Edgar Filing: MOLSON COORS BREWING CO

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal year ended December 31, 2006

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 1-14829

MOLSON COORS BREWING COMPANY

(Exact name of registrant as specified in its charter)

DELAWARE		84-0178360
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1225 17th Street, Denver, Colorado 1555 Notre Dame Street East, Montréal, Québec, Canada		80202 H2L 2R5
(Address of principal executive offices)		(Zip Code)

303-279-6565 (Colorado)
514-521-1786 (Québec)
(Registrant’s telephone number, including area code)

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

Title of each class				Name of each exchange on which registered
Class A Common Stock (voting), $0.01 par value				New York Stock Exchange Toronto Stock Exchange
Class B Common Stock (non-voting), $0.01 par value				New York Stock Exchange Toronto Stock Exchange

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

Title of class
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

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. x

Indicate by check mark whether the registrant is a large accelerated filer x, an accelerated filer o, or a non-accelerated filero (check one).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No

The aggregate market value of the registrant’s publicly-traded stock held by non-affiliates of the registrant at the close of business on June 25, 2006, was $4,466,274,383 based upon the last sales price reported for such date on the New York Stock Exchange and the Toronto Stock Exchange. For purposes of this disclosure, shares of common and exchangeable stock held by persons holding more than 5% of the outstanding shares of stock and shares owned by officers and directors of the registrant as of June 25, 2006 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 20, 2007:

Class A Common Stock—1,337,386 shares

Class B Common Stock—68,636,816 shares

Exchangeable shares:

As of February 20, 2007, the following number of exchangeable shares was outstanding for Molson Coors Canada, Inc.:

Class A Exchangeable Shares—1,657,114

Class B Exchangeable Shares—16,928,210

In addition, the registrant has outstanding one share each of special Class A and Class B voting stock, through which the holders of Class A Exchangeable shares and Class B exchangeable shares of Molson Coors Canada Inc. (a subsidiary of the registrant), respectively, may exercise their voting rights with respect to the registrant. The special Class A and Class B voting stock are entitled to one vote for each of the exchangeable shares, respectively, excluding shares held by the registrant or its subsidiaries, and generally vote together with the Class A common stock and Class B common stock, respectively, on all matters on which the Class A common stock and class B common stock are entitled to vote. The trustee holder of the special class A voting stock and the special Class B voting stock has the right to cast a number of votes equal to the number of then outstanding Class A exchangeable shares and Class B exchangeable shares, respectively.

Documents Incorporated by Reference: Portions of the registrant’s definitive proxy statement for the registrant’s 2007 annual meeting of stockholders are incorporated by reference under Part III of this Annual Report on Form 10-K.

MOLSON COORS BREWING COMPANY AND SUBSIDIARIES
INDEX

		Page(s)
	PART I.
Item 1.	Business		3
Item 1A.	Risk Factors		17
Item 1B.	Unresolved Staff Comments		21
Item 2.	Properties		22
Item 3.	Legal Proceedings		23
Item 4.	Submission of Matters to a Vote of Security Holders		24
	PART II.
Item 5.	Market for the Registrant’s Common Equity and Issuer Purchases of Equity Securities		25
Item 6.	Selected Financial Data		27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		63
Item 8.	Financial Statements and Supplementary Data		65
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		148
Item 9A.	Controls and Procedures		148
Item 9B.	Other Information		149
	PART III.
Item 10.	Directors, Executive Officers and Corporate Governance		150
Item 11.	Executive Compensation		150
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		150
Item 13.	Certain Relationships and Related Transactions, and Director Independence		150
Item 14.	Principal Accounting Fees and Services		150
	PART IV.
Item 15.	Exhibits and Financial Statement Schedules		151
Signatures			157

PART I

ITEM 1. Business

On February 9, 2005, Adolph Coors Company merged with Molson Inc. (the Merger). In connection with the Merger, Adolph Coors Company became the parent of the merged company and changed its name to Molson Coors Brewing Company. Unless otherwise noted in this report, any description of us includes Molson Coors Brewing Company (MCBC or the Company) (formerly Adolph Coors Company), principally a holding company, and its operating subsidiaries: Coors Brewing Company (CBC), operating in the United States (U.S.); Coors Brewers Limited (CBL), operating in the United Kingdom (U.K.); Molson Canada (Molson), operating in Canada; and our other corporate entities. Any reference to “Coors” means the Adolph Coors Company prior to the Merger. Any reference to Molson Inc. means Molson prior to the Merger. Any reference to “Molson Coors” means MCBC, after the Merger.

Unless otherwise indicated, information in this report is presented in U.S. Dollars (USD or $).

(a) General Development of Business

Molson was founded in 1786, and Coors was founded in 1873. Since each company was founded, they have been committed to producing the highest-quality beers. Our brands are designed to appeal to a wide range of consumer tastes, styles and price preferences. Our largest markets are Canada, the United States and the United Kingdom.

The Merger

The Merger was effected by the exchange of Coors stock for Molson stock in a transaction that was valued at approximately $3.6 billion. Although Coors was considered the acquirer for accounting purposes, the transaction was considered a merger of equals by the two companies. The transaction is discussed in Note 2 to the Consolidated Financial Statements in Item 8.

Sale of Kaiser

On January 13, 2006, we sold a 68% equity interest in Cervejarias Kaiser Brasil S.A. (Kaiser) to FEMSA Cerveza S.A. de C.V. (FEMSA). Kaiser is the third largest brewer in Brazil. Kaiser’s key brands include Kaiser Pilsen®, and Bavaria®. We retained a 15% ownership interest in Kaiser, which was reflected as a cost method investment for accounting purposes during most of 2006. During the fourth quarter of 2006, we divested our remaining 15% interest in Kaiser by exercising a put option, for which we collected $15.7 million, including interest. Our financial statements contained in this report present Kaiser as a discontinued operation, as discussed further in Note 4 to the Consolidated Financial Statements in Item 8.

Joint Ventures and Other Arrangements

To focus on our core competencies in manufacturing, marketing and selling malt beverage products, we have entered into joint venture arrangements with third parties over the past decade to leverage their strengths in areas such as can and bottle manufacturing, transportation and distribution. These joint ventures include Rocky Mountain Metal Container (RMMC) (aluminum can manufacturing in the U.S.), Rocky Mountain Bottle Company (RMBC) (glass bottle manufacturing in the U.S.) and Tradeteam, Ltd. (Tradeteam) (transportation and distribution in Great Britain within our Europe segment).

(b) Financial Information About Segments

Our reporting segments have been realigned as a result of the Merger. We have three operating segments: Canada, the United States and Europe. Prior to being segregated and reported as a

discontinued operation during the fourth quarter of 2005, and subsequent to the Merger in the first quarter of 2005, Brazil was an operating segment. A separate operating team manages each segment, and each segment manufactures, markets and sells beer and other beverage products.

See Note 3 to the Consolidated Financial Statements in Item 8 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 regarding future products and business plans, financial results, performance and events. Actual results may differ materially from any such forward-looking statements. Please see Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 beginning on page 14, for some of the factors that may negatively impact our performance. The following statements are made, expressly subject to those and other risk factors.

Our Products

Brands sold in Canada include Coors Light®, Molson Canadian®, Molson Dry®, Molson® Export, Creemore Springs®, Rickard’s Red Ale® and other Rickard’s brands, Carling® and Pilsner®. We also brew or distribute under license the following brands: Amstel Light® under license from Amstel Brouwerij B.V., Heineken® and Murphy’s® under license from Heineken Brouwerijen B.V., Asahi® and Asahi Select® under license from Asahi Beer U.S.A. Inc. and Asahi Breweries, Ltd., Corona® under license from Cerveceria Modelo S.A. De C.V. and Canacermex, Inc., Miller Lite®, Miller Genuine Draft®, Milwaukee’s Best® and Milwaukee’s Best Dry® under license from Miller Brewing Company, and Foster’s® and Foster’s Special Bitter® under license from Carlton & United Beverages Limited.

Brands sold in the United States include: Coors Light®, Coors®, Coors® Non-Alcoholic, Blue Moon® Belgian White Ale and seasonal Blue Moon brands, George Killian’s® Irish RedÔ Lager, Keystone®, Keystone® Light, Keystone® Ice, and Zima® XXX. We also sell the Molson family of brands in the United States.

Brands sold in the United Kingdom include: Carling®, C2Ô, Coors Fine Light Beer®, Worthington’s® ales, Caffrey’s®, Reef®, Screamers® and Stones®. We also sell Grolsch® in the United Kingdom through a joint venture. Additionally, in order to be able to provide a full line of beer and other beverages to our on-premise customers, we sell factored brands in our Europe segment, which are third party brands for which we provide distribution to retail, typically on a non-exclusive basis.

We sold approximately 19% of our 2006 reported volume in the Canada segment, 56% in the United States segment, and 25% in the Europe segment. In 2006, our largest brands accounted for the following percentage of total consolidated volume: Coors Light accounted for approximately 45% of reported volume, Carling for approximately 19%, and Keystone Light for approximately 8%.

Our sales volume from continuing operations totaled 42.1 million barrels in 2006, 40.4 million barrels in 2005 and 32.7 million barrels in 2004, excluding Brazil volume in discontinued operations. The barrel sales figures for periods prior to our Merger on February 9, 2005 do not include barrel sales of our products sold in Canada or the United States through the former Molson Coors Canada or Molson U.S.A. joint ventures. Our reported sales volumes also do not include the CBL factored brands business.

No single customer accounted for more than 10% of our consolidated or segmented sales in 2006, 2005 or 2004.

Canada Segment

Molson is Canada’s largest brewer by volume and North America’s oldest beer company, with an approximate 41% market share in Canada. Molson’s largest competitor, however, maintains a market share that is only slightly less than Molson’s. Molson brews, markets, sells and nationally distributes a wide variety of beer brands. Molson’s portfolio consists of strength or leadership in all major product and price segments. Molson has strong market share and visibility across retail and on-premise channels. Priority focus and investment is leveraged behind key owned brands (Coors Light, Molson Canadian, Molson Dry, Molson Export and Rickard’s) and key strategic distribution partnerships (including Heineken, Corona and Miller). Coors Light currently has an 11% market share and is the largest-selling light beer and the second-best selling beer brand overall in Canada. Molson Canadian currently has an 8% market share and is the third-largest selling beer in Canada.

Our Canada segment consists primarily of the production and sale of the Molson brands, Coors Light, and partner and other brands listed above under “Our Products.” The Canada segment also includes our partnership arrangements related to the distribution of beer in Ontario, Brewers Retail Inc. (BRI), and the Western provinces, Brewers’ Distributor Ltd. (BDL). BRI is consolidated in our financial statements. See Note 5 to the Consolidated Financial Statements in Item 8.

Sales and Distribution

Canada

In Canada, provincial governments regulate the beer industry, particularly the regulation of the pricing, mark-up, container management, sale, distribution and advertising of beer. Distribution and retailing of products in Canada involves a wide range and varied degree of government control through provincial liquor boards.

Province of Ontario

In Ontario, beer may only be purchased at retail outlets operated by BRI, at government-regulated retail outlets operated by the Liquor Control Board of Ontario, approved agents of the Liquor Control Board of Ontario or at any bar, restaurant or tavern licensed by the Liquor Control Board of Ontario to sell liquor for on-premise consumption. All brewers pay a service fee, based on their sales volume, through BRI. Molson, together with certain other brewers, participates in the ownership of BRI in proportion to its provincial market share relative to other brewers. Ontario brewers may deliver directly to BRI’s outlets or may choose to use BRI’s distribution centers to access retail in Ontario, the Liquor Control Board of Ontario system and licensed establishments.

Province of Québec

In Québec, beer is distributed directly by each brewer or through independent agents. Molson is the agent for the licensed brands it distributes. The brewer or agent distributes the products to permit holders for retail sales for on-premise consumption. Québec retail sales for home consumption are made through grocery and convenience stores as well as government operated stores.

Province of British Columbia

In British Columbia, the government’s Liquor Distribution Branch currently controls the regulatory elements of distribution of all alcohol products in the province. Brewers’ Distributor Ltd. (BDL), which Molson co-owns with a competitor, manages the distribution of Molson’s products throughout British Columbia. Consumers can purchase beer at any Liquor Distribution Branch retail outlet, at any independently owned and licensed wine or beer retail store or at any licensed establishment for on-premise

consumption. Liquor-primary licensed establishments for on-premise consumption may also be licensed for off-premise consumption.

Province of Alberta

In Alberta, the distribution of beer is managed by independent private warehousing and shipping companies or by a government sponsored system in the case of U.S.-sourced products. All sales of liquor in Alberta are made through retail outlets licensed by the Alberta Gaming and Liquor Commission or licensees, such as bars, hotels and restaurants. BDL manages the distribution of Molson’s products in Alberta.

Other Provinces

Molson’s products are distributed in the provinces of Manitoba and Saskatchewan through local liquor boards. Manitoba and Saskatchewan also have licensed private retailers. BDL manages the distribution of Molson’s products in Manitoba and Saskatchewan. In the Maritime Provinces (other than Newfoundland), local liquor boards distribute and retail Molson’s products. Yukon, Northwest Territories and Nunavat manage distribution and retail through government liquor commissioners.

Manufacturing, Production and Packaging

Brewing Raw Materials

Molson’s goal is to procure highest quality materials and services at the lowest prices available. Molson selects global suppliers for materials and services that best meet this goal. Molson also uses hedging instruments to protect from volatility in the commodities and foreign exchange markets.

Molson sources barley malt from two primary providers, with commitments through 2009. Hops are purchased from a variety of global suppliers in the U.S., Europe and New Zealand, with commitments through 2007. Other starch brewing adjuncts are sourced from two main suppliers, both in North America. We do not foresee any significant risk of disruption in the supply of these agricultural products. Molson and CBC in the U.S. have benefited from merger-driven cost synergies related to the acquisition of certain brewing materials. Water used in the brewing process is from local sources in the communities where our breweries operate.

Brewing and Packaging Facilities

Molson has six breweries, strategically located throughout Canada, which brew, bottle, package, market and distribute all owned and licensed brands sold in and exported from Canada. The breweries are as follows: Montréal (Québec), Toronto (Ontario), Vancouver (British Columbia), Edmonton (Alberta), St. John’s (Newfoundland) and Creemore (Ontario). The Montréal and Toronto breweries account for approximately three-fourths of the company’s Canada production. The Moncton (New Brunswick) brewery is under construction with plans to be complete by September 2007.

Packaging Materials

Glass bottles

Molson single sources glass bottles, and has a committed supply through 2007. Availability of glass bottles has not been an issue, and Molson does not expect any difficulties in accessing them. However, the risk of glass bottle supply disruptions has increased with the reduction of local supply alternatives due to the consolidation of the glass bottle industry in North America. The distribution systems in each province generally provide the collection network for returnable bottles. The standard container for beer brewed in Canada is the 341 ml returnable bottle, which represents approximately 69% of domestic sales in Canada.

In October 2003, the Canadian Competition Bureau began a review into the validity of industry arrangements regarding industry bottle standards. The Bureau has recently advised that they have discontinued their review. The industry arrangements remain in place.

Aluminum cans

Molson single sources aluminum cans and has a committed supply through 2007. Availability of aluminum cans has not been an issue, and Molson does not expect any difficulties in accessing them. The distribution systems in each province generally provide the collection network for aluminum cans. Aluminum cans account for approximately 21% of domestic sales in Canada.

Kegs

Molson sells approximately 10% of its beer volume in stainless steel kegs. A limited number of kegs are purchased every year, and there is no long-term supply commitment.

Other packaging

Crowns, labels, corrugate and paperboard are purchased from concentrated sources unique to each product. Molson does not foresee difficulties in accessing these products in the near future.

Seasonality of Business

Total industry volume in Canada is sensitive to factors such as weather, changes in demographics and consumer preferences. Consumption of beer in Canada is also seasonal with approximately 41% of industry sales volume occurring during the four months from May through August.

Competitive Conditions

2006 Canada Beer Industry Overview

Since 2001, the premium beer category in Canada has gradually lost volume to the super-premium and “value” (below premium) categories. The growth of the value category slowed in 2005 and 2006, and the price gap between premium and value brands was relatively stable, although the number of value brands increased. In 2006, we increased regular selling prices for our premium brands in select markets, but used targeted feature price activity to generate growth.

The Canadian brewing industry is a mature market. It is characterized by aggressive competition for volume and market share from regional brewers, microbrewers and certain foreign brewers, as well as Molson’s main domestic competitor. These competitive pressures require significant annual investment in marketing and selling activities.

There are three major beer segments based on price: super premium, which includes imports; premium, which includes the majority of domestic brands and the light sub-segment; and value.

During 2006, estimated industry sales volume in Canada, including sales of imported beers, increased by approximately 2% on a year-over-year basis.

Our Competitive Position

The Canada brewing industry is comprised principally of two major brewers, Molson and Labatt, whose combined market share is approximately 81% of beer sold in Canada. The Ontario and Québec markets account for approximately 62% of the total beer market in Canada.

Sales of wine and spirits have grown faster than sales of beer in recent years, resulting in a reduction in the beer segment’s lead in the overall alcoholic beverages market.

