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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File No. 1-2217
The Coca-Cola Company
(Exact name of Registrant as specified in its Charter)
Delaware 58-0628465
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Coca-Cola Plaza 30313
Atlanta, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (404) 676-2121
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date.
Class of Common Stock Outstanding at October 25, 2002April 11, 2003
--------------------- ------------------------------------------------------------
$.25 Par Value 2,479,112,7032,463,263,275 Shares
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THE COCA-COLA COMPANY AND SUBSIDIARIES
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
Three and nine months ended September 30,March 31, 2003 and 2002 and 2001 3
Condensed Consolidated Balance Sheets
September 30, 2002March 31, 2003 and December 31, 20012002 5
Condensed Consolidated Statements of Cash Flows
NineThree months ended September 30,March 31, 2003 and 2002 and 2001 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 2521
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 4034
Item 4. Controls and Procedures 4034
Part II. Other Information
Item 1. Legal Proceedings 414. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 4238
2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ---------
NET OPERATING REVENUES $ 5,322 $ 4,695 $ 14,769 $ 13,307
Cost of goods sold 2,083 1,692 5,404 4,616
---------- ---------- ---------- ---------
GROSS PROFIT 3,239 3,003 9,365 8,691
Selling, administrative and
general expenses 1,694 1,692 4,915 4,587
---------- ---------- ---------- ---------
OPERATING INCOME 1,545 1,311 4,450 4,104
Interest income 46 68 156 227
Interest expense 52 66 156 234
Equity income (loss) - net 113 104 350 167
Other income (loss) - net (62) 26 (292) 23
Gain on issuances of stock
by equity investee - 91 - 91
---------- ---------- ---------- ---------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 1,590 1,534 4,508 4,378
Income taxes 429 460 1,256 1,313
---------- ---------- ---------- ---------
NET INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 1,161 1,074 3,252 3,065
Cumulative effect of
accounting change for SFAS
No. 142, net of income taxes:
Company operations - - (367) -
Equity investees - - (559) -
Cumulative effect of
accounting change for SFAS
No. 133, net of income taxes - - - (10)
---------- ---------- ---------- ---------
NET INCOME $ 1,161 $ 1,074 $ 2,326 $ 3,055
========== ========== ========== =========
BASIC NET INCOME PER SHARE:
Before accounting change $ .47 $ .43 $ 1.31 $ 1.23
Cumulative effect of
accounting change - - (.37) -
---------- ---------- ---------- ---------
$ .47 $ .43 $ .94 $ 1.23
========== ========== ==========Three Months Ended
March 31,
-----------------------
2003 2002
-------- --------
NET OPERATING REVENUES $ 4,498 $ 4,079
Cost of goods sold 1,602 1,394
-------- --------
GROSS PROFIT 2,896 2,685
Selling, general and administrative expenses 1,661 1,527
Other operating charges 159 -
-------- --------
OPERATING INCOME 1,076 1,158
Interest income 56 58
Interest expense 45 46
Equity income (loss) 49 61
Other income (loss) - net (13) (175)
-------- --------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 1,123 1,056
Income taxes 288 324
-------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 835 732
Cumulative effect of accounting change for
SFAS No. 142, net of income taxes:
Company operations - (367)
Equity investees - (559)
-------- --------
NET INCOME (LOSS) $ 835 $ (194)
======== ========
BASIC NET INCOME (LOSS) PER SHARE:
Before accounting change $ .34 $ .29
Cumulative effect of accounting change - (.37)
-------- --------
$ .34 $ (.08)
======== ========
DILUTED NET INCOME (LOSS) PER SHARE:
Before accounting change $ .34 $ .29
Cumulative effect of accounting change - (.37)
-------- --------
$ .34 $ (.08)
======== =========
DIVIDEND PER SHARE $ .22 $ .20
======== ========
3
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ---------
DILUTED NET INCOME PER SHARE:
Before accounting change $ .47 $ .43 $ 1.31 $ 1.23
Cumulative effect of
accounting change - - (.37) -
---------- ---------- ---------- ---------
$ .47 $ .43 $ .94 $ 1.23
========== ========== ========== =========
DIVIDENDS PER SHARE $ .20 $ .18 $ .60 $ .54
========== ========== ========== =========
AVERAGE SHARES OUTSTANDING 2,479 2,488 2,481 2,487
Effect of dilutive
securities 3 - 2 -
---------- ---------- ---------- ---------
AVERAGE SHARES OUTSTANDING
ASSUMING DILUTION 2,482 2,488 2,483 2,487
========== ========== ========== =========
Three Months Ended
March 31,
-----------------------
2003 2002
-------- --------
AVERAGE SHARES OUTSTANDING 2,469 2,481
Effect of dilutive securities 3 5
-------- --------
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,472 2,486
======== ========
See Notes to Condensed Consolidated Financial Statements.
4
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except share data)
ASSETS
September 30, December 31,
2002 2001
------------- ------------
CURRENT
Cash and cash equivalents $ 2,647 $ 1,866
Marketable securities 146 68
---------- ----------
2,793 1,934
Trade accounts receivable, less
allowances of $51 at September 30
and $59 at December 31 2,183 1,882
Inventories 1,287 1,055
Prepaid expenses and other assets 1,985 2,300
---------- ----------
TOTAL CURRENT ASSETS 8,248 7,171
---------- ----------
INVESTMENTS AND OTHER ASSETS
Equity method investments
Coca-Cola Enterprises Inc. 924 788
Coca-Cola Amatil Limited 473 432
Coca-Cola Hellenic Bottling Co SA 854 791
Other, principally bottling companies 2,281 3,117
Cost method investments,
principally bottling companies 250 294
Other assets 3,059 2,792
---------- ----------
7,841 8,214
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land 357 217
Buildings and improvements 2,274 1,812
Machinery and equipment 5,712 4,881
Containers 347 195
---------- ----------
8,690 7,105
Less allowances for depreciation 3,003 2,652
---------- ----------
5,687 4,453
---------- ----------
TRADEMARKS AND OTHER INTANGIBLE ASSETS 3,524 2,579
---------- ----------
$ 25,300 $ 22,417
========== ==========
------
March 31, December 31,
2003 2002
----------- ------------
CURRENT
Cash and cash equivalents $ 3,015 $ 2,126
Marketable securities 178 219
----------- -----------
3,193 2,345
Trade accounts receivable, less
allowances of $54 at March 31
and $55 at December 31 2,088 2,097
Inventories 1,363 1,294
Prepaid expenses and other assets 1,759 1,616
----------- -----------
TOTAL CURRENT ASSETS 8,403 7,352
----------- -----------
INVESTMENTS AND OTHER ASSETS
Equity method investments
Coca-Cola Enterprises Inc. 959 972
Coca-Cola Hellenic Bottling Company S.A. 947 872
Coca-Cola Amatil Limited 525 492
Other, principally bottling companies 2,279 2,401
Cost method investments,
principally bottling companies 238 254
Other assets 2,993 2,694
----------- -----------
7,941 7,685
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Land 398 385
Buildings and improvements 2,426 2,332
Machinery and equipment 6,111 5,888
Containers 423 396
----------- -----------
9,358 9,001
Less allowances for depreciation 3,231 3,090
----------- -----------
6,127 5,911
----------- -----------
TRADEMARKS WITH INDEFINITE LIVES 1,816 1,724
GOODWILL AND OTHER INTANGIBLE ASSETS 2,035 1,829
----------- -----------
TOTAL ASSETS $ 26,322 $ 24,501
=========== ===========
5
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except share data)
LIABILITIES AND SHARE-OWNERS' EQUITY
September 30, December 31,
2002 2001
------------- ------------
CURRENT
Accounts payable and accrued expenses $ 4,311 $ 3,679
Loans and notes payable 2,518 3,743
Current maturities of long-term debt 205 156
Accrued income taxes 1,077 851
---------- ----------
TOTAL CURRENT LIABILITIES 8,111 8,429
---------- ----------
LONG-TERM DEBT 2,835 1,219
---------- ----------
OTHER LIABILITIES 2,199 961
---------- ----------
DEFERRED INCOME TAXES 543 442
---------- ----------
SHARE-OWNERS' EQUITY
Common stock, $.25 par value
Authorized: 5,600,000,000 shares
Issued: 3,494,677,095 shares at
September 30; 3,491,465,016 shares
at December 31 874 873
Capital surplus 3,635 3,520
Reinvested earnings 24,279 23,443
Accumulated other comprehensive income
and unearned compensation on restricted
stock (3,020) (2,788)
---------- ----------
25,768 25,048
Less treasury stock, at cost
(1,014,762,225 shares at September 30;
1,005,237,693 shares at December 31) 14,156 13,682
---------- ----------
11,612 11,366
---------- ----------
$ 25,300 $ 22,417
========== ==========------------------------------------
March 31, December 31,
2003 2002
----------- ------------
CURRENT
Accounts payable and accrued expenses $ 4,194 $ 3,692
Loans and notes payable 3,198 2,475
Current maturities of long-term debt 188 180
Accrued income taxes 1,071 994
----------- ------------
TOTAL CURRENT LIABILITIES 8,651 7,341
----------- ------------
LONG-TERM DEBT 2,760 2,701
----------- ------------
OTHER LIABILITIES 2,411 2,260
----------- ------------
DEFERRED INCOME TAXES 365 399
----------- ------------
SHARE-OWNERS' EQUITY
Common stock, $.25 par value
Authorized: 5,600,000,000 shares
Issued: 3,491,653,401 shares at March 31;
3,490,818,627 shares at December 31 873 873
Capital surplus 3,987 3,857
Reinvested earnings 24,799 24,506
Accumulated other comprehensive income (loss) (2,811) (3,047)
----------- ------------
26,848 26,189
Less treasury stock, at cost
(1,028,360,984 shares at March 31;
1,019,839,490 shares at December 31) 14,713 14,389
----------- ------------
12,135 11,800
----------- ------------
TOTAL LIABILITIES AND SHARE-OWNERS' EQUITY $ 26,322 $ 24,501
=========== ============
See Notes to Condensed Consolidated Financial Statements.
6
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
Nine Months Ended
September 30,
-----------------------------
2002 2001
-------- --------
OPERATING ACTIVITIES
Net income $ 2,326 $ 3,055
Depreciation and amortization 599 571
Deferred income taxes (56) (45)
Equity income or loss, net of dividends (252) (83)
Foreign currency adjustments (12) (47)
Gain on issuances of stock by equity investee - (91)
Gains on sale of assets, including bottling interests (8) (33)
Cumulative effect of accounting changes 926 10
Other items 274 34
Net change in operating assets and liabilities (392) (318)
-------- --------
Net cash provided by operating activities 3,405 3,053
-------- --------
INVESTING ACTIVITIES
Acquisitions and investments,
principally trademarks and bottling companies (415) (308)
Purchases of investments and other assets (115) (365)
Proceeds from disposals of investments
and other assets 277 179
Purchases of property, plant and equipment (582) (528)
Proceeds from disposals of property, plant
and equipment 55 70
Other investing activities 49 112
-------- --------
Net cash used in investing activities (731) (840)
-------- --------
FINANCING ACTIVITIES
Issuances of debt 1,402 2,660
Payments of debt (1,939) (3,225)
Issuances of stock 97 155
Purchases of stock for treasury (478) (219)
Dividends (994) (897)
-------- --------
Net cash used in financing activities (1,912) (1,526)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS 19 (11)
-------- --------
CASH AND CASH EQUIVALENTS
Net increase during the period 781 676
Balance at beginning of period 1,866 1,819
-------- --------
Balance at end of period $ 2,647 $ 2,495Three Months Ended
March 31,
-----------------------
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ 835 $ (194)
Depreciation and amortization 198 195
Stock-based compensation expense 116 109
Deferred income taxes (103) (62)
Equity income or loss, net of dividends (35) (57)
Foreign currency adjustments (58) 56
Gains on sale of assets, including bottling interests (18) (8)
Cumulative effect of accounting change - 926
Other operating charges 152 -
Other items 3 122
Net change in operating assets and liabilities (491) (126)
-------- --------
Net cash provided by operating activities 599 961
-------- --------
INVESTING ACTIVITIES
Acquisitions and investments,
principally trademarks and bottling companies (130) (215)
Purchases of investments and other assets (20) (58)
Proceeds from disposals of investments
and other assets 130 74
Purchases of property, plant and equipment (195) (175)
Proceeds from disposals of property, plant
and equipment 7 22
Other investing activities 59 23
-------- --------
Net cash used in investing activities (149) (329)
-------- --------
FINANCING ACTIVITIES
Issuances of debt 1,026 536
Payments of debt (311) (602)
Issuances of stock 12 30
Purchases of stock for treasury (342) (183)
-------- --------
Net cash provided by (used in) financing activities 385 (219)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS 54 (11)
-------- --------
CASH AND CASH EQUIVALENTS
Net increase during the period 889 402
Balance at beginning of period 2,126 1,866
-------- --------
Balance at end of period $ 3,015 $ 2,268
======== ========
See Notes to Condensed Consolidated Financial Statements.
7
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information
and notes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been no
material change in the information disclosed in the notes to the consolidated
financial statements included in the Annual Report on Form 10-K of The Coca-Cola
Company (together with its subsidiaries, the Company or our Company) for the year ended December 31, 2001.2002. When used in these notes, the
terms "Company," "we," "us" or "our" mean The Coca-Cola Company and its
divisions and subsidiaries. In the opinion of management, all adjustments
(consisting of(including normal recurring accruals), as well as the accounting change to
adopt Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," considered necessary for a fair
presentation have been included. Operating results for the three and nine month periodsperiod
ended September
30, 2002March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.2003.
