US SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

ADOLPH COORS COMPANY

(Exact name of registrant as specified in its charter)

 

 

303-279-6565

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of class

None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12(b)-2 of the Act).

 

The aggregate market value of Class B non-voting stock held by non-affiliates of the registrant at the close of business on June 29, 2003, was $1,718,375,932 based upon the last sales price reported for such date on the New York Stock Exchange. For purposes of this disclosure, shares of Class B Common Stock held by persons holding more than 5% of the outstanding shares of Class B Common Stock and shares owned by officers and directors of the registrant as of June 29, 2003 are excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive of affiliate status.

 

The number of shares outstanding of each of the registrant’s classes of common stock, as of February 27, 2004:

 

 

ADOLPH COORS COMPANY AND SUBSIDIARIES

 

INDEX

 

PART I.
Item 1.	Description of Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
PART II.
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7a.	Quantitative and Qualitative Disclosures About Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9a.	Controls and Procedures
PART III.
Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accountant Fees and Services
PART IV.
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures

 

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PART I

 

ITEM 1. Description of Business.

 

Unless otherwise noted in this report, any description of us includes Adolph Coors Company (ACC), principally a holding company, its operating subsidiaries, Coors Brewing Company (CBC), operating in the United States (US); and Coors Brewers Limited (CBL), operating in the United Kingdom (UK); and our other corporate entities.

 

(a)  General Development of Business

 

Global Expansion

Since our founding in 1873, we have been committed to producing the highest-quality beers. Our portfolio of brands is designed to appeal to a wide range of consumer tastes, styles and price preferences. Until our acquisition of CBL in February 2002, we operated and sold our beverages predominately in North America and in select international markets. The CBL acquisition expanded our international presence to include significant operations and sales in the United Kingdom.

 

Joint Ventures and Other Arrangements

To sharpen focus on our core competencies in manufacturing, marketing and selling malt beverage products, we have entered into various arrangements with third parties over the past decade to leverage their strengths in areas like can and bottle manufacturing, transportation, packaging, engineering, energy production and information technology.

 

Our Products

We own or license all of our trademarks for all of our brands. Brands sold primarily in the Americas include: Coors Light®, Coors Original®, Coors® Non-Alcoholic, Extra Gold®, Zima®, George Killian’s® Irish Red ^TM Lager, Keystone®, Keystone Light®, Keystone Ice®, Blue Moon^TM Belgian White Ale and Mexicali®. We also sell the Molson family of brands in the United States through a joint venture. Brands sold primarily through CBL include: Carling®, Worthington®, Caffrey’s®, Reef®, Screamers^TM and Stones®. We also sell Grolsch® in the United Kingdom through a joint venture.

 

In the United Kingdom in 2003, we achieved considerable success with the continued roll-out of Carling Extra Cold, which is dispensed at on-trade locations (pubs, clubs, restaurants and hotels) at two degrees centigrade, four degrees cooler than traditional English draft lagers. Additionally, in the last quarter of the year, we introduced Coors Fine Light Beer to the on-trade channel. In January 2004, we launched this beer into the off-trade channel (retail and wholesale) and commenced television advertising for the product.  In the United States in 2004, we plan to introduce a low-carb beer called Aspen Edge^TM, and a variety of new flavored Zima products, collectively called Zima XXX^TM (in select US markets).

 

In the United Kingdom, in addition to supplying our own brands, we sell other beverage companies’ brands to our on-premise customers so as to be able to provide them with a full range of products for their retail outlets. These factored brand sales are included in our financial results, increasing our net sales and cost of goods sold, but the related volume is not included in our reported sales volumes.

 

(b)  Financial Information About Segments

 

Prior to our acquisition of CBL, we reported results of operations in one segment. We now categorize our operations into two operating segments: the Americas and Europe. These segments are managed by separate operating teams, even though both segments consist of the manufacture, marketing, and sale of beer and other beverage products.

 

See Item 8, Financial Statements and Supplementary Data, for financial information relating to our segments and operations, including geographic information.

 

(c)  Narrative Description of Business

 

Some of the following statements may describe our expectations of future products and business plans, financial results, performance and events. Actual results may differ materially from these forward-looking statements. Please see Item 7, Management’s Discussion and Analysis – Cautionary Statement Pursuant to Safe Harbor Provisions of

 

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the Private Securities Litigation Reform Act of 1995, for factors that may negatively impact our performance. The following statements are expressly made, subject to those and other risk factors.

 

We sold approximately 68% of our 2003 reported volume in the Americas segment and 32% in the Europe segment. In 2003, Coors Light accounted for about 51% of reported volume and Carling for approximately 22%.

 

Our sales volume totaled 32.7 million barrels in 2003, compared to 31.8 million barrels in 2002 and 22.7 million barrels in 2001. The barrel sales figures for each year do not include barrel sales of our products sold in Canada by the non-consolidated Coors Canada Partnership (Coors Canada) or volume from our joint venture with Molson sold in the United States. An additional 1.5 million, 1.4 million and 1.3 million barrels of beer were sold by Coors Canada in 2003, 2002 and 2001, respectively. Our Molson venture sold 0.9, 0.9 and 0.8 million barrels in 2003, 2002 and 2001, respectively. Our sales volumes also do not include the CBL factored brands business. See Item 7, Management’s Discussion and Analysis, for a discussion of volume changes.

 

No single customer accounted for more than 10% of our consolidated or segmented sales in 2003, 2002 or 2001.

 

Americas Segment

 

The Americas business segment is focused on the production, marketing and sales of the Coors portfolio of brands in the United States and its territories. This segment also includes the Coors Light business in Canada that is conducted through a partnership investment with Molson, Inc. (Molson) and the sale of Molson products in the United States that is conducted through a joint venture investment (Molson USA) with Molson. The Americas segment also includes a small amount of volume that is sold outside of the United States and its territories.

 

Sales and Distribution

 

United States

In the United States, beer is generally distributed through a three-tier system consisting of manufacturers, distributors and retailers. A national network of 472 independent distributors (537 including branch locations) purchases our products and distributes them to retail accounts. We also own three distributorships that handled less than 3% of our total domestic volume in 2003, and we sell Molson branded beers through our Molson USA joint venture which utilizes additional independent distributors.

 

Canada

Coors Canada is our partnership with Molson that manages all marketing activities for our products in Canada. We own 50.1% of this partnership, and Molson owns 49.9%. The partnership contracts with  Molson for the brewing, distribution and sale of our products. Coors Light currently has an 8.7% market share, and is the largest-selling light beer and the 4^th-best selling beer brand overall in Canada.

 

Puerto Rico and the Caribbean

In Puerto Rico, we market and sell Coors Light through an independent distributor. A team of our employees manages the marketing and promotional efforts in this market, where Coors Light is the number-one brand. We also sell our products in a number of other Caribbean markets, including the US Virgin Islands, through local distributors.

 

Asia

We have small developing markets in Japan, China and Taiwan. The Japanese business is currently focused on Zima and Coors Original and we sell Coors Light in Taiwan. We sell Coors Light and Coors Original in China and have contracted with Lion Nathan for the production of finished goods for the Japanese and Chinese markets.

 

Manufacturing, Production and Packaging in the United States

 

Brewing Raw Materials

We use the highest quality water, barley and hops to brew our products. The majority of the water we use is naturally filtered from underground aquifers. We have acquired water rights to provide for long-term strategic growth and to sustain brewing operations in case of a prolonged drought. We buy barley under long-term contracts from a network of independent farmers located in five western US states.

 

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Brewing and Packaging Facilities

We have three domestic production facilities and one small brewery located in Mexico. We own and operate the world’s largest single-site brewery located in Golden, Colorado. In addition, we own and operate a packaging and brewing facility in Memphis, Tennessee, and a packaging facility located in the Shenandoah Valley in Virginia. We brew Coors Light, Coors Original, Extra Gold, Killian’s and the Keystone brands in Golden, and package about 60% of the beer brewed in Golden. The remainder is shipped in bulk from the Golden brewery to either our Memphis or Shenandoah facility for packaging.