United States Segment

Coors Brewing Company is the third-largest brewer by volume in the United States, with an approximate 11% market share. CBC produces, markets, and sells the Coors portfolio of brands in the United States and its territories and includes the results of the Rocky Mountain Metal Corporation (RMMC) and Rocky Mountain Bottle Corporation (RMBC) joint ventures. The U.S. segment also includes Coors brand volume, primarily Coors Light, that is sold outside of the United States and its territories, primarily Mexico and the Caribbean, as well as sales of Molson brand products in the United States.

Sales and Distribution

In the United States, beer is generally distributed through a three-tier system consisting of manufacturers, distributors and retailers. A national network of approximately 550 independent distributors purchases our products and distributes them to retail accounts. We estimate that approximately one-fourth of our product is sold on-premise in bars and restaurants, and the other three-fourths is sold off-premise in liquor stores, convenience stores, grocery stores and other retail outlets. We also own three distributorships which collectively handled approximately 2% of our total U.S. segment’s volume in 2006. Approximately 44% of our volume passes through one of our 11 satellite re-distribution centers throughout the United States prior to being sold to distributors. In Puerto Rico, we market and sell Coors Light through an independent distributor. Coors Light is the leading beer brand in Puerto Rico. Sales in Puerto Rico represented less than 5% of our U.S. sales volume in 2006. We also sell our products in several other Caribbean markets. Cerveceria Cuauhtemoc Moctezuma, S.A. de C.V., a subsidiary of FEMSA Cerveza, is the sole and exclusive importer, marketer, seller and distributor of Coors Light in Mexico.

Manufacturing, Production and Packaging in the United States

Brewing Raw Materials

We use the highest-quality water, barley and hops to brew our products. We malt 100% of our production requirements, using barley purchased under yearly contracts from a network of independent farmers located in five regions in the western United States. Hops and starches are purchased from suppliers primarily in the United States. We have acquired water rights to provide for long-term strategic growth and to sustain brewing operations in case of a prolonged drought in Colorado. CBC also uses hedging instruments to protect from volatility in the commodities and foreign exchange markets.

Brewing and Packaging Facilities

We have two production facilities in the United States. We own and operate the world’s largest single-site brewery located in Golden, Colorado. We also operate a packaging facility located in the Shenandoah Valley in Virginia. In order to supply our markets in the eastern United States more efficiently, we are adding brewing capability to our Virginia facility, which we expect to have operational by summer of 2007. The Golden brewery has the capacity to brew and package more than 15 million barrels annually. The Shenandoah brewery will have a production capacity of approximately 7 million barrels. The Shenandoah facility will source its barley malt from the Golden malting facility.

We closed our Memphis brewing and packaging facility in September 2006 and shifted its production to other MCBC facilities. All products shipped to Puerto Rico or otherwise exported outside the U.S. are now packaged at the Shenandoah facility, and upon its full build-out, all Puerto Rico and export volume will be brewed in Shenandoah.

The U.S. segment imports Molson products and a portion of another U.S. brand volume from Molson’s Montréal brewery.

CBC faces cost challenges due to the concentration of its brewing activities at few locations, compared with our other operating segments and compared with our competitors in the United States, who operate more breweries in geographically diverse locations in the U.S. These cost challenges have been exacerbated by increases in diesel fuel costs in recent years. The Shenandoah brewery in part is an effort to address these challenges.

Packaging Materials

Aluminum cans

Approximately 61% of our U.S. products were packaged in aluminum cans in 2006. We purchased approximately 80% of those cans from RMMC, our joint venture with Ball Corporation (Ball), whose production facility is located adjacent to the brewery in Golden, Colorado. In addition to our supply agreement with RMMC, we also have a commercial supply agreement with Ball to purchase cans and ends in excess of what is supplied through RMMC. Aluminum is an exchange-traded commodity, and its price can be volatile. The RMMC joint venture agreement is scheduled to expire in 2012.

Glass bottles

We packaged approximately 28% of our U.S. products in 2006 in glass bottles. RMBC, our joint venture with Owens-Brockway Glass Container, Inc. (Owens), produces approximately 60% of our U.S. glass bottle requirements at our glass manufacturing facility in Wheat Ridge, Colorado. In July 2003, we extended our joint venture with Owens for 12 years, as well as a supply agreement with Owens for the glass bottles we require in excess of joint venture production.

Kegs

The remaining 11% of U.S. volume we sold in 2006 was packaged in quarter-, half-, and one-sixth barrel stainless steel kegs. A limited number of kegs are purchased each year, and there is no long-term supply agreement.

Other packaging

Crowns, labels, corrugate and paperboard are purchased from concentrated sources unique to each product. We purchase most of our paperboard from a subsidiary of Graphic Packaging Corporation (GPC), a related party. CBC does not foresee difficulties in accessing these products in the future.

Seasonality of the Business

Our U.S. 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), and distributors. While management believes that these sources are reliable, we cannot guarantee the accuracy of these numbers and estimates.

2006 U.S. Beer Industry Overview

The beer industry in the United States is highly competitive and increasingly fragmented, with a profusion of offerings in the above-premium category. With respect to premium lager-style beer, three major brewers control approximately 78% of the market. Growing or even maintaining market share has required increasing investments in marketing and sales. U.S. beer industry shipments had an annual growth rate during the past 10 years of 0.8%. Price discounting in the U.S. beer industry was less intense in 2006, compared with a high level of promotions in the second half of 2005.

Since the change in the Excise Tax structure in Puerto Rico in June 2002, the beer market there has been in modest decline. Additionally, while this market has traditionally been split among U.S. imports, other foreign imports and local brewers, due to the tax advantage held by the local brewer, the Medalla brand has gained significant share in the past several years. Coors Light remains 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 and SAB Miller (SAB). We also compete with imported craft beer brands. According to Beer Marketer’s Insights estimates, we are the nation’s third-largest brewer, selling approximately 11% of the total 2006 U.S. brewing industry shipments (including exports and U.S. shipments of imports). This compares to Anheuser-Busch’s 49% share and SAB’s 18% share.

Our malt beverages also compete with other alcohol beverages, including wine and spirits, and thus our competitive position is affected by consumer preferences between and among these other categories. Sales of wine and spirits have grown faster than sales of beer in recent years, resulting in a reduction in the beer segment’s lead in the overall alcoholic beverages market.

Europe Segment

Coors Brewers, Ltd (CBL) is the United Kingdom’s second-largest beer company with unit volume sales of approximately 10.4 million U.S. barrels in 2006. CBL has an approximate 21% share of the U.K. beer market, Western Europe’s second-largest market. Sales are primarily in England and Wales, with the Carling brand (a mainstream lager) representing more than three-fourths of CBL’s total beer volume. The Europe segment consists of our production and sale of the CBL brands principally in the United Kingdom, our joint venture arrangement for the production and distribution of Grolsch in the United Kingdom and Republic of Ireland, factored brand sales (beverage brands owned by other companies, but sold and delivered to retail by us), and our joint venture arrangement with DHL (formerly Exel Logistics) for the distribution of products throughout Great Britain (through Tradeteam). Our Europe segment also manages a small volume of sales, primarily of Coors products, in Asia and other export markets.

Sales and Distribution

United Kingdom

In the United Kingdom, beer is generally distributed through a two-tier system consisting of manufacturers and retailers. 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. It is also common in the U.K. for brewers to distribute beer, wine, spirits and other products owned and produced by other companies to the on-premise channel, where products are consumed in bars and restaurants. Approximately 30% of CBL’s net sales value in 2006 was these “factored” brands.

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 malt to the CBL breweries.

Over the past three decades, volumes have shifted from the higher margin on-premise channel, where products are consumed in pubs and restaurants, to the lower margin off-premise channel, also referred to as the “take-home” market.

On-Premise Market Channel

The on-premise channel accounted for approximately 62% of our U.K. sales volumes in 2006. The on-premise channel is generally segregated further into two more specific categories: multiple on-premise and free on-premise. Multiple on-premise refers to those customers that own a number of pubs and restaurants and free on-premise refers to individual owner-operators of pubs and restaurants. The on-going market trend from the higher-margin free on-premise channel to the lower-margin multiple on-premise puts the Europe segment’s profitability at risk. In 2006, CBL sold approximately 70% and 30% of its on-premise volume to multiple and free on-premise customers, respectively. In recent years, pricing in the on-premise channel has intensified as the retail pub chains have consolidated. As a result, the larger pub chains have been able to negotiate lower beer prices from brewers, which have not consolidated during this time.

The installation and maintenance of draught beer dispensing equipment in the on-premise channel is generally the responsibility of the brewer in the United Kingdom. Accordingly, CBL owns equipment used to dispense beer from kegs to consumers. This includes beer lines, cooling equipment, taps and countermounts.

Similar to other U.K. brewers, CBL has traditionally used loans to secure supply relationships with customers in the on-premise market. Loans are normally granted at below-market rates of interest, with the outlet purchasing beer at lower-than-average discount levels to compensate. We reclassify a portion of sales revenue as interest income to reflect the economic substance of these loans.

Off-Premise Market Channel

The off-premise channel accounted for approximately 38% of our U.K. sales volume in 2006. The off-premise market includes sales to supermarket chains, convenience stores, liquor store chains, distributors and wholesalers.

Asia

We continue to develop markets in Asia, which are managed by the Europe segment’s management team. We have a Japanese business which is currently focused on the Zima and Coors brands. In China our business is principally focused on the Coors Light brand. Product sold in Japan and China is contract brewed by a third party in China. The small amount of remaining Asia volume is exported from the U.S.

Manufacturing, Production and Packaging

Brewing Raw Materials

We use the highest-quality water, barley and hops to brew our products. During 2006, CBL produced more than 90% of its required malt using barley purchased from sources in the United Kingdom. CBL does not anticipate significant challenges in procuring quality malt for the foreseeable future. Malt sourced externally is committed through 2008 and is produced through a toll malting agreement where CBL purchases the required barley and pays a conversion fee to the malt vendor. Hops and adjunct starches used in the brewing process are purchased from agricultural sources in the United Kingdom and on the European continent. CBL does not anticipate difficulties in accessing these products going forward.

We assure the highest-quality water by obtaining our water from private water sources that are carefully chosen for their purity and are regularly tested to ensure their ongoing purity and to confirm that all the requirements of the U.K. private water regulations are met. Public supplies are used as back-up to the private supplies in some breweries, and these are again tasted and tested regularly to ensure their ongoing purity.

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 and accounts for approximately two-thirds of CBL’s production. Smaller breweries are located in Tadcaster and Alton. Product sold in Ireland and certain Asia markets is produced by contract brewers.

Packaging Materials

Kegs and casks

We used kegs and casks for approximately 56% of our U.K. products in 2006, reflecting a high percentage of product sold on-premise. CBL does not own its own kegs but rather fills and ships kegs owned by a third party, who manages the supply and maintenance of kegs and casks. See Item 1A. Risk Factors related to the Europe segment for further discussion.

Aluminum Cans

Approximately 36% of our U.K. products were packaged in cans in 2006. All of our cans are purchased through a supply contract with Ball.

Glass bottles

Approximately 5% of our U.K. products are packaged in glass bottles purchased through supply contracts with third-party suppliers.

Other packaging

The remaining 3% of our U.K. sales are shipped in bulk tanker for other brewers to package.

Crowns, labels, corrugate and paperboard are purchased from concentrated sources unique to each product. CBL does not foresee difficulties in accessing these or other packaging materials in the foreseeable future.

Seasonality of Business

In the U.K., the beer industry is subject to seasonal sales fluctuations primarily influenced by holiday periods, weather and by certain major televised sporting events (such as the World Cup soccer tournament in the summer of 2006). Peak selling seasons occur during the summer and during the Christmas and New Year periods. The Christmas/New Year holiday peak is most pronounced in the off-premise channel. Consequently, our largest quarters by volume are the third and fourth quarters, and the smallest are the first and second.

Competitive Conditions

2006 U.K. Beer Industry Overview

Beer consumption in the United Kingdom declined by an average of 0.9% per annum between 1980 and 2000. Total trade beer market volume declined by 1.2% in 2006. This was the third consecutive year of

decline and reverses the relatively stable trend seen during 2000 to 2003. The longer-term decline has been mainly attributable to the on-premise channel, where volumes are now approximately 44% lower than in 1980. Over the same period, off-premise volume has increased by approximately 210%. This trend is expected to continue and has been caused by a number of factors, including changes in consumers’ lifestyles and an increasing price difference between beer prices in the on-premise (higher prices) and off-premise (lower prices) channels. Both trends continued in 2006 with off-premise industry market growth of 3.2% and a decline in the on-premise market of 4.3%.

There has also been a steady trend away from ales and towards lager, driven predominantly by the leading lager brands. In 1980, lagers accounted for 31% of beer sales, and in 2006 lagers accounted for almost 75% of U.K. beer sales. While lager volume has been growing, ales, including stouts, have declined during this period, and this trend has accelerated in the last few years. The leading beer brands are generally growing at a faster rate than the market. The top 10 brands now represent approximately 66% of the total market, compared to only 34% in 1995.

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, spirits and ciders. 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 category with Carling, Grolsch, Coors Fine Light Beer and C2 positions us well to take advantage of the continuing trend toward lagers. Our portfolio has been strengthened by the introduction of a range of imported and speciality beer brands, such as Sol, Zatec, Palm and Kasteel Cru.

Our principal competitors are Scottish & Newcastle U.K. Ltd., Inbev U.K. Ltd. and Carlsberg U.K. Ltd. We are the U.K.’s second-largest brewer, with a market share of approximately 21% (excluding factored brands sales), based on AC Nielsen information. This compares to Scottish & Newcastle U.K. Ltd.’s share of approximately 24%, Inbev U.K. Ltd.’s share of approximately 19% and Carlsberg U.K. Ltd.’s share of approximately 12%. In 2006 CBL achieved a small increase in its share of the U.K. beer market and two of our three core brands—Carling and Coors Fine Light Beer—increased their product category share in 2006.

Global Intellectual Property

We own trademarks on the majority of the brands we produce and 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 through 2021. We are not reliant on royalty or other revenue from third parties for our financial success. Therefore, these expirations are not expected to have a significant impact on our business.

Inflation

Inflation is typically a factor in the segments in which we operate, although we periodically experience inflationary trends in specific areas, such as fuel costs, which were significantly higher in 2006 when compared to prior years. Inflation in diesel fuel costs impacts the U.S. segment most significantly due to the geographic size of the U.S. market and the concentration of production at fewer facilities. The U.S. segment is also the most exposed to inflation in aluminum prices, since it packages the majority of its product in aluminum cans.

Regulation

Canada

In Canada, provincial governments regulate the production, marketing, distribution, sale and pricing of beer, and impose commodity taxes and license fees in relation to the production and sale of beer. In 2006, Canada excise taxes totaled $552.5 million or $66.71 per barrel sold. In addition, the federal government regulates the advertising, labeling, quality control, and international trade of beer, and also imposes commodity taxes, consumption taxes, excise taxes and in certain instances, custom duties on imported beer. Further, certain bilateral and multilateral treaties entered into by the federal government, provincial governments and certain foreign governments, especially with the United States, affect the Canadian beer industry.

United States

In the United States, the beer business is 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 U.S. Treasury Department; Alcohol and Tobacco Tax and Trade Bureau; the U.S. Department of Agriculture; the U.S. Food and Drug Administration; state alcohol regulatory agencies as well as state and federal environmental agencies.

Governmental entities also levy taxes and may require bonds to ensure compliance with applicable laws and regulations. U.S. federal excise taxes on malt beverages are currently $18 per barrel. State excise taxes also are levied at rates that ranged in 2006 from a high of $32.10 per barrel in Alaska to a low of $0.60 per barrel in Wyoming. In 2006, U.S. excise taxes totaled $417.6 million or $17.79 per barrel sold.

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 Her Majesty’s Revenue & Customs (HMRC); the Office of Fair Trading; the Data Protection Commissioner and the Environment Agency.

In 2007, a smoking ban in public places will take effect across the remainder of Great Britain. The ban will come into force on April 2, 2007 in Wales, April 30, 2007 in Northern Ireland and July 1, 2007 in England and is expected to have a significant unfavorable volume impact in the on-premise channel in the short-term but potentially increase volume in the off-premise market as consumers adjust their consumption patterns to the new environment. A ban already exists in Scotland and Republic of Ireland and in these geographies the experience was as we have outlined in our expectation for Wales, Northern Ireland and England.

The U.K. government levies excise taxes on all alcohol beverages at varying rates depending on the type of product and its alcohol content by volume. In 2006, we incurred approximately $1.1 billion in excise taxes on gross revenues of approximately $2.5 billion, or approximately $104.58 per barrel.

Environmental Matters

Canada

Our Canadian brewing operations are subject to provincial environmental regulations and local permit requirements. Each of our Canadian breweries, other than the St. John’s brewery, has water treatment facilities to pre-treat waste water before it goes to the respective local governmental facility for final treatment. We have environmental programs in Canada including organization, monitoring and verification, regulatory compliance, reporting, education and training, and corrective action.

Molson sold a chemical specialties business in 1996. The company is responsible for certain aspects of environmental remediation, undertaken or planned, at the business sites. We have established provisions for the costs of these remediation programs.

United States

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 then outstanding litigation. Our settlement was based on an assumed remediation cost of $120 million (in 1992 adjusted dollars). The settlement 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 or timing 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 2006 capital expenditures, earnings or competitive position, and we do not anticipate that they will do so in 2007.