Certain amounts in our prior period financial statements have been
reclassified to conform to the current period presentation. Additionally, first
quarter 2002 results were restated related to the Company's adoption of the
preferable fair value recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
under the modified prospective transition method selected by our Company as
described in SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure." Refer to Note H.
Note B - Seasonality
- --------------------
Sales of nonalcoholic beverages are somewhat seasonal, with the second and
third calendar quarters accounting for the highest sales volumes in the Northern
Hemisphere. The volume of sales in the beverages business may be affected by
weather conditions.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note C - Comprehensive Income (Loss)
- ------------------------------------
Total comprehensive income (loss) for the three months ended September 30,March 31, 2003
and 2002 and
2001 was comprised of the following:
For the three months ended September 30,
----------------------------------------
2002 2001
--------- ---------
Net income $ 1,161 $ 1,074
Net foreign currency translation
gain/(loss) (241) 140
Net gain (loss) on derivative financial
instruments 17 (27)
Net change in unrealized gain (loss) on
available-for-sale securities (68) (26)
Minimum pension liability - -
-------- --------
Total Comprehensive Income $ 869 $ 1,161
======== ========
Total comprehensive income for the nine months ended September 30,March 31,
------------------------------------
2003 2002
and
2001 was comprised of the following:
For the nine months ended September 30,
---------------------------------------
2002 2001
--------- ---------
Net income $ 2,326 $ 3,055
Net foreign currency translation
gain/(loss) (157) 1
Net gain (loss) on derivative financial
instruments (99) 27
Cumulative effect of adopting
SFAS No. 133, net - 50
Net change in unrealized gain (loss) on
available-for-sale securities (1) (19)
Minimum pension liability (33) -
--------- ---------
Total Comprehensive Income $ 2,036 $ 3,114
========= =========
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note C - Comprehensive Income (Loss) (Continued)---- ---
Net income (loss) $ 835 $ (194)
Net foreign currency translation
for the three months and nine months ended
September 30, 2002 was impacted primarily by the weakening of Latin American
currencies. For the nine months ended September 30, 2002, this impact was
partially offset by strengthening of certain currencies since December 31, 2001,
including the Japanese yen and the euro, against the U.S. dollar, primarily in
the second quarter of 2002.gain (loss) 267 (140)
Net gain (loss) on derivative financial
instruments 3 (16)
Net change in unrealized gain (loss) on
available-for-sale securities (2) 78
Net change in minimum pension liability (32) -
--------- ---------
Total comprehensive income (loss) $ 1,071 $ (272)
========= =========
Net foreign currency translation gain (loss) for the three months and nine months ended September 30, 2002 was impactedMarch
31, 2003 resulted primarily by changes infrom the fair valuestrengthening of outstanding hedging instruments
primarily related tocertain currencies against
the U.S. dollar, particularly the euro and the Japanese yen and the reclassification of net gains into
earnings. Fluctuations in the value of the hedging instruments are generally
offset by changes in the fair value or cash flows of the underlying exposures
being hedged.
10yen.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note D - Accounting Pronouncements
Effective January 1, 2002, our Company adopted SFAS No. 142. For information
regarding trademarks and other intangible assets and the impact the adoption of
SFAS No. 142 had on our Condensed Consolidated Financial Statements, refer to
Note F.- ----------------------------------
Effective January 1, 2002, our Company adopted the fair value method defined
in SFAS No. 123, "Accounting for Stock-Based Compensation."123. For information regarding the adoption of the fair value method
defined in SFAS No. 123, refer to Note I.H.
Effective January 1, 2002, our2003, the Company adopted the provisions ofSFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 01-9, "Accounting94-3,
"Liability Recognition for Consideration Given byCertain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a VendorRestructuring)." SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
plan be recognized when the liability is incurred. Under SFAS 146, an exit or
disposal plan exists when the following criteria are met:
* Management having the authority to approve the action, commits to a Customerplan of
termination.
* The plan identifies the number of employees to be terminated, their job
classifications or a Resellerfunctions and their locations, and the expected
completion date.
* The plan establishes the terms of the Vendor's Products."benefit arrangement, including the
benefits that employees will receive upon termination (including but not
limited to cash payments), in sufficient detail to enable employees to
determine the type and amount of benefits they will receive if they are
involuntarily terminated.
* Actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be
withdrawn.
SFAS No. 146 establishes that fair value is the objective for initial
measurement of the liability. In cases where employees are required to render
service until they are terminated in order to receive termination benefits, a
liability for termination benefits is recognized ratably over the future service
period. Under EITF Issue No. 01-9 codifies94-3, a liability for the entire amount of the exit
cost was recognized at the date that the entity met the four criteria described
above. For information regarding the impact of adopting SFAS No. 146 and reconciles the
Task Force consensusesimpact of the streamlining initiatives that the Company has undertaken during
the first quarter of 2003, refer to Note G.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note D - Accounting Pronouncements (Continued)
- ---------------------------------------------
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." This
interpretation elaborates on all or specific
aspects of EITF Issues No. 00-14, "Accounting for Certain Sales Incentives," No.
00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based
Sales Incentives Offers, and Offers for Free Products or Servicesthe disclosures to be Deliveredmade by a guarantor in
interim and annual financial statements about the Future," and No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products"
and identifies other related interpretive issues. The types of sales incentives
provided by our Company to resellers, vendors or customers of our Company's
products principally include participation in sales promotion programs and
volume based incentives.obligations under certain
guarantees. Our Company adopted the disclosure provisions of EITF IssuesFASB Interpretation
No. 00-14 and No. 00-22 on January 1, 2001, resulting in income statement
reclassification45 as of certain sales incentives. Upon adoption, the Company reduced
both net operating revenues and selling, administrative and general expenses by
approximately $142 million for the three months ended September 30, 2001,
approximately $445 million for the nine months ended September 30, 2001 and
approximately $580 million for the year ended December 31, 2001. EITF Issue2002. FASB Interpretation No. 01-9 requires certain selling expenses incurred by the Company, not previously
reclassified, to be classified as deductions from revenue. The adoption of the
remaining items included in EITF Issue No. 01-9 resulted in the Company reducing
both net operating revenues and selling, administrative and general expenses by
approximately $702 million for the three months ended September 30, 2001, and
approximately $1,862 million for the nine months ended September 30, 2001. The
full year amount of the reclassification for 2001 was approximately $2.5
billion. These reclassifications have no impact on operating income.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138. The adoption of SFAS No. 133 resulted in the Company recording
transition adjustments45 also clarifies that a
guarantor is required to recognize, its derivative instruments at fair value and
to recognize the ineffective portioninception of a guarantee, a liability
for the change in fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. In 2003, we adopted the initial recognition and initial
measurement provisions of FASB Interpretation No. 45. We do not currently
provide significant guarantees on a routine basis. As a result, this
interpretation has not had a material impact on our financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation addresses the consolidation of
business enterprises (variable interest entities) to which the usual condition
of consolidation does not apply. This interpretation focuses on financial
interests that indicate control. It concludes that in the absence of clear
control through voting interests, a company's exposure (variable interest) to
the economic risks and potential rewards from the variable interest entity's
assets and activities are the best evidence of control. Variable interests are
rights and obligations that convey economic gains or losses from changes in the
values of the variable interest entity's assets and liabilities. Variable
interests may arise from financial instruments, service contracts, nonvoting
ownership interests and other arrangements. If an enterprise holds a majority of
the variable interests of an entity, it would be considered the primary
beneficiary. The primary beneficiary would be required to include assets,
liabilities and the results of operations of the variable interest entity in its
derivatives. The cumulative effect of these transition adjustments was an
after-tax reductionfinancial statements. This interpretation applies immediately to net income of approximately $10 million and an after-tax
net increasevariable
interest entities that are created after or for which control is obtained after
January 31, 2003. For variable interest entities created prior to accumulated other comprehensive income of approximately $50
million.February 1,
2003, the provisions would be applied effective July 1, 2003.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note D - Accounting Pronouncements (Continued)
- ---------------------------------------------
Our Company holds variable interests in certain entities, primarily bottlers,
that are currently accounted for under the equity method of accounting. As a
result, these entities may be considered variable interest entities, and it is
reasonably possible that the Company may be required to consolidate such
variable interest entities when FASB Interpretation No. 46 becomes effective on
July 1, 2003. The difference between consolidation and the equity method impacts
certain financial ratios because of the presentation of the detailed line items
reported in the financial statements. However, consolidated net income for the
period and our share-owners' equity at the end of the period are the same
whether the investment in the company is accounted for under the equity method
or the company is consolidated. We do not expect this interpretation to have a
material impact on our financial statements because the entities that we may be
required to consolidate are not material to our financial statements.
Note E - Acquisitions
Effective February 2002,- ---------------------
In March 2003, our Company assumed controlacquired a 100 percent ownership interest in
Truesdale Packaging Company LLC (Truesdale) from Coca-Cola Enterprises Inc. for
cash consideration of approximately $60 million. Truesdale owns noncarbonated
beverage production facilities. The purchase price was primarily allocated to
the property, plant and equipment acquired. No amount has been allocated to
intangible assets. The purchase price allocation is subject to refinement.
In November 2001, we entered into a Control and Profit and Loss Transfer
Agreement (CPL) with Coca-Cola Erfrischungsgetraenke AG (CCEAG),. Under the largest bottlerterms
of the CPL, our Company acquired management control of CCEAG. In November 2001,
we also entered into a Pooling Agreement with certain share owners of CCEAG that
provided our Company with voting control of CCEAG. Both agreements became
effective in Germany.February 2002, when our Company acquired control of CCEAG, for a
term ending no later than December 31, 2006. CCEAG is included in our Europe,
Eurasia and Middle East operating segment. As a result of acquiring control of
CCEAG, our Company is working to help focus its sales and marketing programs and
assist in developing the business. This transaction was accounted for as a
business combination, and the consolidated
results of CCEAG's operations have been included
in the Company's Condensed
Consolidated Financial Statementsfinancial statements since February 2002. Prior to February
2002, CCEAG wasour Company accounted for by our CompanyCCEAG under the equity method of accounting. OurAs
of December 31, 2002, our Company hashad an approximate 41 percent ownership
interest in the outstanding shares of CCEAG. In accordance with the terms of a Control and Profit and Loss
Transfer Agreement (CPL) with certain share owners of CCEAG, our Company
obtained managementreturn for control of CCEAG,
for a period of uppursuant to five years. In return
for the management control of CCEAG, the CompanyCPL we guaranteed annual payments, in lieu of dividends by
CCEAG, to all other CCEAG share owners. These guaranteed annual payments equal
..76 euro for each CCEAG share outstanding. Additionally, all other CCEAG share
owners entered into either a put or a put/call option agreement with the
Company, exercisable at the end of the term of the CPL agreement at agreed prices. Our
Company entered into either put or put/call agreements for shares representing
an approximate 59 percent interest in CCEAG. The spread in the strike prices of
the put and call options is approximately 3 percent.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note E - Acquisitions (Continued)
- --------------------------------
As of the date of the transaction, the Company concluded that the exercise of
the put and/or call agreements was a resultvirtual certainty based on the minimal
differences in the strike prices. We concluded that either the holder of assuming controlthe put
option would require the Company to purchase the shares at the agreed-upon put
strike price, or the Company would exercise its call option and require the
share owner to tender its shares at the agreed-upon call strike price. The
holders of the puts or calls may exercise their rights at any time up to the
expiration date, which in this case is in five years. If these rights are
exercised, the actual transfer of shares would not occur until the end of the
term of the CPL. Coupled with the guaranteed payments in lieu of dividends for
the term of the CPL, these instruments represented the financing vehicle for the
transaction. As such, the Company determined that the economic substance of the
transaction resulted in the acquisition of the remaining outstanding shares of
CCEAG ourand required the Company expects to help
focus its salesaccount for the transaction as a business
combination. Furthermore, the terms of the CPL transfer control and marketing programsall of the
economic risks and assist in developingrewards of CCEAG to the business.Company immediately.
The present value of the total amount likely to be paid by our Company to all
other CCEAG share owners, including the put or put/call payments and the
guaranteed annual payments in lieu of dividends, is approximately $700$820 million
at September 30, 2002.March 31, 2003. This amount has increased from the initial liability of
approximately $600 million due to the accretion of the discounted value to the
ultimate maturity of the liability described below, as well as approximately
$80$160 million of translation adjustment related to this liability. This liability
is included in the caption "Other Liabilities" in the Condensed Consolidated
Balance Sheet.Other Liabilities. The accretion of thisthe discounted
value to its ultimate maturity value which is recorded in the caption "Other income (loss)Other Income
(Loss) - net" in the
Condensed Consolidated Statement of Income,Net, and this amount was approximately $11$12 million and $27$6 million for
the three months ended March 31, 2003 and nine months ended September 30,March 31, 2002, respectively. As a result of this transaction, the Company recorded bottler
franchise rights of approximately $925 million and goodwill of approximately $40
million. These amounts are comprised of approximately 41 percent of the historic
book value of CCEAG's franchise rights and goodwill, and approximately 59
percent of the fair value of CCEAG's franchise rights and goodwill computed at
the acquisition date. Such intangible assets were assigned indefinite lives. The
purchase price allocation is subject to refinement.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note E - Acquisitions (Continued)
In separate transactions during 2002, our Company acquired controlling
interests in CCDA Waters, L.L.C. (CCDA) and Cosmos Bottling Corporation (CBC)
for total combined consideration of approximately $328 million. The Company has
initially allocated approximately $250 million of the purchase price for these
acquisitions to goodwill and other indefinite lived intangible assets, primarily
trademarks, brands and licenses. Additionally, the Company has recorded minority
ownership accruals of approximately $242 million related to these acquisitions
in "Other Liabilities." The purchase price allocations for these acquisitions
are subject to refinement. The details of these acquisitions are described
below.