 

Packaging Materials

 

Aluminum Cans

Approximately 59% of our domestic products were packaged in aluminum cans in 2003. A substantial portion of those cans were purchased from a joint venture with Ball Corporation (Ball), Rocky Mountain Metal Container, LLC (RMMC). In addition to our supply agreement with RMMC, we also have commercial supply agreements with Ball and other third-party can manufacturers to purchase cans and ends in excess of what is supplied through RMMC. In 2003, we purchased the significant majority of the cans and ends produced by the RMMC facilities.

 

Glass Bottles

We used glass bottles for approximately 29% of our products in 2003.  We operate a joint venture with Owens-Brockway Glass Container, Inc. (Owens), the Rocky Mountain Bottle Company (RMBC), to produce glass bottles at our glass manufacturing facility. On July 29, 2003, we signed a new agreement, effective for 12 years beginning August 1, 2003, with Owens extending this joint venture, as well as a supply agreement with Owens for the glass bottles we require in excess of joint venture production.

 

Other Packaging

Most of the remaining 12% of volume we sold in 2003 was packaged in quarter and half-barrel stainless steel kegs.

 

We purchase most of our paperboard and label packaging from a subsidiary of Graphic Packaging Corporation (GPC), a related party. These products include paperboard, multi-can pack wrappers, bottle labels and other secondary packaging supplies.

 

Seasonality of the Business

 

Our US sales volumes are normally lowest in the first and fourth quarters and highest in the second and third quarters.

 

Competitive Conditions

 

Known Trends and Competitive Conditions

Industry and competitive information in this section and elsewhere in this report was compiled from various industry sources, including beverage analyst reports (Beer Marketer’s Insights, Impact Databank and The Beer Institute). While management believes that these sources are reliable, we cannot guarantee the accuracy of these numbers and estimates.

 

2003 Americas Beer Industry Overview

The beer industry in the United States is extremely competitive, with three major brewers controlling about 80% of the market. Therefore, growing or even maintaining market share requires substantial and perhaps increasing investments in marketing and sales efforts. US beer industry shipments had an annual growth rate during the past 10 years of less than 1%. The industry’s pricing environment continued to be positive in 2003, with modest price increases on specific brands and packages in select markets.

 

Two major trends impacted the US beer market in 2003. First, overall US beer shipments declined for the first time since 1995, driven by a weak national economy, unusually cool weather in many regions of the country, and the war in Iraq.  The net effect of all these factors was a decline in the US beer industry sales of about 1% during 2003 from the year before. The second industry trend was the growth in beers with low-carbohydrate positioning. Because none of our brands was positioned as low-carbohydrate last year, both of these industry trends negatively impacted our volume in 2003.

 

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The US brewing industry has experienced significant consolidation in the past several years, which has removed excess production capacity. In 2003, beer industry consolidation at the wholesaler level continued. This consolidation generally improves business economics for these combined wholesalers.

 

Over the past several years, the Canadian beer industry volume has been effectively flat with growth of less than 1% in 2003.  The industry’s pricing environment continued to be positive in 2003, with  price increases in several markets across the country.

 

The beer market in Puerto Rico had extraordinary growth in the 70s and 80s. Since then, the market has experienced periodic growth and decline cycles. This market has traditionally been split between local brewers, US imports, and other imports. In mid 2002, Puerto Rico implemented a 50% excise tax increase. This tax increase contributed to a 10% contraction in total beer consumption and disproportionately affected imports, since the most significant local brand was exempt from the tax. Coors Light is the market leader in Puerto Rico with an approximate 50% market share.

 

Our Competitive Position

Our malt beverages compete with numerous above-premium, premium, low-calorie, popular-priced, non-alcoholic and imported brands. These competing brands are produced by national, regional, local and international brewers. We compete most directly with Anheuser-Busch (AB) and SABMiller (Miller), the dominant beer companies in the US industry. According to Beer Marketer’s Insights estimates, we are the nation’s third-largest brewer, selling approximately 11% of the total 2003 US brewing industry shipments (including exports and US shipments of imports). This compares to AB’s 50% share and Miller’s 18% share.

 

Europe Segment

 

The Europe segment consists of our production and sale of the CBL brands principally in the United Kingdom, our joint venture arrangement relating to the production and distribution of Grolsch in the United Kingdom and Republic of Ireland, and our joint venture arrangement with Tradeteam for the physical distribution of products throughout Great Britain.

 

CBL has headquarters in Burton-on-Trent, England, and is the United Kingdom’s second-largest beer company with unit volume sales of approximately 10.3 million US barrels in 2003. CBL holds approximately 20% of the UK beer market, Western Europe’s second-largest market. The CBL sales are primarily in England and Wales, with the Carling brand (a mainstream lager) representing approximately two-thirds of CBL’s total beer volume.

 

Sales and Distribution

 

Over the past three decades, volumes have begun to shift from the on-trade channel, where products are consumed “on-premise,” to the off-trade channel, also referred to as the “take-home” market. Revenue per barrel in the on-trade channel tends to be higher, but the off-trade channel can offer similar returns to brewers because selling, servicing and distribution costs are generally lower. Unlike the United States, where manufacturers are generally not permitted to distribute beer directly to retail, the large majority of our beer in the United Kingdom is sold directly to retailers.

 

Distribution activities for CBL are conducted by Tradeteam, which operates a system of satellite warehouses and a transportation fleet. Tradeteam also manages the transportation of certain raw materials such as malt to the CBL breweries.

 

On-trade

The on-trade channel accounted for approximately 64% of our UK sales volumes in 2003. The installation and maintenance of draught beer dispense equipment in the on-trade channel is generally the responsibility of the brewer in the United Kingdom. CBL retains ownership of equipment required to dispense beer from kegs to consumers. This includes beer lines, line cooling, taps and countermounts.

 

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Similar to other UK brewers, CBL has traditionally used loans to secure supply relationships with customers in the on-trade market. Loans have been granted at below-market rates of interest, with the outlet purchasing beer at lower-than-average discount levels to compensate. Such loans are typically secured by a proprietary interest in the borrower’s property. We reclassify a portion of sales revenue to interest income to reflect the economic substance of these loans.

 

Off-trade

The off-trade channel accounted for approximately 36% of our UK sales volume in 2003, up 2% from 2002. The off-trade market includes sales to supermarket chains, convenience stores, liquor store chains, distributors and wholesalers.

 

Manufacturing, Production and Packaging

 

Brewing Raw Materials

We use the highest quality water, barley and hops to brew our products. Water for our three UK breweries, located in Burton-on-Trent, Alton and Tadcaster, comes from dedicated supplies, filtered through the local underground aquifers. Barley for CBL brewing operations is high quality two-row seed grown exclusively in England to strict standards. We believe we have sufficient access to raw materials to meet our quality and production requirements.

 

Brewing and Packaging Facilities

We operate three breweries in the United Kingdom. The Burton-on-Trent brewery, located in the Midlands, is the largest brewery in the United Kingdom. Other smaller breweries are located in Tadcaster and Alton.

 

Packaging Materials

 

Kegs

We used kegs and casks for approximately 61% of our UK product in 2003. We purchase our kegs and casks through supply contracts with third-party suppliers. The high level of volume packaged in kegs and casks contrasts with the Americas business, and reflects a higher percentage of product sold on-premise.

 

Cans

Approximately 31% of our products were packaged in cans in 2003. Virtually all of our cans were purchased through supply contracts with Ball.

 

Other Packaging

The remaining 8% of our product is primarily packaged in glass bottles purchased through supply contracts with third-party suppliers.

 

Seasonality of Business

 

In Great Britain, the beer industry is subject to seasonal sales fluctuation primarily influenced by holiday periods, weather and by certain major televised sporting events. There is a peak during the summer and during the Christmas and New Year period. The holiday peak is most pronounced in the off-trade channel. Consequently, our largest quarters are the third and fourth quarters, and the smallest are the first and second.