Employees and Employee Relations

Canada

Molson has approximately 3,000 full-time employees in Canada. Approximately 67% of this total workforce is represented by trade unions. Workplace change initiatives are continuing and as a result, joint

union and management steering committees established in most breweries are focusing on customer service, quality, continuous improvement, employee training and a growing degree of employee involvement in all areas of brewery operations. The agreement governing our relationship with 100 employees at the Edmonton brewery is set to expire in 2007. We believe that relations with our Canada employees are good.

United States

We have approximately 3,800 employees in our U.S. segment. Less than 1% of our U.S. work force is represented by unions. We believe that relations with our U.S. employees are good.

Europe

We have approximately 2,750 employees in our Europe segment. Approximately 23% of this total workforce is represented by trade unions, primarily at our Burton-on-Trent and Tadcaster breweries. The agreements do not have expiration dates and negotiations are conducted annually. We believe that relations with our Europe employees are good.

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

See the Consolidated Financial Statements in Item 8 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.molsoncoors.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.

Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995

This document and the documents incorporated in this document by reference contain forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact contained in this document and the materials accompanying this document are forward-looking statements.

Forward-looking statements are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Frequently, but not always, forward-looking statements are identified by the use of the future tense and by words such as “believes,” “expects,” “anticipates,” “intends,” “will,” “may,” “could,” “would,” “projects,” “continues,” “estimates,” or similar expressions. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those indicated by forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements.

The forward-looking statements contained or incorporated by reference in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act) and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding our plans, intentions, beliefs or current expectations.

Among the important factors that could cause actual results to differ materially from those indicated by forward-looking statements are the risks and uncertainties described under “Risk Factors” and elsewhere in this document and in our other filings with the SEC.

Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events or otherwise.

ITEM 1A. Risk Factors

The reader should carefully consider the following factors and the other information contained within this document. The most important factors that could influence the achievement of our goals, and cause actual results to differ materially from those expressed in the forward-looking statements, include, but are not limited to, the following:

Risks specific to our Company

If Pentland and the Coors Trust do not agree on a matter submitted to stockholders, generally the matter will not be approved, even if beneficial to the Company or favored by other stockholders. Pentland and the Coors Trust, which together control more than two-thirds of the Company’s Class A Common and Exchangeable stock, have voting trust agreements through which they have combined their voting power over the shares of our Class A common stock and the Class A exchangeable shares that they own. However, in the event that these two stockholders do not agree to vote in favor of a matter submitted to a stockholder vote (other than the election of directors), the voting trustees will be required to vote all of the Class A common stock and Class A exchangeable shares deposited in the voting trusts against the matter. There is no other mechanism in the voting trust agreements to resolve a potential deadlock between these stockholders. Therefore, if either Pentland or the Coors Trust is unwilling to vote in favor of a transaction that is subject to a stockholder vote, we may be unable to complete the transaction even if our board, management or other stockholders believe the transaction is beneficial for Molson Coors.

Our success as an enterprise depends largely on the success of three primary products in three mature markets; the failure or weakening of one or more could materially adversely affect our financial results. Although we currently have 14 products in our U.S. portfolio, Coors Light represented more than 71% of our U.S. segment’s sales volume for 2006. Carling lager is the best-selling brand in the United Kingdom and represented more than 77% of our European segment’s sales volume in 2006. The combination of the Molson Canadian and Coors Light brands represented more than 42% of our Canada segment’s sales volume in 2006. Consequently, any material shift in consumer preferences away from these brands, or from the categories in which they compete, would have a disproportionately large adverse impact on our business. Moreover, each of our three major markets is mature, and we face large competitors who have greater financial, marketing and distribution resources and are more diverse in terms of their geographies and brand portfolios.

We have indebtedness that is substantial in relation to our stockholders’ equity, which could hinder our ability to adjust to rapid changes in market conditions or to respond to competitive pressures. As of December 31, 2006, we had approximately $850 million in debt primarily related to our acquisition of CBL and $1.1 billion of debt primarily related to our Merger with Molson. As a result, we must use a portion of our cash flow from operations to pay interest on our debt. If our financial and operating performance does not generate sufficient cash flow for all of our activities, our operations could be adversely impacted.

We rely on a small number of suppliers to obtain the packaging we need to operate our business. The inability to obtain materials could unfavorably affect our ability to produce our products. For our U.S. business, we purchase most of our paperboard and container supplies from a single supplier or a small number of suppliers. This packaging is unique and is not produced by any other supplier. Additionally, we are

contractually obligated to purchase substantially all our can and bottle needs in the United States and Canada from our container joint ventures or from our partners in those ventures, Ball Corporation (RMMC) and Owens-Brockway Glass Container, Inc. (RMBC). Consolidation of the glass bottle industry in North America has reduced local supply alternatives and increased risks of glass bottle supply disruptions. CBL has a single source for its can supply (Ball). The inability of any of these suppliers to meet our production requirements without sufficient time to develop an alternative source could have a material adverse effect on our business.

Our primary production facilities in Europe and the United States are located at single sites, so we could be more vulnerable than our competitors to transportation disruptions, fuel increases and natural disasters. Our primary production facility in the United States is in Golden, Colorado, and in Europe, our primary production facility is located in Burton-on-Trent, England. In both segments, our competitors have multiple geographically dispersed breweries and packaging facilities. As a result, we must ship our products greater distances than some of our competitors, making us more vulnerable to fluctuations in costs such as fuel, as well as the impact of any localized natural disasters should they occur.

The termination of one or more manufacturer/distribution agreements could have a material adverse effect on our business. We manufacture and/or distribute products of other beverage companies, including those of one or more competitors, through various licensing, distribution or other arrangements in Canada and the United Kingdom. The loss of one or more of these arrangements could have a material adverse effect on the results of one or more reporting segments.

Because we will continue to face intense global competition, operating results may be unfavorably impacted. The brewing industry is highly competitive and requires substantial human and capital resources. Competition in our various markets could cause us to reduce prices, increase capital and other expenditures or lose sales volume, any of which could have a material adverse effect on our business and financial results. In addition, in some of our markets, our primary competitors have substantially greater financial, marketing, production and distribution resources than Molson Coors has. In all of the markets where Molson Coors operates, aggressive marketing strategies by our main competitors could adversely affect our financial results.

Changes in tax, environmental or other regulations or failure to comply with existing licensing, trade and other regulations could have a material adverse effect on our financial condition. Our business is highly regulated by federal, state, provincial and local laws and regulations in various countries regarding such matters as licensing requirements, trade and pricing practices, labeling, advertising, promotion and marketing practices, relationships with distributors, environmental matters, smoking bans at on-premise locations and other matters. Failure to comply with these laws and regulations could result in the loss, revocation or suspension of our licenses, permits or approvals. In addition, changes in tax, environmental or any other laws or regulations could have a material adverse effect on our business, financial condition and results of operations.

Our consolidated financial statements are subject to fluctuations in foreign exchange rates, most significantly the British pound and the Canadian dollar. We hold assets and incur liabilities, earn revenues and pay expenses in different currencies, most significantly in Canada and in the United Kingdom. Since our financial statements are presented in USD, we must translate our assets, liabilities, income and expenses into USD at current exchange rates. Increases and decreases in the value of the USD will affect, perhaps adversely, the value of these items in our financial statements, even if their local currency value has not changed.

Our operations face significant commodity price change and foreign exchange rate exposure which could materially and adversely affect our operating results. We use a large volume of agricultural and other raw materials to produce our products, including barley, barley malt, hops, various starches, water and packaging materials, including aluminum and paper products. We also use a significant amount of diesel

fuel in our operations. The supply and price of these raw materials and commodities can be affected by a number of factors beyond our control, including market demand, global geo-political events (especially as to their impact on crude oil prices and the resulting impact on diesel fuel prices), frosts, droughts and other weather conditions, economic factors affecting growth decisions, plant diseases and theft. To the extent any of the foregoing factors affect the prices of ingredients or packaging, our results of operations could be materially and adversely impacted. We have active hedging programs to address commodity price and foreign exchange rate changes. However, to the extent we fail to adequately manage the foregoing risks, including if our hedging arrangements do not effectively or completely hedge changes in foreign currency rates or commodity price risks, including price risk associated with diesel fuel and aluminum, both of which are at historically high price levels, our results of operations may be adversely impacted.

We could be adversely affected by overall declines in the beer market. Consumer trends in some global markets indicate increases in consumer preference for wine and spirits, as well as for lower priced, value segment beer brands in some Canadian markets, which could result in loss of volume or a deterioration of operating margins.

Because of our reliance on a single information technology service supplier, we could experience significant disruption to our business. We rely exclusively on one information technology services provider worldwide for our network, help desk, hardware and software configuration. If that service provider fails and we are unable to find a suitable replacement in a timely manner, we could be unable to properly administer our information technology systems.

Due to a high concentration of unionized workers in the United Kingdom and Canada, we could be significantly affected by labor strikes, work stoppages or other employee-related issues. Approximately 67% of Molson’s total workforce and approximately 23% of CBL’s total workforce is represented by trade unions. Although we believe relations with our employees are good, stringent labor laws in the United Kingdom expose us to a greater risk of loss should we experience labor disruptions in that market.

Changes to the regulation of the distribution systems for our products could adversely impact our business. In 2006, the U.S. Supreme Court ruled that certain state regulations of interstate wine shipments are unlawful. As a result of this decision, states may alter the three-tier distribution system that has historically applied to the distribution of our products. Changes to the three-tier distribution system could have a materially adverse impact on our business. Further, in certain Canadian provinces, our products are distributed through joint venture arrangements that are mandated and regulated by provincial government regulators. If provincial regulation should change, effectively eliminating the distribution channels, the costs to adjust our distribution methods could have a material adverse impact on our business.

Risks specific to our Discontinued Operations

Indemnities provided to the purchaser of 83% of the Kaiser business in Brazil could result in future cash outflows and statement of operations charges. On January 13, 2006, we agreed to sell a 68% equity interest in Kaiser to FEMSA for $68 million cash, including the assumption by FEMSA of Kaiser-related debt and certain contingencies. In November 2006, we divested our remaining 15% ownership interest in Kaiser and received $15.7 million, resulting in an increase of FEMSA’s purchased ownership of Kaiser to 83%. The terms of our 2006 agreement require us to indemnify FEMSA for exposures related to certain tax, civil and labor contingencies and certain purchased tax credits. The ultimate resolution of these claims is not under our control, and we cannot predict the outcomes of administrative and judicial proceedings that will occur with regard to these claims. It is possible that we will have to make cash outlays to FEMSA with regard to these indemnities. While the fair values of these indemnity obligations are recorded as liabilities on our balance sheet in conjunction with the sale, we could incur future statement of operations charges as facts further develop resulting in changes to our fair value estimates or change in assessment of probability of loss on these items. Due to the uncertainty involved in the ultimate outcome and timing of these contingencies, significant adjustments to the carrying value of our indemnity liabilities and corresponding statement of operations charges/credits could result in the future.

Risks specific to the Canada Segment

We may be required to provide funding to the entity that owns the Montréal Canadiens hockey club and the related entertainment business pursuant to the guarantees given to the National Hockey League (NHL). Pursuant to certain guarantees given to the NHL as a minority owner of the entertainment business and the Montréal Canadiens professional hockey club (majority ownership sold by Molson in 2001), Molson may have to provide funding to the Club (joint and severally based on our 19.9% ownership) to meet its obligations and its operating expenses if the Club cannot meet its obligations under various agreements.

An adverse result in a lawsuit brought by Miller could have an adverse impact on our business. In December 2005, Miller Brewing Company sued the Company and several subsidiaries in a Wisconsin federal court. Miller seeks to invalidate a licensing agreement allowing Molson Canada the sole distribution of Miller products in Canada. Miller claims U.S. and Canadian antitrust violations and violations of the Agreement’s confidentiality provisions. Miller also claims that the Agreement’s purposes have been frustrated as a result of the Molson Coors Merger. If Miller were to prevail in this action, it could have an adverse impact on our business, and we may be required to record an impairment charge on all or a portion of the $112.0 million carrying value of our intangible asset associated with the Miller arrangements.

If we are unsuccessful in maintaining licensing, distribution and related agreements, our business could suffer adverse effects. We manufacture and/or distribute products of other beverage companies in Canada, including those of one or more competitors, through various licensing, distribution or other arrangements. The loss of one or more of these arrangements could adversely impact our business.

If the Maritime Provinces refuse to recognize our new brewery in Moncton, New Brunswick, as a “local brewer,” we will not be able to use that facility as planned. We are completing a brewery in Moncton, New Brunswick. We decided to build it on the basis of assurances from Canada’s Maritime Provinces (which include New Brunswick and Nova Scotia) that the facility would qualify as a “local brewer,” under the Maritime Accord so that beer shipped to other Maritime Provinces would be subject to much lower handling fees than beer shipped from elsewhere in Canada. There is risk that certain Maritime Provinces will not honor their previous assurances. If so, our return on investment would be substantially lower than planned, and we may be required to record an impairment charge on all or a portion of the $25.2 million spent to construct the brewery.

Risks specific to the U.S. Segment

Litigation directed at the alcohol beverage industry may adversely affect our sales volumes, our business and our financial results. Molson Coors and other brewers and distilled spirits manufacturers have been sued in several courts regarding advertising practices and underage consumption. The suits 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 these lawsuits, several of which have been dismissed and are now on appeal. It is not possible at this time to estimate the possible loss or range of loss, if any, that may result from these lawsuits.

We are highly dependent on independent distributors in the United States to sell our products, with no assurance that these distributors will effectively sell our products. We sell all of our products in the United States to distributors for resale to retail outlets. Some of our distributors are at a competitive disadvantage because they are smaller than the largest distributors in their markets. Our distributors also sell products that compete with our products. These distributors may give our competitors’ products higher priority, thereby reducing sales of our products. In addition, the regulatory environment of many states makes it very difficult to change distributors. Consequently, if we are not allowed or are unable to replace unproductive or inefficient distributors, our business, financial position and results of operation may be adversely affected.

Risks specific to the Europe Segment

Sales volume trends in the United Kingdom brewing industry reflect movement from on-premise channels to off-premise channels, a trend which unfavorably impacts our profitability. We have noted in recent years that beer volume sales in the U.K. have been shifting from pubs and restaurants (on-premise) to retail stores (off-premise), for the industry in general. The progression to a ban on smoking in pubs and restaurants across the whole of the U.K. anticipated to be effective in 2007 is likely to accelerate this trend. Margins on sales to off-premise customers tend to be lower than margins on sales to on-premise customers, hence these trends could adversely impact our profitability.

Consolidation of pubs and growth in the size of pub chains in the United Kingdom could result in less ability to achieve favorable pricing. The trend toward consolidation of pubs, away from independent pub and club operations, is continuing in the United Kingdom. These larger entities have stronger price negotiating power, and therefore continuation of this trend could impact CBL’s ability to obtain favorable pricing in the on-premise channel (due to spillover effect of reduced negotiating leverage) and could reduce our revenues and profit margins. In addition, these larger customers continue to move to purchasing directly more of the products that, in the past, we have provided as part of our factored business. Further consolidation could impact us adversely.

We depend exclusively on one logistics provider in England, Wales and Scotland for distribution of our CBL products. We are a party to a joint venture with DHL called Tradeteam. Tradeteam handles all of the physical distribution for CBL in England, Wales and Scotland, except where a different distribution system is requested by a customer. If Tradeteam were unable to continue distribution of our products and we were unable to find a suitable replacement in a timely manner, we could experience significant disruptions in our business that could have an adverse financial impact.

We are reliant on a single third party as a supplier for kegs in the United Kingdom. Our CBL business uses kegs managed by a logistics provider who is responsible for providing an adequate stock of kegs as well as their upkeep. Due to greater than anticipated keg losses as well as reduced fill fees (attributable to reduced overall volume), the logistics provider has encountered financial difficulty. As a result of action taken by the logistics provider's lending institution, related to perceived financial difficulties of the borrower, the logistics provider has been forced into administration (restructuring proceedings) and the bank, on February 20, 2007, exercised its option to put the keg population to CBL. As a result, we expect to purchase the existing keg population from the logistics provider's lender at fair value pursuant to the terms of the agreement between CBL and the logistics provider’s lender. We estimate that this potential capital expenditure, which may be financed over a period of time in excess of one year, could amount to approximately $70 million to $100 million, which is not included in the 2007 capital expenditures plan. As a result of this capital requirement, we may reduce other elements of our 2007 capital expenditures plan, or offset risk posed by the potential keg purchase through increased cash generation efforts.

