnewald in Investor Relations, (303) 277-2555. For the latest copy of the Company’s annual report to shareholders, write to the Coors Consumer Information Center, Mail No. NH475, Adolph Coors Company, P.O. Box 4030, Golden, Colorado 80401, or call (800) 642-6116. Customer/News Media Relations First Quarter Second Quarter Third Quarter Fourth Quarter Dividends $0.125 $0.125 $0.150 $0.150 Customers are invited to call our Consumer Information Center, (800) 642-6116, or access our financial Web site, www.coorsinvestor.com, for information about the Company and our products. The news media should direct questions to Corporate Communications, (303) 277-2555 or (800) 525-3786. Coors Brewing Company is pleased to offer specific information to the public regarding the Company’s financial, environmental and social performance, as well as other areas of interest. For example, interested individuals can get the latest issue of the Coors Brewing Company Environmental, Health and Safety Progress Report or Corporate Social Performance briefings on a wide range of topics of interest to our customers, investors, neighbors and other stakeholders. Simply call the Coors Consumer Information Center at (800) 642-6116. Transfer Agent First Quarter Second Quarter Third Quarter Fourth Quarter Dividends $0.125 $0.125 $0.125 $0.125 In February, the Company declared a quarterly dividend of 15 cents per share, which was paid March 16, 1998, to shareholders of record February 28, 1998. Equal Opportunity at Coors Boston EquiServe, 150 Royall Street, Canton, Massachusetts 02021, (781) 575-3400. Adolph Coors Company employs 5,800 people worldwide and maintains a long-standing commitment to equal opportunity in the areas of employment, promotion and purchasing. We enthusiastically support the Company’s policy, which prohibits discrimination on the basis of race, color, national origin, sexual orientation, religion, disability, veteran status, gender or age. This report is printed on recycled paper. DESIGN: Rassman Design, PHOTOGRAPHY: SideLight Studios and Fonda Photographic PRINTED IN U.S.A. by Sprint Press, Inc., Denver
Slide 44: Adolph Coors Company, Golden, Colorado 80401 (303) 279-6565 0705-AR-97