 

Competitive Conditions

 

2003 UK Beer Industry Overview

Beer consumption in the United Kingdom has been in long-term decline since 1980, falling by an average of 0.8% per annum. This decline has been mainly attributable to the on-trade channel, where volumes are now 40% lower than in 1980. Over the same period, off-trade volume has increased by 278%. This trend is expected to continue and has been influenced by a number of factors, including the increasing price difference between beer in the on- and off-trade channels and changes in consumers’ lifestyles. 2003 represented a continuation of these trends with off-trade market growth of 7.4% and a decline in the on-trade market of 2.7%, with the off-trade now representing one third of the market. The total UK beer market grew 1.1% in 2003, which represented the third consecutive year of growth, a contributing factor to this growth in 2003 being the unusually hot summer weather.

 

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As well as the on- to off-trade mix shift, there has been a steady trend toward lager at the expense of ales, driven predominantly by the leading mainstream and premium lager brands. In 1980, lagers accounted for 31% of beer sales, and in 2003 lagers accounted for nearly 70%, up from 67% in 2002. While lager volume has been growing at an average compound annual growth rate of 2.3% over the last five years, ales, including stouts, have declined by over 10% per year during this period. This trend has accelerated in the last two years. The leading beer brands are generally growing at a faster rate than the market. The top 10 brands now represent approximately 60% of the total market, compared to only 34% in 1994.

 

Our Competitive Position

Our beers and flavored alcohol beverages compete not only with similar products from competitors, but also with other alcohol beverages, including wines and spirits. With the exception of stout, where we do not have our own brand, our brand portfolio gives us strong representation in all major beer categories. Our strength in the growing lager sector with Carling and Grolsch makes us well positioned to take advantage of the continuing trend away from ales to lagers.

 

Our principal competitors are Scottish Courage Ltd., Interbrew UK Ltd. and Carlsberg-Tetley Ltd. We are the United Kingdom’s second-largest brewer, with an approximate 20% market share (excluding factored brands sales), based on AC Nielsen information. This compares to Scottish Courage Ltd.’s share of 25%, Interbrew UK Ltd.’s 19% share (excluding Heineken brands, which are no longer part of Interbrew’s brand portfolio) and Carlsberg-Tetley Ltd.’s 13% share. Our core brands – Carling, Grolsch, Worthington’s and Reef – all increased their product sector share in 2003.

 

Intellectual Property

 

We own trademarks on the majority of the brands we produce and we have licenses for the remainder. We also hold several patents on innovative processes related to product formula, can making, can decorating and certain other technical operations. These patents have expiration dates ranging through 2021. These expirations are not expected to have a significant impact on our business.

 

Regulation

 

Americas

Our business in the United States and its territories is highly regulated by federal, state and local governments. These regulations govern many parts of our operations, including brewing, marketing and advertising, transportation, distributor relationships, sales and environmental issues. To operate our facilities, we must obtain and maintain numerous permits, licenses and approvals from various governmental agencies, including the US Treasury Department; Alcohol and Tobacco Tax and Trade Bureau (formerly called the Bureau of Alcohol, Tobacco and Firearms); the US Department of Agriculture; the US Food and Drug Administration; state alcohol regulatory agencies as well as state and federal environmental agencies. Internationally, our business is also subject to regulations and restrictions imposed by the laws of the foreign jurisdictions where we sell our products.

 

Governmental entities also levy taxes and may require bonds to ensure compliance with applicable laws and regulations. US federal excise taxes on malt beverages are currently $18 per barrel. State excise taxes also are levied at rates that ranged in 2003 from a high of $28.52 per barrel in Hawaii to a low of $0.62 per barrel in Wyoming. In 2003, we incurred approximately $404 million in federal and state excise taxes in the Americas segment on revenues of approximately $2.8 billion, or approximately $18 per barrel.

 

Europe

In the United Kingdom, regulations apply to many parts of our operations and products, including brewing; food safety; labeling and packaging; marketing and advertising; environmental; health and safety; employment; and data protection regulations. To operate our breweries and carry on business in the United Kingdom, we must obtain and maintain numerous permits and licenses from local Licensing Justices and governmental bodies; including HM Customs & Excise, the Office of Fair Trading, the Data Protection Commissioner and the Environment Agency.

 

The UK government levies excise taxes on all alcohol beverages at varying rates depending on the type of product and its alcohol by volume. In 2003, we incurred approximately $983 million in excise taxes on gross revenues of approximately $2.6 billion, or approximately $94 per barrel.

 

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Environmental Matters

 

Americas

We are one of a number of entities named by the Environmental Protection Agency (EPA) as a potentially responsible party (PRP) at the Lowry Superfund site. This landfill is owned by the City and County of Denver (Denver), and is managed by Waste Management of Colorado, Inc. (Waste Management). In 1990, we recorded a pretax charge of $30 million, a portion of which was put into a trust in 1993 as part of a settlement with Denver and Waste Management regarding the then outstanding litigation. Our settlement was based on an assumed cost of $120 million (in 1992 adjusted dollars).  It requires us to pay a portion of future costs in excess of that amount.

 

Considering uncertainties at the site, including what additional remedial actions may be required by the EPA, new technologies, and what costs are included in the determination of when the $120 million threshold is reached, the estimate of our liability may change as facts further develop. We cannot predict the amount of any such change, but additional accruals could be required in the future.

 

We are aware of groundwater contamination at some of our properties in Colorado resulting from historical, ongoing or nearby activities. There may also be other contamination of which we are currently unaware.

 

From time to time, we have been notified that we are or may be a PRP under the Comprehensive Environmental Response, Compensation and Liability Act or similar state laws for the cleanup of other sites where hazardous substances have allegedly been released into the environment. While we cannot predict our eventual aggregate cost for the environmental and related matters in which we may be or are currently involved, we believe that any payments, if required, for these matters would be made over a period of time in amounts that would not be material in any one year to our operating results, cash flows or our financial or competitive position. We believe adequate reserves have been provided for losses that are probable and estimable.

 

Europe

We are subject to the requirements of government and local environmental and occupational health and safety laws and regulations. Compliance with these laws and regulations did not materially affect our 2003 capital expenditures, earnings or competitive position, and we do not anticipate that they will do so in 2004.

 

Employees and Employee Relations

 

Americas

We have approximately 5,400 employees in our Americas business. Memphis hourly employees, who constitute about 5% of our Americas work force, are represented by the Teamsters union; and a small number of other employees are represented by other unions. The Memphis union contract expires in 2005. We believe that relations with our Americas employees are good.

 

Europe

We have approximately 3,100 employees in our Europe business. Approximately 31% of this total workforce is represented by trade unions, primarily at our Burton-on-Trent and Tadcaster breweries. Separate negotiated agreements are in place with the Transport and General Workers Union at the Tadcaster Brewery and the Burton-on-Trent Brewery. The agreements do not have expiration dates, and negotiations are conducted annually. We believe that relations with our European employees are good.

 

(d) Financial Information About Foreign and Domestic Operations and Export Sales

 

See Item 8, Financial Statements and Supplementary Data, for discussion of sales, operating income and identifiable assets attributable to our country of domicile, the United States, and all foreign countries.

 

(e) Available Information

 

Our internet website is http://www.coors.com. Through a direct link to our reports at the SEC’s website at http://www.sec.gov, we make available, free of charge on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the SEC.

 

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ITEM 2. Properties

 

As of December 28, 2003, our major facilities were:

 

Facility		Location		Character
Americas
Brewery / packaging plants		Golden, CO Memphis, TN Tecate, Mexico		Malt beverages / packaged malt beverages
Packaging plant		Elkton, VA (Shenandoah Valley)		Packaged malt beverages
Can and end plant		Golden, CO		Aluminum cans and ends
Bottle plant		Wheat Ridge, CO		Glass bottles
Distributorship locations		Meridian, ID Glenwood Springs, CO Denver, CO		Wholesale beer distribution
Nine  satellite warehouses		Throughout the United States		Distribution centers
Europe
Brewery / packaging plants		Burton-on-Trent, Staffordshire Tadcaster Brewery, Yorkshire Alton Brewery, Hampshire		Malt and spirit-based beverages / packaged malt beverages
Distribution warehouse		Burton-on-Trent, Staffordshire		Distribution Center
Brewery		Cape Hill, Birmingham		Held for sale

 

We believe our facilities are well maintained and suitable for their respective operations. Our operating facilities are not constrained by capacity issues. Our satellite warehouses are owned and operated by third parties.