We may incur impairments of the carrying value of our goodwill and other intangible assets that have indefinite useful lives. In connection with various business combinations, we have allocated material amounts of the related purchase prices to goodwill and other intangible assets that are considered to have indefinite useful lives. These assets are tested for impairment at least annually, using estimates and assumptions affected by factors such as economic and industry conditions and changes in operating performance. In the event that the adverse financial impact of current trends with respect to our U.K. business continue and including the potential impact of an expected smoking ban in on-premise locations across the whole of the U.K. in 2007 are worse than we anticipate, we may be required to record impairment charges. This could be material and could adversely impact our results of operations.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

As of December 31, 2006, our major facilities were:

Facility	Location	Character
Canada
Administrative Offices	Toronto, Ontario	Canada Segment Headquarters
	Montréal, Québec	Corporate Headquarters
Brewery / packaging plants	St Johns, Newfoundland	Packaged malt beverages
	Montréal, Québec
	Toronto, Ontario
	Creemore, Ontario
	Edmonton, Alberta
	Vancouver, British Columbia
	Moncton, New Brunswick(1)
Retail stores	Ontario Province(2)	Beer retail stores
Distribution warehouses	Montréal, Québec	Distribution centers
	Ontario Province(3)
United States
Administrative Offices	Golden, CO	U.S. Segment Headquarters
	Denver, CO(4)	Corporate Headquarters
Brewery / packaging plants	Golden, CO	Malt beverages / packaged malt beverages
	Elkton, VA (Shenandoah Valley)(5)	Malt beverages / packaged malt beverages
Can and end plant	Golden, CO	Aluminum cans and ends
Bottle plant	Wheat Ridge, CO	Glass bottles
Distributorship locations	Meridian, ID	Wholesale beer distribution
	Glenwood Springs, CO
	Denver, CO
Distribution warehouses	Golden, CO	Distribution centers
	Elkton, VA
Europe
Administrative Office	Burton-on-Trent, Staffordshire	Europe Segment Headquarters
Brewery / packaging plants	Burton-on-Trent, Staffordshire	Malt and spirit-based beverages / packaged malt beverages
	Tadcaster Brewery, Yorkshire	Malt and spirit-based beverages / packaged malt beverages
	Alton Brewery, Hampshire
Distribution warehouse	Burton-on-Trent, Staffordshire	Distribution center

(1) Construction of brewery of malt beverages/packaging plant to be completed and operational in 2007.

(2) Approximately 400 stores owned or leased by BRI joint venture in various locations in Ontario Province.

(3) We have six warehouses owned or leased by our BRI joint venture and one warehouse owned by Molson in the Ontario Province.

(4) Leased facility.

(5) Completion of a brewery of malt beverages in 2007.

We believe our facilities are well maintained and suitable for their respective operations. In 2006, our operating facilities were not capacity constrained.

ITEM 3. Legal Proceedings

Beginning in May 2005, several purported class actions were filed in the United States and Canada, including Federal courts in Delaware and Colorado and provincial courts in Ontario and Québec, alleging, among other things, that the Company and its affiliated entities, including Molson Inc., and certain officers and directors misled stockholders by failing to disclose first quarter (January-March) 2005 U.S. business trends prior to the Merger vote in January 2005. The Colorado case has since been transferred to Delaware and consolidated with one of those cases. One of the lawsuits filed in Delaware federal court also alleges that the Company failed to comply with U.S. GAAP. The Company will vigorously defend the lawsuits.

In May 2005, the Company was contacted by the Central Regional Office of the U.S. Securities and Exchange Commission in Denver (the SEC) requesting the voluntary provision of documents and other information from the Company and Molson Inc. relating primarily to corporate and financial information and communications related to the Merger, the Company’s financial results for the first quarter of 2005 and other information. In November 2006, the Company received a letter from the SEC stating that this matter (In the Matter of Molson Coors Brewing Company, D-02739-A) has been recommended for termination, and no enforcement action has been recommended to the Commission. The information in the SEC’s letter was provided under the guidelines in the final paragraph of Securities Act Release No. 5310.

The Company was contacted by the New York Stock Exchange in June 2005, requesting information in connection with events leading up to the Company’s earnings announcement on April 28, 2005, which was the date we announced our first quarter 2005 losses attributed to lower sales and the Merger. The Exchange regularly conducts reviews of market activity surrounding corporate announcements or events and has indicated that no inference of impropriety should be drawn from its inquiry. The Company cooperated with this inquiry. As a matter of policy, the Exchange does not comment publicly on the status of its investigations. However, we have not been contacted by the NYSE with respect to this investigation in approximately 18 months. If there were any formal action taken by the NYSE, it would be in the form of an Investigatory Panel Decision. Such Decisions are publicly available.

In July 2005, the Ontario Securities Commission (Commission) requested information related to the trading of MCBC stock prior to April 28, 2005, which was the date we announced our first quarter 2005 losses attributed to lower sales and the Merger. The Company cooperated with the inquiry. The Commission has advised the Company that it has closed the file on this matter without action of any kind.

In early October 2006, the Audit Committee of the Company’s Board of Directors concluded its investigation of whether a complaint that it received in the third quarter of 2005 had any merit. The complaint related primarily to disclosure in connection with the Merger, exercises of stock options by Molson Inc. option holders before the record date for the special dividend paid to Molson Inc. shareholders before the Merger (which were disclosed in the Company’s Report on Form 8-K dated February 15, 2005), statements made concerning the special dividend to Molson Inc. shareholders and sales of the Company’s common stock in connection with exercise of stock options by the Company’s chief executive officer and chief financial officer following the Merger, after the release of the year-end results for Coors and Molson Inc. and after the Company lifted the trading restrictions imposed before the Merger. The Audit Committee’s independent counsel, which was retained to assist in conducting the investigation, reviewed and discussed with the staff of the SEC the various findings of an approximately 12-month long investigation conducted by the independent counsel. The Audit Committee determined, after thoroughly reviewing the facts, and in consultation with its independent counsel, to conclude the

investigation. In concluding the investigation, the Audit Committee determined that the various matters referred to in the complaint were without merit.

In December 2005, Miller Brewing Company sued the Company and several subsidiaries in a Wisconsin federal court. Miller seeks to invalidate a licensing agreement (the Agreement) allowing Molson Canada the sole distribution of Miller products in Canada. Miller also seeks damages for U.S. and Canadian antitrust violations, and violations of the Agreement’s confidentiality provisions. Miller also claimed that the Agreement’s purposes have been frustrated as a result of the Merger. The Company has filed a claim against Miller and certain related entities in Ontario, Canada, seeking a declaration that the licensing agreement remains in full force and effect. We are currently in discussions with Miller regarding a resolution of this dispute. There can be no assurances that we will arrive at such a resolution.

In late October 2006, Molson Canada received a letter from Foster’s Group Limited providing twelve months’ notice of its intention to terminate the Foster’s U.S. License Agreement due to the Merger. The Agreement provides Molson Canada with the right to produce Foster’s beer for the U.S. marketplace. In November 2006, Molson Canada filed a notice of action in Ontario, Canada disputing the validity of the termination notice. In December 2006, Foster’s filed a separate application in Ontario, Canada seeking termination of the Agreement. Molson Canada will vigorously defend its rights in these matters.

Molson 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. In each suit, the manufacturers have advanced motions for dismissal to the court. Several of the lawsuits have been dismissed on appeal. There have been no appellate decisions. We will vigorously defend these cases and it is not possible at this time to estimate the possible loss or range of loss, if any, related to these lawsuits.

CBL replaced a bonus plan in the United Kingdom with a different plan under which a bonus was not paid in 2003. A group of employees pursued a claim against CBL with respect to this issue with an employment tribunal. During the second quarter of 2005, the tribunal ruled against CBL. CBL appealed this ruling, and the appeal was heard in the first quarter of 2006, where most impacts of the initial tribunal judgments were overturned. However, the employment appeal tribunal remitted two specific issues back to a new employment tribunal. CBL appealed the employment appeal tribunal’s judgment. In January 2007, the appeal decision was ruled in the Company’s favor, holding that the employment tribunal had no jurisdiction to hear the employees’ claims, and the claims were dismissed. It is possible that the employees may attempt to advance their claims in a different forum.

We are involved in other disputes and legal actions arising in the ordinary course of our business. While it is not feasible to predict or determine the outcome of these proceedings, in our opinion, based on a review with legal counsel, none of these disputes and legal actions is expected to have a material impact on our consolidated financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters, including the above-described advertising practices case, may arise from time to time that may harm our business.

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

Not applicable.

PART II

ITEM 5. Market for the Registrant’s Common Equity and Issuer Purchases of Equity Securities

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

In connection with the Merger and effective February 9, 2005, we now have Class A and Class B common stock trading on the New York Stock Exchange under the symbols “TAP A” and “TAP,” respectively, and on the Toronto Stock Exchange as “TAP.A” and “TAP.B,” respectively. In addition, our indirect subsidiary, Molson Coors Canada Inc., has Exchangeable Class A and Exchangeable Class B shares trading on the Toronto Stock Exchange under the symbols “TPX.A” and “TPX.B,” respectively. The Class A and B exchangeable shares are a means for shareholders to defer tax in Canada and have substantially the same economic and voting rights as the respective common shares. The exchangeable shares can be exchanged for Molson Coors Class A or B common stock at any time and at the exchange ratios described in the Merger documents, and receive the same dividends. At the time of exchange, shareholders’ taxes are due. The exchangeable shares have voting rights through special voting shares held by a trustee, and the holders thereof are able to elect members of the Board of Directors. See Note 2 in the Consolidated Financial Statements in Item 8 for information on the exchange ratios used to effect the Merger.

The Merger was effected by the issuance of Adolph Coors Company stock for Molson, Inc. stock in a transaction that was valued at approximately $3.6 billion. Coors is considered the accounting acquirer, although the transaction is viewed as a merger of equals by the two companies. The transaction is discussed in Note 2 to the Consolidated Financial Statements in Item 8. The approximate number of record security holders by class of stock at February 20, 2007, is as follows:

Title of class	Number of record security holders
Class A common stock, voting, $0.01 par value		28
Class B common stock, non-voting, $0.01 par value		2,993
Class A exchangeable shares		317
Class B exchangeable shares		3,264

The following table sets forth the high and low sales prices per share of our Class A common stock and dividends paid for each fiscal quarter of 2006 and 2005 as reported by the New York Stock Exchange.

	High		Low		Dividends
2006
First quarter	$	70.50	$	62.60		$	0.32
Second quarter	$	72.85	$	65.69		$	0.32
Third quarter	$	71.11	$	65.90		$	0.32
Fourth quarter	$	76.00	$	65.50		$	0.32
2005
First quarter	$	75.75	$	68.50		$	0.32
Second quarter	$	80.00	$	63.69		$	0.32
Third quarter	$	69.00	$	62.50		$	0.32
Fourth quarter	$	68.75	$	63.69		$	0.32

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 2006 and 2005 as reported by the New York Stock Exchange.

	High		Low		Dividends
2006
First quarter	$	70.55	$	62.35		$	0.32
Second quarter	$	73.86	$	63.98		$	0.32
Third quarter	$	71.45	$	66.21		$	0.32
Fourth quarter	$	76.45	$	64.59		$	0.32
2005
First quarter	$	76.30	$	67.73		$	0.32
Second quarter	$	79.50	$	58.09		$	0.32
Third quarter	$	67.08	$	59.87		$	0.32
Fourth quarter	$	67.62	$	60.87		$	0.32

The following table sets forth the high and low sales prices per share of our Exchangeable Class A shares and dividends paid for each fiscal quarter of 2006 and 2005 as reported by the Toronto Stock Exchange.

	High	Low	Dividends
2006
First quarter	CAD 81.85	CAD 68.00		$	0.32
Second quarter	CAD 78.46	CAD 73.25		$	0.32
Third quarter	CAD 78.00	CAD 75.00		$	0.32
Fourth quarter	CAD 88.50	CAD 75.64		$	0.32
2005
First quarter	CAD 92.91	CAD 83.00		$	0.32
Second quarter	CAD 97.73	CAD 72.01		$	0.32
Third quarter	CAD 80.00	CAD 70.01		$	0.32
Fourth quarter	CAD 78.00	CAD 70.00		$	0.32

The following table sets forth the high and low sales prices per share of our Exchangeable Class B shares and dividends paid for each fiscal quarter of 2006 and 2005 as reported by the Toronto Stock Exchange.

	High	Low	Dividends
2006
First quarter	CAD 82.25	CAD 71.50		$	0.32
Second quarter	CAD 83.30	CAD 70.93		$	0.32
Third quarter	CAD 80.95	CAD 74.39		$	0.32
Fourth quarter	CAD 89.12	CAD 72.95		$	0.32
2005
First quarter	CAD 91.40	CAD 83.85		$	0.32
Second quarter	CAD 97.00	CAD 72.22		$	0.32
Third quarter	CAD 79.50	CAD 73.91		$	0.32
Fourth quarter	CAD 80.70	CAD 71.40		$	0.32

ITEM 6. Selected Financial Data

The table below summarizes selected financial information for the five 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.

	2006(1)			2005(2)			2004			2003			2002(3)
	(In thousands, except per share data)
*Consolidated Statement of Operations:*
Gross sales	$	7,901,614		$	7,417,702		$	5,819,727		$	5,387,220		$	4,956,947
Beer excise taxes	(2,056,629		)	(1,910,796		)	(1,513,911		)	(1,387,107		)	(1,180,625		)
Net sales	5,844,985			5,506,906			4,305,816			4,000,113			3,776,322
Cost of goods sold	(3,481,081		)	(3,306,949		)	(2,741,694		)	(2,586,783		)	(2,414,530		)
Gross profit	2,363,904			2,199,957			1,564,122			1,413,330			1,361,792
Marketing, general and administrative	(1,705,405		)	(1,632,516		)	(1,223,219		)	(1,105,959		)	(1,057,240		)
Special items, net	(77,404		)	(145,392		)	7,522			—			(6,267		)
Operating income	581,095			422,049			348,425			307,371			298,285
Interest expense, net	(126,781		)	(113,603		)	(53,189		)	(61,950		)	(49,732		)
Other income (expense), net	17,736			(13,245		)	12,946			8,397			8,047
Income from continuing operations before income taxes	472,050			295,201			308,182			253,818			256,600
Income tax expense	(82,405		)	(50,264		)	(95,228		)	(79,161		)	(94,947		)
Income from continuing operations before minority interests	389,645			244,937			212,954			174,657			161,653
Minority interests(4)	(16,089		)	(14,491		)	(16,218		)	—			—
Income from continuing operations	373,556			230,446			196,736			174,657			161,653
Loss from discontinued operations, net of tax(5)	(12,525		)	(91,826		)	—			—			—
Cumulative effect of change in accounting principle, net of tax(6)	—			(3,676		)	—			—			—
Net income	$	361,031		$	134,944		$	196,736		$	174,657		$	161,653
Basic income (loss) per share:
Continuing operations	$	4.34		$	2.90		$	5.29		$	4.81		$	4.47
Discontinued operations	(0.15		)	(1.16		)	—			—			—
Cumulative effect of change in accounting principle	—			(0.04		)	—			—			—
Basic net income per share	$	4.19		$	1.70		$	5.29		$	4.81		$	4.47
Diluted income (loss) per share:
Continuing operations	$	4.31		$	2.88		$	5.19		$	4.77		$	4.42
Discontinued operations	(0.14		)	(1.15		)	—			—			—
Cumulative effect of change in accounting principle	—			(0.04		)	—			—			—
Diluted net income per share	$	4.17		$	1.69		$	5.19		$	4.77		$	4.42

	2006(1)			2005(2)			2004			2003			2002(3)
	(In thousands, except per share data)
*Consolidated Balance Sheet data:*
Cash and cash equivalents	$	182,186		$	39,413		$	123,013		$	19,440		$	59,167
Working capital (deficit)	$	(341,760	)	$	(768,374	)	$	91,319		$	(54,874	)	$	(93,995	)
Total assets	$	11,603,413		$	11,799,265		$	4,657,524		$	4,444,740		$	4,297,411
Current portion of long-term debt and other short-term borrowings	$	4,441		$	348,102		$	38,528		$	91,165		$	144,049
Long-term debt	$	2,129,845		$	2,136,668		$	893,678		$	1,159,838		$	1,383,392
Stockholder's equity	$	5,817,356		$	5,324,717		$	1,601,166		$	1,267,376		$	981,851
*Consolidated Cash Flow data:*
Cash provided by operations	$	833,244		$	422,275		$	499,908		$	528,828		$	244,968
Cash used in investing activities	$	(294,813	)	$	(312,708	)	$	(67,448	)	$	(214,614	)	$	(1,570,761	)
Cash (used in) provided by financing activities	$	(401,239	)	$	(188,775	)	$	(335,664	)	$	(357,393	)	$	1,291,668
*Other information:*
Barrels of beer and other beverages sold	42,143			40,431			32,703			32,735			31,841
Dividends per share of common stock	$	1.28		$	1.28		$	0.82		$	0.82		$	0.82
Depreciation and amortization	$	438,354		$	392,814		$	265,921		$	236,821		$	227,132
Capital expenditures and additions to intangible assets	$	446,376		$	406,045		$	211,530		$	240,458		$	246,842

(1) 53-weeks included in 2006 versus 52 weeks reflected in 2002 - 2005.

(2) Results prior to February 9, 2005 exclude Molson, Inc.

(3) Results for the first five weeks of fiscal 2002 exclude CBL.

(4) Minority interests in net income of consolidated entities represents the minority owners' share of income generated in 2006 and 2005 by BRI, RMBC, RMMC and Grolsch joint ventures and in 2004 by RMBC, RMMC and Grolsch joint ventures, which were consolidated for the first time in 2004 under FIN 46R.