In July 2002, our Company and Danone Waters of North America, Inc. (DWNA)
formed a new company, CCDA, for the production, marketing and distribution of
DWNA's bottled spring and source water business in the United States. In forming
CCDA, DWNA contributed assets of its retail bottled spring and source water
business in the United States. These assets include five production facilities,
a license for the use of the Dannon and Sparkletts brands, as well as ownership
of several value brands. Our Company made a cash payment to acquire a 51 percent
equity interest in CCDA and is also providing marketing, distribution and
management expertise. This transaction was accounted for as a business
combination, and the consolidated results of CCDA's operations have been
included in the Company's Condensed Consolidated Financial Statements since July
2002. This business combination expanded our water brands to include a national
offering in all sectors of the water category with purified, spring and source
waters.
In November 2001, our Company and Coca-Cola Bottlers Philippines, Inc.
(CCBPI) entered into a sale and purchase agreement with RFM Corp. to acquire its
83.2 percent interest in CBC, a publicly traded Philippine beverage company. As
of the date of the agreement, the Company began supplying concentrate for this
operation. The purchase of RFM's interest was finalized on January 3, 2002. On
March 7, 2002, a tender offer was completed with our Company and CCBPI acquiring
all shares of the remaining minority share owners except for shares representing
a one percent interest in CBC. As of September 30, 2002, our Company's direct
ownership interest in CBC is 60.9 percent, and our indirect ownership interest
in CBC is 13.4 percent. This transaction was accounted for as a business
combination, and the results of CBC's operations have been included in the
Company's Consolidated Financial Statements since January 3, 2002. CBC is an
established carbonated soft drink business in the Philippines. Our Company's
goal is to leverage our new partnership with San Miguel Corporation in the
Philippines, as well as leverage our sales, marketing and system resources, to
expand CBC volume and profit over time. The Company and CCBPI have agreed to
restructure the operations of CBC, and this restructuring will result in the
Company owning all acquired trademarks and CCBPI owning all the acquired
bottling assets. This restructuring is expected to be completed in 2003, and no
gain or loss is expected upon completion of the deconsolidation of the bottling
assets.
Had the results of these businesses been included in operations commencing
with 2001, the reported results would not have been materially affected.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note F - Trademarks and Other Intangible Assets
In accordance with SFAS No. 142, goodwill and indefinite lived intangible
assets will no longer be amortized but will be reviewed annually for impairment.
Intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. The amortization provisions of SFAS No.
142 apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company began applying the new accounting rules effective January 1, 2002.
The adoption of SFAS No. 142 required the Company to perform an initial
impairment assessment on all goodwill and indefinite lived intangible assets as
of January 1, 2002. The Company compared the fair value of trademarks and other
intangible assets to current carrying value. Fair values were derived using
discounted cash flow analyses. The assumptions used in these discounted cash
flow analyses were consistent with our internal planning. Valuations were
completed for intangible assets for both the Company and our equity method
investees. For the Company's intangible assets, the cumulative effect of this
change in accounting principle was an after-tax decrease to net income of
approximately $367 million. For the Company's proportionate share of its equity
method investees, the cumulative effect of this change in accounting principle
was an after-tax decrease to net income of approximately $559 million. The
deferred income tax benefit related to the cumulative effect of this change for
the Company's intangible assets was approximately $94 million and for the
Company's proportionate share of its equity method investees was approximately
$123 million.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE FOperating Segments
- Trademarks and Other Intangible Assets (Continued)
The impairment charges resulting in the after-tax decrease to net income for
the cumulative effect of this change by applicable operating segment as of
January 1, 2002, are as follows (in millions):
The Company:
Europe, Eurasia and Middle East $ 33
Latin America 226
Asia 108
----------
Total $ 367
==========
The Company's Proportionate Share of its Equity
Method Investees:
Africa $ 63
Europe, Eurasia and Middle East 400
Latin America 96
----------
Total $ 559
==========
Of the Company's $226 million impairment for Latin America, approximately
$113 million relates to Company-owned Brazilian bottlers' franchise rights. The
Brazilian macroeconomic conditions, the devaluation of the currency and lower
pricing impacted the valuation of these bottlers' franchise rights. The
remainder of the $226 million primarily relates to a $109 million impairment for
certain trademarks in Latin America. In early 1999, our Company formed a
strategic partnership to market and distribute such trademark brands. The
macroeconomic conditions and lower pricing depressed operating margins for these
trademarks.
Of the $108 million impairment for the Company in Asia, $99 million relates
to bottlers' franchise rights in consolidated bottling operations in our
Southeast and West Asia Division. Difficult economic conditions impacted our
business in Singapore, Sri Lanka, Nepal and Vietnam. As a result, bottlers in
these countries experienced lower than expected volume and operating margins.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - Trademarks and Other Intangible Assets (Continued)
For Europe, Eurasia and Middle East equity method investees, a $400 million
impairment was recorded for the Company's proportionate share related to
bottlers' franchise rights. Of this amount, approximately $301 million related
to CCEAG. This impairment was due to a prolonged difficult economic environment
in Germany resulting in continuing losses for CCEAG in east Germany. The market
for nonalcoholic beverages is currently undergoing a transformation. A changing
competitive landscape, continuing price pressure, and growing demand for new
products and packaging were elements impacting CCEAG. The $400 million
impairment also included a $50 million charge for Middle East bottlers'
franchise rights. In our Africa operating segment, a $63 million charge was
recorded for the Company's proportionate share of impairments related to equity
method investee bottlers' franchise rights. These Middle East and Africa
bottlers have challenges as a result of the political instability, and the
resulting economic instability, in their respective regions, which has adversely
impacted financial performance.
A $96 million impairment was recorded for the Company's proportionate share
related to bottlers' franchise rights of Latin America equity method investees.
In South Latin America, the macroeconomic conditions and devaluation of the
Argentine peso significantly impacted the valuation of bottlers' franchise
rights.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - Trademarks and Other Intangible Assets (Continued)
As discussed in Note E above, the Company acquired certain intangible assets
in connection with the business combinations of CCEAG, CBC and CCDA. Because
such assets were assigned indefinite lives, no amortization will be recorded.
The following table sets forth the information for intangible assets subject
to amortization and for intangible assets not subject to amortization (in
millions):
September 30, 2002 December 31, 2001
------------------ -----------------
Amortized intangible assets
(various, principally trademarks):
Gross carrying amount $ 168 $ 160
======== ========
Accumulated amortization $ 73 $ 67
======== ========
Unamortized intangible assets:
Trademarks $ 1,727 $ 1,697
Bottlers' franchise rights 1,327 639
Goodwill 282 108
Other 93 42
-------- --------
Total $ 3,429 $ 2,486
======== ========
Aggregate amortization expense:
For the three months ended
September 30, 2002 $ 3
========
For the nine months ended
September 30, 2002 $ 9
========
Estimated amortization expense:
For the year ending December 31, 2002 $ 12
For the year ending December 31, 2003 12
For the year ending December 31, 2004 11
For the year ending December 31, 2005 11
For the year ending December 31, 2006 8
For the year ending December 31, 2007 8
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - Trademarks and Other Intangible Assets (Continued)
The following table summarizes and reconciles net income before cumulative
effect of accounting change for the three and nine months ended September 30,
2002 and 2001, adjusted to exclude amortization expense recognized in such
periods related to trademarks, bottlers' franchise rights, goodwill, other
indefinite lived intangible assets that are no longer amortized and our
proportionate share of equity method intangibles (in millions except per share
amounts):
For the three months ended September 30,
---------------------------------------
2002 2001
--------- ---------
Reported net income before cumulative effect
of accounting change (1) $ 1,161 $ 1,074
Add back after-tax amounts:
Trademark amortization - 7
Bottlers' franchise rights amortization - 2
Goodwill amortization - 1
Other indefinite lived
intangible amortization - 1
Equity method intangibles amortization - 27
--------- ---------
Adjusted net income before cumulative effect
of accounting change $ 1,161 $ 1,112
========= =========
For the three months ended September 30,
---------------------------------------
2002 2001
--------- ---------
Basic net income per share before
accounting change (1):
Reported net income $ .47 $ .43
Trademark amortization - -
Bottlers' franchise rights amortization - -
Goodwill amortization - -
Other indefinite lived
intangible amortization - -
Equity method intangibles amortization - .02
--------- ---------
Adjusted basic net income per share
before accounting change $ .47 $ .45
========= =========
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - Trademarks and Other Intangible Assets (Continued)
For the three months ended September 30,
---------------------------------------
2002 2001
--------- ---------
Diluted net income per share before
accounting change (1):
Reported net income $ .47 $ .43
Trademark amortization - -
Bottlers' franchise rights amortization - -
Goodwill amortization - -
Other indefinite lived
intangible amortization - -
Equity method intangibles amortization - .02
--------- ---------
Adjusted diluted net income per share
before accounting change $ .47 $ .45
========= =========
For the nine months ended September 30,
--------------------------------------
2002 2001
--------- ---------
Reported net income before cumulative effect
of accounting change (1) $ 3,252 $ 3,065
Add back after-tax amounts:
Trademark amortization - 21
Bottlers' franchise rights amortization - 4
Goodwill amortization - 3
Other indefinite lived
intangible amortization - 3
Equity method intangibles amortization - 81
--------- ---------
Adjusted net income before cumulative effect
of accounting change $ 3,252 $ 3,177
========= =========
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - Trademarks and Other Intangible Assets (Continued)
For the nine months ended September 30,
---------------------------------------
2002 2001
--------- ---------
Basic net income per share before
accounting change (1):
Reported net income $ 1.31 $ 1.23
Trademark amortization - .01
Bottlers' franchise rights amortization - -
Goodwill amortization - -
Other indefinite lived
intangible amortization - -
Equity method intangibles amortization - .03
--------- ---------
Adjusted basic net income per share
before accounting change $ 1.31 $ 1.27
========= =========
For the nine months ended September 30,
---------------------------------------
2002 2001
--------- ---------
Diluted net income per share before
accounting change (1):
Reported net income $ 1.31 $ 1.23
Trademark amortization - .01
Bottlers' franchise rights amortization - -
Goodwill amortization - -
Other indefinite lived
intangible amortization - -
Equity method intangibles amortization - .03
--------- ---------
Adjusted diluted net income per share
before accounting change $ 1.31 $ 1.27
========= =========
(1) Basic and diluted net income per share amounts are rounded to the nearest
$.01, and after-tax amounts are rounded to the nearest million; therefore, such
rounding may slightly impact amounts presented.
20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note G - Operating Segments---------------------------
The Company's operating structure includes the following operating segments:
North America (including The Minute Maid Company); Africa; Europe, Eurasia and
Middle East; Latin America; Asia; and Corporate. North America includes the
United States, Canada and Puerto Rico. During the first quarter of 2002, the
Egypt Region was relocated from Europe, Eurasia and Middle East to Africa. Prior period amounts have been
reclassified to conform to the current period presentation.
Information about our Company's operations as of and for the three months
ended September 30,March 31, 2003 and 2002, and 2001, by operating segment, is as follows (in
millions):
Europe,
North Eurasia and Latin
America Africa Middle East America Asia Corporate Consolidated
------- ------ ------------ --------- -------- --------- ------------
20022003
- ----
Net operating
revenues $ 1,436 $ 175 $ 1,289 $ 483 $ 1,086 $ 29 $ 4,498
Operating
income (1) (2) $ 1,706 $ 164 $ 1,518 $ 487 $ 1,400 $ 47 $ 5,322254 67 348 242 348 (183) 1,076
Income before
income taxes and
cumulative effect
of accounting
change (1) 434 69 480 228 504 (125) 1,590270 64 329 269 360 (169) 1,123
Identifiable
operating
assets (3) 5,153 539 4,665 1,032 2,545 6,584 20,5185,270 585 4,963 1,214 2,587 6,755 21,374
Investments (4) 143 79 1,050 1,366 1,144 1,000 4,782
2001102 109 1,230 1,322 1,180 1,005 4,948
2002
- ----
Net operating
revenues $ 1,4801,362 $ 158145 $ 1,2061,017 $ 525543 $ 1,295978 $ 3134 $ 4,6954,079
Operating income 338 55 329 271 355 (190) 1,158
Income before
income taxes and
cumulative effect
of accounting
change (5) 359 64 321 305 528 (43) 1,534(2) 341 57 304 239 360 (245) 1,056
Identifiable
operating
assets 4,268 525 2,354 1,641 2,066 5,964 16,8184,718 478 4,433 1,493 2,014 5,976 19,112
Investments 141 226 1,826 1,677 1,067 910 5,847
Intercompany transfers between operating segments are not material.
Refer to Notes on page 22.132 101 929 1,490 1,064 861 4,577
21Intercompany transfers between operating segments are not material.
(1) Operating Income and Income Before Income Taxes and Cumulative Effect of
Accounting Change were reduced by $81 million for North America, $55
million for Europe, Eurasia and Middle East, and $23 million for
Corporate as a result of other operating charges associated with the
streamlining initiatives. Operating Income and Income Before Income Taxes
and Cumulative Effect of Accounting Change were increased by $52 million
for Corporate as a result of the Company's receipt of a settlement
related to a vitamin antitrust litigation matter. Refer to Note G.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note F - Operating Segments (Continued)
- --------------------------------------
(2) Income Before Income Taxes and Cumulative Effect of Accounting Change for
Latin America in 2002 was negatively impacted by a charge related to a
write-down of investments in Latin America partially offset by the
Company's share of a gain recorded by one of our investees in Latin
America. Refer to Note G.
Note G - Significant Operating and Non-Operating Items
- ------------------------------------------------------
In the first quarter of 2003, the Company reached a settlement with certain
defendants in a vitamin antitrust litigation matter. In that litigation, the
Company alleged that certain vitamin manufacturers participated in a global
conspiracy to fix the price of some vitamins, including vitamins used in the
manufacture of some of the Company's products. During the first quarter of 2003,
the Company received a settlement relating to this litigation of approximately
$52 million on a pretax basis, or $0.01 per share on an after-tax basis. The
amount was recorded as a reduction to Cost of Goods Sold.
During the first quarter of 2003, the Company initiated steps to streamline
and simplify its operations, primarily in North America and Germany. In North
America, the Company is integrating the operations of our three separate North
American business units - Coca-Cola North America, The Minute Maid Company and
Fountain. In Germany, CCEAG is taking steps to improve efficiency in sales
distribution and manufacturing. As described in Note D, under SFAS No. 146, a
liability is accrued only when certain criteria are met. Of the Company's total
streamlining initiatives, certain components of these initiatives have met these
criteria as of March 31, 2003. The total cost expected to be incurred for these
components of the streamlining initiatives that, as of March 31, 2003, meet the
criteria described in Note D is approximately $225 million, of which
approximately $159 million was accrued during the first quarter of 2003. The
table below provides more details related to these costs. As of March 31, 2003,
approximately 900 associates had been separated.
Employees separated from the Company as a result of these streamlining
initiatives were offered severance or early retirement packages, as appropriate,
which included both financial and non-financial components. The expenses
recorded during the first quarter of 2003 included costs associated with
involuntary terminations and other direct costs associated with implementing
these initiatives. Other direct costs included the relocation of employees;
contract termination costs; and costs associated with the development,
communication and administration of these initiatives. In the first quarter of
2003, the Company incurred total pretax expenses related to these streamlining
initiatives of approximately $159 million, or $0.04 per share after tax. These
expenses were recorded to Other Operating Charges.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note G - Significant Operating Segmentsand Non-Operating Items (Continued)
Information about our Company's operations- -----------------------------------------------------------------
The table below summarizes the total costs expected to be incurred for the
ninecomponents of the streamlining initiatives which have met the criteria described
in SFAS No. 146, the costs incurred to date, the balance of accrued streamlining
expenses and the movement in that accrual as of and for the three months ended
September 30, 2002March 31, 2003 (in millions):
Total | Accrued
Costs | Costs Balance
Expected | Incurred March 31,
Cost Summary to be Incurred | to Date Payments 2003
- ------------ -------------- | -------- -------- ---------
Severance pay and benefits $ 158 | $ 107 $ (2) $ 105
Retirement related benefits 46 | 33 - 33
Outside services - legal, |
outplacement, consulting 12 | 10 (5) 5
Other direct costs 9 | 9 - 9
-------- | -------- -------- --------
|
Total $ 225 | $ 159 $ (7) $ 152
======== | ======== ======= ========
The total amount of costs expected to be incurred for the components of the
streamlining initiatives which have met the criteria described in SFAS No. 146
and 2001,the costs incurred to date for the three months ended March 31, 2003 by
operating segment is as follows (in millions):
Europe,
North Eurasia and Latin
America Africa Middle East America Asia Corporate Consolidated
------- ------ ------------ --------- -------- --------- ------------
2002
- ----
Net operating
revenues (1)(2) $ 4,712 $ 493 $ 3,993 $ 1,584 $ 3,858 $ 129 $ 14,769
Income before
income taxes and
cumulative effect
of accounting
change (1) 1,274 185 1,265 790 1,455 (461) 4,508
2001
- ----
Net operating
revenues $ 4,317 $ 450 $ 3,104 $ 1,612 $ 3,699 $ 125 $ 13,307
Income before
Income taxes and
cumulative effect
of accounting
change (5) 1,109 180 1,113 939 1,383 (346) 4,378
Intercompany transfers between operating segments are not material.
Notes:
- -----
(1) Net operating revenues and income before income taxes and cumulative effect
of accounting change for Latin America were negatively impacted by exchange
and challenging economic conditions, primarily in Argentina, Venezuela and
Brazil.
(2) Net operating revenues for Europe, Eurasia and Middle East were impacted by
the consolidation of CCEAG in 2002.
(3) Identifiable operating assets for North America increased primarily due to
the consolidation of CCDA in 2002 and Odwalla, Inc. in December 2001.
Identifiable operating assets for Europe, Eurasia and Middle East increased
primarily due to the consolidation of CCEAG in 2002. Identifiable operating
assets for Latin America decreased primarily due to the negative impact of
exchange.
(4) Investments for Europe, Eurasia and Middle East decreased primarily due to
the consolidation of CCEAG in 2002.
(5) Income before income taxes and cumulative effect of accounting change for
Corporate was positively impacted by a one-time non-cash gain of
approximately $91 million, described in further detail in Note J.
22Total
Costs Costs
Expected Incurred
to be Incurred to Date
-------------- --------
North America $ 122 $ 81
Europe, Eurasia and Middle East 80 55
Corporate/Other 23 23
------- -------
Total $ 225 $ 159
======= =======
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note HG - NonrecurringSignificant Operating and Non-Operating Items In the third quarter of 2002, our Company recorded a non-cash pretax charge
of approximately $33 million related to our share of impairment and
restructuring charges taken by certain investees in Latin America. This charge
was recorded to "Equity income (loss)(Continued)
- net."-----------------------------------------------------------------
Our Company hashad direct and indirect ownership interests totaling
approximately 18 percent in Cervejarias Kaiser S.A. (Kaiser S.A.). In March
2002, Kaiser S.A. sold its investment in Cervejarias Kaiser Brazil Ltda to
Molson Inc. (Molson) for cash of approximately $485 million and shares of Molson
valued at approximately $150 million. Our Company's pretax share of the gain
related to this sale was approximately $43$51 million, of which approximately $21$28
million was recorded in the caption "Equity income (loss) - net"Equity Income (Loss) and approximately $22$23
million was recorded in the caption "Other income (loss)Other Income (Loss) - net."Net.
In the first quarter of 2002, our Company recorded a non-cash pretax charge
of approximately $157 million (recorded in the caption "Other income (loss)Other Income (Loss) -
net")Net) primarily related to the write-down of our investments in Latin America.
This write-down reduced the carrying value of the investments in Latin America
to fair value. The charge was primarily the result of the economic developments
in Argentina during the first quarter of 2002, including the devaluation of the
Argentine peso and the severity of the unfavorable economic outlook.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note IH - Restricted Stock, Stock Options and Other Stock Plans
Effective January 1,- --------------------------------------------------------------
Our Company currently sponsors stock option plans and restricted stock award
plans. Prior to 2002, our Company adoptedaccounted for those plans under the
fair value methodrecognition and measurement provisions of recording stock-based compensation contained in SFAS No. 123, "Accounting for
Stock-Based Compensation," which is considered the preferable accounting method
for stock-based employee compensation. Historically, our Company had applied the
intrinsic value method permitted under SFAS No. 123, as defined in Accounting
Principles BoardAPB Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25) and related Interpretations,interpretations. No
stock-based employee compensation expense for stock options was reflected in accountingNet
Income for years prior to 2002, as all stock options granted under those plans
had an exercise price equal to the fair market value of the underlying common
stock on the date of grant. Effective January 1, 2002, our stock-based compensation plans.
Accordingly, noCompany adopted the
preferable fair value recognition provisions of SFAS No. 123. Under the modified
prospective transition method selected by our Company as described in SFAS No.
148, compensation cost hasrecognized for the three months ended March 31, 2003 and
March 31, 2002 is the same as that which would have been recognized for our stock option plans
in the past. All future employee stock option grants and other stock-based
compensation will be expensed to "Selling, administrative and general expenses"
over the vesting period based on the fair value at the date the stock-based
compensation is granted. The Financial Accounting Standards Board has issued an
exposure draft which, if finalized as drafted, would allow companies adoptinghad the fair
value method permitted underof SFAS No. 123 to choosebeen applied from three
alternative transition methods.its original effective date.
The Company will evaluate these alternatives and
select an appropriate transition method after the issuanceimpact of the final
standard, which is expected lateradoption of the fair value method of accounting for
stock-based compensation was an increase to stock-based compensation expense of
approximately $114 million and approximately $95 million, respectively, for the
three month periods ended March 31, 2003 and March 31, 2002. This stock
compensation expense was recorded in the caption Selling, General and
Administrative Expenses. As a result of adopting SFAS No. 123 and SFAS No. 148,
our first quarter 2002 results were restated to reflect the impact of the
adoption of the fair value method under SFAS 123. For the quarter ended March
31, 2002, the impact of this year. The ultimaterestatement on Selling, General and Administrative
Expenses was an increase of approximately $95 million; and the impact on our
financial statementsIncome
Taxes was a decrease of approximately $26 million, resulting in a negative
impact to Net Income of approximately $69 million. The income per share impact
of this restatement was a reduction of $0.03 per share. In accordance with the
modified prospective method of adoption, results for years prior to 2002 will depend upon the transition method selected.
23have
not been restated.
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note J - Issuances of Stock by Equity Investee
In July 2001, Coca-Cola Enterprises Inc. (CCE) completed its acquisition of
Hondo Incorporated and Herbco Enterprises, Inc., collectively known as Herb
Coca-Cola. The transaction was valued at approximately $1.4 billion, with
approximately 30 percent of the transaction funded with the issuance of
approximately 25 million shares of CCE common stock, and the remaining portion
funded through debt and assumed debt. The issuance of shares resulted in a
one-time non-cash pretax gain for our Company of approximately $91 million
during the third quarter of 2001. We provided deferred taxes of approximately
$36 million on this gain. This transaction reduced our ownership in CCE from
approximately 40 percent to approximately 38 percent.
Note KI - Commitments and Contingencies
- --------------------------------------
In 2003, we have adopted the initial recognition and initial measurement
provisions of FASB Interpretation No. 45. Because we do not currently provide
significant guarantees on a routine basis, there has been no material effect to
our financial statements. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002.
On September 30, 2002,March 31, 2003, we were contingently liable for guarantees of indebtedness
owed by third parties in the amount of $470 million, of which $16
million$468 million. These guarantees are
related to third-party customers and bottlers and have arisen through the Company's equity investee bottlers.normal
course of business. These guarantees have various terms, and none of these
guarantees are individually significant. We do not consider it probable that we
will be required to satisfy these guarantees.
We believe our exposure to concentrations of credit risk is limited due to
the diverse geographic areas covered by our operations.
In June 2002, our Company announced long-term agreements with the National
Collegiate Athletic Association (NCAA) and CBS, and with the Houston Astros
Baseball Club with a combined value of approximately $650 to $800 million. Our
Company, CBS and the NCAA will participate in an integrated marketing and media
program that includes, for our Company, beverage marketing and media rights to
87 NCAA championships in 22 sports. Additionally, The Minute Maid Company, an
operating unit of our Company, and the Houston Astros Baseball Club will
participate in a long-term marketing and community partnership, including naming
rights for Astros Field, which was renamed "Minute Maid Park." The definitive
agreement with the NCAA and CBS is expected to be finalized during 2002. The
definitive agreement with the Houston Astros Baseball club was completed during
the third quarter of 2002.
The Company is also involved in various legal proceedings and disputes.
Additionally, the Company provides certain indemnifications in relation to the
disposition of previously consolidated subsidiaries. These indemnifications
generally provide a purchaser with reimbursements for out of pocket costs which
arise from events that occurred within the subsidiary prior to the disposition.proceedings. Management
believes that any liability ofto the Company whichthat may arise as a result of
thesecurrently pending legal proceedings, disputes or indemnifications,including those discussed below, will not
have a material adverse effect on the financial condition of the Company taken
as a whole.
24During the period from 1970 to 1981, our Company owned Aqua-Chem, Inc.
(Aqua-Chem). A division of Aqua-Chem manufactured certain boilers that contained
gaskets that Aqua-Chem purchased from outside suppliers. Several years after our
Company sold this entity, Aqua-Chem received its first lawsuit relating to
asbestos, a component of some of the gaskets. Aqua-Chem has notified our Company
that it believes we are obligated to them for certain costs and expenses
associated with the litigation. Aqua-Chem has demanded that our Company
reimburse it for approximately $10 million for out-of-pocket litigation-related
expenses incurred over the last 18 years. Aqua-Chem has also demanded that the
Company acknowledge a continuing obligation to Aqua-Chem for any future
liabilities and expenses that are excluded from coverage under the applicable
insurance or for which there is no insurance. Our Company disputes Aqua-Chem's
claims, and we believe we have no obligation to Aqua-Chem for any of its past,
present or future liabilities, costs or expenses. Furthermore, we believe we
have substantial legal and factual defenses to Aqua-Chem's claims. The parties
have entered into litigation to resolve this dispute. The Company believes
Aqua-Chem has substantial insurance coverage to pay Aqua-Chem's asbestos
claimants. An estimate of possible losses over time, if any, cannot be made at
this time.
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I - Commitments and Contingencies (Continued)
- -------------------------------------------------
The Competition Authority of the European Commission made unannounced visits
to the offices of the Company and our bottling partners in Austria, Belgium,
Denmark, Germany and Great Britain several years ago. Similarly, the Spanish
competition authorities made unannounced visits to our own offices and those of
certain bottlers in Spain in 2000. The European Commission and the Spanish
competition authorities continue their investigations into unspecified market
practices in their respective jurisdictions. The Company believes we have
substantial legal and factual defenses in these matters.
Additionally, at the time of divesting our interest in a consolidated entity,
we sometimes agree to indemnify the buyer for specific liabilities related to
the period we owned the entity. Management believes that any liability to the
Company that may arise as a result of any such indemnification agreements will
not have a material adverse effect on the financial condition of the Company
taken as a whole.
20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Beverage Volume
- ---------------
We measure our sales volume in two ways: (1) gallons and (2) unit cases of
finished products. "Gallons" represent our primary business and measure the
volume of concentrates, syrups, beverage bases, finished beverages and other beverage products (expressedpowders
(in all cases, expressed in equivalent gallons of syrup) included by the Company infor all beverage
products which are reportable as unit case volume. Most of our revenues are
based on this measure of primarily wholesale activity, which consists primarilymainly of
our sales to bottlers and customers.
Our Company records revenue
when title to our products passes to our bottling partners or our customers.
Unit cases represent activity at the retail level. Most of our Company's
revenues are not based directly onWe also measure volume in unit case volume. As used in this report,
"unitcases. "Unit case" means a unit of measurement
equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings); and "unit.
"Unit case volume" of the
Company means the number of unit cases (or unit case equivalents) of
Company trademark or licensed beverage products directly or indirectly sold by
the Coca-Cola bottling system or by the Company to customers, includingcustomers. Volume primarily consists of beverage
products bearing trademarksCompany trademarks. Also included in unit case volume are
certain products licensed to theour Company and certain key products
(which are not material)or owned by Coca-Cola system bottlers andour bottling partners, for
which theour Company provides marketing support and derives profit from the sales.
Such products licensed to our Company or owned by our bottling partners account
for a minimal portion of total unit case volume. Although most of our Company's
revenues are not based directly on unit case volume, we believe unit case volume
is one of the measures of the underlying strength of the Coca-Cola system
because it measures trends at the consumer level.
In the thirdfirst quarter of 2002,2003, our worldwide unit case volume increased 54
percent compared to the thirdfirst quarter of 2001.2002. The increase in unit case volume
was driven by 4 percent volume growth for international operations and 93 percent
growth for North American operations. ThisThe worldwide volume growth was driven by
solid growth in certain markets and also benefited from several recent strategic
acquisitions and license agreements. The North America volume growth included a
positive impact of 4 percentage points resulting from recent2002 transactions involving the Danone and Evian
water brands and Seagram's mixers.
The introduction ofmixers, as well as strong performance from Vanilla
Coke, diet Vanilla Coke and diet Coke with LemonCoke. North America growth was also helped drivedriven by
solid performance in the Retail Division, offset by a decline in the Foodservice
and Hospitality Division. The overall industry growth duringwas negatively impacted by
the third quarter. Thirdtiming of the Easter holiday, poor weather conditions, and weaker traffic in
restaurants, hotels and leisure channels. First quarter 20022003 unit case volume
for the Company's international operating segments included 3 percent growth for
Africa; 21 percent growthdecline for Europe, Eurasia and Middle East; 15 percent growth
for Latin America; and 98 percent growth for Asia. In Africa, growth was driven
by Southern Africa, which continued to generateits strong growthperformance during the thirdfirst
quarter, partially offset by the impact of political instabilitya challenging operating environment
in parts of North and boycotts against
American brandsWest Africa. Although the Company had solid performance in
Northern Africa. The 2many European markets, the 1 percent growthdecline in Europe, Eurasia and Middle East
was impacted by poor weather in Eastern Europe, the unseasonably cool summer, floods throughout many
parts of Europe and the boycott of American brandscurrent political
environment in the Middle East.East, the timing of the Easter holiday and declines in
volume in Germany
21
RESULTS OF OPERATIONS (Continued)
Beverage Volume (Continued)
- --------------------------
resulting from the implementation of a deposit law on non-returnable packages.
The 15 percent growth in Latin America was due to strong volume growth in Mexico
(driven by strong performance from Fanta and Lift as well as the inclusion of
the Risco water brand) and improving trends in Argentina. These positive
factors in Latin America were partially offset by continued challenging economic
conditions in other Latin American markets, primarily Argentina, Venezuela, where
production of the Company's products did not occur for approximately half of the
first quarter due to strikes and Brazil.political turmoil. The 98 percent growth in Asia
was driven by significant growth in India, China and the Philippines, partially
offset by relatively flat growtha 2 percent decline in Japan due to extremely poor weather
conditionsa sharp decline in the month of July.
25
RESULTS OF OPERATIONS
Beverage Volume (Continued)industry
trends during March.
The current unstable economic and political conditions and civil unrest in
the Middle East and Northern Africa, particularly the war in Iraq, as well as in
certain regions of Latin America, particularly Venezuela, have had an adverse
impact on our Company's recent business results and we believe thatas has the impact of the new
deposit law in Germany. Although these trends could continue in the fourth quarter.
Furthermore,throughout 2003,
our Company has not yet seen the improvements in overall
macroeconomic conditions that we anticipated at the beginning of 2002. Our current expectation is that the macroeconomic environment isresults will likely to remain
difficult throughout the remainder of 2002.
Our unit case volume for the first nine months of 2002 increased 5 percent
comparedimprove during 2003 as our
Company moves beyond these short-term external factors. Refer to the first nine monthsheading
"Update to Application of 2001. The increase in unit case volume was
driven by 5 percent volume growth for international operations and 6 percent
growth for North American operations. The North America volume growth included a
positive impactCritical Accounting Policies" on page 30 of 2 percentage points resulting from recent transactions
involving the Danone and Evian water brands and Seagram's mixers. The
introduction of Vanilla Coke and diet Coke with Lemon also helped drive growth
for the first nine months of 2002. Unit case volume for the first nine months of
2002 for the Company's international operating segments included 7 percent
growth for Africa; 4 percent growth for Europe, Eurasia and Middle East; 1
percent growth for Latin America; and 11 percent growth for Asia.this
report.
The Company is focused on continuing to broaden its family of brands. In
particular, we are expanding and growing our non-carbonatednoncarbonated offerings to provide
more alternatives to consumers. Carbonated soft drinks and non-carbonated
beverages contributed approximately 2 percent volume growth and approximately 27
percent volume growth, respectively, forIn the first nine months of 2002. As
mentioned above,past year, our Company recently completed several
strategic acquisitions and license agreements involving non-carbonatednoncarbonated brands
such as Evian and Danone waters in North America and Risco, a water brand in
Mexico. The Company also entered into a long-term license agreement involving
Seagram's mixers, a carbonated line of drinks. These brands and other brands
acquired during the past 12 months such as Cosmos in the Philippines and Odwalla in the United
States had annual volume in the year before we
acquired them of approximately 500400 million unit cases.
2622
RESULTS OF OPERATIONS (Continued)
Net Operating Revenues and Gross Margin
- ---------------------------------------
Net operating revenuesOperating Revenues were $5,322$4,498 million in the thirdfirst quarter of 2003,
compared to $4,079 million in the first quarter of 2002, compared to $4,695 million in the third quarter of 2001, an increase of $627$419
million or 1310 percent. The increase reflected a 7 percent increase in gallon
shipments (which includes the impact of acquisitions), the impact of structural
changes that added approximately $450 millionof 3 percent, primarily due to net
operating revenues (primarily the consolidationinclusion of one additional month of
revenue from our German bottler, Coca-Cola Erfrischungsgetraenke AG (CCEAG), Cosmos Bottling Corporation (CBC), Odwalla,
Inc. (Odwalla) and
CCDA Waters, L.L.C. (CCDA), partially offset by the deconsolidationfavorable impact of our Russian bottling operations), and price increases2 percent of a weaker U.S. dollar. CCEAG was
consolidated in certain regions including North America and Europe.February 2002, therefore, the first quarter of 2002 contained
only two months of CCEAG revenue versus three months of CCEAG revenue included
in the first quarter of 2003. These increases were partially offset by the
shift inimpact of price and product/geographic mix of 2 percent.
The structuring changes mentioned above primarily impacted the increase in gallon shipments to higher
growth but lower revenue regions such as IndiaEurope,
Eurasia and China. For further
informationMiddle East operating segment. The impact of acquisitions mentioned
above was primarily related to the consolidation2002 transactions involving the Danone and
Evian water brands and Seagram's mixers which impacted the North America
operating segment. The impact of CCEAG, CBCthe weaker U.S. dollar mentioned above was
driven primarily by the stronger euro that favorably impacted the Europe,
Eurasia and CCDA refer to Note E.
NetMiddle East operating revenues were $14,769 million insegment, the first nine months of 2002,
compared to $13,307 million instronger Japanese yen that
favorably impacted the first nine months of 2001, an increase of
$1,462 million or 11 percent. The increase for the first nine months of 2002
reflected a 5 percent increase in gallon shipments, structural changes that
added approximately $1,050 million to netAsia operating revenues (primarily the
consolidation of CCEAG, CBC, Odwalla and CCDA,segment, partially offset by generally
weaker currencies negatively impacting the deconsolidation of our Russian bottling operations), and price increases in
selected countries. These positive factors were partially offset by the negative
impact (approximately 2 percentage points) of a stronger U.S. dollar.Latin America operating segment. For
further discussion related to the impact of exchange and expected trends, refer
to "Exchange.""Exchange" on 31 of this report.
The contribution to Net Operating Revenues from Company operations is as
follows (in millions):
Three Months Ended
March 31,
------------------
2003 2002
---- ----
Company Operations, Excluding Bottling Operations $ 3,942 $ 3,655
Company-Owned Bottling Operations 556 424
-------- --------
Consolidated Net Operating Revenues $ 4,498 $ 4,079
======== ========
Our gross profit margin decreased to 60.964.4 percent in the thirdfirst quarter of
20022003 from 64.065.8 percent in the thirdfirst quarter of 2001. For the first nine months
of 2002, our gross profit margin decreased to 63.4 percent from 65.3 percent for
the first nine months of 2001.2002. The decrease in our gross profit margin for the
third quarter and the first nine months of 2002 was due
primarily to the
consolidationone additional month of lower margin operations, primarily CCEAG CBC, Odwalla and
CCDA, partially offset by the deconsolidation of our Russian bottling
operations.gross profit being included in 2003.
Generally, bottling operations produce higher revenues but lower gross margins
compared to concentrate and syrup operations. 27This decrease was partially offset
by our receipt during the first quarter of 2003 of a settlement of approximately
$52 million from certain defendants in a vitamin antitrust litigation. This
amount was recorded as a reduction to Cost of Goods Sold and impacted the
Corporate operating segment. Refer to Note G.
23
RESULTS OF OPERATIONS (Continued)
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, General and GeneralAdministrative Expenses Selling, administrative and general expenses were $1,694$1,661 million in the thirdfirst
quarter of 2003, compared to $1,527 million in the first quarter of 2002, compared to $1,692 million in the third quarter of 2001, an
increase of $2 million. The increase was due to structural changes (primarily
the consolidation of CCEAG, CBC, Odwalla and CCDA, partially offset by the
deconsolidation of our Russian bottling operations), which increased selling,
administrative and general expenses by approximately $160 million, partially
offset by the 2001 strategic one-time marketing initiatives of $94 million
described in more detail below, and a reduction in amortization expense of
intangible assets of approximately $15 million due to the adoption of Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets."
Selling, administrative and general expenses were $4,915 million for the
first nine months of 2002, compared to $4,587 million for the first nine months
of 2001, an increase of $328$134 million or 79 percent. The increase was due to structural
changes (primarily the consolidationone additional month of CCEAG CBC, Odwalla and CCDA,
partially offset by the deconsolidation of our Russian bottling operations)expenses included in 2003),
which increased selling, administrativeSelling, General and general expensesAdministrative Expenses by approximately
$370 million. This increase was partially offset by the 2001 strategic one-time
marketing initiatives of $180$59 million, described below, a reduction in
amortizationincreased stock-based compensation expense of intangible assets of approximately $40$19
million due to
the adoption of SFAS No. 142, and the favorable impact (approximately 2 percentage points) of a strongerweaker U.S.
dollar.
Other Operating Charges
- -----------------------
In 2001,the first quarter of 2003, the Company implemented significant strategic one-time marketing
initiatives to accelerate the Company's business strategies. During the third
quarterrecorded charges of 2001, approximately
$94$159 million, or $0.03$0.04 per share after tax, was
expensed onrelated to the streamlining
initiatives, primarily in North America and Germany, announced during the first
quarter of 2003. Of these incremental one-time marketing activitiescharges, approximately $81 million impacted the North
America operating segment, approximately $55 million impacted the Europe,
Eurasia and Middle East operating segment, and approximately $23 million
impacted the Corporate operating segment. Approximately 900 associates had been
separated as of March 31, 2003.
In North America, the Company is integrating the operations of our three
separate North American business units - Coca-Cola North America, The Minute
Maid Company and Fountain. In Germany, the German division office has been
relocated to Berlin to more closely align with CCEAG, and CCEAG has taken steps
to improve efficiency in selected key
markets, specificallysales, distribution and manufacturing.
The above initiatives are expected to result in the United States, Japanseparation of a total of
approximately 1,900 associates in 2003, primarily in North America and Germany.
Approximately $180These initiatives are expected to result in a full-year 2003 charge to earnings
of approximately $400 million or $0.05 per share after tax, was expensed foron a pretax basis. This expected $400 million
charge is composed of costs associated with involuntary terminations and other
direct costs, including the relocation of employees; contract termination costs;
costs associated with the development, communication and administration of these
incremental
one-time marketing activites forinitiatives; and asset write-offs. To the extent not already recorded in the
first nine monthsquarter, the charge is expected to be recorded throughout the rest of
2001.
282003. As a result of the above initiatives, apart from the charge to earnings,
the Company's financial results are expected to benefit by at least $50 million
(pretax) in 2003 and at least $100 million (pretax) on an annualized basis
beginning in 2004.
24
RESULTS OF OPERATIONS (Continued)
Operating Income and Operating Margin
- -------------------------------------
Operating incomeIncome was $1,545$1,076 million in the thirdfirst quarter of 2003, compared to
$1,158 million in the first quarter of 2002, compared to
$1,311 million in the third quartera decrease of 2001, an increase of $234$82 million or 187
percent. Our consolidated operating margin for the thirdfirst quarter of 20022003 was
29.023.9 percent, compared to 27.928.4 percent for the comparable period in 2001.2002. The
increasedecrease in operating incomeOperating Income for the thirdfirst quarter of 20022003 reflected the
expenses related to the 2003 streamlining initiatives of approximately $159
million and the increased stock-based compensation expense of approximately $19
million. These items were partially offset by the increase in gallon shipments
and receipt of 7 percent and price increases in selected
countries, the reduction in amortization expense of approximately $15a $52 million duesettlement related to the adoption of SFAS No. 142 andvitamin litigation in the
incremental marketing in 2001 of
approximately $94 million. These positive factors were partially offset by the
negative impact from the stronger U.S. dollar, which reduced operating income by
approximately 1 percent during the thirdfirst quarter of 2002.2003. The stronger U.S.
dollar compared to the Argentine peso, the Mexican peso, the Brazilian real, the
Venezuelan bolivar and the South African rand was partially offset by strength
in the euro. The increasedecrease in the Company's operating margin was due
primarily to the negative impact thatexpenses related to the incremental marketing had on the 2001 operating
margin, partially offset by2003 streamlining initiatives and
structural changes in 2002 (primarily the
consolidationone additional month of CCEAG CBC, Odwalla and CCDA, partially offset by the
deconsolidation of our Russian bottling operations), which reduced the Company's
operating margin during the third quarter of 2002.results being
included in 2003 as compared to 2002). Generally, bottling operations produce
higher revenues but lower operating margins compared to concentrate and syrup
operations.
Operating income was $4,450 million for the first nine months of 2002,
compared to $4,104 million for the first nine months of 2001, an increase of
$346 million or 8 percent. Our consolidated operating margin for the first nine
months of 2002 was 30.1 percent, compared to 30.8 percent for the comparable
period in 2001. The increase in operating income for the first nine months of
2002 reflected the increase in gallon shipments of 5 percent and price increases
in selected countries, the reduction in amortization expense of approximately
$40 million due to the adoption of SFAS No. 142, and the incremental marketing
in 2001 of approximately $180 million. These positive factors were partially
offset by the negative impact from the stronger U.S. dollar, which reduced
operating income by approximately 3 percent during the first nine months of
2002. The stronger U.S. dollar compared to the Japanese yen, the Argentine peso,
the Mexican peso, the Brazilian real, the Venezuelan bolivar and the South
African rand was partially offset by strength in the euro. Additionally,
structural changes (primarily the consolidation of CCEAG, CBC, Odwalla and CCDA,
partially offset by the deconsolidation of our Russian bottling operations)
contributed to the reduction in operating margin. Generally, bottling operations
produce higher revenues but lower operating margins compared to concentrate and
syrup operations.
2925
RESULTS OF OPERATIONS (Continued)
Interest Income and Interest Expense
- ------------------------------------
Interest incomeIncome decreased to $46$56 million for the thirdfirst quarter of 2002 and to
$1562003 from
$58 million for the nine months ended September 30, 2002, from $68 million and
$227 million, respectively, for the comparable periods in 2001. In both cases, a
majorityfirst quarter of the2002. This slight decrease was primarily
due to lower interest rates earned on short-term investments during 2002.investments. Nevertheless, the
Company continues to benefit from cash invested in locations outside the United
States earning higher interest rates than could be obtained within the United
States. Interest expenseExpense decreased $14$1 million, or 212 percent, in the thirdfirst
quarter of 20022003 relative to the comparable period in 2001, and by $78 million, or 33 percent, for the nine
months ended September 30, 2002, relative to the comparable period in 2001, due mainly to both a
decrease in average commercial paper debt balances and slightly lower interest
rates for commercial paper debt.
The decrease in interest expense for
commercial paper debt was partially offset by increased interest expense on debt
related to the consolidation of CCEAG. Our Company's debt increased
approximately $890 million, of which approximately $810 million is classified as
long-term, as a result of the consolidation of CCEAG. Additionally, long-term
debt increased due to the issuance during 2002 of $750 million of notes due June
1, 2005. The proceeds from this long-term debt issuance were used to reduce
current debt.
Equity Income (Loss)
- Net-------------------
Our Company's share of income from equity method investments for the thirdfirst
quarter of 2003 totaled $49 million, compared to $61 million in the first
quarter of 2002, totaled $113a decrease of $12 million compared to $104 million inor 20 percent. Equity income for the
thirdfirst quarter of 2001, an increase of $9 million or 9 percent. This increase in 2002 was due to the overall improving health of the Coca-Cola bottling system around
the world. However, our equity method investments in Latin America have been
adversely impacted by ongoing economic difficulties. Specific items with a
positive impact to equity income were the increase in equity income for
Coca-Cola Enterprises Inc. (CCE) due to improving trends in operating and
financial performance of approximately $65 million (which included a $22 million
favorable impact resultingbenefited from the adoption of SFAS No. 142) and the increase
in equity income due to the reduction in amortization expenses of approximately
$17 million for investments other than CCE resulting from implementation of SFAS
No. 142. These increases were partially offset by the economic difficulties in
Latin America mentioned above as well as our Company's share of impairment and
restructuring charges taken by equity method investees in Latin America during
the third quarter of 2002. The Company's share of these charges was
approximately $33 million.
30
RESULTS OF OPERATIONS (Continued)
Equity Income (Loss) - Net (Continued)
For the first nine months of 2002, our Company's share of income from equity
method investees totaled $350 million, compared to $167 million for the
comparable period in 2001, an increase of $183 million, or 110 percent. This
increase in 2002 was due to the overall improving health of the Coca-Cola
bottling system around the world. However, our equity method investments in
Latin America have been adversely impacted by ongoing economic difficulties.
Specific items with a positive impact to equity income were the increase in
equity income for CCE due to improving trends in operating and financial
performance of approximately $160 million (which included a $67 million
favorable impact resulting from the adoption of SFAS No. 142) and the increase
in equity income due to the reduction in amortization expenses of approximately
$51 million for investments other than CCE resulting from implementation of SFAS
No. 142. These increases were partially offset by the economic difficulties in
Latin America mentioned above as well as our Company's share of impairment and
restructuring charges taken by equity method investees in Latin America during
the third quarter of 2002. The Company's share of these charges was
approximately $33 million.
For the first nine months of 2002, our Company's share of income from equity
method investees was also favorably impacted by a benefit related to our share of the gain on the sale
by Cervejarias Kaiser S.A. (Kaiser S.A.) of its interests in Brazil to Molson
Inc. (refer to Note H)G). Approximately $21$28 million of the pretax gain from thethis
sale by Kaiser S.A. was recorded in equity income with the remaining portion
$22 million,(approximately $23 million) recorded in "OtherOther Income (Loss) - Net. Equity income
(loss) -
net."for the majority of our investees increased during the first quarter of 2003 due
to the overall improving health of the Coca-Cola bottling system around the
world. However, several of our equity method investments in Latin America have
continued to be adversely impacted by ongoing economic difficulties, which
resulted in a combined decline in equity income for these investees of
approximately $10 million for the first quarter of 2003 compared to the first
quarter of 2002.
Other Income (Loss) - Net
"Other income (loss) - net"-------------------------
Other Income (Loss) - Net was a net loss of $62$13 million for the thirdfirst quarter
of 2003 compared to a net loss of $175 million for the first quarter of 2002, compared to income of $26 million for the third quarter of 2001,
a
difference of $88$162 million. The 2002A portion of this difference, approximately $43
million, is related to the net loss was principally comprised of
foreign currency exchange losses of approximately $24 million, the accretion of
the discounted value of the CCEAG liability of approximately $11 million (refer
to Note E), and minority ownership accruals. The losses on currency exchange
were primarily in Latin
America, which was impacted by the significant devaluation of currencies.
"Other income (loss) - net" was a net loss of $292 million for the first nine
months of 2002 compared to income of $23 million for the comparable periodArgentine peso
in 2001, a difference of $315 million. The 2002 net loss was principally comprised
of foreign currency exchange losses of approximately $110 million, the accretion
of the discounted value of the CCEAG liability of approximately $27 million
(refer to Note E), the nonrecurring items described below, and minority
ownership accruals. The losses on currency exchange were primarily in Africa and
Latin America, which were impacted by the significant devaluation of currencies.
31
RESULTS OF OPERATIONS (Continued)2002.
Additionally, Other Income (Loss) - Net (Continued)
Additionally, the first nine months of 2002 werewas impacted by nonrecurringtwo other items which
were recorded during the first quarter of 2002. In the first quarter of 2002,
our Company recorded a non-cash pretax charge of approximately $157 million
primarily related to the write-down of our investments in Latin America. The
charge was primarily the result of the economic developments in Argentina during the
first quarter of 2002, including the devaluation of the Argentine peso and the
severity of the unfavorable economic outlook. The Company expects to realize a
minimal tax benefit from this write-down. The final impact on
diluted earnings per share was an after-tax reductionIn the first quarter of approximately $0.06 per
share. As previously noted,2002, our
Company also recorded in Other Income (Loss) - Net a $22$23 million portion of the pretax gain
from the sale by Kaiser S.A.
was recorded in "Other income (loss) - net."
Issuances of Stock by Equity Investee
In July 2001, CCE completed its acquisition of Hondo Incorporated and Herbco
Enterprises, Inc., collectively known as Herb Coca-Cola. The transaction was
valued at approximately $1.4 billion, with approximately 30 percent of the
transaction funded with the issuance of approximately 25 million shares of CCE
common stock, and the remaining portion funded through debt and assumed debt.
The issuance of shares resulted in a one-time non-cash pretax gain for our
Company of approximately $91 million during the third quarter of 2001. We
provided deferred taxes of approximately $36 million on this gain. This
transaction reduced our ownership in CCE from approximately 40 percent to
approximately 38 percent.
3226
RESULTS OF OPERATIONS (Continued)
Income Taxes
- ------------
Our effective tax rate was 2725.6 percent for the thirdfirst quarter of 20022003
compared to 3030.7 percent for the thirdfirst quarter of 2001. Our2002. The 25.6 percent
effective tax rate for the first nine monthsquarter of 2002 was 28 percent compared to 30 percent for2003 includes the first
nine months of 2001.following:
* The effective tax rate for the costs related to the streamlining
initiatives was approximately 35 percent.
* The effective tax rate for the proceeds received related to the vitamin
antitrust litigation matter was approximately 35 percent.
* The effective tax rate for all other pretax income was approximately 26.5
percent.
The 30.7 percent effective tax rate for the first nine monthsquarter of 2002 was impacted by two nonrecurring items:includes
the following:
* The effective tax rate for our Company's share of the gain on the sale of
Kaiser S.A. interests andwas approximately 33 percent.
* The effective tax rate for the write-down of our investments primarily in
Latin America. Excluding the impact of these items, ourAmerica was approximately 4 percent.
* The effective tax rate would have
beenfor all other pretax income was approximately 27
percent for the first nine months of 2002.percent.
For the full year 20022004 and in future years, the Company currently expects the ongoing
effective tax rate to be approximately 2726.5 percent instead of the 27.527 percent
rate previously estimated by the Company in its Annual Report on Form 10-K for
the year ended December 31, 2001. This slight reduction in our estimated effective tax rate is due to a
non-cash benefit related to the adoption of SFAS No. 142 and is expected to
benefit the current year by approximately $0.01 per share.2002. Our ongoing effective tax rate reflects tax benefits
derived from significant operations outside the United States, which are taxed
at lower rates than the U.S. statutory rates.
Cumulative Effect of Accounting Change for SFAS No. 142
For information regarding the requirements of SFAS No. 142 and details of the
Company's adoption of SFAS No. 142, refer to Note F.- -------------------------------------------------------
The adoption of SFAS No. 142 iswas a required change in accounting principle,
and the cumulative effect of adopting this standard as of January 1, 2002
resulted in a non-cash, after-tax decrease to net income of $367 million for
Company operations and $559 million for the Company's proportionate share of its
equity method investees in the first quarter of 2002. The adoption of this
accounting standard is expected to
resultresulted in a pretax reduction in annual amortization expense of
approximately $60 million, and an increase in annual equity income of approximately
$150 million.
33
RESULTS OF OPERATIONS (Continued)
Recent Developments
Effective January 1, 2002, our Company adoptedmillion for the fair value method of
recording stock-based compensation contained in SFAS No. 123, "Accounting for
Stock-Based Compensation," which is considered the preferable accounting method
for stock-based employee compensation. Historically, our Company had applied the
intrinsic value method permitted under SFAS No. 123, as defined in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations, in accounting for our stock-based compensation plans.
Accordingly, no compensation cost has been recognized for our stock option plans
in the past. All future employee stock option grants and other stock-based
compensation will be expensed to "Selling, administrative and general expenses"
over the vesting period based on the fair value at the date the stock-based
compensation is granted. The Financial Accounting Standards Board has issued an
exposure draft which, if finalized as drafted, would allow companies adopting
the fair value method permitted under SFAS No. 123 to choose from three
alternative transition methods. The Company will evaluate these alternatives and
select an appropriate transition method after the issuance of the final
standard, which is expected later this year. The ultimate impact on our
financial statements in 2002 and in future years will depend upon the transition
method selected.
34year ended December 31, 2002.
27
FINANCIAL CONDITION
Net Cash Flow Provided by Operating Activities
- ----------------------------------------------
Net cash provided by operating activities in the first ninethree months of 20022003
amounted to $3,405$599 million versus $3,053$961 million for the comparable period in 2001, an increase2002,
a decrease of $352$362 million. IncreasedDecreased cash flows from operations for the first
ninethree months of 2003 compared to 2002 were a result of improved worldwide business operating
results along withthe funding of an
employee retirement plan of approximately $145 million in the first quarter of
2003 and the collection of significant tax receivables in 2002 of approximately
$280 million in connection with an Advance Pricing Agreement (APA) reached
between the United States and Japan in 2000. The APA established the level of
royalties paid by Coca-Cola (Japan) Company Limited to our Company for the years
1993 through 2001. These increases wereThe effect of these items was partially offset by pension plan
contributions of approximately $124 million made during the second quarter of
2002.overall
improved worldwide business operating results.
Investing Activities
- --------------------
Net cash used in investing activities totaled $731$149 million for the first
ninethree months of 2002,2003, compared to $840$329 million for the comparable period in
2001,2002, a decrease of $109$180 million. During the first ninethree months of 2003, cash
outlays for investing activities included purchases of property, plant and
equipment of $195 million and the acquisition of Truesdale Packaging Company LLC
from Coca-Cola Enterprises Inc. for approximately $60 million (refer to Note E).
Our Company currently estimates that purchases of property, plant and equipment
will total approximately $1 billion for 2003.
Net cash used in investing activities totaled $329 million for the first
three months of 2002. During the first quarter of 2002, cash outlays for
investing activities included purchases of property, plant and equipment of
$582approximately $175 million, plus acquisitions and the acquisitions of CBC and CCDA for total combined considerationinvestments of approximately
$328$215 million (refer to Note E). These items were partially offset
by the receipt of approximately $146 million in 2002primarily related to the 2001 salepurchase of our Company's ownership interests in various Russian bottling operations. Our
Company currently estimates that purchasesshares of property, plant and equipment will
total approximately $800 to $900 million for the full year 2002 and
approximately $1 billion for 2003.Cosmos Bottling
Corporation.
Financing Activities
- --------------------
Our financing activities include net borrowings, dividend payments, share
issuances and share repurchases. Net cash provided by financing activities
totaled $385 million for the first three months of 2003 compared to net cash
used in financing activities totaled
$1,912of $219 million for the first ninethree months of 2002 compared to $1,526 million for
the first nine months of 2001, an increase of $386 million.2002.
In the first ninethree months of 2003, the Company had issuances of debt of
$1,026 million and payments of debt of $311 million. The issuances of debt
primarily included $711 million of issuances of commercial paper with maturities
of less than 90 days and $271 million in issuances of commercial paper with
maturities of over 90 days. The payments of debt primarily included $299 million
related to commercial paper with maturities over 90 days.
28
FINANCIAL CONDITION (Continued)
Financing Activities (Continued)
- -------------------------------
For the comparable first three months of 2002, the Company had issuances of
debt of $1,402$536 million and payments of debt of $1,939$602 million. The issuances of debt
primarily included $636 million of issuances of commercial paper with maturities over 90
days and $750 million in issuances of long-term notes due June 1, 2005. The
payments of debt primarily included $616 million related to commercial paper
with maturities over 90 days, and net payments of $1,275 million related to
commercial paper with maturities less than 90 days.
35
FINANCIAL CONDITION (Continued)
Financing Activities (Continued)
For the comparable first nine months of 2001, the Company had issuances of
debt of $2,660 million and payments of debt of $3,225 million. The issuances of
debt primarily included $2,121$35 million of issuances of commercial paper with maturities
over 90 days and a $500 million issuance of long-term debt. The payments of debt
primarily included $3,128$337 million related to commercial paper with maturities over
90 days, and net payments of $72$253 million related to commercial paper with
maturities less than 90 days.
During the first ninethree months of 20022003 and 2001,2002, the Company repurchased
common stock under the stock repurchase plan authorized by our Board of
Directors in October 1996. Cash used to purchase common stock for treasury was $478 million
for the first nine months of 2002 compared to $219 million for the first nine
months of 2001. During the first ninethree months of 2002,2003, the Company
repurchased approximately 9,327,0008.3 million shares of common stock at an average cost
of $49.79$38.48 per share under the 1996 plan. During the first ninethree months of 2001,2002,
the Company repurchased approximately 4,050,0003.7 million shares of common stock at an
average cost of $48.76$46.94 per share under the 1996 plan. Cash used to purchase
these shares of common stock for treasury was $319 million for the first three
months of 2003 compared to $175 million for the first three months of 2002. The
Company currently estimates that its share repurchases will total approximately
$750 million during 2002 and over $1$1.5 billion during 2003.2003, including the first quarter purchases just described.
Financial Position
The Condensed Consolidated Balance Sheet- ------------------
Our balance sheet as of September 30, 2002,March 31, 2003, as compared to the Condensed Consolidated Balance Sheetour balance sheet as
of December 31, 2001,2002, was significantly impacted by our Company's consolidation of CCEAG. Prior to
consolidation, our investment in CCEAG was recorded as an equity method
investment. Thus, the $836 million decrease in "Equity method investments -
other, principally bottling companies" was primarily driven by the consolidation
of CCEAG. Upon consolidation of CCEAG, the individual balances were included in
the Company's respective balance sheet line items. The consolidation of CCEAG,
CCDA, CBC and Odwalla was the main reason for the following changes in the
Company's balance sheet from December 31, 2001 to September 30, 2002: (1) $301
million increase in "Trade accounts receivable"; (2) $1,234 million increase in
"Property, Plant and Equipment"; (3) $945 million increase in "Trademarks and
Other Intangible Assets"; and (4) $1,238 million increase in "Other
liabilities."following:
* The increase in "CashCash and cash equivalents"Cash Equivalents of $889 million was due
primarily to the accumulation of cash for the quarterly dividend payment and the consolidation of
CCEAG.payment.
* The increase in "Accounts payableLoans and accrued expenses"Notes Payable of $723 million was due to the
issuance of commercial paper during the first quarter of 2003 to meet
short-term cash needs, including the quarterly dividend payment and
repurchases of common stock.
* The increase in Accounts Payable and Accrued Expenses of $502 million was
primarily due to dividends payable accrued as of September 30, 2002,March 31, 2003, which
will be paid during the fourthsecond quarter of 2003.
The overall increase in total assets as of March 31, 2003, compared to
December 31, 2002, was primarily related to the increase in cash and cash
equivalents mentioned above, which impacted the Corporate operating segment, and
the consolidationimpact of CCEAG, CCDA and CBC.
Additionally, the asset impairments recorded as a result of the adoption of SFAS
No. 142, which was effective January 1, 2002, alsostronger euro (which impacted the September 30,
2002 Condensed Consolidated Balance Sheet,Europe, Eurasia and Middle
East operating segment) and Japanese yen (which impacted the Asia operating
segment), partially offset by reducing the balances in both
"Investments and Other Assets" and "Trademarks and Other Intangible Assets."
36impact of weakening currencies impacting the
Latin America operating segment.
29
FINANCIAL CONDITION (Continued)
Financial Position (Continued)Update to Application of Critical Accounting Policies
- -----------------------------------------------------
During the first quarter of 2003, several events occurred that had an
unfavorable impact on our operations, specifically:
* The $1,616 million increasewar in Iraq and the continued overall civil and political unrest in
the Middle East had an adverse impact on our Company's long-term debt wasbusiness results
and, therefore, could impact the valuation of our assets in this region.
* Germany's operating results have been impacted by what our Company
believes is a short-term disruption caused by the implementation of a
deposit law on non-returnable packages. The unexpected change on January
1, 2003 resulted in major retailers delisting non-returnable packages.
Furthermore, consumers have begun to shift their consumption back to
returnable packages and to other beverage categories that were not
impacted by the deposit law.
* In Venezuela, production of Company products did not occur for
approximately half of the first quarter of 2003 due to bothstrikes and
political turmoil.
In the consolidationfirst quarter of CCEAG, which had2003, the effect of increasing debt by
approximately $890 million, of which approximately $810 million is classified as
long-term,Company evaluated the impact that these
events could have on our future business results and the issuance during 2002carrying value of $750 millionour
investments and assets in these regions of notes due June 1,
2005. The proceedsthe world. Currently, management
believes these events will only have a temporary unfavorable impact on our
operations, and therefore, resulted in no asset impairment. We plan to closely
monitor these and other conditions in the future and continue to evaluate any
impact they might have on our assets and investments in these regions of this $750 million long-term debt issuance were used to
reduce current debt.the
world.
30
FINANCIAL CONDITION (Continued)
Exchange
- --------
Our international operations are subject to certain opportunities and risks,
including currency fluctuations and government actions. We closely monitor our
operations in each country and seek to adopt appropriate strategies that are
responsive to changing economic and political environments and to fluctuations
in foreign currencies.
We use approximately 5950 functional currencies. Due to our global operations,
weaknesses in some of these currencies are often offset by strengths in others.
The U.S. dollar was approximately 16 percent weaker in the thirdfirst quarter of 2002,2003
compared to the thirdfirst quarter of 2001,2002, based on comparable weighted averages for
our functional currencies. This does not include the effects of our hedging
activities and, therefore, does not reflect the actual impact of fluctuations in
exchange rates on our operating results. Our foreign currency management program
mitigates over time a portion of the impact of exchange on net income and
earnings per share. The effective impact of exchange to our Company after
considering hedging activities was a reductionneutral to operating income of
approximately 1 percent in the thirdfirst
quarter of 2003 compared to the first quarter of 2002 resulting from less
attractive hedge rates on the Japanese yen and of approximately 3
percent forweakness in Latin American
currencies, offset by a strengthening euro. For the first nine monthsremainder of 2002, compared to the same periods in 2001.
The effective impact of exchange to our Company after considering hedging
activities was a negative impact of $0.01 on net income per share for the third
quarter of 2002, and a negative impact of $0.06 on net income per share for the
first nine months of 2002, compared to the same periods in 2001. Based on
currently available information, our Company expects this trend to continue, and
probably worsen somewhat, during the fourth quarter of 2002. For 2003, the
Company expects exchange to have a neutral orto slightly negativepositive impact on its
operating results.Operating Income.
The Company will continue to manage its foreign currency exposures to
mitigate over time a portion of the impact of exchange on net income and
earnings per share. Our Company conducts business in nearlymore than 200 countries
around the world, and we manage foreign currency exposures through the portfolio
effect of the basket of functional currencies in which we do business.
3731
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by our Company and subsidiaries or
with the approval of an authorized executive officer of our Company may
constitute "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995, including statements made in this report and
other filings with the Securities and Exchange Commission. Generally, the words
"believe," "expect," "intend," "estimate," "anticipate," "project," "will" and
similar expressions identify forward-looking statements, which generally are not
historical in nature. All statements which address operating performance, events
or developments that we expect or anticipate will occur in the future ---
including statements relating to volume growth, share of sales and earnings per
share growth and statements expressing general optimism about future operating
results --- are forward-looking statements. Forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from our Company's historical experience and our present expectations
or projections. As and when made, management believes that these forward-looking
statements are reasonable. However, caution should be taken not to place undue
reliance on any such forward-looking statements since such statements speak only
as of the date when made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
The following are some of the factors that could cause our Company's actual
results to differ materially from the expected results described in or
underlying our Company's forward-looking statements:
* Economic and political conditions, especially in international markets,
including civil unrest, product boycotts, governmental changes and
restrictions on the ability to transfer capital across borders. Without
limiting the preceding sentence, the current unstable economic and
political conditions and civil unrest in the Middle East, Venezuela,
North Korea or elsewhere, the war in Iraq, or the continuation or
escalation of terrorism, could have adverse impacts on our Company's
business results or financial condition.
* Changes in the nonalcoholic beverages business environment. These
include, without limitation, changes in consumer preferences, competitive
product and pricing pressures and our ability to gain or maintain share
of sales in the global market as a result of actions by competitors.
Factors such as these could impact our earnings, share of sales and
volume growth.
32
FORWARD-LOOKING STATEMENTS (Continued)
* Foreign currency rate fluctuations, interest rate fluctuations and other
capital market conditions. Most of our exposures to capital markets,
including foreign currency and interest rates, are managed on a
consolidated basis, which allows us to net certain exposures and, thus,
take advantage of any natural offsets. We use derivative financial
instruments to reduce our net exposure to financial risks. There can be
no assurance, however, that our financial risk management program will be
successful in reducing capital market exposures.
* Changes in the nonalcoholic beverages business environment. These include,
without limitation, changes in consumer preferences, competitive product and
pricing pressures and our ability to gain or maintain share of sales in the
global market as a result of actions by competitors. Factors such as these
could impact our earnings, share of sales and volume growth.
38
FORWARD-LOOKING STATEMENTS (Continued)
* Adverse weather conditions, which could reduce demand for Company
products.
* Economic and political conditions, especially in international markets,
including civil unrest, governmental changes and restrictions on the ability
to transfer capital across borders. Without limiting the preceding sentence,
the current unstable economic and political conditions and civil unrest in
the Middle East, Northern Africa and Brazil could have an adverse impact on
our Company's business results and valuation of assets in those regions.
Moreover, if the conflict between the U.S. and Iraq escalates, our business
results could be negatively impacted.
* Our ability to generate sufficient cash flows to support capital expansion
plans, share repurchase programs and general operating activities.
* Changes in laws and regulations, including changes in accounting standards,
taxation requirements (including tax rate changes, new tax laws and revised
tax law interpretations), competition laws and environmental laws in domestic
or foreign jurisdictions.
* The effectiveness of our advertising, marketing and promotional programs.
* Fluctuations in the cost and availability of raw materials and the
ability to maintain favorable supplier arrangements and relationships.
* Our ability to achieve earnings forecasts, which are generated based on
projected volumes and sales of many product types, some of which are more
profitable than others. There can be no assurance that we will achieve
the projected level or mix of product sales.
* Changes in laws and regulations, including changes in accounting
standards, taxation requirements (including tax rate changes, new tax
laws and revised tax law interpretations), competition laws and
environmental laws in domestic or foreign jurisdictions.
* Our ability to penetrate developing and emerging markets, which also
depends on economic and political conditions, and how well we are able to
acquire or form strategic business alliances with local bottlers and make
necessary infrastructure enhancements to production facilities,
distribution networks, sales equipment and technology. Moreover, the
supply of products in developing markets must match the customers' demand
for those products, and due to product, price and cultural differences,
there can be no assurance of product acceptance in any particular market.
* The uncertainties of litigation, as well as other risks and uncertainties
detailed from time to time in our Company's Securities and Exchange
Commission filings.
The foregoing list of important factors is not exclusive.
3933
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
We have no material changes to the disclosure on this matter made in our
Annual Report on Form 10-K for the year ended December 31, 2001.2002.
Item 4. Controls and Procedures
The Company maintainsWe maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company's Securities Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are
designed to do, and management necessarily was required to apply its judgementjudgment in
evaluating the cost-benefit relationship of possible controls and procedures. Also, the Company has
investments in certain unconsolidated entities. As the Company does not control
or manage these entities, its disclosure controls and procedures with respect to
such entities are necessarily substantially more limited than those it maintains
with respect to its consolidated subsidiaries.
During the 90-day period prior to the date of this report, an evaluation was
performed under the supervision and with the participation of our Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company'sour disclosure
controls and procedures. Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company'sour disclosure controls and
procedures were effective. Subsequent to the date of this evaluation, there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls, and no corrective
actions taken with regard to significant deficiencies or material weaknesses in
such controls.
4034
Part II. Other Information
Item 1. Legal Proceedings
As reported in the4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's Annual ReportMeeting of Share Owners was held on Form 10-KWednesday, April 16,
2003, in Houston, Texas, at which the following matters were submitted to a vote
of the share owners:
(a) Votes regarding the election of five Directors for a term expiring in
2006 were as follows:
Term expiring in 2006 FOR WITHHELD
--------------------- ------------- ----------
Ronald W. Allen 1,980,974,951 95,597,480
Maria Elena Lagomasino 2,037,130,483 39,441,948
Donald F. McHenry 2,037,619,310 38,953,121
Sam Nunn 2,017,779,203 58,793,228
James B. Williams 2,025,426,013 51,146,418
Additional Directors, whose terms of office as Directors continued
after the meeting, are as follows:
Term expiring in 2004 Term expiring in 2005
--------------------- ---------------------
Herbert A. Allen Cathleen P. Black
Barry Diller Warren E. Buffett
Robert L. Nardelli Douglas N. Daft
James D. Robinson III Susan Bennett King
Peter V. Ueberroth
(b) Votes regarding ratification of the appointment of Ernst & Young LLP
as independent auditors of the Company to serve for the fiscal year
endedending December 31, 2001,2003 were as follows:
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
------------- ----------- ------------- -----------
1,945,940,592 104,202,709 26,429,130 0
35
Submission of Matters to a Vote of Security Holders (Continued)
- ---------------------------------------------------------------
(c) Votes on October 27, 2000, a class action lawsuit (Carpenter's
Health & Welfare Fund of Philadelphia & Vicinity v.proposal to approve an amendment to The Coca-Cola Company
et
al.) was filed in the United States District Court for the Northern District of
Georgia alleging that the Company, M. Douglas Ivester, Jack L. Stahl and James
E. Chestnut violated antifraud provisions of the federal securities laws by
making misrepresentations or material omissions relating2002 Stock Option Plan were as follows:
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
------------- ----------- ------------- -----------
1,652,997,780 397,535,444 26,039,207 0
(d) Votes on a proposal to approve the Company's financial conditionExecutive and prospects in late 1999 and early 2000. A second, largely
identical lawsuit (Gaetan LaValla v. The Coca-Cola Company, et al.) was filed in
the same court on November 9, 2000. The Complaints allege that the Company and
the individual named officers: (1) forced certain Coca-Cola system bottlers to
accept "excessive, unwanted and unneeded" sales of concentrate during the third
and fourth quarters of 1999, thus creating a misleading sense of improvement in
our Company's performance in those quarters; (2) failed to write down the value
of impaired assets in Russia, Japan and elsewhereLong-Term
Performance Incentive Plan were as follows:
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
------------- ----------- ------------- -----------
1,942,573,803 108,469,074 25,529,554 0
(e) Votes on a timely basis, again
resultingshare-owner proposal regarding contributions to National
Public Radio were as follows:
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
------------- ------------- ------------- -----------
33,151,901 1,685,641,375 37,442,913 320,336,242
36
Submission of Matters to a Vote of Security Holders (Continued)
- --------------------------------------------------------------
(f) Votes on a share-owner proposal regarding an executive compensation
review were as follows:
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
------------- ------------- ------------- -----------
135,701,453 1,582,604,771 37,929,965 320,336,242
(g) Votes on a share-owner proposal regarding restricted stock were as
follows:
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
------------- ------------- ------------- -------------
97,229,136 1,628,215,740 30,791,313 320,336,242
(h) Votes on a share-owner proposal regarding indexing stock options were
as follows:
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
------------- ------------- ------------- -------------
174,694,961 1,549,969,333 31,571,895 320,336,242
(i) Votes on a share-owner proposal regarding Company policy in the presentationColombia
were as follows:
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
------------- ------------- ------------- -------------
96,603,379 1,596,498,853 63,133,957 320,336,242
37
Submission of misleading interim financial results in the
third and fourth quartersMatters to a Vote of 1999; and (3) misrepresented the reasons for Mr.
Ivester's departure from the Company and then misleadingly reassured the
financial community that there would be no changes in the Company's coreSecurity Holders (Continued)
- --------------------------------------------------------------
(j) Votes on a share-owner proposal regarding China business strategy or financial outlook following that departure. Damages in an
unspecified amount are sought in both Complaints.
On January 8, 2001, an order was entered by the United States District Court
for the Northern District of Georgia consolidating the two cases for all
purposes. The Court also ordered the plaintiffs to file a Consolidated Amended
Complaint. On July 25, 2001, plaintiffs filed a Consolidated Amended Complaint,
which largely repeated the allegations made in the original Complaints and added
Douglas N. Daftprinciples
were as an additional defendant.
On September 25, 2001, the defendants filed a Motion to Dismiss all counts of
the Consolidated Amended Complaint. On August 20, 2002, the Court granted in
part and denied in part the defendants' Motion to Dismiss. The Court also
granted the plaintiffs' Motion for Leave to Amend the Complaint. On or about
September 5, 2002, the defendants filed a Motion for Partial Reconsideration of
the Court's August 20, 2002 ruling. This latter Motion is currently under
consideration by the Court.
The Company believes it has meritorious legal and factual defenses and
intends to defend the consolidated action vigorously.
The Company is involved in various other legal proceedings. Management of the
Company believes that any liability to the Company which may arise as a result
of these proceedings, including the proceedings specifically discussed above,
will not have a material adverse effect on the financial condition of the
Company and its subsidiaries taken as a whole.
41
follows:
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
------------- ------------- ------------- -------------
101,563,532 1,577,957,941 76,764,716 320,286,242
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
310.1 - By-LawsThe Performance Incentive Plan of theThe Coca-Cola Company, as
amended and restated through
October 17, 2002.
10effective January 1, 2003.
10.2 - 1989 RestrictedThe Coca-Cola Company 2002 Stock AwardOption Plan and Stock
Appreciation Right Plan, as amended and restated throughas of
February 20, 2003.
10.3 - Amendment Number Six to The Coca-Cola Company Key Executive
Retirement Plan, dated as of February 27, 2003.
10.4 - Executive and Long-Term Performance Incentive Plan of The
Coca-Cola Company, effective as of January 1, 2003. This plan
amends and restates into one plan the following two plans:
(1) Long-Term Performance Incentive Plan of the Company, and
(2) Executive Performance Incentive Plan of the Company.
10.5 - Amendment One to The Coca-Cola Company Supplemental Benefit
Plan, dated as of February 27, 2003.
10.6 - Letter Agreement, dated March 1, 2002.4, 2003, between the Company
and Stephen C. Jones.
12 - Computation of Ratios of Earnings to Fixed Charges.
38
Additional Exhibits.
In accordance with SEC Release No. 33-8212, Exhibits 99.1 and 99.2
are to be treated as "accompanying" this report rather than "filed" as
part of the report.
99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
executed by Douglas N. Daft, Chairman of the Board of
Directors and Chief Executive Officer of The Coca-Cola
Company.
99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
executed by Gary P. Fayard, Executive Vice President and
Chief Financial Officer of The Coca-Cola Company.
(b) Reports on Form 8-K:
(1) During the thirdfourth quarter of 2002, the Company filed a report
on Form 8-K dated Auguston November 13, 2002.
Item 9. Regulation FD Disclosure:
(1) Statements Under Oath of Principal Executive Officer and
Principal Financial Officer Regarding Facts and Circumstances
Relating to Exchange Act Filings.
(2)
Certifications of the Principal Executive Officer and the Principal
Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
42(2) During the fourth quarter of 2002, the Company filed a report
on Form 8-K on December 12, 2002.
Item 5. Other Items:
Press release issued by the Company on December 11, 2002.
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE COCA-COLA COMPANY
(REGISTRANT)
Date: November 13, 2002April 25, 2003 By: /s/ Connie D. McDaniel
------------------------------------------------------------------
Connie D. McDaniel
Vice President and Controller
(On behalf of the Registrant and
as Chief Accounting Officer)
4340
CERTIFICATIONS
I, Douglas N. Daft, Chairman, Board of Directors, and Chief Executive Officer of
The Coca-Cola Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Coca-Cola Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
4441
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002April 25, 2003
/s/ Douglas N. Daft
------------------------------------------------------------------------
Douglas N. Daft
Chairman, Board of Directors, and
Chief Executive Officer
4542
I, Gary P. Fayard, SeniorExecutive Vice President and Chief Financial Officer of
The Coca-Cola Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Coca-Cola Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
4643
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002April 25, 2003
/s/ Gary P. Fayard
---------------------------------------------------------------
Gary P. Fayard
SeniorExecutive Vice President and
Chief Financial Officer
4744
Exhibit Index
Exhibit Number and Description
(a) Exhibits
310.1 - By-LawsThe Performance Incentive Plan of theThe Coca-Cola Company, as amended
and restated through
October 17, 2002.
10effective January 1, 2003.
10.2 - 1989 RestrictedThe Coca-Cola Company 2002 Stock AwardOption Plan and Stock Appreciation
Right Plan, as amended and restated throughas of February 20, 2003.
10.3 - Amendment Number Six to The Coca-Cola Company Key Executive
Retirement Plan, dated as of February 27, 2003.
10.4 - Executive and Long-Term Performance Incentive Plan of The Coca-Cola
Company, effective as of January 1, 2003. This plan amends and
restates into one plan the following two plans: (1) Long-Term
Performance Incentive Plan of the Company, and (2) Executive
Performance Incentive Plan of the Company.
10.5 - Amendment One to The Coca-Cola Company Supplemental Benefit
Plan, dated as of February 27, 2003.
10.6 - Letter Agreement, dated March 1, 2002.4, 2003, between the Company and
Stephen C. Jones.
12 - Computation of Ratios of Earnings to Fixed Charges.
4845
Additional Exhibits.
In accordance with SEC Release No. 33-8212, Exhibits 99.1 and 99.2 are to
be treated as "accompanying" this report rather than "filed" as part of the
report.
99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed
by Douglas N. Daft, Chairman of the Board of Directors and Chief
Executive Officer of The Coca-Cola Company.
99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed
by Gary P. Fayard, Executive Vice President and Chief Financial
Officer of The Coca-Cola Company.
46
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