 

ITEM 3. Legal Proceedings

 

We are involved in certain disputes and legal actions arising in the ordinary course of our business.  While it is not feasible to predict or determine the outcome of these proceedings, in our opinion, based on a review with legal counsel, none of these disputes and legal actions is expected to have a material impact on our consolidated financial or other position, results of operations or cash flows.  However, litigation is subject to inherent uncertainties, and an adverse result in these matters, including the advertising practices case described below, could arise that may harm our business (see Item 8, Note 14, Commitments and Contingencies for additional discussion of our Legal Contingencies).

 

Coors and many other brewers and distilled spirits manufacturers have been sued in several courts regarding advertising practices and underage consumption. The suits have all been brought by the same law firm and allege that each defendant intentionally marketed its products to “children and other underage consumers.” In essence, each suit seeks, on behalf of an undefined class of parents and guardians, an injunction and unspecified money damages.  We will vigorously defend this litigation and it is not possible at this time to estimate the possible loss or range of loss, if any, in these lawsuits.

 

ITEM 4. Submission of Matters to a Vote of Security Holders

 

On October 3, 2003, at a special meeting of our shareholders, Class A and Class B shareholders voted to approve a proposal that resulted in a change of our state of incorporation from Colorado to Delaware. The change was made in order to take advantage of Delaware’s comprehensive, widely used and extensively interpreted corporate law. The re-incorporation did not result in any change in our name, headquarters, business, jobs, management, location of offices or facilities, number of employees, taxes payable to the State of Colorado, assets, liabilities, or net worth. However, the par value of all our classes of stock is now $0.01 per share, effective as of the fourth quarter of 2003.

 

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PART II

 

ITEM 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

 

Our Class B non-voting common stock has traded on the New York Stock Exchange since March 11, 1999, under the symbol “RKY” and prior to that was quoted on the NASDAQ National Market under the symbol “ACCOB.”

 

The approximate number of record security holders by class of stock at February 27, 2004, is as follows:

 

Title of class		Number of record security holders
Class A common stock, voting, $0.01 par value		All shares of this class are held by the Adolph Coors, Jr. Trust
Class B common stock, non-voting, $0.01 par value		2,985
Preferred stock, non-voting, no par value		None issued

 

The following table sets forth the high and low sales prices per share of our Class B common stock and dividends paid for each fiscal quarter of 2003 and 2002 as reported by the New York Stock Exchange:

 

		HIGH			LOW			DIVIDENDS
2003
First Quarter		$	64.00		$	46.15		$	0.205
Second Quarter		$	55.12		$	48.24		$	0.205
Third Quarter		$	57.06		$	48.08		$	0.205
Fourth Quarter		$	58.00		$	53.15		$	0.205
2002
First Quarter		$	67.47		$	51.92		$	0.205
Second Quarter		$	68.76		$	59.34		$	0.205
Third Quarter		$	64.18		$	51.40		$	0.205
Fourth Quarter		$	69.66		$	56.30		$	0.205

 

Equity Compensation Plan Information

The following table summarizes information about the 1990 Adolph Coors Equity Incentive Plan (the “EI Plan”), the Coors 1995 Supplemental Compensation Plan, and the Equity Compensation Plan for Non-Employee Directors as of December 28, 2003. All outstanding awards shown in the table below relate to our Class B common stock.

 

Plan Category		A Number of securities to be issued upon exercise of outstanding options, warrants and rights		B Weighted-average exercise price of outstanding options, warrants and rights			C Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A)
Equity compensation plans approved by security holders		6,586,779	(1)	$	54.75	(1)	2,679,019	(1)
Equity compensation plans not approved by security holders		None		None			None

 

(1)   We may issue securities under our equity compensation plan in forms other than options, warrants or rights. Under the EI Plan, we may issue Restricted Stock Awards, as that term is defined in the Plan.

 

As of December 28, 2003, there were 26,750 restricted shares outstanding. These include shares with respect to which restrictions on ownership (i.e., vesting periods) will lapse within one to three years from the date of issue.

 

11

 

On May 31, 2003, we granted options for a total of 10,000 shares of our non-voting Class B common stock to our five non-employee members of the Board of Directors, under our Equity Compensation Plan for Non-Employee Directors. These options were issued as a component of the directors’ annual compensation (see Item 12. Security Ownership of Certain Beneficial Owners and Management). The options were issued at an exercise price of $54.68 per share, and are exercisable for a period of ten years commencing on the earlier of the one year anniversary of the date of grant or the next following annual shareholders meeting following the date of grant, provided that the Director is still serving as our Director on such date.

 

ITEM 6. Selected Financial Data

 

The table below summarizes selected financial information for the 5 years ended as noted. For further information, refer to our consolidated financial statements and notes thereto presented under Item 8, Financial Statements and Supplementary Data.

 

		(In thousands, except per share data)
		2003			2002(2)			2001			2000(1)			1999
Consolidated Statement of Operations:
Gross sales		$	5,387,220		$	4,956,947		$	2,842,752		$	2,841,738		$	2,642,712
Beer excise taxes		(1,387,107		)	(1,180,625		)	(413,290		)	(427,323		)	(406,228		)
Net sales		4,000,113			3,776,322			2,429,462			2,414,415			2,236,484
Cost of goods sold		(2,586,783		)	(2,414,530		)	(1,537,623		)	(1,525,829		)	(1,397,251		)
Gross profit		1,413,330			1,361,792			891,839			888,586			839,233
Marketing, general and administrative		(1,105,959		)	(1,057,240		)	(717,060		)	(722,745		)	(692,993		)
Special charges		—			(6,267		)	(23,174		)	(15,215		)	(5,705		)
Operating income		307,371			298,285			151,605			150,626			140,535
Interest (expense) income, net		(61,950		)	(49,732		)	14,403			14,911			6,929
Other income, net		8,397			8,047			32,005			3,988			3,203
Income before income taxes		253,818			256,600			198,013			169,525			150,667
Income tax expense		(79,161		)	(94,947		)	(75,049		)	(59,908		)	(58,383		)
Net income		$	174,657		$	161,653		$	122,964		$	109,617		$	92,284
Net income per common share - basic		$	4.81		$	4.47		$	3.33		$	2.98		$	2.51
Net income per common share - diluted		$	4.77		$	4.42		$	3.31		$	2.93		$	2.46
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term and long-term marketable securities		$	19,440		$	59,167		$	309,705		$	386,195		$	279,883
Working capital		$	(54,874	)	$	(93,995	)	$	88,984		$	118,415		$	220,117
Total assets		$	4,486,226		$	4,297,411		$	1,739,692		$	1,629,304		$	1,546,376
Current portion of long-term debt and other short-term borrowings		$	91,165		$	144,049		$	88,038		—			—
Long-term debt		$	1,159,838		$	1,383,392		$	20,000		$	105,000		$	105,000
Shareholders’ equity		$	1,267,376		$	981,851		$	951,312		$	932,389		$	841,539
Consolidated Cash Flow Data:
Cash provided by operations		$	544,138		$	258,545		$	193,396		$	280,731		$	211,324
Cash (used in) investing activities		$	(229,924	)	$	(1,584,338	)	$	(196,749	)	$	(297,541	)	$	(121,043	)
Cash (used in) provided by financing activities		$	(357,393	)	$	1,291,668		$	(38,844	)	$	(26,870	)	$	(87,687	)
Other Information:
Barrels of beer and other beverages sold		32,735			31,841			22,713			22,994			21,954
Dividends per share of common stock		$	0.820		$	0.820		$	0.800		$	0.720		$	0.645
Depreciation, depletion and amortization		$	236,821		$	227,132		$	121,091		$	129,283		$	123,770
Capital expenditures and additions to intangible assets		$	240,458		$	246,842		$	244,548		$	154,324		$	134,377

 

(1) 53-week year versus 52-week year.