(5) Results of operations of our former Brazil segment in 2006 and 2005, prior to the sale in January of 2006 but subsequent to the Merger in February 2005. See related Note 4 to the Consolidated Financial Statements in Item 8.

(6) Effect of implementing FASB Interpretation No. 47 "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143" (FIN 47) in the fourth quarter of 2005.

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

Executive Summary

Our income from continuing operations for the fiscal year ended December 31, 2006 was $373.6 million compared to income from continuing operations of $230.4 million for the fiscal year ended December 25, 2005. Our net income for 2006 was $361.0 million, or $4.17 per diluted share, compared to net income for 2005 of $134.9 million, or $1.69 per diluted share. Net sales for 2006 were $5.8 billion on 42.1 million barrels of beer sold, versus $5.5 billion on 40.4 million barrels sold in 2005. The merger with Molson was completed on February 9, 2005; consequently, a portion of the growth in volume, revenue and

profit is due to the inclusion of the Canada segment for the full year in 2006, versus forty-five and one-half weeks for the year ended 2005. Also, our 2006 fiscal year included 53 weeks, compared to 52 weeks in 2005. The 53rd week in our fiscal 2006 increased total company sales volume by approximately 600 thousand barrels and pre-tax profit by approximately $6 million.

Our performance in 2006—our second year as a merged company—demonstrated that our brand growth strategies and cost-reduction efforts continue to strengthen our competitive capabilities and financial performance. We achieved revenue and profit growth, despite substantial competitive and inflationary cost challenges in each of our major markets. We achieved several critical successes in 2006:

· We grew volume in all of our businesses on the strength of our leading brands.

· We gained market share in the U.S. and U.K. and improved our Canada share trends substantially versus the pre-merger trend that Molson experienced.

· We increased revenue per barrel in Canada and in the U.S., supported by our brand-building efforts.

· We captured more than $104 million of cost reductions across our company, including nearly $66 million of merger synergies—more than 60% above our original synergies goal for 2006.

· We continued to invest strategically behind our brand equities and in our sales execution capabilities in each of our businesses.

· We invested in capital and other projects, most significantly in the Shenandoah brewery in the U.S., that will help us to continue to reduce our fixed-cost structure and grow earnings and financial flexibility.

· We generated $833.2 million of operating cash flow and repaid all commercial paper borrowings and all borrowings under our credit facility by the end of the year.

We achieved these results with a focus on building strong brands while controlling and reducing costs across our company.

Synergies and other cost savings initiatives

The Company originally targeted $40 million of annual Merger-related savings for 2006. During the course of the year, we increased our target to $60 million, and achieved $66 million in annual synergies during 2006. Combined with the $59 million of synergy savings achieved in 2005, we have captured a total of $125 million of synergies over the past two years. We expect to exceed the total synergies goal of $175 million during 2007. Moreover, we are developing and implementing a next generation of cost savings initiatives, which are in varying stages of development.

Income taxes

Our full year effective tax rate was 17.5% in 2006 and 17.0% in 2005. Our 2006 effective tax rate was significantly lower than the federal statutory rate of 35% primarily due to the following: lower income tax rates applicable to our Canadian and U.K. businesses; and one-time benefits from revaluing our deferred tax assets and liabilities to give effect to reductions in foreign income tax rates. Our 2005 effective tax rate was lower than the federal statutory rate of 35% primarily due to lower income tax rates applicable to our Canadian and U.K. businesses and a one time benefit resulting from the reversal of a previously recognized deferred tax liability due to our election to treat our portion of all foreign subsidiary earnings through December 25, 2005, as permanently reinvested under the accounting guidance of APB 23 “Accounting for Income Taxes—Special Areas” and SFAS 109 “Accounting for Income Taxes.”

Components of our Statement of Operations

Net sales—Our net sales represent almost exclusively the sale of beer and other malt beverages, the vast majority of which are brands that we own and brew ourselves. We import or brew and sell certain non-owned partner brands under licensing and related arrangements. We also sell certain “factored brands,” as a distributor, to on-premise customers in the United Kingdom (Europe segment).

Cost of goods sold—Our cost of goods sold include costs we incur to make and ship beer. These costs include brewing materials, such as barley, in the United States and United Kingdom where we manufacture the majority of our own malt. In Canada, we purchase malt from third parties. Hops and various grains are other key brewing materials purchased by all of our segments. Packaging materials, including costs for glass bottles, aluminum and steel cans, and cardboard and paperboard are also included in our cost of goods sold. Our cost of goods sold also include both direct and indirect labor, freight costs, utilities, maintenance costs, and other manufacturing overheads.

Marketing, general and administrative—These costs include media advertising (television, radio, print), tactical advertising (signs, banners, point-of-sale materials) and promotion costs planned and executed on both local and national levels within our operating segments. These costs also include our sales organizations, including labor and other overheads. This classification also includes general and administrative costs for functions such as finance, legal, human resources and information technology, which consist primarily of labor and outside services.

Special Items—These are unique, infrequent and unusual items which affect our statement of operations, and are discussed in each segment’s Results of Operations discussion.

Interest income (expense)—Interest costs associated with borrowings to finance our operations are classified here. Interest income in the Europe segment is associated with trade loans receivable from customers.

Other income (expense)—This classification includes primarily gains and losses associated with activities not directly related to brewing and selling beer. For instance, gains or losses on sales of non-operating assets, our share of income or loss associated with our ownership in Tradeteam and the Montréal Canadiens hockey club, and certain foreign exchange gains and losses are classified here.

Discussions of statement of operations line items such as minority interests, discontinued operations and cumulative effect of a change in accounting principle are discussed in detail elsewhere in MD&A and in the Notes to the Consolidated Financial Statements in Item 8.

Discontinued Operations

The Company’s former Brazil business, Kaiser, which was acquired as part of the Merger, is reported as a discontinued operation due to the sale of a 68% controlling interest in the business on January 13, 2006. Proceeds from the sale were $68 million cash, less $4.2 million of transaction costs. We divested our remaining 15% interest in Kaiser during the fourth quarter, for which we received $15.7 million, including $0.6 million of accrued interest. The loss from discontinued operations of $12.5 million for the year ended 2006 is composed of the following components:

· Losses generated by Kaiser prior to the sale of $2.3 million.

· A loss on the January 2006 sale of 68% of the business of $2.8 million.

· Unfavorable adjustments to indemnity liabilities due to foreign exchange fluctuations and changes in estimates of $3.0 million.

· A net loss of $4.4 million as a result of the exercise of the put option on our remaining 15% common ownership interest. The net result of a gain from the proceeds from the exercise of our put

option was more than offset by a loss due to the increase in our indemnity liabilities as a result of purchaser’s increased ownership level. See Note 4 to the Consolidated Financial Statements in Item 8.

During 2005, Kaiser generated pre-tax losses of $91.8 million, due to operating losses and special charges associated with increasing reserves for contingent liabilities.

In conjunction with this transaction, the purchaser (FEMSA) assumed $63 million of financial debt and assumed contingent liabilities of approximately $260 million, related primarily to tax claims, subject to our indemnification. We have a level of continuing potential exposure to these contingent liabilities of Kaiser, as well as previously disclosed but less than probable unaccrued claims, due to certain indemnities provided to FEMSA pursuant to the sales and purchase agreement. While we believe that all significant contingencies were disclosed as part of the sale process and adequately reserved for on Kaiser’s financial statements, resolution of contingencies and claims above reserved or otherwise disclosed amounts could, under some circumstances, result in additional cash outflows for Molson Coors because of transaction-related indemnity provisions. We have recorded these indemnity liabilities at fair value and have a carrying value at December 31, 2006, of $111.0 million. Due to the uncertainty involved with the ultimate outcome and timing of these contingencies, there could be significant adjustments in the future.

Cumulative Effect of Change in Accounting Principle

Molson Coors has adopted Financial Accounting Standards Board Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (FIN 47) under which companies must recognize potential long-term liabilities related to the eventual retirement of assets. As a result of adopting FIN 47, we recorded a cumulative non-cash expense of $3.7 million, after tax, in the 2005 fourth quarter, reported as Cumulative Effect of Change in Accounting Principle in the Company’s statement of operations. As reported in our 2005 fourth quarter and full year results, these liabilities represent accumulated remediation and restoration costs expected to be incurred up to 30 years in the future for anticipated asset retirements. Costs related to FIN 47 were not significant in 2006, and following this cumulative catch-up expense recorded in the fourth quarter of 2005, we do not expect FIN 47-related expense to have a significant impact on our annual operating results.

Results of Operations

Canada Segment

Before the Merger, the Canada segment consisted of Coors Brewing Company’s 50.1% interest in the Coors Canada Partnership (CCP), through which the Coors Light business in Canada was conducted. CCP contracted with Molson for the brewing, distribution and the sale of Coors Light products, while CCP managed all marketing activities in Canada. In connection with the Merger, CCP was dissolved into the Canadian business. Coors accounted for its interest in CCP using the equity method of accounting.

Following the Merger, our Canada segment consists primarily of Molson’s beer business including the production and sale of the Molson brands, Coors Light and other licensed brands, principally in Canada. The Canada segment also includes our joint venture arrangements related to the distribution of beer in Ontario Brewers Retail, Inc. (BRI) (consolidated under FIN 46R) and the Western provinces Brewers’ Distributor Ltd. (BDL).

The following represents the Canada segment’s historical results:

	Fiscal year ended
	December 31, 2006(1)(5)				% change			December 25, 2005(5)				% change			December 26, 2004
	(In thousands, except percentages)
Volume in barrels(2)		8,282				11.1	%		7,457				N/M			—
Net sales(3)		$	1,793,608			17.4	%		$	1,527,306			N/M			$	60,693
Cost of goods sold		(883,649		)		11.7	%		(790,859		)		N/M			—
Gross profit		909,959				23.6	%		736,447				N/M			60,693
Marketing, general and administrative expenses		(439,920		)		16.5	%		(377,545		)		N/M			969
Special items, net		—				N/M			(5,161		)		N/M			—
Operating income		470,039				32.9	%		353,741				N/M			61,662
Other income (expense), net		13,228				N/M			(2,183		)		N/M			—
Segment earnings before income taxes(4)		$	483,267			37.5	%		$	351,558			470.1	%		$	61,662

N/M = Not meaningful

(1) 53 weeks included in 2006 versus 52 weeks in 2004 - 2005(5).

(2) Volumes represent net sales of MCBC owned brands and partner brands.

(3) Net sales in 2004 represent royalties to the Company from the Coors Canada partnership.

(4) Earnings before income taxes in 2006 and 2005 include $4,799 thousand and $5,093 thousand for the years ended, respectively, of the minority owners' share of income attributable to the BRI joint venture.

(5) Molson's results are included in the Canada segment results for the 2006 and 2005 years ended, beginning at the date of the Merger, February 9, 2005.

The following represents the Canada segment’s pro forma results, as if the Merger had occurred on December 29, 2003, the first day of Coors’ 2004 fiscal year:

	Fiscal year ended
	December 31, 2006							December 25, 2005							December 26, 2004
	(Actual)				% Change			(Pro forma)				% Change			(Pro forma)
	(In thousands, except percentages)
Volume in barrels		8,282				1.6	%		8,148				(1.1	)%		8,241
Net sales		$	1,793,608			10.2	%		$	1,627,721			6.5	%		$	1,528,279
Cost of goods sold		(883,649		)		8.0	%		(818,297		)		5.9	%		(772,510		)
Gross profit		909,959				12.4	%		809,424				7.1	%		755,769
Marketing, general and administrative expenses		(439,920		)		3.4	%		(425,468		)		24.2	%		(342,635		)
Special items, net		—				N/M			(5,161		)		N/M	%		(20,404		)
Operating income		470,039				24.1	%		378,795				(3.5	)%		392,730
Other income (expense), net		13,228				N/M	%		(1,490		)		N/M	%		(2,837		)
Segment earnings before income taxes		$	483,267			28.1	%		$	377,305			(3.2	)%		$	389,893

N/M = Not meaningful

Foreign currency impact on results

Our Canada segment (as stated in USD) benefited from a 6% year-over-year increase in the value of the CAD against the USD in 2006 versus 2005. Similarly, the Canada segment benefited from a 7% year-over-year increase in the value of CAD against USD in 2005 versus 2004.

Net sales

For the 53 weeks ended December 31, 2006, sales volume in Canada increased by 11.1% to 8.3 million barrels versus prior year volume of 7.5 million barrels for the fiscal period beginning February 9, 2005 and ended December 25, 2005. On a pro forma basis, sales volume increased 1.6% to 8.3 million barrels versus 2005 pro forma volume of 8.1 million. The 53rd week in 2006 accounted for approximately 130 thousand barrels, providing the year-over-year increase.

On a pro forma basis, Molson strategic brands grew at mid-single-digit rates, lead by Coors Light, Rickard’s and our partner import brands, all of which grew at double-digit rates on a full year basis. These increases were partially offset by declines in unsupported brands and other premium brands, reductions in contract packaging of non-owned brands for export shipment and the discontinuation of Molson Kick and A Marca Bavaria.

On a full year basis, 2006 net sales revenue grew $266.3 million or 17.4% versus prior year. On a comparable, pro forma basis, net sales revenue grew $165.9 million or 10.2% with approximately 1% growth in local currency on a per barrel basis.

For the full year, net sales revenue was $216.57 per barrel, an increase of 8.4% over comparable 2005 net sales revenue of $199.77 per barrel. An approximate 6% appreciation in the value of CAD against USD during the year increased net sales revenue by approximately $115 million. The remainder of the increase was driven by the year over year impact of modest general price increases and improved sales mix from increased import sales, which are at higher than average retail prices. These improvements were partially offset by increased price discounting during the year, predominantly in Ontario and Québec.

For the year ended December 25, 2005, pro forma net sales were $1.6 billion, 6.5% higher than the comparable period in the prior year. Net sales revenue per barrel grew slightly in local currency for the year ended December 25, 2005, driven by modest general price increases offset by unfavorable product mix. Net unfavorable sales mix was driven by value segment growth, primarily in Ontario and Alberta, which was partially offset by improved import sales at higher than average sale prices.

Canada segment net sales volume for the year ended December 25, 2005, decreased 1.1% to 8.2 million barrels on a comparable pro forma basis from 2004. The decrease was driven by volume declines in the first quarter, partially offset by strong industry volume trends and improved sales activity and market performance over the balance of 2005.

Cost of goods sold and gross profit

Cost of goods sold increased $92.8 million, or 11.7%, in 2006 versus prior year. On a comparable, pro forma basis, cost of goods sold increased $65.4 million or 8.0%, decreasing slightly less than 1% on a per barrel basis in local currency.

Cost of goods sold was $106.7 per barrel, an increase of 6.2% over 2005’s pro forma cost of goods sold of $100.43 per barrel. After adjusting for the approximate 6% appreciation in the value of CAD against USD, cost of goods sold decreased by slightly less than 1% in 2006 in local currency. Inflationary cost increases across nearly all inputs drove approximately 3% increase in cost of goods sold per barrel. These and other cost increases were completely offset by implementation of synergies and other cost savings initiatives, lower input costs related to favorable foreign currency, and lower employee-related expenses in

2006. Finally, a 1% reduction was due to a $4 million benefit in the fourth quarter of 2006 related to a one-time non-cash adjustment of certain foreign currency positions to their market values.

On a pro forma basis, cost of goods sold increased 5.9% to $818.3 million for the year ended December 25, 2005, from $772.5 million in the same period for 2004. For the same period, in local currency, cost of goods sold per barrel in Canada decreased as synergy and other cost savings were offset by unfavorable product mix.

Marketing, general and administrative expenses

Marketing, general and administrative expenses increased $62.4 million for 2006. This is an increase of $14.5 million or 3.4% on a comparable, pro forma basis. In local currency, total marketing, general and administrative expenses decreased by approximately 3.5% due to lower promotional spending and brand investments in 2006, due in part to cycling of the promotional launch of Molson Kick and A Marca Bavaria in 2005, and partly to offset price discounting. These costs were partially offset by higher employee expenses and one-time costs in 2006, including incremental spending as a result of the additional week in 2006 results.

On a pro forma basis, marketing, general and administrative expenses increased 24.2% to $425.5 million for 2005, from $342.6 million in the same period for 2004. Canada increased 2005 marketing and sales spending at a high-single-digit growth rate. In local currency general and administrative costs increased due to higher depreciation, increased employee costs and non-recurring items, partially offset by Merger-related synergies.

Special items, net

There were no special items in 2006.

Special items, net of $5.2 million in 2005 were attributable primarily to restructuring the sales and marketing organizations in Canada. On a pro forma basis, special items, net in 2004 of $20.4 million were Merger-related, and therefore did not recur in 2005.

Other (expense) income, net

In 2006, other income increased $15.4 million over the prior year. On a pro forma basis other income increased $14.7 million over the prior year or $16.8 million in local currency. Other income primarily represents equity earnings and amortization expense related to the Montréal Canadiens hockey club (the Club), which improved over the prior year. During the year, the entities which control and own a majority of the Club purchased the preferred shares in the Club held by Molson. In addition, Molson was released from a direct guarantee associated with the Club’s debt financing, and as a result of the reduction in our financial risk profile, we have re-evaluated our remaining guarantee liabilities, specifically under the NHL Consent Agreement and the Bell Centre land lease guarantees, resulting in an approximate $9.0 million income benefit associated with the reduction in the exposure attributable to such guarantees.