(2) Results for the first five weeks of fiscal 2002 and all prior fiscal years exclude CBL.

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Executive Summary

 

Overall, 2003 was a difficult year for us, especially in the US We faced extremely soft industry demand throughout the year in the US, and, although we made significant progress in key areas of our business, our Americas segment profits came in only slightly above our prior year results.

 

The US beer industry faced many challenges in 2003, including:

•      Continued weakness in the US economy during 2003 and, specifically, high unemployment levels among the key 21-24-year-old male consumer population,

•      Unfavorable weather, particularly in the Northeast, for a significant part of the peak summer selling season,

•      The popularity of low-carbohydrate diets that softened demand for beer,

•      The rise in popularity of distilled spirits and other alternative beverages, particularly among 21-29-year olds, and

•      A protracted grocery store strike in California that likely impacted sales in the largest beer state.

 

Two additional issues were unique to our US business during 2003.  First, we did not offer a product with “low-carbohydrate” positioning.  Second, late in the year, when most of the industry was showing signs of recovery, we experienced significant product-supply problems that left us unable to meet all the needs of our wholesale and retail customers.  We are addressing these issues early in 2004 in order to optimize our supply chain systems capabilities.

 

Our 2003 performance in the Europe segment, specifically in the UK, reflected strong volume and market share growth.  Results were negatively impacted by the lack of benefits in 2003 from revenue-producing transitional activities which occurred in 2002 following our acquisition of the UK business, as well as high levels of discounting in the off-Trade channel during the first two-thirds of the year.  Later in the year, however, our performance in the UK showed the positive profit impact of our strong volume growth, reduced off-Trade discounting levels, and productivity improvements from supply chain initiatives.

 

•      One critical area of accomplishment in 2003 was our cash generation and debt reduction. Full-year debt repayments totaled $272 million, more than 30% greater than the $208 million we repaid in 2002.  Cash flow during the year benefited from higher operating cash flow, a temporary reduction in cash taxes, improvements in working capital, and continually improving capital spending disciplines in the US  Those are the key highlights for 2003. Looking forward, we have four major strategies we’re focused on to succeed in the global beer industry: First, we are striving to capture an increasing share of each new generation of legal-drinking-age beer drinkers in order to gain their brand loyalty for the long-term.  We intend to accomplish this by building our big brands in big markets – Coors Light in the Americas, Carling and Grolsch in the UK — which are the young-adult beer drinker’s point of entry into our portfolio.  To achieve this goal, we continued during 2003 to refine our sales and marketing initiatives supporting our flagship brands.  As a result, volume momentum in the UK behind Carling and Grolsch has been outstanding.  In Canada, Coors Light has continued to grow volume and market share.Despite a poor volume year in the US, we’ve made progress among key demographics and retail channels, and we are taking steps to make all of our initiatives even more effective.

 

•      Second, we intend to capture more than our fair share of the product news opportunities in the category each year through both new products and brands, or product developments with existing brands, such as Coors Light and Carling.  In March 2004, we launched Aspen Edge – our entry in the low-carb segment here in the US.  We are also repositioning Zima in the US, continuing to expand Carling Extra Cold in the UK, and launching our Coors Fine Light beer in the UK.

 

•      Third, we need to strengthen our access to retail by building the capabilities that are key to partnering and being successful with our wholesalers and retailers. Our biggest investment to strengthen our access to retail in 2003 was the initiative to improve our Americas supply-chain systems and processes.  Making these investments was a necessity for the long-term success of our business.  Our start-up problems were greater than expected, but in early 2004, product supply has improved as wholesale and retail stock-outs are now a fraction of what they were in our most difficult period early in the fourth quarter of 2003.  When the capabilities of our new supply-chain systems and processes are more fully optimized later this year, our

 

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distributors will have more control over their orders, better visibility throughout the shipping process, and better service, which we anticipate will result in efficiencies and cost savings for us and for our distributors.

 

•      Fourth, we need to lower our cost structure so that we can grow profits and afford the investments needed to grow and succeed.  In 2003 we made significant progress in both the Americas and Europe.  Productivity from operations in the US was solid in 2003, despite soft volume.  In the UK, we right-sized our production assets in 2003, and we expect to see the benefits in 2004.

 

We believe these four strategies represent the right business model for succeeding in our current environment.  Despite our 2003 results and the challenges ahead, we have made significant progress in key areas of our business that make us optimistic about our future prospects.

 

# # #

 

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Results of Operations

Our consolidated results are driven by the results of our two operating segments, Americas and Europe, and our unallocated corporate expenses. When comparing 2003 to 2002, note that we only include CBL results since February 2, 2002, the date of acquisition, thus excluding CBL’s January 2002 results.

 

Consolidated income before income taxes decreased 1.1% in 2003 compared to 2002.  Our consolidated volume increased 2.8% from 31.8 million barrels to 32.7 million barrels.  These results were driven by improved performance in the second half of the year in our major businesses outside the United States, including Europe, Canada, and the Caribbean.  Our business was also helped by favorable foreign exchange rates, better margins, and improved UK operations productivity.  However, offsetting these positive factors,  our US business suffered from soft industry demand throughout the year, increased popularity of beers with low-carbohydrate positioning, and our product-supply disruptions related to implementation of our new supply chain systems and processes late in the year.

 

Our effective tax rate in 2003 at 31.2% was significantly lower than our tax rate in 2002 at 37.0%.  The lower rate was primarily the result of the favorable completion of tax audits for the years 1996 through 2000 and benefits realized from the tax structure related to the acquisition of our UK business.  This lower tax rate is directly responsible for net income and earnings per share increasing 8% in 2003 from the prior year.

 

From 2001 to 2002, consolidated income before taxes increased significantly, primarily as a result of our acquisition of CBL on February 2, 2002.  From 2001 to 2002, our net sales and income before income taxes increased 55.4% and 29.6%, respectively, as a result of the additional business.  We also experienced a significant increase in interest expense, from $2.0 million to $70.9 million, during 2002 as a result of debt incurred to acquire the CBL business.  We achieved an increase from 22.7 million barrels to 31.8 million barrels of beverages, an increase of 40%. Our Americas business reported a modest increase in income before income taxes and basically flat volume from 2001 to 2002.  These results are expanded upon in the Americas segment discussion that follows.

 

Our consolidated effective tax rate was 37.0% in 2002, down from 37.9% for 2001.  The decrease was driven by the benefits realized from our UK business.

 

Americas Segment

 

The Americas segment is focused on the production, marketing and sales of the Coors portfolio of brands in the United States and its territories. This segment also includes the Coors Light business in Canada that is conducted through a partnership investment with Molson, Coors Canada, and the sale of Molson products in the United States that is conducted through a joint venture investment, Molson USA. The Americas segment also includes the small amount of volume that is sold outside of the United States and its territories and Europe.

 

15

 

		Fiscal Year Ended
		December 28, 2003			Percent Change		December 29, 2002			Percent Change		December 30, 2001
		(In thousands, except percentages)
Volume in barrels		22,374			(1.4	)%	22,688			N/M		22,667
Net sales		$	2,409,595		0.4	%	2,400,849			(0.9	%	$	2,422,282
Cost of goods sold		(1,474,250		)	(0.5	)%	(1,481,630		)	(3.3	)%	(1,532,471		)
Gross profit		935,345			1.8	%	919,219			3.3	%	889,811
Marketing, general and administrative expenses		(717,622		)	2.3	%	(701,454		)	2.3	%	(685,568		)
Special charges, net (1)		¾			N/M		(3,625		)	(84.4	)%	(23,174		)
Operating income		217,723			1.7	%	214,140			18.3	%	181,069
Gain on sale of distributorships (2)		¾			—		¾			N/M		27,667
Other income, net (3)		3,485			(28.4	)%	4,864			N/M		1,319
Income before income taxes		$	221,208		1.0	%	$	219,004		4.3	%	$	210,055

 

(1)          The 2002 net charge consists of expenses related to restructuring and the dissolution of our former can and end joint venture, offset by a cash payment on a debt from our former partner in a brewing business in South Korea.  The net 2001 charge consists of the restructuring of our purchasing and production organizations, impairment charges on certain fixed assets, charges to dissolve our former can and end joint venture and incremental consulting, legal and other costs incurred in preparation to restructure and outsource our information technology infrastructure.