Other expense in 2005 represents the equity losses in the Montréal Canadiens Hockey Club.

United States Segment

The United States (U.S.) segment produces, markets, and sells the Coors and Molson portfolios of brands in the United States and its territories and includes the results of the Rocky Mountain Metal Corporation (RMMC) and Rocky Mountain Bottle Corporation (RMBC) joint ventures consolidated under FIN 46R. The U.S. segment also includes Coors brand volume that is sold in Mexico and the Caribbean.

	Fiscal year ended
	December 31, 2006(1)			% change			December 25, 2005			% change			December 26, 2004
	(In thousands, except percentages)
Volume in barrels(2)	23,471				3.6	%	22,645				2.6	%	22,068
Net sales	$	2,619,879			5.9	%	$	2,474,956			4.0	%	$	2,380,193
Cost of goods sold	(1,645,598		)		7.9	%	(1,525,060		)		4.3	%	(1,462,373		)
Gross profit	974,281				2.6	%	949,896				3.5	%	917,820
Marketing, general and administrative expenses	(744,795		)		0.7	%	(739,315		)		0.5	%	(735,529		)
Special items, net	(73,652		)		N/M		(68,081		)		N/M		—
Operating income	155,834				9.4	%	142,500				(21.8	)%	182,291
Other income (expense), net(3)	3,238				N/M		(457		)		N/M		19,924
Segment earnings before income taxes(4)	$	159,072			12.0	%	$	142,043			(29.8	)%	$	202,215

N/M = Not meaningful

(1) 53 weeks included in 2006 versus 52 weeks in 2004 - 2005.

(2) Volumes represent net sales of owned brands.

(3) Consists primarily of gains from sales of non-operating assets, water rights, a royalty settlement and equity share of Molson USA losses in 2004.

(4) Earnings before income taxes in 2006, 2005 and 2004 includes $16,262 thousand, $12,679 thousand and $13,015 thousand, respectively, of the minority owners' share of income attributable to the RMBC and RMMC joint ventures.

Net sales

Sales volume to wholesalers grew 3.6% in 2006 compared to 2005. Without the 53rd week in 2006, volume growth would have been approximately 2.2%. The growth was driven by low-single-digit growth for the Coors Light brand, high-single-digit growth of Keystone Light, and double-digit growth of the Blue Moon brand. Excluding our Caribbean business, which was impacted by a weak economy and a new sales tax enacted in Puerto Rico during the year, our 50-states sales-to-retail (STRs) grew 3.7% from a year ago. Coors Light achieved its seventh consecutive quarter of total channel U.S. growth and grew share in the grocery and convenience store channels (according to external retail sales data reports). This continued volume momentum was driven by building our brand equities, through our Coors Light advertising “Rocky Mountain Cold Refreshment” focus, as well as better alignment with our distributor network and improving our effectiveness with chain retail accounts.

Net sales per barrel increased 2.1% in 2006 due to higher base pricing and reduced discounting compared to the level of price promotion activity we experienced during 2005. However, the overall industry environment continues to be challenging, as price realization for the major brewers continues to

lag inflation. In addition, product mix was slightly unfavorable due primarily to the volume increases in our Keystone brands in 2006.

Full year U.S. sales volume increased in 2005 versus 2004, driven by volume increases in the Coors Light, Keystone Light and Blue Moon brands, and the addition of Molson brands sold in the United States that were included in U.S. results following the Merger.

Net sales per barrel increased 1.3% from 2004 to 2005. We experienced favorable gross pricing in 2005, partially offset by significant price promotions and coupon activity in key markets. These pricing factors accounted for approximately one-half of the increase in revenue per barrel, while the balance of the revenue per barrel growth was due primarily to collection of fuel surcharges from customers and higher sales of import brands through company-owned distributorships.

Cost of goods sold

Cost of goods sold per barrel increased by 4.1% to $70.11 per barrel in 2006 versus $67.35 per barrel in 2005. The net increase in Cost of goods sold was driven by four primary factors:

· Inflationary increases across nearly all facets of our operations, including packaging materials, freight rates, fuel and various components of labor and labor-related costs, resulted in an approximate 5% increase in cost of goods per barrel. Approximately three-quarters of those inflationary increases are attributable to commodities, with the balance attributable to labor and labor-related increases.

· Innovative promotional packaging initiatives that are helping to drive sales of Coors Light and other brands resulted in approximately 1% of the increase. These include our plastic bottle cooler box, cold wrap bottle, and frost-brew can liner.

· Certain initiatives that will yield lower costs in future years resulted in temporarily higher costs in 2006 and accounted for approximately 1% of the total increase. These initiatives included costs related to temporary process changes and new contract packaging and freight arrangements related to closing our Memphis brewery in September 2006.

· Savings from our operations cost initiatives and Merger synergies reduced costs of goods sold per barrel by 3% and offset approximately half of the total inflation cost increases during the year.

Cost of goods sold per barrel increased by 1.6% to $67.35 per barrel in 2005 from $66.27 per barrel in 2004. The increase in cost of goods sold per barrel was driven by higher freight, diesel fuel, packaging materials, and utilities costs. Inflation alone would have accounted for an increase of approximately 4% in cost of goods per barrel. However, these unfavorable factors were partially offset by favorable cost trends from supply chain cost management, labor productivity and Merger synergies.

Marketing, general and administrative expenses

Marketing, general and administrative expenses increased by $5.5 million, or 0.7%, in 2006 versus 2005. Our stock-based long-term incentive program primarily drove the year-over-year increase, along with modest increases in our advertising and sales expenses. The total increase was partially offset by reductions of certain overhead and personnel-related costs.

Marketing, general and administrative expenses increased by $3.8 million, or 0.5%, in 2005 versus 2004. Increased spending on sales capabilities were partially offset by lower general and administrative overhead costs.

Special items, net

Special items, net in the U.S. segment in 2006 were associated primarily with the closure and sale of the Memphis brewery, completed in the third quarter of 2006. We recorded approximately $60 million in accelerated depreciation on brewery assets and impairments of fixed assets, reflecting their sales value, $12.5 million for accruals of severance and other costs associated with the plant closure, and a $3.1 million increase in the estimate of costs to withdraw from a multi-employer pension plan benefiting former Memphis workers. Memphis-related accelerated depreciation was higher in 2006 than in 2005 due to a lower sales price for the Memphis plant than our estimate in 2005.

The 2006 special items were partially offset by the receipt of a $2.4 million cash distribution from bankruptcy proceedings of a former insurance carrier for a claim related to our environmental obligations at the Lowry Superfund site in Denver, Colorado. We recorded the cash receipt as a special benefit consistent with the classification of the charge recorded in a previous year. The estimated environmental liability associated with this site was not impacted by the proceeds received. See Note 8 to the Consolidated Financial Statements in Item 8 for further discussion.

Special items, net in the U.S. segment in 2005 were associated primarily with the planned closure of the Memphis brewery in 2006. We recorded $33.3 million in accelerated depreciation on brewery assets, $3.2 million in direct impairments of assets, $1.7 million for accruals of severance and associated benefits, and $25.0 million representing an estimate of costs to withdraw from a multi-employer pension plan for Memphis workers. We recorded an additional $4.9 million of restructuring charges associated with restructuring brewery operations in Golden, Colorado.

Other income (expense), net

Other income was higher in 2006 versus 2005 primarily due to the recognition of a portion of a previously deferred gain on the sale of real estate. This amount was recognized in the second quarter of 2006 upon the satisfaction of certain conditions pertaining to the sale contract.

Other income was lower in 2005 versus 2004, primarily due to two factors in 2004: $11.7 million of gains on the sale of non-operating real estate and $8.3 million of royalties in 2004 related to a coal mine previously owned by Coors.

Europe Segment

The Europe segment consists of our production and sale of the CBL brands principally in the United Kingdom, our joint venture arrangement for the production and distribution of Grolsch in the United Kingdom and Republic of Ireland (consolidated under FIN 46R beginning in 2004), factored brand sales (beverage brands owned by other companies but sold and delivered to retail by us) and our joint venture arrangement with DHL for the distribution of products throughout Great Britain (Tradeteam). Our Europe segment also includes a small volume of sales in Asia and other export markets.

	Fiscal year ended
	December 31, 2006(1)				% change			December 25, 2005				% change			December 26, 2004
	(In thousands, except percentages)
Volume in barrels(2)		10,390				0.6	%		10,329				(2.9	)%	10,635
Net sales		$	1,426,337			(5.0	)%		$	1,501,299			(19.5	)%	$	1,864,930
Cost of goods sold		(949,513		)		(4.1	)%		(989,740		)		(22.6	)%	(1,279,321		)
Gross profit		476,824				(6.8	)%		511,559				(12.6	)%	585,609
Marketing, general and administrative expenses		(400,469		)		(6.9	)%		(429,973		)		(3.8	)%	(447,163		)
Special items, net		(9,034		)		(34.7	)%		(13,841		)		N/M		7,522
Operating income		67,321				(0.6	)%		67,745				(53.6	)%	145,968
Interest income(3)		11,687				(9.9	)%		12,978				(19.0	)%	16,024
Other income (expense), net		4,824				N/M			(14,174		)		N/M		(5,655		)
Segment earnings before income taxes(4)		$	83,832			26.0	%		$	66,549			(57.4	)%	$	156,337

N/M = Not meaningful

(1) 53 weeks included in 2006 versus 52 weeks in 2004 - 2005.

(2) Volumes represent net sales of owned brands, joint venture brands and exclude factored brand net sales volumes.

(3) Interest income is earned on trade loans to U.K. on-premise customers and is typically driven by debt balances outstanding from period-to-period.

(4) Earnings before income taxes in 2006, 2005 and 2004 includes $5,824 thousand ($4,051 thousand, net of tax), $5,798 thousand ($4,191 thousand, net of tax) and $6,854 thousand ($4,798 thousand, net of tax), respectively, of the minority owners' share of income attributable to the Grolsch joint venture.

Foreign currency impact on results

Our Europe segment results were positively affected by a 1% year-over-year increase in the value of the British Pound Sterling (GBP or £) against USD in 2006. Conversely, the Europe segment was adversely affected by a 0.5% year-over-year increase in the value of the GBP against USD in 2005.

Net sales

Net sales for the Europe segment decreased by 5.0% in 2006, while volume increased by 0.6%. The 53rd week in 2006 contributed approximately 140 thousand barrels of sales volume, providing the year-over-year increase. Net sales in local currency decreased by approximately 6.5%. The 52 week volume decline was driven by premium lagers, flavored alcohol beverages (FABs) and ales. This decline was partially offset by growth of the Carling brand. CBL’s overall volume increase for the year drove a slight market share increase for the company versus an overall industry decline.

Beer volume in our on-premise business, which represents approximately two-thirds of our Europe volume and an even greater proportion of our margin, declined by slightly more than 2% compared to 2005. This compared to an overall industry on-premise channel decline of 4.3% yielding a small market share gain for CBL. Our off-premise volume for 2006 increased by approximately 2% over 2005, with Carling accounting for most of the gain. We experienced a small off-premise market share decline in 2006.

In addition to the volume trends mentioned above, we experienced unfavorable pricing in both the on-premise and the off-premise channels and a decrease in the sales value of factored brands. These reductions were compounded by unfavorable channel and brand mix. In addition, net sales were impacted by lower factored brand sales resulting from a change in our trading arrangements with one major factored brand customer requiring us to move from gross reporting of sales and cost of goods sold to a net presentation for that customer, which caused a year-over-year reduction in both net sales and cost of goods sold of approximately $46 million from 2005, but with no net impact on gross profit.

Net sales for the Europe segment decreased 19.5% in 2005, while volume decreased 2.9% from the previous year. The volume decline was driven by the Grolsch brand, flavored alcohol beverages (FABs) and ales. This decline was partially offset by growth of the Carling brand. CBL’s overall volume decline for the year was slightly worse than the overall market decline.

Beer volume in our on-premise business declined by 2% in 2005 compared to 2004. This compared to an overall industry on-premise channel decline of nearly 4% in the year, yielding a small market share gain for us. Our off-premise volume for 2005 decreased approximately 2% over 2004, resulting in a small off-premise market share decline for us.

As in 2006, in addition to the volume trends mentioned above, we experienced unfavorable pricing in both the on-premise and the off-premise channels, as well as a decrease in the sales value of factored brands. These reductions were further compounded by unfavorable channel and brand mix.

The change in our trading arrangements with one major factored brand customer in 2005 caused a year-over-year reduction in both net sales and cost of goods sold of $243.4 million from 2004, but with no net impact on gross profit.

Owned-brand net sales in local currency per barrel decreased approximately 2% in 2005 when compared to 2004.

Cost of goods sold

Cost of goods sold per barrel in local currency decreased approximately 6% in 2006 versus 2005. The change to net reporting for certain factored brand sales (described above) accounted for approximately $46 million of the decrease in the year to date cost of goods sold. The remaining decrease was driven by cost savings from our supply chain restructuring initiatives begun in 2005 and lower distribution costs, partly offset by increased energy costs.

Cost of goods sold decreased 22.6% in 2005 versus 2004. The cost of goods sold decrease in local currency was driven by the change in trading arrangements with one major factored brand customer mentioned above combined with a mix shift away from glass packaged products which have higher packaging costs. These reductions were partially offset by the de-leveraging of fixed costs, higher distribution costs and increased energy costs.

Marketing, general and administrative expenses

Europe marketing, general and administrative expenses decreased by 6.9% with a per barrel decrease of 7.4% in 2006 versus 2005. The decrease was primarily the result of cost reduction initiatives we announced and began implementing during 2005 and rigorous cost control throughout the year.

In 2005, Europe marketing, general and administrative expenses decreased 3.8%, and 1.0% on a per barrel basis versus 2004. This decrease was primarily the result of lower overhead, sales and marketing and payroll related spending in response to profit challenges presented by lower revenue per barrel.

Special items, net

In 2006, special items, net of $9.0 million are a combination of $13.0 million employee termination costs associated with the U.K. supply chain and back office restructuring efforts and $1.3 million costs associated with exiting the Russia market, offset by a $5.3 million pension curtailment gain. The pension curtailment reflects reductions in headcount from restructuring efforts and is discussed further in Note 8 to the Consolidated Financial Statements in Item 8.

In 2005, special items, net consisted of $14.3 million for employee termination costs and $3.0 million of income associated with disposals of long-lived assets, consisting of $6.5 million from gains on sales of assets and a one-time development profit on real estate formerly held by the company, offset by asset impairment charges of $3.5 million. Also included in 2005 are $2.5 million of exit costs associated with the closure of our Russia and Taiwan offices. See Note 8 to the Consolidated Financial Statements in Item 8 for further discussion.

The special items in 2004 represented the profit on sale of real estate.

Other (expense) income, net

Other income of $4.8 million represents a $19.0 million improvement over 2005, driven by improved Tradeteam profitability, our joint venture partner for the distribution of product, profits on the sale of surplus real estate and lower non-operating leasehold expenses.

The decline in other income in 2005 from 2004 reflects declining Tradeteam operating performance and increased non-operating leasehold expenses.

Interest income

Interest income is earned on trade loans to U.K. on-premise customers. Interest income decreased by 9.9% and 19.0% in 2006 and 2005, respectively, as a result of lower loan balances versus the prior years.

Corporate

Corporate includes interest and certain other general and administrative costs that are not allocated to the operating segments. The majority of these corporate costs relates to worldwide finance and administrative functions, such as corporate affairs, legal, human resources, insurance and risk management.

	Fiscal year ended
	December 31, 2006(1)				% change			December 25, 2005				% change			December 26, 2004
	(In thousands, except percentages)
Net sales(2)		$	5,161			54.3	%		$	3,345			N/M			$	—
Cost of goods sold		(2,321		)		79.9	%		(1,290		)		N/M			—
Gross profit		2,840				38.2	%		2,055				N/M			—
Marketing, general and administrative expenses		(120,221		)		40.3	%		(85,683		)		106.5	%		(41,496		)
Special items, net(3)		5,282				N/M			(58,309		)		N/M			—
Operating loss		(112,099		)		(21.0	)%		(141,937		)		242.0	%		(41,496		)
Interest expense, net		(138,468		)		9.4	%		(126,581		)		82.9	%		(69,213		)
Other (expense) income, net		(3,554		)		N/M			3,569				N/M			(1,323		)
Segment loss before income taxes(4)		$	(254,121	)		(4.1	)%		$	(264,949	)		136.5	%		$	(112,032	)

N/M = Not meaningful

(1) 53 weeks included in 2006 versus 52 weeks in 2004 - 2005.

(2) The amounts shown are reflective of revenues and costs associated with the Company's intellectual property, including trademarks and brands. Certain 2004 amounts have not been reclassified due to immateriality.

(3) Special items consist of change in control benefits (expenses) incurred as a consequence of the Merger.

(4) Loss before income taxes in 2006, 2005 and 2004 includes $9,023 thousand, $7,472 thousand and $1,595 thousand, respectively, of the minority owners' share of interest expense attributable to debt obligations of the RMMC and BRI joint ventures.

Marketing, general and administrative expenses

Corporate marketing, general and administrative expenses in 2006 were $120.2 million, up $34.5 million from 2005. This increase is a result of a number of factors, including 1) $20 million related to increased incentive pay, split equally between our stock-based long term incentive plan, including the effect of adopting FAS123R accounting treatment for expensing equity-based compensation, and higher incentive pay resulting from improved profit and cash performance; 2) $7 million related to investments in projects designed to deliver further cost reductions. These initiatives are designed to improve and standardize systems, processes and structure across the areas of operations, information technology, finance and human resources; 3) approximately $11 million due to the full ramp up of new and ongoing costs to build strong corporate center capabilities, which include Sarbanes-Oxley compliance, corporate governance, finance, legal, commercial development and human resources, the transfer of global costs from operating segments to the Corporate center, and severance payments; and 4) approximately $1 million related to the 53rd week. These increases were partially offset by $4 million reduction in legal fees resulting from the favorable completion of several major disputes.

Marketing, general and administrative (MG&A) expenses were higher in 2005 versus 2004, primarily due to establishing the new global organization and headquarters, significant legal fees, information technology projects, and a reallocation of certain MG&A costs from segments to Corporate to directly support the business units’ long term operating efficiency programs and other strategic objectives.

Special items, net

The Corporate segment recognized special items, net of $5.3 million and special items, net of $58.3 million for the years ended December 31, 2006, and December 25, 2005, respectively. The 2006 net credit was a result of evaluating the December 31, 2006 ending MCBC stock price versus the stock option floor price on stock options held by former Coors officers who left the Company under change in control agreements following the Merger offset by associated additional payroll related taxes to be paid on behalf of a former Coors officer that exercised stock options under the change in control agreement. The 2005 charges were associated with 1) $31.8 million of severance and other benefits paid to 12 former Coors officers who exercised change—in-control rights, 2) $6.9 million were a result of providing an exercise price floor under stock options, including additional payroll related taxes to be paid on behalf of a former Coors officer that exercised stock options under the change in control agreement associated with these potential awards, 3) $14.6 million of severance and share-based compensation and benefits paid to two former Molson officers who left the Company during the second quarter of 2005 following the Merger, and 4) $5.0 million of Merger-related costs that did not qualify for capitalization under purchase accounting. See Note 8 to the Consolidated Financial Statements in Item 8.

Interest expense, net

Interest expense, net was $138.5 million during 2006, versus $126.6 million during 2005. Interest expense, net increased due to higher interest rates on permanent financing (as opposed to short-term temporary financing in place through September 2005 following the Merger), 53rd week impact and a stronger Canadian dollar and British Pound Sterling. These increased costs were partially offset by the benefit of lower overall debt levels due to debt repayments in 2006.

Interest expense, net nearly doubled in 2005, compared to 2004 due to the addition of Merger-related debt including debt assumed on Molson’s opening balance sheet which approximated $1.5 billion. (See related Note 2 to the Consolidated Financial Statements in Item 8).

Other income (expense), net

Other expense, net in 2006 includes primarily foreign exchange losses, while the other income, net in 2005 includes primarily foreign exchange gains.

Liquidity and Capital Resources

Our primary sources of liquidity are cash provided by operating activities, external borrowings and asset monetizations. As of December 31, 2006 and December 25, 2005, we had working capital deficits of $341.8 million and $768.4 million, respectively. We commonly operate at working capital deficits given the relatively quick turnover of our receivables and inventory. Decreased current liabilities accounted for most of the decrease in working capital deficit for 2006 versus 2005, especially with regard to the current portion of long-term debt and discontinued operations. Current portion of long-term debt at December 31, 2006, and December 25, 2005 was $4.0 million and $334.1 million, respectively, balances which reflect significant repayments during 2006. We had total cash of $182.2 million at December 31, 2006, compared to $39.4 million at December 25, 2005. The higher balances at year-end 2006 reflect excess cash accumulated following the repayment during 2006 of debt obligations eligible for normal, scheduled repayment. Long-term debt was $2,129.8 million and $2,136.7 million at December 31, 2006, and December 25, 2005,

respectively. Remaining debt as of the end of 2006 consists primarily of bonds with longer-term maturities. We believe that cash flows from operations and cash provided by short-term borrowings, when necessary, will be sufficient to meet our ongoing operating requirements, scheduled principal and interest payments on debt, dividend payments and anticipated capital expenditures. However, our liquidity could be impacted significantly by a decrease in demand for our products, which could arise from competitive circumstances, a decline in the acceptability of alcohol beverages or any of the other factors we describe in Item 1A. “Risk Factors.”

Operating Activities

Net cash provided by operating activities of $833.2 million for the 53 weeks ended December 31, 2006, improved by $411.0 million from the 52 week period ending December 25, 2005. Net income was higher by $226.1 million in 2006 versus 2005, the reasons for which are discussed in detail in the Results of Operations discussion in this section. However, much of the improvement in operating cash flow from 2005 to 2006 was due to a number of unfavorable items in 2005. Cash paid for income taxes was lower by $162.7 million during 2006 versus 2005. During the second quarter of 2005, we made a $138 million Canadian tax payment that was driven by the Merger, a one-time liquidity event that was not repeated in 2006. Our pension funding in 2006 was lower by $55.1 million primarily due to a special voluntary funding to the U.S. plan in 2005. Merger-related costs of $21 million were paid out subsequent to the Merger in the first quarter of 2005 by our Molson business in Canada (costs which had been accrued on the opening balance sheet as of the merger date), representing a unique cash outflow not experienced in 2006. We also made payments to officers under change in control and severance agreements of $24 million in 2005. The remaining improvement in operating cash flow from 2005 to 2006 is due primarily to Molson’s Canadian business being included in 2006 for the full 53 weeks versus 45 ½ weeks in 2005, given the merger date of February 9, 2005. We believe that our cash flow from operating activities in 2006 is more indicative of future performance than the comparable period of 2005, given the number of unusual cash outflows occurring in 2005.

Coincident with the sale of the Memphis brewery in September 2006, we have incurred a $28.1 million liability for the estimated payment required for our withdrawal from the hourly workers multi-employer pension plan. We expect to pay approximately $2.4 million through 10 monthly installments in late 2006 and 2007 and then pay the remaining $25.7 million in one lump sum payment in September 2007.

Our net cash provided by operating activities in 2005 was $422 million, a decrease of $78 million from 2004. The addition of Molson’s Canadian beer business made a significant positive contribution to our operating cash flow. However, there were several items that offset this increase. First, in early 2005 we made a $138 million Canadian tax payment triggered by the Merger but previously deferred by Molson. Our total tax expense for the year was only $50 million, and there were additional tax payments to other governmental authorities in addition to the $138 million. Second, we funded $202 million into our defined benefit pension plans in the United States, Canada and the United Kingdom, compared with expense associated with these plans of $65 million. Finally, operating cash flow in 2005 also diminished because of unfavorable operating profit in the Europe segment, and severance and change in control payments to officers who departed the Company following the Merger.

Investing Activities

Net cash used in investing activities of $294.8 million for the year ended December 31, 2006, was lower by $17.9 million compared to the same period in 2005. Additions to properties were higher in 2006 by $40.3 million as compared to 2005, due primarily to spending in Canada and the U.S. related to the build-out of the Moncton, New Brunswick and Shenandoah, Virginia breweries. In 2006, we recognized proceeds of $68.0 million on the sale of 68% of the Kaiser business in Brazil, offset by $4.2 million of transaction costs. In December 2006, we collected proceeds of $15.7 million as a result of the exercise of our put

option related to our remaining 15% ownership of the Kaiser business in Brazil. Proceeds from sales of properties and intangible assets were lower by $13.3 million year over year. 2005 proceeds included a significant collection of a note related to a 2004 sale of property in the U.K. causing proceeds to exceed 2006 levels, which included the sale of the Memphis plant in the U.S. and various real estate sales in the U.K. On June 30, 2006, as part of a general refinancing of the Montréal Canadiens Hockey team (the Club), Molson sold its preferred equity interest in the Montréal Canadiens hockey club to entities which control and own a majority interest in the Club. Total proceeds coincident with the transaction were CAD $41.6 million (USD $36.5 million). We retain a 19.9% common equity interest in the Club as well as board representation. The transaction structure is consistent with our long term commitment to the Team and its success, and helps to ensure the team’s long term presence in Montréal.

Net cash used in investing activities in 2005 was $313 million, compared to $67 million in 2004. Capital expenditures were higher by $195 million in 2005 due to the inclusion of Molson’s Canada segment capital expenditures of $107 million following the Merger, and spending in the United States related to the build-out of the Shenandoah facility to a full brewery. We also spent $16.5 million in 2005 to acquire Creemore Springs, a small brewery in Canada, and spent $20.4 million on transaction costs associated with the Merger. These factors were offset by the favorable impact of acquiring $73.5 million in cash with the Merger, the collection of a $35.0 million note receivable related to a sale of real estate in the U.K. and collecting a net $17 million on trade loan activity in the U.K. Cash used in investing activities in 2004, which was prior to the merger, reflected capital expenditures of the U.S. and Europe segments only, proceeds from the sale of kegs in the U.K. and sales of real estate in both the U.S. and U.K., and a pension settlement received in 2004 from the former owners of CBL. Also, we presented as an investing activity the inclusion of the opening cash balances of the joint ventures we began consolidating during the first quarter of 2004 as a result of the implementation of FIN 46R.

Financing Activities

Our debt position significantly affects our financing activity. See Note 13 to the Consolidated Financial Statements in Item 8 of this report for a summary of our debt position at December 31, 2006 and December 25, 2005.

Net cash used for financing activities was $401.2 million for 2006 compared to $188.8 million of cash used in financing activities during 2005. Net repayments of debt were approximately $356.2 million for 2006, encompassing all activity in our various debt and credit facilities (including those associated with discontinued operations). Net repayments of debt during 2005 were approximately $108.9 million (including those associated with discontinued operations). The increased levels of debt repayment were due primarily to higher level of operating cash flows generated by the business in 2006 versus 2005. Proceeds from stock option exercises in 2006 were $83.3 million exceeding 2005 exercises by $28.1 million. Proceeds in 2006 were impacted by significant exercises of stock options during the fourth quarter.

Net cash used in financing activities was $188.8 million in 2005, compared to $335.7 million in 2004. During 2005, we paid dividends to stockholders of $110.0 million, compared to $30.5 million in 2004, as a result of increased shares outstanding and a revised dividend policy following the Merger. The large increase in our balance sheet debt from $932 million at year end 2004 to $2,485 million at year-end 2005 was largely the result of the assumption of Molson’s outstanding debt as of the Merger date (February 9, 2005). This debt assumed included borrowings Molson incurred prior to the Merger to pay the special dividends on Molson stock before the Merger. Substantially all of our debt pay down occurred after the Merger date. Also, we collected approximately $11 million less cash in 2005 versus 2004 as a result of stock option exercises.

Capital Resources

See Note 13 to the Consolidated Financial Statements in Item 8, for a complete discussion and presentation of all borrowings and available sources of borrowing, including lines of credit.

The vast majority of our remaining debt borrowings as of December 31, 2006, consist of publicly traded notes totaling $1,918.0 million principal amount, with maturities ranging from 2010 to 2015. Our remaining debt other than the notes consists of various notes payable of $215.9 million at consolidated joint ventures, which mature in 2011 and 2013. While we will continue to use commercial paper borrowings, if necessary, to manage our liquidity through our periods of lower operating cash flow in early 2007, we expect to reach a point in mid-2007 when we will need to consider different alternatives for the use of cash generated. We expect to take a balanced approach to our alternatives in 2007 and beyond, which could include funding of defined benefit pension plans, prepayments of consolidated joint venture debt obligations, modest purchases of company stock and preserving cash flexibility for potential growth investments. Any purchases of MCBC stock on the open market would require a board-approved plan, which does not currently exist.

In August 2006, the available amount of the $1.4 billion revolving multicurrency bank credit facility was reduced to $750 million, and the expiration date was extended to August 2011. At December 31, 2006, there were no borrowings outstanding against the facility. There were no other significant changes in our short or long-term borrowings.

Credit Rating

As of February 16, 2007, our credit rating with Standard & Poor’s and Moody’s with regard to our long-term debt was BBB and Baa2, respectively. If the long term debt ratings were to drop, consequently affecting our short term rating, our access to the commercial paper market for shorter-term borrowings could be unfavorably impacted, resulting in either higher interest rates or an inability to borrow through commercial paper at all. We had no commercial paper borrowings at December 31, 2006.

Capital Expenditures

In 2006, we spent approximately $446.3 million (including approximately $29.3 million spent at consolidated joint ventures) on capital improvement projects worldwide. Of this, approximately 64% was in support of the U.S. segment, with the remainder split between the Canadian (21%), European (14%) and Corporate (1%) segments. The capital expenditure plan for 2007 is expected to be approximately $320 million, including approximately $46 million of spending by consolidated joint ventures. 2007 capital spending is expected to be lower than 2006 primarily due to the planned completion of the Shenandoah brewery in early 2007.

Our CBL business uses kegs managed by a logistics provider who is responsible for providing an adequate stock of kegs as well as their upkeep. Due to greater than anticipated keg losses as well as reduced fill fees (attributable to reduced overall volume), the logistics provider has encountered financial difficulty. As a result of action taken by the logistics provider's lending institution, related to perceived financial difficulties of the borrower, the logistics provider has been forced into administration (restructuring proceedings) and the bank, on February 20, 2007, exercised its option to put the keg population to CBL. As a result, we expect to purchase the existing keg population from the logistics provider's lender at fair value pursuant to the terms of the agreement between CBL and the logistics provider’s lender. We estimate that this potential capital expenditure, which may be financed over a period of time in excess of one year, could amount to approximately $70 million to $100 million, which is not included in the capital expenditures plan of $320 million provided above. As a result of this capital requirement, we may reduce other elements of our 2007 capital expenditures plan, or offset risk posed by the potential keg purchase through increased cash generation efforts.

Contractual Obligations and Commercial Commitments

Contractual Cash Obligations as of December 31, 2006

	Payments due by period
	Total amounts committed		Less than 1 year		1 - 3 years		4 - 5 years		After 5 years
	(In thousands)
Long-term debt, including current maturities(1)	$	2,134,286	$	4,441	$	8,020	$	492,097	$	1,629,728
Interest payments(2)	763,370		124,089		247,197		220,693		171,391
Derivative payments(2)	1,804,663		95,812		191,623		485,886		1,031,342
Retirement plan expenditures(3)	457,948		236,775		50,403		51,202		119,568
Operating leases	289,197		61,293		91,720		58,708		77,476
Capital leases(4)	2,083		1,162		921		—		—
Other long-term obligations(5)	5,686,612		1,483,588		2,062,211		1,600,308		540,505
Total obligations	$	11,138,159	$	2,007,160	$	2,652,095	$	2,908,894	$	3,570,010

(1) Refer to debt schedule in Note 13 for long-term debt discussion.

(2) The “interest payments” line includes interest on our bonds and other borrowings outstanding at December 31, 2006, excluding the cash flow impacts of any interest rate or cross currency swaps. Current floating interest rates and currency exchange rates are assumed to be constant throughout the periods presented. The “derivative payments” line includes the floating rate payment obligations, which are paid to counterparties under our interest rate and cross currency swap agreements, £530 million ($1,038 million at December 31, 2006 exchange rates) payment due to the cross currency swap counterparty in 2012, and $300 million (CAD $350 million at December 31, 2006 exchange rates) payment due to the cross currency swap counterparty in 2010. Current floating interest rates and currency exchange rates are assumed to be constant throughout the periods presented. We will be receiving a total of $1,493 million in fixed and floating rate payments from our counterparties under the swap agreements, which offset the payments included in the table. As interest rates increase, payments to or receipts from our counterparties will also increase. Net interest payments, including swap receipts and payments, over the periods presented are as follows (in thousands):

Total		Less than 1 year		1 - 3 years		4 - 5 years		After 5 years
$	1,075,320	$	136,576	$	272,169	$	261,814	$	404,761

(3) Represents expected contributions under our defined benefit pension plans in the next twelve months and our benefits payments under retiree medical plans for all periods presented.

(4) Includes a U.K. sale-leaseback included in a global information services agreement signed with Electronic Data Systems (EDS) late in 2003, effective January 2004. The EDS contract includes services to our Canada, U.S. and U.K. operations and our corporate office and, unless extended, will expire in 2010.

(5) Approximately $3,781 million of the total other long-term obligations relate to long-term supply contracts with third parties to purchase raw material and energy used in production, including our contract with Graphic Packaging Corporation, a related party, dated March 25, 2003. Approximately $662 million relates to commitments associated with Tradeteam in the United Kingdom. The remaining amounts relate to sales and marketing, information technology services, open purchase orders and other commitments.

Other Commercial Commitments as of December 31, 2006

	Amount of commitment expiration per period
	Total amounts committed			Less than 1 year		1 - 3 years		4 - 5 years		After 5 years
	(In thousands)
Standby letters of credit		$	55,353		54,368		985		—		—

Advertising and Promotions

As of December 31, 2006, our aggregate commitments for advertising and promotions, including marketing at sports arenas, stadiums and other venues and events, total approximately $951.8 million over the next five years and thereafter. Our advertising and promotions commitments are included in other long-term obligations in the table above.