(2)          Gain from the sale of Company-owned distributorships

(3)          Consists primarily of equity share of Molson USA losses and gains from sales of water rights and warehouses.

 

N/M = Not Meaningful

 

Foreign Currency impact on 2003 results

In 2003, our Americas segment benefited from a 10.8% year-over-year increase in the value of the Canadian Dollar (CAD) against the US dollar.  As a result of this exchange rate fluctuation, net sales, operating income, and income before taxes are higher than in the prior year by approximately $5.5 million.

 

Net sales and volume

Net sales for the Americas segment increased slightly from 2002 to 2003.  On a per barrel basis, net sales increased 1.8% while volume decreased 1.4% year-over-year.  Net sales were impacted positively by continued favorable pricing in the United States, as well as significant growth in our Canadian business.  Likewise, net sales were impacted positively by a one-time $4.2 million increase in revenue during the first quarter that resulted from the settlement of a contract interpretation dispute between CBC and one of our wholesalers.  However, we experienced challenges in our Americas segment as our volume was impacted negatively by a weak industry demand throughout the year caused by a very wet summer in the Northeast and a sluggish economy.  In addition, we were negatively impacted by a mix shift toward lower revenue-per-barrel brands such as Keystone Light, which experienced a volume growth of 10.9%.  Growing consumer interest in low-carbohydrate food and beverage products hurt sales for Coors Light and other premium light beers that did not have low-carbohydrate positioning.  As a result of this change in consumer tastes and the mix shift away from premium products, Coors Light sales volume declined in 2003.

 

We also experienced significant challenges in the fourth quarter of 2003 when we implemented new supply chain systems and processes.  Due to a difficult start-up early in the fourth quarter, we were unable to ship sufficient quantities of beer in some brand and package configurations.  While our supply chain improved by the end of the year, the supply disruptions caused by this implementation had a meaningful negative impact on 2003 volume and earnings.

 

Our 2002 net sales decreased 0.9% from 2001, while volume for the Americas segment remained relatively flat.  Net revenue per barrel declined 1% from 2001.  The declines were mostly due to the sale of company-owned distributorships in 2001 (whose volumes were included in 2001 results until the date of sale), a decline in volume in Puerto Rico as a result of a 50% increase in a beer excise tax that took effect during the summer of 2002, and a

 

16

 

negative sales mix in the United States where consumer preferences moved toward our lower revenue-per-barrel brands, geographies, and packages.  Partially offsetting these declines in sales and volume was improved domestic pricing and reduced price promotions.

 

From a brand perspective, growth in domestic Coors Light and Keystone Light brands in 2002 versus 2001 were partially offset by declines in Zima, Killian’s and exported Coors Light.  Zima was impacted disproportionately by the influx of new flavored alcohol beverages (FABs) in the United States during much of 2002.

 

Cost of goods sold and gross profit

Americas cost of goods sold increased approximately 0.9% per barrel in 2003 versus 2002.  The overall increase in cost of goods sold per barrel in 2003 was the result of higher depreciation costs stemming from recent additions to fixed assets, higher pension and other labor-related costs, increased fuel costs, and the de-leveraging of fixed costs resulting from the decline in volume. Our higher pension costs were the result of the unfavorable impacts of lower returns on pension assets in recent years and lower discount rates. In addition to these more pervasive factors, we incurred approximately $8 million of increased costs in the fourth quarter of 2003, primarily related to extra freight, direct labor and finished goods loss associated with our new supply chain processes and systems implementation. These costs were in addition to the impacts from decreased volume. However, our controllable operations costs, which make up about 95% of our Americas cost of goods sold, declined slightly per barrel during the year as a result of operations efficiency initiatives and improved packaging costs.

 

Compared to 2002, our 2003 gross profit increased 1.8%, or 3.2% on a per-barrel basis. As a percentage of net sales, gross profit increased by nearly 1%. Increases were driven primarily by price increases and improved operations efficiencies and lower packaging costs.

 

In 2002, we experienced a 3.3% decrease in cost of goods sold.  On a per-barrel basis, the decline was 3.4%.  As a percentage of net sales, cost of goods sold was approximately 61.7% in 2002 compared to 63.3% in 2001. These decreases are attributable primarily to the sale of company-owned distributorships in 2001, lower transportation and packaging costs and continued operations efficiency initiatives in our breweries.  Offsetting these decreases were higher costs associated with adding capacity to our Golden and Memphis manufacturing facilities and bottle packaging capacity in Shenandoah, Virginia.  We also incurred higher pension and other labor-related costs.

 

Our gross profit increased 3.3% in 2002 over 2001. As a percentage of net sales, gross profit increased nearly 2%. Increases were driven by the decline in cost of goods sold.

 

Marketing, General and Administrative expenses

Marketing, general and administrative expenses increased 2.3%, or 3.8% on a per barrel basis, in 2003 compared to 2002.  This increase was driven by higher costs for employee benefits, primarily pension costs, and higher spending levels related to information technology.  Selling and marketing expense was also slightly higher year-over-year.

 

In 2002, marketing, general and administrative expenses increased 2.3% over the previous year, driven by higher marketing expense as we invested more behind our brands in advertising and sales promotion, higher systems investments and labor-related costs. Partially offset by this increase in selling and marketing expense was a decline in general and administrative expense due to the sale of company-owned distributorships in 2001.

 

Europe Segment

 

The Europe segment consists of our production and sale of the CBL brands, principally in the United Kingdom but also in other parts of the world, our joint venture arrangement relating to the production and distribution of Grolsch in the United Kingdom and Republic of Ireland, and our joint venture arrangement for the physical distribution of products throughout Great Britain (Tradeteam).  It also includes the sale of Coors Fine Light in the United Kingdom and Coors Light in the Republic of Ireland. Note that the CBL results for January 2002, typically a loss month, are excluded from the 2002 results discussed below.

 

17

 

		Fiscal Year Ended
		December 28, 2003			Percent Change		December 29, 2002 (1)			December 30, 2001 (1)
		(In thousands, except percentages)
Volume in barrels		10,361			13.2	%	9,153			46
Net sales		$	1,590,518		15.6	%	$	1,375,473		$	7,180
Cost of goods sold		(1,112,533		)	19.3	%	(932,900		)	(5,152		)
Gross profit		477,985			8.0	%	442,573			2,028
Marketing, general and administrative expenses		(361,553		)	9.0	%	(331,656		)	(10,188		)
Operating income (loss)		116,432			5.0	%	110,917			(8,160		)
Interest income		17,156			4.7	%	16,390			¾
Other income, net (2)		4,114			133.0	%	1,766			¾
Income (loss) before income taxes		$	137,702		6.7	%	$	129,073		$	(8,160	)

 

(1)                Since we did not own CBL prior to February 2002, we do not report historical financial results for this business.  Accordingly, the historical Europe segment results include only our pre-acquisition Europe operation, which generated very small volume and revenue.  Our discussion on the comparative results of the Europe segment from 2001 to 2002 has been excluded, as comparative results are not meaningful.

(2)                2003 other income, net was composed primarily of Tradeteam income (included in cost of goods sold in 2002), offset by leasehold expenses and losses on asset sales (See Item 8, Note 2).  In 2002, other income, net primarily related to income from a small investment in an internet marketing venture in the UK.

N/M = Not Meaningful

 

Foreign currency impact on 2003 results

In 2003, our Europe segment benefited from an 8.4% year-over-year increase in the value of the British pound sterling (GBP) against the US dollar, partially as a result of this exchange rate fluctuation, all results from our Europe segment in 2003 are significantly higher than in the prior year.  The following table summarizes the approximate effect this change in exchange rate had on the Europe results in 2003:

 

		Increase Due to Currency Effects
		(In thousands)
Net sales		$US		126,071
Cost of goods sold		(88,950			)
Gross profit		37,121
Marketing, general & administrative		(29,115			)
Operating income		8,006
Interest income		1,398
Other income, net		397
Income before income taxes		$	9,801

 

Net sales and volume

Net sales for the Europe segment increased 15.6% in 2003, while volume increased 13.2% from the previous year.  The significant increase in net sales and volume was partly due to our owning the CBL business for the full year in 2003 versus forty-seven weeks in 2002. 9% of the sales increase represents the effect of currency exchange rates. On a full year comparative basis, our sales volumes increased 6.7%. This growth was driven by the Carling and Grolsch brands, both of which grew volume by more than 10% during the year.

 

Our on-trade business, which represents approximately two-thirds of our Europe volume and an even greater portion of margin, grew volume by approximately 5% compared to the full year 2002 as a result of strong sales execution, particularly with Carling and Carling Extra Cold, and unusually hot weather in the United Kingdom this summer.  In a declining on-trade market, this yielded a market share gain of approximately 1.5 percentage points. Our off-trade volume for 2003 increased approximately 13% over the comparable period in 2002, led by Carling and Grolsch.

 

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Contributing factors to this volume growth were the favorable summer weather and aggressive discounting, primarily in the first half of the year. Our off-trade market share growth for the year was approximately 1%.

 

Our positive volume in both the on- and off-trade and positive pricing in the on-trade were partially offset by a decline in our on-trade factored brand sales and, in the off-trade, heavy price discounting and mix shift toward lower revenue-per-barrel sales. The decline in sales of factored brands in the on-trade was driven by some of our large on-trade chain customers changing to purchase non-Coors products directly from the brand owners.

 

Cost of goods sold and gross profit

Cost of goods sold increased 19.3% in 2003 versus 2002.  On a per-barrel basis, cost of goods sold increased 5.4%.  The aggregate increase in cost of goods sold was driven by increased volume and higher foreign exchange rates, coupled with our owning the business for the full year versus only a partial period in 2002.  Also driving this increase, and the increase in the per barrel cost, was the reclassification of Tradeteam earnings from cost of goods sold to other income beginning in 2003 and the loss of income from contract brewing arrangements that substantially ceased near the end of 2002. Additionally, during the first three quarters of 2003, we incurred higher production costs as we contracted with regional brewers to package some of our off-trade volume while we were commissioning the new and upgraded packing lines in our Burton brewery.

 

We were able to realize some benefit from right-sizing and improving our UK production infrastructure towards the latter half of the year, which partially offset the increases noted above.  The increases in cost of goods sold were also reduced by the decrease in factored brand volume where the purchase cost is included in our cost of goods sold, but the related volume is not included in reported volumes.

 

Gross profit in the Europe segment increased 8.0%; however, excluding the impact of foreign exchange, gross profit was essentially flat despite the inclusion of a full year of sales in 2003. Gross profit per barrel decreased 4.6% and gross profit as a percentage of net sales decreased 2% during 2003 as a result of the reclassification of Tradeteam earnings and our contract packaging costs incurred as we commissioned the packaging lines in Burton.

 

Marketing, general and administrative expenses

Europe marketing, general and administrative expenses increased 9.0% during 2003 almost entirely due to exchange rates and the impact of the full year of ownership. On a per-barrel basis, marketing, general and administrative expenses decreased 3.7% year-over-year. Various factors impacted marketing, general and administrative expense during 2003, which effectively off-set each other: (a) we had higher investments in sales staff and increased depreciation charges from investments in information systems and dispense equipment, the latter supporting the sales growth in the on-trade; (b) we were impacted by the loss of reimbursements from the transitional services arrangements with Interbrew S.A. that were set up following the CBL acquisition in February 2002 and largely concluded by the end of that year. These reimbursements were recorded as a reduction to marketing, general and administrative expenses in 2002; (c) we realized savings in employee bonus costs and directors’ costs; and (d) the one-time gain of $3.5 million before tax on the sale of the rights to our Hooper’s Hooch FAB brand in Russia during the third quarter.

 

Interest income

Interest income is earned on trade loans to UK on-trade customers. Interest income increased 4.7% in 2003 as a result of favorable foreign exchange rates, the inclusion of an additional five weeks of results in 2003 and a lower debt balance in 2003.

 

Corporate

 

Corporate currently includes interest expense and certain other general and administrative costs that are not allocable to either the Americas or Europe operating segments. Corporate contains no sales or cost of goods sold. In 2003, we changed our allocation methodology between the Americas and Europe segments for general and administrative expenses, leaving certain of these costs in Corporate. The 2002 and 2001 amounts have been reclassified to conform to the new presentation.  The majority of these corporate costs relates to worldwide finance and administrative functions, such as corporate affairs, legal, human resources, insurance and risk management.

 

19

 

		Fiscal Year Ended
		December 28, 2003			Percent Change		December 29, 2002			Percent Change		December 30, 2001
		(In thousands, except percentages)
Net sales		$	¾		¾		$	¾		¾		$	¾
Cost of goods sold		¾			¾		¾			¾		¾
Gross profit		¾			¾		¾			¾		¾
Marketing, general and administrative expenses		(26,784		)	11.0	%	(24,130		)	13.3	%	(21,304		)
Special charges (1)		¾			N/M		(2,642		)	N/M		¾
Operating loss		(26,784		)	N/M		(26,772		)	25.7	%	(21,304		)
Interest income		2,089			(56.5	)%	4,797			(70.8	)%	16,409
Interest expense		(81,195		)	14.5	%	(70,919		)	N/M		(2,006		)
Other income, net (2)		798			(43.7	)%	1,417			(53.1	)%	3,019
Loss before income taxes		$	(105,092	)	14.9	%	$	(91,477	)	N/M		$	(3,882	)

 

(1)                                  Relate primarily to acquisition costs for CBL, including accounting, appraisal and legal fees not eligible for capitalization.

(2)                                  Consists of foreign currency exchange gains (losses), bank fees and gains on sales of investments.

 

N/M = Not Meaningful

 

Marketing, general and administrative expenses

Marketing, general and administrative expenses for Corporate increased 11.0% in 2003 compared to 2002 due to increased pension and benefit costs and management of a larger global business.  2002 marketing, general and administrative expenses increased significantly from 2001 for the same reasons.

 

Interest income

Interest income for 2003 decreased $2.7 million because of lower interest rates and lower cash balances in 2003 over 2002. Interest income decreased $11.6 million from 2001 to 2002 due to higher cash and interest-bearing securities balances in 2001. We sold all of our interest-bearing securities in January 2002 to help fund the acquisition of CBL.

 

Interest expense

Interest expense increased $10.3 million in 2003. This increase was driven by having our fixed-rate debt structure in place for the full year in 2003 versus only eight months in 2002 and the currency appreciation on our GBP-denominated term debt prior to its payoff in August 2003.  Prior to finalizing the long-term structure in second quarter of 2002, we had exclusively short-term borrowings at lower interest rates that supported our acquisition of CBL in February 2002. The increase is also due to our cross-currency swap structure and our GBP-denominated interest expense. Partially offsetting these factors was the implementation of our lower interest rate commercial paper program in June 2003, the initial proceeds of which we used to pay down approximately $300 million of higher-rate GBP-denominated term debt. Our new debt structure has lower interest costs on outstanding balances.

 

2002 interest expense increased $68.9 million versus 2001 due to the significant increase in debt incurred to purchase CBL early that year.

 

Liquidity and Capital Resources

 

Liquidity

Our primary sources of liquidity are cash provided by operating activities and external borrowings. As of December 28, 2003, including cash and short-term borrowings, we had negative working capital of $54.9 million compared to negative working capital of $94.0 million at December 29, 2002. We are able to operate with a negative working capital investment because of relatively short terms on receivables in our Americas segment and our ability to carry low levels of finished goods inventories as a result of the structure of our distribution system. These factors are offset by higher investments in working capital in Europe, primarily with regard to accounts receivable. The increase in our working capital is the net result of changes in our short-term borrowings, accrued expenses and other liabilities, accounts and notes receivable and raw materials. At December 28, 2003, cash and short-term marketable securities totaled

 

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$19.4 million, compared to $59.2 million at December 29, 2002. Our cash and short-term marketable securities balances decreased primarily due to early payments of principal and interest on our long-term debt made late in our fiscal year 2003.

 

We believe that cash flows from operations and cash provided by short-term borrowings, when necessary, will be quite sufficient to meet our ongoing operating requirements, scheduled principal and interest payments on debt, dividend payments and anticipated capital expenditures. However, our liquidity could be impacted significantly by a decrease in demand for our products, which could arise from competitive circumstances, a decline in the acceptability of alcohol beverages, any shift away from light beers and any of the other factors we describe in the section titled “Risk Factors.” We continue to evaluate opportunities to supplement our operating cash flow through potential monetizations of assets. Success in accomplishing these efforts will result in faster reduction of outstanding debt. We also have credit facilities that contain financial and operating covenants, and provide for scheduled repayments, that could impact our liquidity on an ongoing basis. During the fiscal year ended December 28, 2003, we made debt repayments of approximately $272.0 million.

 

Operating Activities

Net cash provided by operating activities increased $285.6 million in 2003 compared to 2002. The increase was attributable primarily to cash provided by trade receivables and payables in 2003 - the result of continued emphasis on working capital management by improving receivable collection in the UK and managing the purchasing cycle throughout the Company.

 

Net cash provided by operating activities increased $65.1 million in 2002, compared to 2001.  The change was attributable primarily to the acquisition of CBL, which added to our depreciation and amortization and modified the composition of our working capital in 2002.

 

Investing Activities

During the fiscal year ended December 28, 2003, we used net cash of $229.9 million in investing activities, compared to $1.6 billion used in 2002. The decrease in net cash used is due to the $1.6 billion payment, net of cash acquired, made to purchase CBL in 2002. However, excluding our 2002 $1.6 billion payment to acquire CBL, total cash used in investing activities increased approximately $232.9 million compared to the same period last year, mainly due to the absence of sales and maturities of investments in 2003 versus 2002. A significant amount of investments was sold in 2002 to help fund the acquisition of CBL.

 

Net cash used in investing activities increased $1.4 billion from 2001 to 2002.  The increase was due to the cash used in the acquisition of CBL. Also, in 2001, we made a payment of $65.0 million for our 49.9% interest in Molson USA.  However, excluding these payments, total cash provided by investing activities increased approximately $134.7 million year-over-year mostly due to a substantial decrease in purchases of securities.  As a result of our debt burden associated with the CBL acquisition, we did not purchase any marketable securities in 2002 compared to purchases of $228.2 million during 2001.

 

Financing Activities

Net cash used in financing activities was $357.4 million in 2003, representing a $1.6 billion decrease from cash provided by financing activities in 2002. This decrease is primarily attributable to the $2.4 billion proceeds from issuance of debt in 2002, partially offset by larger payments on debt and capital lease obligations in 2002.  Debt-related activity in 2003 reflected net payments of long- and short-term debt totaling  $297.1 million whereas in 2002, debt-related activity reflected a net increase in long- and short-term debt of $1.3 billion, due primarily to borrowings related to our acquisition of CBL.  Repayments of long-term debt during 2003 totaled $272.0 million; the remaining change in financing activities relates to temporary changes in short-term borrowings.

 

In 2002, net cash provided by financing activities increased $1.3 billion from the previous year as a result of debt proceeds and payments associated with our acquisition of CBL.  Excluding these items, change in financing activities was driven by changes in overdraft balances and the absence of treasury stock purchases in 2002 versus purchases of $72.3 million in 2001.

 

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Debt Structure

Our total borrowings as of December 28, 2003, were composed of the following:

 

		As of
Description		December 28, 2003			December 29, 2002
		(In thousands)
Short-term borrowings		$	21,309		$	101,654
Senior private placement notes		$	20,000		$	20,000
6 3/8% Senior notes due 2012		854,043			855,289
Senior Credit Facility:
USD amortizing term loan		86,000			168,000
GBP amortizing term loan		—			365,689
Commercial paper		249,645			—
Other		20,006			16,809
Total long-term debt (including current portion)		1,229,694			1,425,787
Less current portion of long-term debt		(69,856		)	(42,395		)
Total long-term debt		$	1,159,838		$	1,383,392

 

The aggregate principal debt maturities of long-term debt for the next five fiscal years are as follows:

 

		Amount
		(In thousands)
2004		$	69,856
2005		24,951
2006		80,133
2007		199,338
2008		—
Thereafter		855,416
Total		$	1,229,694

 

We incurred significant debt in 2002 to finance the purchase of CBL. Since the acquisition, we have used cash from operating activities and from asset monetizations, net of capital expenditures and other cash used in investing activities, to make payments on our debt obligations.

 

In June 2003, we issued approximately $300 million of commercial paper, approximately $250 million of which was outstanding at December 28, 2003.  $200 million of our commercial paper balance is classified as long-term, reflecting our intent to keep this amount outstanding for longer than 360 days and our ability to refinance these borrowings on a long-term basis through our revolving line of credit. The remaining $50 million is classified as short term, as our intent is to repay that portion in the next twelve months.

 

Concurrent with our issuance of commercial paper, we made a payment against the then-outstanding principal and interest on our GBP-denominated amortizing term loan of approximately 181.1 million GBP ($300.3 million at then-prevailing foreign currency exchange rates) using proceeds from our issuance of commercial paper. We repaid the balance of our GBP term loan in the third quarter of 2003 using cash generated from operations. We also repaid $55 million of our US dollar (USD)-denominated term loan in the fourth quarter. In conjunction with these payments, we accelerated our amortization of loan fees, resulting in a charge of $3.7 million to interest expense during the year. See Item 8, Financial Statements and Supplementary Data, for further information.

 

In May 2003, we increased our unsecured committed credit arrangement from $300 million to $500 million in order to support our commercial paper program. As of December 28, 2003, $250 million of the total $500 million line of credit was being used as a backstop for our commercial paper program while the remainder was available for general corporate purposes.

 

At December 28, 2003, CBC had two USD-denominated uncommitted lines of credit totaling $50.0 million in aggregate. The lines of credit are with two different lenders. We had $7.0 million outstanding under these lines of credit as of December 28, 2003.  CBL had two 10 million GBP uncommitted lines of credit and a 10

 

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million GBP overdraft facility. No amount had been drawn on the overdraft facility as of December 28, 2003. The lines of credit had balances outstanding of $11.9 million at December 28, 2003.

 

In addition, we have two uncommitted lines of credit totaling 900 million Japanese yen or approximately $8.4 million at December 28, 2003.  At December 28, 2003, interest rates were below 1% and balances outstanding totaled $2.4 million.

 

Some of our debt instruments require us to meet certain covenant restrictions, including financial tests and other limitations.  As of December 28, 2003, we were in compliance with all of these covenants.

 

Contractual Obligations and Commercial Commitments

 

Contractual Cash Obligations as of December 28, 2003

 

		Payments Due By Period
		Total			Less than 1 year			1 – 3 years			4 – 5 years			After 5 years
		(In thousands)
Long term debt		$	1,229,694		$	69,856		$	105,084		$	199,338		$	855,416
Operating leases		105,749			21,898			36,534			18,671			28,646
Retirement plan expenditures (3)		172,059			78,305			19,874			21,167			52,713
Other long term obligations(1)		6,606,199			1,139,062			1,718,270			1,344,728			2,404,139
Total obligations		$	8,113,701		$	1,309,121		$	1,879,762