Pension Plans

Our consolidated, unfunded pension position at the end of 2006 was approximately $359 million, a decrease of $441 million from the end of 2005. The funded positions of pension plans in each of the Canada, U.S. and U.K. improved due to improved asset returns, higher interest rates (which have the effect of decreasing the discounted pension liabilities), contributions to the plans, plan changes and reductions in U.K. staffing levels. Approximately $12 million of the underfunded pension position at the end of 2006 was the responsibility of the minority owners of BRI. See discussion below regarding the adoption of SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, 106, and 132(R).”

We fund pension plans to meet the minimum requirements set forth in applicable employee benefits laws. Sometimes we voluntarily increase funding levels to meet expense and asset return forecasts in any given year. Pension contributions on a consolidated basis were $155 million in 2006, reflecting statutory contribution levels in Canada and the United Kingdom, and $23 million of voluntary contributions in the United States. We anticipate making approximately $185 million of both statutory and voluntary contributions to our pension plans in 2007.

Consolidated pension expense was $33 million in 2006, a decrease of $32 million from 2005. Decreases in the U.S. and U.K. of $12 million and $13 million, respectively, were attributable mainly to higher expected returns on plan assets in 2006 and a pension curtailment in the U.K.

As a result of employee restructuring activities associated with the Europe segment supply chain operations, a pension curtailment was recognized in the second quarter of 2006. The curtailment triggered a remeasurement of the pension assets and liabilities as of April 30, 2006. Additionally, as a result of the curtailment, a gain of $5.3 million was recognized and presented as a special item in the statement of operations in the second quarter of 2006. This gain arose from the reduction in estimated future working lifetimes of plan participants resulting in the acceleration of the recognition of a prior service benefit. This prior service benefit was generated by plan changes in previous years and was deferred on the balance sheet and amortized into earnings over the then expected working lifetime of plan participants of approximately 10 years. In addition, this curtailment event required a remeasurement of the projected benefit obligation and plan assets, which resulted in an $11.8 million reduction in the projected benefit obligation at April 30, 2006 (See Note 16 to the Consolidated Financial Statements in Item 8), which was recognized in other comprehensive income in the second quarter of 2006.

We anticipate pension expense on a consolidated basis for 2007 to approximate $9 million. This lower expense amount for 2007, when compared to 2006, reflects an estimated pension benefit from the U.K. pension plan of approximately $19 million for 2007.

Postretirement Benefit Plans

Our consolidated, unfunded postretirement benefit position at the end of 2006 was approximately $402 million, an increase of $25 million from the end of 2005. Benefits paid under our postretirement benefit plans were approximately $22 million in 2006 and in 2005. Under our postretirement benefit plans we expect payments of approximately $24 million in 2007. See discussion below regarding the adoption of SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, 106, and 132(R).”

Consolidated postretirement benefit expense was $35 million in 2006, an increase of $10 million from 2005, attributable mainly to our Canada segment plans. We anticipate postretirement benefit expense on a consolidated basis for 2007 of approximately $31 million.

Contingencies

In the ordinary course of business or in the course of the sale of a business, we enter into contractual arrangements under which we may agree to indemnify third-parties from any losses or guarantees incurred relating to pre-existing conditions for losses or guarantees arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. See Note 20 to the Consolidated Financial Statements in Item 8 under the captions “Environmental,” “Indemnity Obligations—Sale of Kaiser” and “Montréal Canadiens.”

Off-Balance Sheet Arrangements

As of December 31, 2006, we did not have any material off-balance sheet arrangements (as defined in Item 303(a) (4) (ii) of Regulation S-K).

Outlook for 2007

Canada Segment

Consistent with our objective to be a brand-led company, we have continued to build a consumer-preferred portfolio. Our strategic brands grew at mid-single-digit rates during 2006, led by the continuation of double-digit growth from Coors Light and our partner import portfolio. This represents the seventh straight quarter of volume and share growth for Coors Light across all sales regions in Canada. Rickard’s also has continued its solid growth trend, delivering double-digit growth. We will leverage this momentum by applying a range of national and local programs to drive revenue growth in 2007. Our results for 2007 will face a challenging comparison late this year as we cycle the additional week of 2006 sales volume and corresponding profit in Canada.

With regard to costs in Canada, we continue to pursue and achieve the original merger synergy targets and the development of the next phase of our cost reduction initiatives. These synergies and other cost savings successfully offset about half of our cost inflation in Canada in 2006. While we expect to continue to reduce the impact of inflation in 2007 with synergies and other cost savings, cost of goods sold is expected to increase at a low-single-digit rate per barrel in local currency. The increase is due to slightly higher expected labor expenses, lower foreign exchange benefits (associated with USD-denominated costs of goods inputs) and the impact of cycling non-recurring, non-cash 2006 fourth quarter benefits.

In addition to packaging materials, waste reduction, plant productivity and distribution savings, we are re-organizing our selling, general and administrative functions beginning in January 2007. This reorganization initiative is focused on labor savings across all functions, along with reductions in other overhead expenses. The restructuring will cost approximately $9 million, most of which will be expensed in the first quarter of 2007, and is expected to have a payback period of slightly over one year.

We expect continued competitive pressure in 2007, which calls for a balanced approach between long-term strategic brand building and tactics to address short-term competitive activity. In 2006, we redirected

some of our marketing spending to price promotion, particularly in Ontario and Québec. In 2007, we plan to increase investment in our strategic brands, driving a low-single-digit increase in marketing and sales expenses. We will continue to implement initiatives to attack costs to help fund these investments and build the long-term brand equities necessary to be successful in the Canada beer business.

Brewing and/or distribution agreements with other brewers contribute to our revenue and profitability. Miller Brewing Company has sued us to invalidate our licensing arrangement. We are contesting their claim, and currently are in discussions with Miller regarding a resolution of this dispute. However, there can be no assurances that we will arrive at such a resolution. A termination of this contract could result in an impairment of a significant portion of our intangible asset associated with the Miller arrangements, which has a carrying value of approximately $112.0 million at December 31, 2006. During the fourth quarter of 2006, we received notification from the Foster’s Group (Foster’s) that they intend to terminate our U.S. production arrangement with them. We contend that the termination notice is ineffective. A termination of this contract could result in an impairment of a significant portion of our distribution right intangible associated with the Foster’s arrangement, which has a carrying value of approximately $25.0 million at December 31, 2006. More generally, the termination of partner brand agreements would have an unfavorable impact on the profitability of the Canada segment.

Finally, the Canadian Dollar appreciated about 6% in 2006 against the U.S. dollar, providing a significant benefit to our full-year earnings as measured in U.S. dollars. However, if the current trend toward weakening of the Canadian dollar versus the U.S. dollar continues, our 2007 Canada results could be negatively impacted when viewed in U.S. dollars.

U.S. Segment

Throughout 2006, the U.S. business built sales momentum by leveraging its key brand equities and taking a disciplined approach to market, resulting in volume growth for Coors Light, Keystone and Blue Moon. These brands will remain our primary focus in 2007, along with some additional focus on developing our regional brands. In 2007, we will continue to drive sales by building our key retail account business and furthering our alignment with our distributor network. In the first quarter of 2007, we again leveraged our Coors Light National Football League (NFL) sponsorship throughout the playoffs, and we expect our distributors to rebuild inventories of our products in preparation for peak season and the ramp-up of our new Shenandoah, Virginia brewing capacity. On the other hand, we expect challenging economic conditions to continue to impact our volume trends in Puerto Rico. We expect our first quarter results in the U.S. to benefit from a greater-than-normal distributor inventory build from the low levels after the New Year’s holiday.

The U.S. beer price environment improved during 2006. We have seen some progress on front line pricing in the past several months, and going forward we will continue to take a disciplined approach to both front line pricing and discounting, while building our core brand equities to drive growth.

With regard to costs, we expect continued significant inflation challenges during 2007 in our U.S. business. Our first quarter cost of goods sold per barrel will increase because of higher commodity costs, including aluminum and agricultural inputs, partially offset by lower depreciation expense due to the combined effect of selling the Memphis brewery last year and not beginning to depreciate most of the Virginia brewing assets until the second quarter of this year.

In response to these challenges, we are striving to maximize the benefits of our long-term cost initiatives, especially merger synergy savings such as the closing of the Memphis brewery in September 2006 and the opening of our new brewery in Virginia before peak season 2007. Nonetheless, we do not currently expect the benefit of our cost initiatives to fully offset inflationary cost increases under the current outlook for commodities and other inputs. As a result, we expect U.S. cost of goods to increase at a low-single-digit rate in 2007, a somewhat smaller increase than in 2006. If aluminum, diesel fuel or other costs increase substantially, it could present a significant challenge to driving U.S. profit growth in 2007.

Europe Segment

We were very successful in reducing costs and achieved total cost savings of more than $40 million in 2006, which were delivered well above our initial expectations and helped to offset the margin loss that our business sustained during the course of the year. This impressive work contributed substantially to our earnings performance in a very challenging 2006 market and is strengthening the competitive position of this business for the future. The competitive environment in the U.K. beer industry continues to be challenging with a difficult retail environment caused by pressure on consumer spending from increased taxes, interest rates and utility prices that have collectively impacted disposable incomes. Industry economics also continue to exert downward pressure on pricing, driven by retailer consolidation and supplier over-capacity. The overall competitive environment in the U.K. is likely to worsen in 2007 as smoking bans are implemented in all of the country by mid-year. Also, our cost savings opportunities are becoming smaller and more difficult to achieve versus the past two years. We have three main strategies to address these challenges:

· First, we implemented cost reduction initiatives during 2006, and will implement further initiatives during 2007. Early in 2007, we also anticipate a modest flow-through of cost savings implemented in the first half of 2006. Cost savings will become less impactful as we lap the performance of 2006.

· Second, we will continue to invest heavily behind our core lager brands—Carling, Grolsch and Coors Fine Light. We have increased advertising spending around Carling as part of our new marketing campaign and have received positive consumer feedback to our outdoor and television advertising. In 2006 we continued to expand Carling C2, including a launch into the U.K. off-premise channel in the fourth quarter. C2 is a mid-strength lager, that meets changing consumer preferences and lifestyles.

· Third, at retail we continue to roll out our new cold-dispense technologies and distinctive above-bar fonts. This rollout extends our cold platform beyond Carling for a broad group of our strategic brands as we aim to maintain our leadership in cold dispense. This leading retail innovation is driving sales with current retailers, along with increased distribution via new retail outlets. During 2006 we installed 14,000 cold dispense points, and have seen positive results in those outlets.

We face an on-premise smoking ban in three of our markets beginning in 2007: in Wales on April 2nd, in Northern Ireland on April 30th and in England on July 1st. We expect them to be detrimental to the on-premise channel in the short term but potentially to increase the size of the off-premise market as smokers adjust to the ban. This shift to the lower-margin off-premise channel likely will offset only a portion of the negative on-premise volume and profit impact, so the overall impact on volume and margin will still be negative in 2007. Our experience in other markets has been that on-premise sales usually recover at least partially in the years following the implementation of a local smoking ban.

As a part of our ongoing cost reduction efforts across the organization, we expect to incur restructuring costs of approximately $13 million in 2007. These costs, which largely relate to employee severance, are expected to have a payback period of approximately one and a half years.

Industry pricing continues to be the most important source of margin pressure in the U.K. beer business in both the on- and off-premise. The U.K. business is managing pricing by channel, in the context of local competition, while staying focused on our core strategy of building strong brands for the long term.

Corporate

We expect corporate marketing, general and administrative costs to be 15% to 20%, or $20 to $25 million, lower in 2007 partially resulting from aggressive cost reductions which began in the latter part of 2006, contributing $4 to $5 million of cost savings in 2007. In addition, we anticipate also benefiting from the elimination of approximately $17 million of costs due to 1) severance payments; 2) high legal fees

that are not expected to repeat in 2007 and 3) the elimination of certain incentive compensation plans and lower expected payments for ongoing plans. Approximately $8 million of costs that are in direct support of the operating segments will transfer into the respective segments in 2007, with the majority transferring to the U.S. segment. These cost reductions will be offset partially by increased spending related to investments in projects designed to deliver cost reductions across all business segments.

Goodwill

Because there is goodwill included in the carrying value of our three segments, the fair value of the applicable reporting unit was compared to its carrying value during the third quarter of 2006 to determine whether there was goodwill impairment. Most of the goodwill associated with the U.S. and Canada segments originated in the Merger. Similarly, we tested indefinite-lived intangible assets for impairment during the third quarter of 2006, most of which relate to our Canada and Europe segments.

A portion of the Merger goodwill was allocated to the U.S. segment, based on the level of Merger synergy savings expected to accrue to the U.S. segment over time. Our testing during the third quarter of 2006 indicated that the fair values of the reporting units in the U.S. and Canada exceeded their carrying values, resulting in no impairments of goodwill in 2006. However, a reduction in the fair value of the U.S. or Canada segment in the future could lead to goodwill impairment. We also have significant indefinite-lived intangible assets in Canada, associated primarily with core, non-core and partner beer brands, as well as distribution rights. These intangible assets were also evaluated for impairment during the third quarter of 2006, and we determined that their fair values exceeded their carrying values. A reduction in the fair values of these intangibles could lead to impairment charges in the future. Reductions in fair value could occur for a number of reasons, including cost increases due to inflation, an unfavorable beer pricing environment, declines in industry or company-specific beer volume sales, termination of brewing and/or distribution agreements with other brewers.

The goodwill associated with the Europe segment originated in the 2002 purchase of the CBL business by Coors. Our testing during the third quarter of 2006 indicated that the fair value of the CBL reporting unit exceeded its carrying value, resulting in no impairments of goodwill. However, a slight reduction in the fair value of the CBL reporting unit in the future could lead to goodwill impairment. We also have a significant indefinite-lived intangible asset in Europe, associated with the Carling brand, which was also tested in the third quarter of 2006, and no impairment was warranted. Future reductions in the fair value of the Europe business or of specific intangibles could occur for a number of reasons, including cost increases due to inflation, an unfavorable beer pricing environment, and declines in industry or company-specific beer volume sales, which could result in possible impairment of these assets.

Interest

We estimate that corporate interest expense in 2007 will be approximately $115 to $119 million, excluding U.K. trade loan interest income.

Tax

Our tax rate is volatile and may fluctuate with changes in, among other things, the amount of income or loss, our ability to utilize foreign tax credits, and changes in tax laws. On February 21, 2007, the Canadian government enacted a tax technical correction bill that will result in a one-time, non-cash income tax benefit of approximately $90 million in the first quarter of 2007. As a result, we anticipate that our 2007 effective tax rate on income will be in the range of 6% to 11%. Absent this tax law change and resulting benefit, and with no other changes in tax laws or company tax structure, we would expect that our effective tax rate would be in the range of 25% to 30%. We note, however, that there are other pending

tax law changes in Canada that if enacted, would result in further reductions in the range of our 2007 effective tax rate.

Other

The company anticipates that expense related to depreciation and amortization of assets will decline approximately 10% in 2007 versus 2006 excluding special items, due to the net effect of five factors:

· Substantial existing assets will have been fully depreciated, so expense related to these assets is expected to be significantly lower in 2007 than 2006.

· Sale of the Memphis brewery in September 2006 eliminates depreciation expense for this facility, including approximately $60 million of accelerated depreciation in 2006 to reduce the facility’s carrying value to equal its salvage value.

· Adding packaging capacity in our Toronto and Virginia facilities during 2006 and brewing capacity in our Virginia facility in the first half of 2007.

· We are evaluating the estimated useful lives of a substantial portion of our property, plant and equipment on a global basis, in light of improvements in maintenance, new technology and changes in expected patterns of usage. We expect this evaluation to result in an adjustment of useful lives—favorably and unfavorably—for a wide range of existing assets.

· Installing cold dispense units in pubs and restaurants in the U.K.

Changes to our capital spending plans or other changes in our asset base could alter this forward view of depreciation expense.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. We review our accounting policies on an on-going basis. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. By their nature, estimates are subject to uncertainty. Actual results may differ materially from these estimates under different assumptions or conditions. We have identified the accounting estimates below as critical to our financial condition and results of operations:

Pension and Postretirement Benefits

We have defined benefit plans that cover the majority of our employees in Canada, the United States and the United Kingdom. We also have postretirement welfare plans in Canada and the United States that provide medical benefits for retirees and eligible dependents and life insurance for certain retirees. The accounting for these plans is subject to the guidance provided in Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions” (SFAS 87) and Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions” (SFAS 106). These statements require that management make certain assumptions relating to the long-term rate of return on plan assets, discount rates used to measure future obligations and expenses, salary increases, inflation, health care cost trend rates and other assumptions. We believe that the accounting estimates related to our pension and postretirement plans are critical accounting estimates because they are highly susceptible to change from period to period based on market conditions. See discussion below regarding

the adoption of SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, 106, and 132(R).”

We performed an analysis of high quality corporate bonds at the end of 2006 and compared the results to appropriate indices and industry trends to support the discount rates used in determining our pension liabilities in Canada, the United States, and the United Kingdom for the year ended December 31, 2006. Discount rates and expected rates of return on plan assets are selected at the end of a given fiscal year and impact expense in the subsequent year. A 50 basis point change in certain assumptions made at the beginning of 2006 would have had the following effects on 2006 pension expense: