EXHIBIT 13.1
FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
Our mission is to maximize share-owner value over time. To
achieve this mission, The Coca-Cola Company and its subsidiaries
(our Company) execute a comprehensive business strategy driven
by four key objectives. We strive to (1) increase volume, (2)
expand our share of nonalcoholic beverage sales worldwide, (3)
maximize our long-term cash flows and (4) create economic value
added by improving economic profit. We achieve these goals by
strategically investing in the high-return beverage business and
by optimizing our cost of capital through appropriate financial
policies.
INVESTMENTS
Our Company believes in strengthening our system through a
process of continuous improvement and reinvestment in the
marketplace.
With a global business system that operates in nearly 200
countries and generates superior cash flows, our Company is
uniquely positioned to capitalize on profitable new investment
opportunities. Our criteria for investment are simple: New
investments must directly enhance our existing operations and
must be expected to provide cash returns that exceed our long-
term, after-tax, weighted-average cost of capital, currently
estimated at approximately 11 percent.
Because it consistently generates high returns, the beverage
business is a particularly attractive investment for us. In
highly developed markets, our expenditures focus primarily on
marketing our Company's brands. In emerging and developing
markets, our main objective is to increase the penetration of
our products. In these markets, we allocate most of our
investments to enhancing infrastructure such as production
facilities, distribution networks, sales equipment and
technology. We make these investments by acquiring or forming
strategic business alliances with local bottlers and by matching
local expertise with our experience, resources and focus.
Our investment strategy focuses on our "six-pack" of business
fundamentals: brands, bottling system, customers, information,
people and a mindset of continuing to enhance and build our
system.
CONSUMER AND BRAND ACTIVITIES - To meet our long-term growth
objectives, we make significant investments in marketing to
support our existing brands and to acquire new brands, when
appropriate. We define marketing as anything we do to create
consumer demand for our brands. We focus on continually finding
new ways to differentiate our products and build value into all
our brands. Marketing investments enhance consumer awareness and
increase consumer preference for our brands. This produces growth
in volume, per capita consumption and our share of worldwide
beverage sales.
We own some of the world's most valuable brands, more than 160
in all. These include soft drinks and noncarbonated beverages
such as sports drinks, juice drinks, water products, teas and
coffees.
We heighten consumer awareness and product appeal for our
brands using integrated marketing programs. Through our bottling
investments and strategic alliances with other bottlers of our
products, we create and implement these programs worldwide. In
developing a global strategy for a Company brand, we conduct
product and packaging research, establish brand positioning,
develop precise consumer communications and solicit consumer
feedback. Our integrated marketing programs include activities
such as advertising, point-of-sale merchandising and product
sampling.
In December 1998, our Company signed an agreement with Cadbury
Schweppes plc to purchase beverage brands in countries around
the world, (except in the United States, France and South Africa),
and its concentrate plants in Ireland and Spain for approximately
$1.85 billion. These brands include Schweppes and Canada Dry
mixers, such as tonic water, club soda and ginger ale; Crush;
Dr Pepper; and certain regional brands. These transactions are
subject to certain conditions including approvals from regulatory
authorities in various countries.
In December 1997, our Company announced its intent to acquire
from beverage company Pernod Ricard, its Orangina brands, three
bottling operations and one concentrate plant in France for
approximately 5 billion French francs (approximately $890 million
based on December 1998 exchange rates). This transaction remains
subject to approvals from regulatory authorities of the French
government.
BOTTLING SYSTEM - Our Company has business relationships with
three types of bottlers: (1) independently owned bottlers, in
which we have no ownership interest; (2) bottlers in which we
have invested and have a noncontrolling ownership interest;
and (3) bottlers in which we have invested and have a
controlling ownership interest.
During 1998, independently owned bottling operations produced
and distributed approximately 34 percent of our worldwide unit
case volume. Bottlers in which we own a noncontrolling ownership
interest produced and distributed approximately 55 percent of
our 1998 worldwide unit case volume. Controlled bottling and
fountain operations produced and distributed approximately 11
percent.
The reason we invest in bottling operations is to maximize the
strength and efficiency of our production, distribution and
marketing systems around the world. These investments often
result in increases in unit case volume, net revenues and
profits at the bottler level, which in turn generate increased
gallon sales for our concentrate business. Thus, both our
Company and the bottlers benefit from long-term growth in
volume, improved cash flows and increased share-owner value.
We designate certain bottling operations in which we have a
noncontrolling ownership interest as "anchor bottlers" due to
their level of responsibility and performance. The strong
commitment of anchor bottlers to their own profitable volume
growth helps us meet our strategic goals and furthers the inter-
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FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
ests of our worldwide production, distribution and marketing
systems. Anchor bottlers tend to be large and geographically
diverse, with strong financial resources for long-term
investment and strong management resources. In 1998, our anchor
bottlers produced and distributed approximately 43 percent of
our total worldwide unit case volume. Anchor bottlers give us
strong strategic business partners on every major continent. We
enter into anchor bottler partnerships because we expect results
beyond what we could attain alone or with multiple bottlers.
Consistent with our strategy, in January 1999, two Japanese
bottlers, Kita Kyushu Coca-Cola Bottling Company, Ltd. and Sanyo
Coca-Cola Bottling Company, Ltd., announced plans for a merger
to become a new, publicly traded, bottling company, Coca-Cola
West Japan Company, Ltd., Japan's first anchor bottler. The
transaction, valued at approximately $2.2 billion, will create
our 11th anchor bottler. We plan to hold approximately 5 percent
interest in the new anchor bottler.
In 1998, Coca-Cola Amatil Limited (Coca-Cola Amatil) completed
a spin-off of its European operations into a new publicly traded
European bottler, Coca-Cola Beverages plc (Coca-Cola Beverages).
With its formation, Coca-Cola Beverages became our 10th anchor
bottler. At December 31, 1998, we owned approximately 50.5
percent of Coca-Cola Beverages. Our expectation is that our
ownership position will reduce to less than 50 percent in 1999;
therefore, we are accounting for the investment by the equity
method of accounting.
In 1998, our Company contributed its wholly owned bottling
interests in Norway and Finland to Coca-Cola Nordic Beverages
(CCNB), which also has bottling interests in Denmark and Sweden.
CCNB, an anchor bottler, is a joint venture in which Carlsberg
A/S owns a 51 percent interest, and we own a 49 percent interest.
When we make investment decisions about bottling operations,
we consider the bottler's capital structure and its available
resources at the time of our investment. Although it is not our
primary long-term business strategy, in certain situations it
can be advantageous to acquire a controlling interest in a
bottling operation. Owning such a controlling interest allows
us to compensate for limited local resources and enables us to
help focus these bottlers' sales and marketing programs, assist
in developing their business and information systems and
establish appropriate capital structures.
During 1998, we acquired a 100 percent interest in additional
Russian bottling operations from Inchcape plc. Also during 1998,
as part of our strategy to establish an integrated bottling
system in India, we purchased 16 independent Indian bottling
operations, bringing our total purchased since January 1997 to
18.
In line with our long-term bottling strategy, we periodically
consider options for reducing our ownership interest in a
bottler. One option is to combine our bottling interests with
the bottling interests of others to form strategic business
alliances. Another option is to sell our interest in a bottling
operation to one of our equity investee bottlers. In both of
these situations, we continue participating in the bottler's
earnings through our portion of the equity investee's income.
After the spin-off of Coca-Cola Beverages by Coca-Cola Amatil,
we sold our northern and central Italian bottling operations to
Coca-Cola Beverages in exchange for consideration valued at
approximately $1 billion. Additionally, we exchanged our bottling
operations in South Korea with Coca-Cola Amatil for shares of
Coca-Cola Amatil stock.
As stated earlier, our investments in a bottler can represent
either a noncontrolling or a controlling interest. Through
noncontrolling investments in bottling companies, we provide
expertise and resources to strengthen those businesses.
In line with our established investment strategy, our bottling
investments generally have been profitable over time. For
bottling investments accounted for by the equity method, we
measure the profitability of our bottling investments in two
ways - equity income and the excess of the fair values over the
carrying values of our investments. Equity income, included in
our consolidated net income, represents our share of the net
earnings of our investee companies. In 1998, equity income was
$32 million.
The following table illustrates the difference in calculated
fair values, based on quoted closing prices of publicly traded
shares, over our Company's carrying values for selected equity
method investees (in millions):
Fair Carrying
December 31, Value Value Difference
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1998
Coca-Cola Enterprises Inc. $ 6,040 $ 584 $ 5,456
Coca-Cola Amatil Limited 1,619 1,255 364
Coca-Cola Beverages plc 949 879 70
Panamerican Beverages, Inc. 668 753 (85)
Coca-Cola FEMSA, S.A. de C.V. 566 105 461
Grupo Continental, S.A. 190 102 88
Coca-Cola Bottling Co.
Consolidated 143 72 71
Embotelladoras Argos 69 105 (36)
Embotelladoras Polar S.A. 50 60 (10)
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$ 6,379
========================================================================
The excess of calculated fair values over carrying values for
our investments illustrates the significant increase in the value
of our investments. Although this excess value for equity method
investees is not reflected in our consolidated results of
operations or financial position, it represents a true economic
benefit to us.
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FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
CUSTOMERS - The Coca-Cola system has over 14 million customers
around the world that sell or serve our products directly to
consumers. We keenly focus on enhancing value for these customers
and providing solutions to grow their beverage businesses. Our
approach includes understanding each customer's business and
needs, whether it is a sophisticated retailer in a developed
market or a kiosk owner in an emerging market.
INFORMATION - In 1996, our Company launched Project Infinity,
a strategic business initiative utilizing technology to integrate
business systems across our global enterprise over the next
several years. In 1997, we began testing a limited version of
Project Infinity software technology. In 1998, we installed
Project Infinity technology at strategic prototype locations and
began process testing.
Project Infinity will enhance our competitiveness by supplying
immediate, detailed information about our financial position and
the marketplace to our management, associates and bottlers
worldwide. By giving our people real-time data, Project Infinity
will increase our ability to recognize opportunities and make
better and faster decisions about operations, marketing and
finance. Project Infinity will require significant capital
expenditures over the next several years. All related costs of
business process reengineering activities are expensed as
incurred.
PEOPLE AND MINDSET - Our continued success depends on recruiting,
training and retaining people who can quickly identify and act on
profitable business opportunities. This means maintaining and
refining a corporate culture that encourages learning, innovation
and value creation on a daily basis. The Coca-Cola Learning
Consortium works with the management of our entire system to
foster learning as a core capability. This group helps build the
culture, systems and processes our people need to develop the
knowledge and skills to take full advantage of new and ongoing
opportunities.
CAPITAL EXPENDITURES - Total capital expenditures for property,
plant and equipment (including our investments in information
technology) and the percentage distribution by operating segment
for 1998, 1997 and 1996 are as follows (in millions):
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------
Capital expenditures $ 863 $ 1,093 $ 990
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North America{1} 34% 24% 27%
Africa 2% 2% 3%
Greater Europe 25% 30% 38%
Latin America 8% 7% 8%
Middle & Far East 13% 18% 12%
Corporate 18% 19% 12%
================================================================
{1} Includes The Minute Maid Company
FINANCIAL STRATEGIES
Using the following strategies to optimize our cost of capital
increases our ability to maximize share-owner value.
DEBT FINANCING - Our Company maintains prudent debt levels based
on our cash flow, interest coverage and percentage of debt to
capital. We use debt financing to lower our overall cost of
capital, which increases our return on share-owners' equity.
Our capital structure and financial policies have earned long-
term credit ratings of "AA-" from Standard & Poor's and "Aa3"
from Moody's, and the highest credit ratings available for our
commercial paper programs.
Our global presence and strong capital position give us easy
access to key financial markets around the world, enabling us to
raise funds with a low effective cost. This posture, coupled with
the active management of our mix of short-term and long-term
debt, results in a lower overall cost of borrowing. Our debt
management policies, in conjunction with our share repurchase
programs and investment activity, typically result in current
liabilities exceeding current assets.
In managing our use of debt capital, we consider the following
financial measurements and ratios:
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------
Net debt (in billions) $ 3.3 $ 2.0 $ 2.8
Net debt-to-net capital 28% 22% 32%
Free cash flow to net debt 39% 172% 85%
Interest coverage 19x 22x 17x
Ratio of earnings to
fixed charges 17.3x 20.8x 14.9x
===============================================================
Net debt is debt in excess of cash, cash equivalents and
marketable securities not required for operations and certain
temporary bottling investments.
SHARE REPURCHASES - Our Company demonstrates confidence in the
long-term growth potential of our business by our consistent use
of share repurchase programs. In October 1996, our Board of
Directors authorized a plan to repurchase up to 206 million
shares of our Company's common stock through the year 2006. In
1998, we repurchased approximately 7 million shares under the
1996 plan and approximately 13 million additional shares to
complete our 1992 share repurchase plan of 200 million shares.
Since the inception of our initial share repurchase program
in 1984, through our current program as of December 31, 1998,
we have repurchased more than 1 billion shares. This represents
32 percent of the shares outstanding as of January 1, 1984, at
an average price per share of $12.46.
DIVIDEND POLICY - At its February 1999 meeting, our Board of
Directors again increased our quarterly dividend, raising it to
$.16 per share. This is equivalent to a full-year dividend of
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FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
$.64 in 1999, our 37th consecutive annual increase. Our annual
common stock dividend was $.60 per share, $.56 per share and
$.50 per share in 1998, 1997 and 1996, respectively.
In 1998, our dividend payout ratio was approximately 42 percent
of our net income. To free up additional cash for reinvestment in
our high-return beverage business, our Board of Directors intends
to gradually reduce our dividend payout ratio to 30 percent over
time.
FINANCIAL RISK MANAGEMENT
Our Company uses derivative financial instruments primarily to
reduce our exposure to adverse fluctuations in interest rates and
foreign exchange rates and, to a lesser extent, adverse
fluctuations in commodity prices and other market risks. We do
not enter into derivative financial instruments for trading
purposes. As a matter of policy, all our derivative positions
are used to reduce risk by hedging an underlying economic
exposure. Because of the high correlation between the hedging
instrument and the underlying exposure, fluctuations in the
value of the instruments are generally offset by reciprocal
changes in the value of the underlying exposure. The derivatives
we use are straightforward instruments with liquid markets.
Our Company monitors our exposure to financial market risks
using several objective measurement systems, including value-at-
risk models. For the value-at-risk calculations discussed below,
we used a historical simulation model to estimate potential
future losses our Company could incur as a result of adverse
movements in foreign currency and interest rates. We have not
considered the potential impact of favorable movements in
foreign currency and interest rates on our calculations. We
examined historical weekly returns over the previous 10 years
to calculate our value at risk. Our value-at-risk calculations
do not purport to represent actual losses that our Company
expects to incur.
FOREIGN CURRENCY - We manage most of our foreign currency
exposures on a consolidated basis, which allows us to net
certain exposures and take advantage of any natural offsets.
With approximately 74 percent of 1998 operating income generated
outside the United States, over time weakness in one particular
currency is often offset by strengths in others. We use
derivative financial instruments to further reduce our net
exposure to currency fluctuations.
Our Company enters into forward exchange contracts and
purchases currency options (principally European currencies and
Japanese yen) to hedge firm sale commitments denominated in
foreign currencies. We also purchase currency options
(principally European currencies and Japanese yen) to hedge
certain anticipated sales. Premiums paid and realized gains and
losses, including those on any terminated contracts, are included
in prepaid expenses and other assets. These are recognized in
income, along with unrealized gains and losses, in the same
period we realize the hedged transactions. Gains and losses on
derivative financial instruments that are designated and
effective as hedges of net investments in international
operations are included in share-owners' equity as a foreign
currency translation adjustment, a component of other
comprehensive income.
Our value-at-risk calculation estimates foreign currency risk
on our derivatives and other financial instruments. The average
value at risk represents the simple average of quarterly amounts
for the past year. We have not included in our calculation the
effects of currency movements on anticipated foreign currency
denominated sales and other hedged transactions. We performed
calculations to estimate the impact to the fair values of our
derivatives and other financial instruments over a one-week
period resulting from an adverse movement in foreign currency
exchange rates. As a result of our calculations, we estimate,
with 95 percent confidence, that the fair values would decline
by less than $75 million using 1998 average fair values and by
less than $60 million using December 31, 1998, fair values. On
December 31, 1997, we estimated the fair value would decline by
less than $58 million. However, we would expect that any loss in
the fair value of our derivatives and other financial instruments
would generally be offset by an increase in the fair value of our
underlying exposures.
INTEREST RATES - Our Company maintains our percentage of fixed
and variable rate debt within defined parameters. We enter into
interest rate swap agreements that maintain the fixed-to-variable
mix within these parameters. We recognize any differences paid or
received on interest rate swap agreements as adjustments to
interest expense over the life of each swap.
Our value-at-risk calculation estimates interest rate risk on
our derivatives and other financial instruments. The average
value at risk represents the simple average of quarterly amounts
for the past year. According to our calculations, we estimate,
with 95 percent confidence, that any increase in our average and
December 31, 1998, net interest expense due to an adverse move in
interest rates over a one-week period would not have a material
impact on our Consolidated Financial Statements. Our December 31,
1997, estimate also was not material to our Consolidated
Financial Statements.
PERFORMANCE TOOLS
Economic profit provides a framework by which we measure the
value of our actions. We define economic profit as income from
continuing operations, after taxes, excluding interest, in excess
of a computed capital charge for average operating capital
employed. To ensure that our management team stays clearly
focused on the key drivers of our business, economic profit and
unit case volume are used in determining annual and long-term
incentive awards for most eligible employees.
We use value-based management (VBM) as a tool to help improve
our performance in planning and execution. VBM principles assist
us in managing economic profit by clarifying
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FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
our understanding of what creates value and what destroys it and
encouraging us to manage for increased value. With VBM, we
determine how best to create value in every area of our business.
We believe that by using VBM as a planning and execution tool,
and economic profit as a performance measurement tool, we greatly
enhance our ability to build share-owner value over time.
TOTAL RETURN TO SHARE OWNERS
Our Company has provided share owners with an excellent return
on their investment over the past decade. A $100 investment in
our Company's common stock on December 31, 1988, together with
reinvested dividends, grew in pretax value to approximately
$1,365 on December 31, 1998, an average annual compound return
of 30 percent.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OUR BUSINESS
We are the world's leading manufacturer, marketer and
distributor of soft-drink beverage concentrates and syrups as
well as the world's largest marketer and distributor of juice
and juice-drink products. Our Company manufactures beverage
concentrates and syrups and, in certain instances, finished
beverages, which we sell to bottling and canning operations,
authorized fountain wholesalers and some fountain retailers.
In addition, we have ownership interests in numerous bottling
and canning operations.
VOLUME
We measure our sales volume in two ways: (1) gallon sales of
concentrates and syrups and (2) unit cases of finished products.
Gallon sales represent our primary business and measure the
volume of concentrates and syrups we sell to our bottling
partners or customers. Most of our revenues are based on this
measure of "wholesale" activity. We also measure volume in unit
cases, which represent the amount of finished products our
bottling system sells to retail customers. We believe unit case
volume more accurately measures the underlying strength of our
business system because it measures trends at the retail level.
We include fountain syrups sold directly to our customers in
both measures.
Against a challenging economic environment in many of our key
markets, our worldwide unit case volume increased 6 percent in
1998, on top of a 9 percent increase in 1997. Our business
system sold 15.8 billion unit cases in 1998, an increase of
approximately 900 million unit cases over 1997. These results
are the product of years of systematic investment in beverage
brands, bottlers, capital, information systems and people.
OPERATIONS
NET OPERATING REVENUES AND GROSS MARGIN - On a consolidated
basis, our net revenues remained even with 1997, and our gross
profit grew 3 percent in 1998. Net revenues remained even with
1997, primarily due to an increase in gallon sales and price
increases in certain markets, offset by the impact of a stronger
U.S. dollar and the sale of our previously consolidated bottling
and canning operations in Italy.
Our gross profit margin increased to 70 percent in 1998,
primarily due to the sale of previously consolidated bottling and
canning operations. The sale of consolidated bottling operations
shifts a greater portion of our net revenues to the lower
revenue, but higher margin, concentrate business.
On a consolidated basis, our net revenues increased 1 percent,
and our gross profit grew 8 percent in 1997. The growth in
revenues reflects gallon sales increases and price increases in
certain markets, offset by the full-year impact of the sale of
previously consolidated bottling and canning operations in
France, Belgium and eastern Germany in 1996, as well as the
effects of a stronger U.S. dollar. Our gross profit margin
increased to 68 percent in 1997 from 64 percent in 1996,
primarily as a result of the sale in 1996 of previously
consolidated bottling operations.
SELLING, ADMINISTRATIVE AND GENERAL EXPENSES - Selling expenses
totaled $6,552 million in 1998, $6,283 million in 1997 and $6,060
million in 1996. The increases in 1998 and 1997 were primarily
due to higher marketing expenditures in support of our Company's
volume growth.
Administrative and general expenses totaled $1,732 million in
1998, $1,569 million in 1997 and $1,960 million in 1996. The
increase in 1998 was mainly due to the expansion of our business
into emerging markets. Offsetting this increase was the impact of
the sale of our bottling operations in northern and central
Italy.
Also in 1998 we recorded nonrecurring provisions primarily
related to the impairment of certain assets in North America of
$25 million and Corporate of $48 million.
The decrease in 1997 was principally due to certain
nonrecurring provisions recorded in 1996, as discussed below,
partially offset by a $60 million nonrecurring provision recorded
in 1997 related to enhancing manufacturing efficiencies in North
America.
In 1996, administrative and general expenses increased due to
certain nonrecurring provisions. In the third quarter of 1996,
we recorded provisions of approximately $276 million in
administrative and general expenses related to our plans for
strengthening our worldwide system. Of this $276 million,
approximately $130 million related to streamlining our
operations, primarily in Greater Europe and Latin America. The
remainder of this $276 million provision was for impairment
charges to certain production facilities and reserves for losses
on the disposal of other production facilities of The Minute Maid
Company.
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FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
Also in 1996, we recorded in Corporate's administrative and
general expenses an $80 million impairment charge to recognize
Project Infinity's impact on existing information systems and a
$28.5 million charge as a result of our decision to make a
contribution to The Coca-Cola Foundation, a not-for-profit
charitable organization.
Administrative and general expenses, as a percentage of net
operating revenues, totaled approximately 9 percent in 1998,
8 percent in 1997 and 10 percent in 1996.
OPERATING INCOME AND OPERATING MARGIN - On a consolidated basis,
our operating income declined less than 1 percent in 1998 to
$4,967 million. This follows a 28 percent increase in 1997 to
$5,001 million. The 1998 results reflect an increase in gallon sales
coupled with an increase in gross profit margins, offset by the
impact of the stronger U.S. dollar and the sales of previously
consolidated bottling operations. The 1997 increase was due to
increased gallon sales coupled with an increase in gross profit
margins, as well as the recording of several nonrecurring
provisions in the third quarter of 1996. Our consolidated
operating margin was 26 percent in 1998 and 27 percent in 1997.
MARGIN ANALYSIS
[bar chart]
1998 1997 1996
- ---------------------------------------------------------
Net Operating Revenues $18.8 $18.9 $18.7
(in billions)
Gross Margin 70% 68% 64%
Operating Margin 26% 27% 21%
- ---------------------------------------------------------
INTEREST INCOME AND INTEREST EXPENSE - In 1998, our interest
income increased 4 percent, primarily due to cash held in
locations outside the United States earning higher interest
rates. In 1997, our interest income decreased 11 percent,
primarily due to decreases in international interest rates.
Interest expense increased 7 percent in 1998 due to higher
average commercial paper borrowings. Average 1998 debt balances
increased from 1997 primarily due to additional investments in
bottling operations. In 1997, we utilized cash proceeds received
from various transactions to reduce short-term indebtedness. In
1997, our interest expense decreased 10 percent, as a result of
the use of proceeds received reducing our commercial paper
borrowings.
EQUITY INCOME - Equity income decreased to $32 million in 1998,
principally due to the weak economic environments around the
world, the impact of a stronger U.S. dollar, continued structural
changes and losses in start-up bottling operations. Equity income
decreased 27 percent to $155 million in 1997, primarily due to
the significant amount of structural change in our global
bottling system, which was partially offset by solid results at
key equity bottlers.
OTHER INCOME-NET - In 1998, other income-net totaled $230 million
and primarily includes gains recorded on the sales of our
bottling operations in northern and central Italy.
In 1997, other income-net increased $496 million and included
gains totaling $508 million on the sales of our interests in
Coca-Cola & Schweppes Beverages Ltd., Coca-Cola Beverages Ltd.
of Canada and The Coca-Cola Bottling Company of New York, Inc.
Gains on other bottling transactions are also included in other
income-net.
GAINS ON ISSUANCES OF STOCK BY EQUITY INVESTEES - At the time an
equity investee sells its stock to third parties at a price in
excess of our book value, our Company's equity in the underlying
net assets of that investee increases. We generally record an
increase to our investment account and a corresponding gain in
these transactions.
As a result of sales of stock by certain equity investees,
we recorded pretax gains of approximately $27 million in 1998
and approximately $363 million in 1997. These gains represent
the increase in our Company's equity in the underlying net
assets of the related investee. For a more complete description
of these transactions, see Note 3 in our Consolidated Financial
Statements.
INCOME TAXES - Our effective tax rates were 32.0 percent in 1998,
31.8 percent in 1997 and 24.0 percent in 1996. Our effective tax
rate reflects tax benefits derived from significant operations
outside the United States, which are taxed at rates lower than
the U.S. statutory rate of 35.0 percent, partially offset by the
tax impact of certain gains recognized from previously discussed
bottling transactions. These transactions are generally taxed at
rates higher than our Company's effective tax rate on operations.
In 1996, our Company reached an agreement, in principle with
the U.S. Internal Revenue Service, settling certain U.S.-related
income tax matters. This settlement resulted in a one-time
reduction of $320 million to our 1996 income tax expense. For a
more complete description, see Note 14 in our Consolidated
Financial Statements.
INCOME PER SHARE - Our basic net income per share declined by
14 percent in 1998, compared to a 19 percent growth in 1997 and
1996. Diluted net income per share declined 13 percent in 1998,
compared to a 19 percent and 18 percent growth in 1997 and 1996,
respectively.
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FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
We believe our ability to generate cash from operations to
reinvest in our business is one of our fundamental financial
strengths. We anticipate that our operating activities in 1999
will continue to provide us with cash flows to assist in our
business expansion and meet our financial commitments.
FREE CASH FLOW - Free cash flow is the cash remaining from
operations after we have satisfied our business reinvestment
opportunities. We focus on increasing free cash flow to achieve
our primary objective: maximizing share-owner value over time.
We use free cash flow, along with borrowings, to pay dividends
and repurchase shares. The consolidated statements of our cash
flows are summarized as follows (in millions):
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------
Cash flows provided by
(used in):
Operations $ 3,433 $ 4,033 $ 3,463
Investment activities (2,161) (500) (1,050)
- -------------------------------------------------------------------
FREE CASH FLOW 1,272 3,533 2,413
Cash flows used in:
Financing
Share repurchases (1,563) (1,262) (1,521)
Other financing activities 230 (1,833) (581)
Exchange (28) (134) (45)
- -------------------------------------------------------------------
Increase (decrease) in cash $ (89) $ 304 $ 266
===================================================================
Cash provided by operations in 1998 amounted to $3.4 billion,
a 15 percent decrease from 1997, primarily due to an increased
use of cash for operating assets and liabilities in 1998. In
1997, cash provided by operations amounted to $4.0 billion, a 16
percent increase from 1996. This change was primarily due to an
increase in net income in 1997.
In 1998, net cash used in investing activities increased
compared to 1997. Investing activities in 1997 included
incremental proceeds of approximately $1 billion, as discussed
below. During 1998, investing activities included additional
investments in territories, such as India and Latin American
countries.
In 1997, net cash used in investing activities decreased,
primarily due to the increase in proceeds from the disposal of
investments and other assets, which included the dispositions of
our interests in Coca-Cola & Schweppes Beverages Ltd., The
Coca-Cola Bottling Company of New York, Inc., and Coca-Cola
Beverages Ltd. of Canada. This growth was partially offset by
increased acquisitions and investments, primarily in bottling
operations, including the South Korean bottlers.
FINANCING ACTIVITIES - Our financing activities include net
borrowings, dividend payments and share repurchases. Net cash
used in financing activities totaled $1.3 billion in 1998,
$3.1 billion in 1997 and $2.1 billion in 1996. The change between
1998 and 1997 was primarily due to net reductions of debt in 1997
compared to net borrowings in 1998.
Cash used to purchase common stock for treasury totaled $1.6
billion in 1998 versus $1.3 billion in 1997.
Commercial paper is our primary source of short-term financing.
On December 31, 1998, we had $4.3 billion outstanding in
commercial paper borrowings compared to $2.6 billion outstanding
in 1997, a $1.7 billion increase in borrowings. The 1998 increase
in loans and notes payable was due to additional commercial paper
borrowings used for additional investments in bottling operations
and share repurchases. The 1997 reduction of debt was due to cash
proceeds received from the sale of bottlers. In addition, at
December 31, 1998, we had $1.6 billion in lines of credit and
other short-term credit facilities available, of which
approximately $89 million was outstanding.
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 so we can quickly and decisively respond to changing
economic and political environments and to fluctuations in
foreign currencies.
We use approximately 50 functional currencies. Due to our
global operations, weaknesses in some of these currencies are
often offset by strengths in others. In 1998, 1997 and 1996,
the weighted-average exchange rates for foreign currencies, and
certain individual currencies, strengthened (weakened) against
the U.S. dollar as follows:
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------
All currencies (9)% (10)% (10)%
- ----------------------------------------------------------------
Australian dollar (16)% (6)% 5 %
British pound 2 % 4 % (1)%
Canadian dollar (7)% (1)% Even
French franc (3)% (12)% (4)%
German mark (3)% (13)% (6)%
Japanese yen (6)% (10)% (15)%
================================================================
These percentages do not include the effects of our hedging
activities and, therefore, do not reflect the actual impact of
fluctuations in exchange on our operating results. Our foreign
currency management program mitigates over time a portion of our
exchange risks. The impact of a stronger U.S. dollar reduced our
operating income by approximately 9 percent in 1998.
The change in our foreign currency translation adjustment in
1997 was primarily due to the revaluation of net assets located
in countries where the local currency significantly weakened
against the U.S. dollar. Exchange gains (losses)-net amounted to
$(34) million in 1998, $(56) million in 1997 and $3 million in
1996, and were recorded in other income-net. Exchange gains
(losses)-net includes the remeasurement of certain currencies
into functional currencies and the costs of hedging certain
exposures of our balance sheet.
Additional information concerning our hedging activities is
presented in Note 9 in our Consolidated Financial Statements.
- 33 -
FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
FINANCIAL POSITION
The carrying amount of our investment in Coca-Cola Enterprises
increased in 1998 as a result of Coca-Cola Enterprises' issuance
of stock in its acquisitions of various bottling operations. The
carrying value of our investment in Coca-Cola Amatil increased
due to its acquisition of our bottling operations in South Korea,
offset by the spin-off of Coca-Cola Beverages to its share
owners. The increase for Coca-Cola Beverages is primarily a
result of our equity participation in its formation in 1998, as
previously discussed, and the sale to Coca-Cola Beverages of our
bottling operations in northern and central Italy. The increase
in prepaid expenses and other assets is primarily due to
increases in receivables from equity method investees, marketing
prepaids and miscellaneous receivables.
The carrying value of our investment in Coca-Cola Enterprises
decreased in 1997 as a result of deferred gains related to the
sales of our interests in Coca-Cola & Schweppes Beverages Ltd.,
Coca-Cola Beverages Ltd. of Canada and The Coca-Cola Bottling
Company of New York, Inc. to Coca-Cola Enterprises. The deferred
gains resulted from our approximately 44 percent ownership in
Coca-Cola Enterprises. The carrying value of our investment in
Coca-Cola Amatil increased in 1997 due to Coca-Cola Amatil
issuing shares to San Miguel Corporation at a value per share
greater than the carrying value per share of our interest in
Coca-Cola Amatil. Our equity method investments also increased in
1997 due to our change from the cost method to the equity method
of accounting for Panamerican Beverages, Inc. (Panamco) and Grupo
Continental, S.A., and due to increased investments in other
bottling operations. Our cost method investments declined due to
the change in accounting for Panamco and Grupo Continental, S.A.,
partially offset by additional investments in Embotelladoras
Polar S.A. and Embotelladora Andina S.A. Unrealized gain on
available-for-sale securities, a component of share-owners'
equity, is composed of adjustments to report our marketable cost
method investments at fair value. During 1997, unrealized gain
on securities decreased $98 million primarily due to the change
in accounting for Panamco and Grupo Continental, S.A.
YEAR 2000
Certain computer programs written with two digits rather than
four to define the applicable year may experience problems
handling dates near the end of and beyond the year 1999 (Year
2000 failure dates). This may cause computer applications to
fail or to create erroneous results unless corrective measures
are taken. The Year 2000 problem can arise at any point in the
Company's supply, manufacturing, processing, distribution and
financial chains.
Aided by third party service providers, we are implementing a
plan to address the anticipated impacts of the Year 2000 problem
on our information technology (IT) systems and on non-IT systems
involving embedded chip technologies (non-IT systems). We are
also surveying selected third parties to determine the status
of their Year 2000 compliance programs. In addition, we are
developing contingency plans specifying what the Company will do
if it or important third parties experience disruptions as a
result of the Year 2000 problem.
With respect to IT systems, our Year 2000 plan includes
programs relating to (i) computer applications, including those
for mainframes, client server systems, minicomputers and personal
computers (the Applications Program) and (ii) IT infrastructure,
including hardware, software, network technology and voice and
data communications (the Infrastructure Program). In the case of
non-IT systems, our Year 2000 plan includes programs relating to
(i) equipment and processes required to produce and distribute
beverage concentrates and syrups, finished beverages, juices and
juice-drink products (the Manufacturing Program) and (ii)
equipment and systems in buildings not encompassed by the
Manufacturing Program that our Company occupies or leases to
third parties (the Facilities Program).
Each of these programs is being conducted in phases, described
as follows:
INVENTORY PHASE - Identify hardware, software, processes or
devices that use or process date information.
ASSESSMENT PHASE - Identify Year 2000 date processing
deficiencies and related implications.
PLANNING PHASE - Determine for each deficiency an appropriate
solution and budget. Schedule resources and develop testing
plans.
IMPLEMENTATION PHASE - Implement designed solutions. Conduct
appropriate systems testing.
Certain additional testing may be conducted following
completion of the implementation phase. The plan also includes a
control element intended to ensure that changes to IT and non-IT
systems do not introduce additional Year 2000 issues.
Our Year 2000 plan is subject to modification and is revised
periodically as additional information is developed. The Company
currently believes that its Year 2000 plan will be completed in
all material respects prior to the anticipated Year 2000 failure
dates. As of the respective dates indicated below, status reports
regarding the Applications, Infrastructure, Manufacturing and
Facilities Programs are as follows:
APPLICATIONS PROGRAM (AS OF JANUARY 16, 1999) - We have
completed the inventory, assessment and planning phases for all
46 applications considered to be mission-critical, and
implementation phase progress is as follows: 37 are complete and
nine are expected to be completed by June 1999. Of approximately
2,500 other applications we have identified, approximately 2,300
have been assessed and approximately 1,200 of these have been
determined to require Year 2000 planning and implementation phase
work. Remaining assessment phase work is expected to be completed
by March 1999. We have completed the planning and implementation
- 34 -
FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
phases for approximately 1,100 applications, and we estimate
completion of the remainder by July 1999.
INFRASTRUCTURE PROGRAM (AS OF JANUARY 16, 1999) - The inventory
phase is estimated to be approximately 91 percent complete and is
expected to be fully completed by April 1999. Approximately 2,300
"components" have been identified. (We define a component as a
particular type - of which there may be numerous individual
iterations - of software package, computer or telecommunications
hardware, or lab or research equipment, including any supporting
software and utilities.) The assessment, planning and
implementation phases are estimated to be approximately 84
percent, 79 percent and 50 percent complete, respectively, and
are expected to be fully completed by May, May and October 1999,
respectively.
MANUFACTURING PROGRAM (AS OF JANUARY 22, 1999) - We have
identified 102 separate manufacturing operations in which our
Company's ownership interest is 50 percent or greater. Of these,
100 operations have completed the inventory phase, and all are
expected to have done so by January 1999. The assessment phase
is complete in 94 operations and is expected to be fully
completed by February 1999. Planning phase work has been
completed in 76 operations and is expected to be fully completed
by April 1999. Implementation phase work has been completed in
42 operations and is expected to be fully completed by July 1999.
FACILITIES PROGRAM (AS OF JANUARY 25, 1999) - We have
identified 46 non-manufacturing buildings in which our Company's
ownership interest is 50 percent or greater. Of these, status by
phase is as follows:
Not Yet In Total Estimated 100%
Phase Started Progress Complete Buildings Completion Date
- -----------------------------------------------------------------------
Inventory 4 1 41 46 March 1999
Assessment 5 9 32 46 April 1999
Planning 12 21 13 46 May 1999
Implementation 33 6 7 46 October 1999
=======================================================================
Owners of properties leased by our Company are being contacted
in order to assess the Year 2000 readiness of their facilities.
THIRD PARTY YEAR 2000 READINESS - The Company has material
relationships with third parties whose failure to be Year 2000
compliant could have materially adverse impacts on our Company's
business, operations or financial condition in the future. Third
parties that we consider to be in this category for Year 2000
purposes (Key Business Partners) include critically important
bottlers, customers, suppliers, vendors and public entities such
as government regulatory agencies, utilities, financial entities
and others.
BOTTLERS - We derive most of our net operating revenues from
sales of concentrates, syrups and finished products to authorized
third parties, including bottling and canning operations
(Bottlers), that produce, package and distribute beverages
bearing the Company's brands. We have made Year 2000 awareness
information available to all Bottlers and have asked each
Bottler to advise us of the Bottler's plans for reaching Year
2000 readiness with respect to non-IT systems. As of December 31,
1998, unconsolidated Bottlers representing approximately 99
percent of our 1998 worldwide unit case volume from
unconsolidated Bottlers have made their plans available to us,
including all 10 of our anchor bottlers. We have also contacted
the Bottlers to inquire about their state of Year 2000 readiness
with respect to IT systems as well as the actions being taken by
Bottlers with respect to third parties. We may take further
action as we deem it appropriate in particular cases.
CUSTOMERS - We have met and exchanged information with a
limited number of key non-Bottler customers regarding Year 2000
readiness issues. We are now formalizing these contacts into a
program designed to help us assess the Year 2000 readiness of
key non-Bottler customers.
SUPPLIERS AND VENDORS - The Company classifies as "critical"
those suppliers of products or services consumed on an ongoing
basis that, if interrupted, would materially disrupt the
Company's ability to deliver products or conduct operations.
We are conducting on-site reviews of suppliers identified as
critical on a worldwide basis, for purposes of assessing their
Year 2000 plans and their progress toward implementation. We
expect all of these reviews to be completed by April 1999.
Thereafter, additional assessments may occur during the remainder
of the year. In addition, each Company field location is working
to assess the likelihood of supply issues with suppliers
classified as critical on a regional basis.
Suppliers of less critical importance to our business, and
vendors from whom we buy goods expected to be in service beyond
1999, have been sent a questionnaire from us asking about the
status of their Year 2000 plans. Responses are being evaluated,
certain selected goods are being tested, and follow-up action is
being taken by the Company as it deems appropriate.
PUBLIC ENTITIES - We are also in the process of implementing a
Year 2000 program involving interaction with and assessment of
public entities such as government regulatory agencies,
utilities, financial entities and others.
CONTINGENCY PLANS - The Company is preparing contingency plans
relating specifically to identified Year 2000 risks and
developing cost estimates relating to these plans. Contingency
plans may include stockpiling raw and packaging materials,
increasing inventory levels, securing alternate sources of
supply and other appropriate measures. We anticipate completion
of the Year 2000 contingency plans during the first half of 1999.
Once developed, Year 2000 contingency plans and related cost
estimates will be tested in certain respects and continually
refined as additional information becomes available.
- 35 -
FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
YEAR 2000 RISKS - While the Company currently believes that it
will be able to modify or replace its affected systems in time
to minimize any significant detrimental effects on its
operations, failure to do so, or the failure of Key Business
Partners or other third parties to modify or replace their
affected systems, could have materially adverse impacts on the
Company's business, operations or financial condition in the
future. There can be no guarantee that such impacts will not
occur. In particular, because of the interdependent nature of
business systems, the Company could be materially adversely
affected if private businesses, utilities and governmental
entities with which it does business or that provide essential
products or services are not Year 2000 ready. The Company
currently believes that the greatest risk of disruption in its
businesses exists in certain international markets. Reasonably
likely consequences of failure by the Company or third parties
to resolve the Year 2000 problem include, among other things,
temporary slowdowns or cessations of operations at one or more
Company or Bottler facilities, delays in the delivery or
distribution of products, delays in the receipt of supplies,
invoice and collection errors, and inventory and supply
obsolescence. However, the Company believes that its Year 2000
readiness program, including related contingency planning,
should significantly reduce the possibility of significant
interruptions of normal operations.
COSTS - As of December 31, 1998, the Company's total incremental
costs (historical plus estimated future costs) of addressing Year
2000 issues are estimated to be in the range of $130 million to
$160 million, of which approximately $70 million has been
incurred. These costs are being funded through operating cash
flow. These amounts do not include: (i) any costs associated
with the implementation of contingency plans, which are in the
process of being developed, or (ii) costs associated with
replacements of computerized systems or equipment in cases where
replacement was not accelerated due to Year 2000 issues.
Implementation of our Company's Year 2000 plan is an ongoing
process. Consequently, the above described estimates of costs
and completion dates for the various components of the plan are
subject to change.
For further information regarding Year 2000 matters, see the
disclosures under Forward-Looking Statements on page 37.
EURO CONVERSION
In January 1999, certain member countries of the European
Union established permanent, fixed conversion rates between their
existing currencies and the European Union's common currency
(the Euro).
The transition period for the introduction of the Euro is
scheduled to phase in over a period ending January 1, 2002, with
the existing currency being completely removed from circulation
on July 1, 2002. Our Company has been preparing for the
introduction of the Euro for several years. The timing of our
phasing out all uses of the existing currencies will comply
with the legal requirements and also be scheduled to facilitate
optimal coordination with the plans of our vendors, distributors
and customers. Our work related to the introduction of the Euro
and the phasing out of the other currencies includes converting
information technology systems; recalculating currency risk;
recalibrating derivatives and other financial instruments;
evaluating and taking action, if needed, regarding continuity of
contracts; and modifying our processes for preparing tax,
accounting, payroll and customer records.
Based on our work to date, we believe the introduction of the
Euro and the phasing out of the other currencies will not have a
material impact on our Company's Consolidated Financial
Statements.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation affects the way we operate in many markets around
the world. In general, we are able to increase prices to
counteract the inflationary effects of increasing costs and to
generate sufficient cash flows to maintain our productive
capability.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The new
statement requires all derivatives to be recorded on the balance
sheet at fair value and establishes new accounting rules for
hedging instruments. The statement is effective for the Company
in the Year 2000. We are assessing the impact this statement will
have on our Consolidated Financial Statements.
OUTLOOK
While we cannot predict future performance, we believe
considerable opportunities exist for sustained, profitable
growth, not only in the developing population centers of the
world but also in our most established markets, including the
United States.
We firmly believe the strength of our brands, our unparalleled
distribution system, our global presence, our strong financial
condition and the skills of our people give us the flexibility to
capitalize on our growth opportunities as we continue to pursue
our goal of increasing share-owner value over time.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act)
provides a safe harbor for forward-looking statements made by or
on behalf of our Company. Our Company and its representatives may
from time to time make written or verbal forward-looking
statements, including statements contained in this report and
other Company filings with the Securities and Exchange Commission
and in our reports to share owners.
- 36 -
FINANCIAL REVIEW
INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
THE COCA-COLA COMPANY AND SUBSIDIARIES
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, statements expressing
general optimism about future operating results and non-
historical Year 2000 information, are forward-looking statements
within the meaning of the Act. The forward-looking statements are
and will be based on management's then current views and
assumptions regarding future events and operating performance.
The following are some of the factors that could affect our
financial performance or could cause actual results to differ
materially from estimates contained in or underlying our
Company's forward-looking statements:
- -- Our ability to generate sufficient cash flows to support
capital expansion plans, share repurchase programs and general
operating activities.
- -- 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. While we believe our
opportunities for sustained, profitable growth are
considerable, unanticipated actions of competitors could
impact our earnings, share of sales and volume growth.
- -- Changes in laws and regulations, including changes in
accounting standards, taxation requirements (including tax
rate changes, new tax laws and revised tax law
interpretations) and environmental laws in domestic or foreign
jurisdictions.
- -- 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.
- -- Interest rate fluctuations and other capital market
conditions, including foreign currency rate fluctuations. Most
of our exposures to capital markets, including interest and
foreign currency, 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 foreign
currency exposures.
- -- Economic and political conditions in international markets,
including civil unrest, governmental changes and restrictions
on the ability to transfer capital across borders.
- -- 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 effectiveness of our advertising, marketing and
promotional programs.
- -- 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.
- -- Adverse weather conditions, which could reduce demand for
Company products.
- -- Our ability and the ability of our Key Business Partners and
other third parties to replace, modify or upgrade computer
systems in ways that adequately address the Year 2000 problem.
Given the numerous and significant uncertainties involved,
there can be no assurance that Year 2000 related estimates and
anticipated results will be achieved, and actual results could
differ materially. Specific factors that might cause such
material differences include, but are not limited to, the
ability to identify and correct all relevant computer codes
and embedded chips, unanticipated difficulties or delays in
the implementation of Year 2000 project plans and the ability
of third parties to adequately address their own Year 2000
issues.
- -- Our ability to timely resolve issues relating to introduction
of the European Union's common currency (the Euro).
The foregoing list of important factors is not exclusive.
ADDITIONAL INFORMATION
For additional information about our operations, cash flows,
liquidity and capital resources, please refer to the information
on pages 40 through 60 of this report. Additional information
concerning our operating segments is presented on pages 57
through 58.
- 37 -
SELECTED FINANCIAL DATA
THE COCA-COLA COMPANY AND SUBSIDIARIES
Compound
(In millions except per Growth Rates Year Ended December 31,
share data, ratios ------------------ -----------------------------------------------
and growth rates) 5 Years 10 Years 1998{2} 1997{2} 1996{2} 1995{2}
- -----------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net operating revenues 6.0% 8.8% $ 18,813 $ 18,868 $ 18,673 $ 18,127
Cost of goods sold 1.5% 5.0% 5,562 6,015 6,738 6,940
- -----------------------------------------------------------------------------------------------
Gross profit 8.4% 11.0% 13,251 12,853 11,935 11,187
Selling, administrative
and general expenses 7.5% 10.5% 8,284 7,852 8,020 7,161
- -----------------------------------------------------------------------------------------------
Operating income 9.9% 12.0% 4,967 5,001 3,915 4,026
Interest income 219 211 238 245
Interest expense 277 258 286 272
Equity income 32 155 211 169
Other income (deductions)-net 230 583 87 86
Gains on issuances of stock by
equity investees 27 363 431 74
- ----------------------------------------------------------------------------------------------
Income from continuing
operations before income
taxes and changes in
accounting principles 10.3% 12.3% 5,198 6,055 4,596 4,328
Income taxes 10.8% 12.0% 1,665 1,926 1,104 1,342
- ----------------------------------------------------------------------------------------------
Income from continuing
operations before changes
in accounting principles 10.1% 12.5% $ 3,533 $ 4,129 $ 3,492 $ 2,986
===============================================================================================
Net income 10.2% 13.0% $ 3,533 $ 4,129 $ 3,492 $ 2,986
Preferred stock dividends - - - -
- -----------------------------------------------------------------------------------------------
Net income available to
common share owners 10.2% 13.0% $ 3,533 $ 4,129 $ 3,492 $ 2,986
===============================================================================================
Average common shares
outstanding 2,467 2,477 2,494 2,525
Average common shares
outstanding assuming
dilution 2,496 2,515 2,523 2,549
PER COMMON SHARE DATA
Income from continuing
operations before
changes in accounting
principles - basic 11.2% 14.5% $ 1.43 $ 1.67 $ 1.40 $ 1.18
Income from continuing
operations before
changes in accounting
principles - diluted 11.3% 14.4% 1.42 1.64 1.38 1.17
Basic net income 11.2% 14.8% 1.43 1.67 1.40 1.18
Diluted net income 11.3% 15.0% 1.42 1.64 1.38 1.17
Cash dividends 12.0% 14.9% .60 .56 .50 .44
Market price on December 31 24.6% 28.2% 67.00 66.69 52.63 37.13
TOTAL MARKET VALUE OF
COMMON STOCK{1} 23.3% 26.4% $165,190 $164,766 $130,575 $ 92,983
BALANCE SHEET DATA
Cash, cash equivalents and
current marketable
securities $ 1,807 $ 1,843 $ 1,658 $ 1,315
Property, plant and
equipment-net 3,669 3,743 3,550 4,336
Depreciation 381 384 442 421
Capital expenditures 863 1,093 990 937
Total assets 19,145 16,881 16,112 15,004
Long-term debt 687 801 1,116 1,141
Total debt 5,149 3,875 4,513 4,064
Share-owners' equity 8,403 7,274 6,125 5,369
Total capital{1} 13,552 11,149 10,638 9,433
OTHER KEY FINANCIAL MEASURES{1}
Total debt-to-total capital 38.0% 34.8% 42.4% 43.1%
Net debt-to-net capital 28.1% 22.0% 31.6% 32.3%
Return on common equity 45.1% 61.6% 60.8% 56.4%
Return on capital 30.2% 39.5% 36.8% 34.9%
Dividend payout ratio 41.9% 33.6% 35.7% 37.2%
Free cash flow $ 1,272 $ 3,533 $ 2,413 $ 2,102
Economic profit $ 2,480 $ 3,325 $ 2,718 $ 2,291
===============================================================================================
<FN>
{1} See Glossary on page 65.
{2} In 1998, we adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits."
{3} In 1994, we adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities."
{4} In 1993, we adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits."
{5} In 1992, we adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions."
</FN>
- 38 -
SELECTED FINANCIAL DATA
THE COCA-COLA COMPANY AND SUBSIDIARIES
(In millions except per Year Ended December 31,
share data, ratios --------------------------------------------------------------------------------------
and growth rates) 1994{2,3} 1993{2,4} 1992{2,5,6} 1991{2,6} 1990{2,6} 1989{6} 1988
------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net operating revenues $ 16,264 $ 14,030 $ 13,119 $ 11,599 $ 10,261 $ 8,637 $ 8,076
Cost of goods sold 6,168 5,160 5,055 4,649 4,208 3,548 3,429
- -------------------------------------------------------------------------------------------------------------------
Gross profit 10,096 8,870 8,064 6,950 6,053 5,089 4,647
Selling, administrative
and general expenses 6,459 5,771 5,317 4,641 4,103 3,342 3,044
- -------------------------------------------------------------------------------------------------------------------
Operating income 3,637 3,099 2,747 2,309 1,950 1,747 1,603
Interest income 181 144 164 175 170 205 199
Interest expense 199 168 171 192 231 308 230
Equity income 134 91 65 40 110 75 92
Other income (deductions)-
net (25) 7 (59) 51 15 45 (38)
Gains on issuances of stock
by equity investees - 12 - - - - -
- -------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before income
taxes and changes in
accounting principles 3,728 3,185 2,746 2,383 2,014 1,764 1,626
Income taxes 1,174 997 863 765 632 553 537
- -------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before changes
in accounting principles $ 2,554 $ 2,188 $ 1,883 $ 1,618 $ 1,382 $ 1,211 $ 1,089
===================================================================================================================
Net income $ 2,554 $ 2,176 $ 1,664 $ 1,618 $ 1,382 $ 1,537 $ 1,045
Preferred stock dividends - - - 1 18 21 7
- -------------------------------------------------------------------------------------------------------------------
Net income available to
common share owners $ 2,554 $ 2,176 $ 1,664 $ 1,617 $ 1,364 $ 1,516{7} $ 1,038
===================================================================================================================
Average common shares
outstanding 2,580 2,603 2,634 2,666 2,674 2,768 2,917
Average common shares
outstanding assuming
dilution 2,599 2,626 2,668 2,695 2,706 2,789 2,929
PER COMMON SHARE DATA
Income from continuing
operations before
changes in accounting
principles - basic $ .99 $ .84 $ .72 $ .61 $ .51 $ .43 $ .37
Income from continuing
operations before
changes in accounting
principles - diluted .98 .83 .71 .60 .50 .43 .37
Basic net income .99 .84 .63 .61 .51 .55{7} .36
Diluted net income .98 .83 .62 .60 .50 .54 .35
Cash dividends .39 .34 .28 .24 .20 .17 .15
Market price on December 31 25.75 22.31 20.94 20.06 11.63 9.66 5.58
TOTAL MARKET VALUE OF
COMMON STOCK{1} $ 65,711 $ 57,905 $ 54,728 $53,325 $ 31,073 $ 26,034 $15,834
BALANCE SHEET DATA
Cash, cash equivalents and
current marketable
securities $ 1,531 $ 1,078 $ 1,063 $ 1,117 $ 1,492 $ 1,182 $ 1,231
Property, plant and
equipment - net 4,080 3,729 3,526 2,890 2,386 2,021 1,759
Depreciation 382 333 310 254 236 181 167
Capital expenditures 878 800 1,083 792 593 462 387
Total assets 13,863 11,998 11,040 10,185 9,245 8,249 7,451
Long-term debt 1,426 1,428 1,120 985 536 549 761
Total debt 3,509 3,100 3,207 2,288 2,537 1,980 2,124
Share-owners' equity 5,228 4,570 3,881 4,236 3,662 3,299 3,345
Total capital{1} 8,737 7,670 7,088 6,524 6,199 5,279 5,469
OTHER KEY FINANCIAL
MEASURES{1}
Total debt-to-total capital 40.2% 40.4% 45.2% 35.1% 40.9% 37.5% 38.8%
Net debt-to-net capital 25.5% 29.0% 33.1% 24.2% 24.6% 15.6% 21.1%
Return on common equity 52.1% 51.8% 46.4% 41.3% 41.4% 39.4% 34.7%
Return on capital 32.8% 31.2% 29.4% 27.5% 26.8% 26.5% 21.3%
Dividend payout ratio 39.4% 40.6% 44.3% 39.5% 39.2% 31.0%{7} 42.1%
Free cash flow $ 2,146 $ 1,623 $ 873 $ 960 $ 844 $ 1,664 $ 1,517
Economic profit $ 1,896 $ 1,549 $ 1,300 $ 1,073 $ 920 $ 859 $ 717
===================================================================================================================
<FN>
{6} In 1992, we adopted SFAS No. 109, "Accounting for Income Taxes," by restating financial statements
beginning in 1989.
{7} Net income available to common share owners in 1989 included after-tax gains of $604 million
($.22 per common share, basic and diluted) from the sales of our equity interest in Columbia
Pictures Entertainment, Inc. and our bottled water business, and the transition effect of
$265 million related to the change in accounting for income taxes. Excluding these nonrecurring
items, our dividend payout ratio in 1989 was 39.9 percent.
<FN>
- 39 -
CONSOLIDATED BALANCE SHEETS
THE COCA-COLA COMPANY AND SUBSIDIARIES
December 31, 1998 1997
- ------------------------------------------------------------------------------------
(In millions except share data)
ASSETS
CURRENT
Cash and cash equivalents $ 1,648 $ 1,737
Marketable securities 159 106
- ------------------------------------------------------------------------------------
1,807 1,843
Trade accounts receivable, less allowances
of $10 in 1998 and $23 in 1997 1,666 1,639
Inventories 890 959
Prepaid expenses and other assets 2,017 1,528
- ------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,380 5,969
- ------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Equity method investments
Coca-Cola Enterprises Inc. 584 184
Coca-Cola Amatil Limited 1,255 1,204
Coca-Cola Beverages plc 879 -
Other, principally bottling companies 3,573 3,049
Cost method investments, principally
bottling companies 395 457
Marketable securities and other assets 1,863 1,607
- -------------------------------------------------------------------------------------
8,549 6,501
- -------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 199 183
Buildings and improvements 1,507 1,535
Machinery and equipment 3,855 3,896
Containers 124 157
- -------------------------------------------------------------------------------------
5,685 5,771
Less allowances for depreciation 2,016 2,028
- -------------------------------------------------------------------------------------
3,669 3,743
- -------------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS 547 668
- -------------------------------------------------------------------------------------
$ 19,145 $ 16,881
=====================================================================================
- 40 -
CONSOLIDATED BALANCE SHEETS
THE COCA-COLA COMPANY AND SUBSIDIARIES
December 31, 1998 1997
- -------------------------------------------------------------------------------------
LIABILITIES AND SHARE-OWNERS' EQUITY
CURRENT
Accounts payable and accrued expenses $ 3,141 $ 3,249
Loans and notes payable 4,459 2,677
Current maturities of long-term debt 3 397
Accrued income taxes 1,037 1,056
- -------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 8,640 7,379
- -------------------------------------------------------------------------------------
LONG-TERM DEBT 687 801
- -------------------------------------------------------------------------------------
OTHER LIABILITIES 991 1,001
- -------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 424 426
- -------------------------------------------------------------------------------------
SHARE-OWNERS' EQUITY
Common stock, $.25 par value
Authorized: 5,600,000,000 shares
Issued: 3,460,083,686 shares in 1998;
3,443,441,902 shares in 1997 865 861
Capital surplus 2,195 1,527
Reinvested earnings 19,922 17,869
Accumulated other comprehensive income
and unearned compensation on restricted stock (1,434) (1,401)
- -------------------------------------------------------------------------------------
21,548 18,856
Less treasury stock, at cost
(994,566,196 shares in 1998;
972,812,731 shares in 1997) 13,145 11,582
- ------------------------------------------------------------------------------------
8,403 7,274
- ------------------------------------------------------------------------------------
$ 19,145 $ 16,881
====================================================================================
See Notes to Consolidated Financial Statements.
- 41 -
CONSOLIDATED STATEMENTS OF INCOME
THE COCA-COLA COMPANY AND SUBSIDIARIES
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------
(In millions except per share data)
NET OPERATING REVENUES $ 18,813 $ 18,868 $ 18,673
Cost of goods sold 5,562 6,015 6,738
- -------------------------------------------------------------------------------------------
GROSS PROFIT 13,251 12,853 11,935
Selling, administrative and general expenses 8,284 7,852 8,020
- -------------------------------------------------------------------------------------------
OPERATING INCOME 4,967 5,001 3,915
Interest income 219 211 238
Interest expense 277 258 286
Equity income 32 155 211
Other income-net 230 583 87
Gains on issuances of stock by equity investees 27 363 431
- -------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 5,198 6,055 4,596
Income taxes 1,665 1,926 1,104
- -------------------------------------------------------------------------------------------
NET INCOME $ 3,533 $ 4,129 $ 3,492
===========================================================================================
BASIC NET INCOME PER SHARE $ 1.43 $ 1.67 $ 1.40
DILUTED NET INCOME PER SHARE $ 1.42 $ 1.64 $ 1.38
===========================================================================================
AVERAGE SHARES OUTSTANDING 2,467 2,477 2,494
Dilutive effect of stock options 29 38 29
- -------------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,496 2,515 2,523
===========================================================================================
See Notes to Consolidated Financial Statements.
- 42 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE COCA-COLA COMPANY AND SUBSIDIARIES
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------
(In millions)
OPERATING ACTIVITIES
Net income $ 3,533 $ 4,129 $ 3,492
Depreciation and amortization 645 626 633
Deferred income taxes (38) 380 (145)
Equity income, net of dividends 31 (108) (89)
Foreign currency adjustments 21 37 (60)
Gains on issuances of stock by equity investees (27) (363) (431)
Gains on sales of assets, including
bottling interests (306) (639) (135)
Other items 124 18 316
Net change in operating assets and liabilities (550) (47) (118)
- -----------------------------------------------------------------------------------
Net cash provided by operating activities 3,433 4,033 3,463
- -----------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions and investments, principally
bottling companies (1,428) (1,100) (645)
Purchases of investments and other assets (610) (459) (623)
Proceeds from disposals of investments and
other assets 1,036 1,999 1,302
Purchases of property, plant and equipment (863) (1,093) (990)
Proceeds from disposals of property, plant
and equipment 54 71 81
Other investing activities (350) 82 (175)
- -----------------------------------------------------------------------------------
Net cash used in investing activities (2,161) (500) (1,050)
- -----------------------------------------------------------------------------------
Net cash provided by operations
after reinvestment 1,272 3,533 2,413
- -----------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuances of debt 1,818 155 1,122
Payments of debt (410) (751) (580)
Issuances of stock 302 150 124
Purchases of stock for treasury (1,563) (1,262) (1,521)
Dividends (1,480) (1,387) (1,247)
- -----------------------------------------------------------------------------------
Net cash used in financing activities (1,333) (3,095) (2,102)
- -----------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (28) (134) (45)
- -----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) during the year (89) 304 266
Balance at beginning of the year 1,737 1,433 1,167
- -----------------------------------------------------------------------------------
Balance at end of year $ 1,648 $ 1,737 $ 1,433
===================================================================================
See Notes to Consolidated Financial Statements.
- 43 -
CONSOLIDATED STATEMENTS OF SHARE-OWNERS' EQUITY
THE COCA-COLA COMPANY AND SUBSIDIARIES
Number of Accumulated
Common Outstanding Other
Three Years Ended Shares Common Capital Reinvested Restricted Comprehensive Treasury
December 31, 1998 Outstanding Stock Surplus Earnings Stock Income Stock Total
- -------------------------------------------------------------------------------------------------------------------
(In millions except per share data) |
|
BALANCE DECEMBER 31, 1995 2,505 | $856 $ 863 $12,882 $ (68) $ (365) $ (8,799) $ 5,369
- ---------------------------------------|---------------------------------------------------------------------------
COMPREHENSIVE INCOME: |
Net income - | - - 3,492 - - - 3,492
Translation adjustments - | - - - - (238) - (238)
Net change in unrealized |
gain on securities - | - - - - 74 - 74
Minimum pension liability - | - - - - (8) - (8)
| --------
|
COMPREHENSIVE INCOME | 3,320
Stock issued to employees | --------
exercising stock options 9 | 2 122 - - - - 124
Tax benefit from employees' |
stock option and |
restricted stock plans - | - 63 - - - - 63
Stock issued under restricted |
stock plans, less |
amortization of $15 - | - 10 - 7 - - 17
Purchases of stock for |
treasury (33){1}| - - - - - (1,521) (1,521)
Dividends (per share - $.50) - | - - (1,247) - - - (1,247)
- ---------------------------------------|---------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 2,481 | 858 1,058 15,127 (61) (537) (10,320) 6,125
- ---------------------------------------|---------------------------------------------------------------------------
COMPREHENSIVE INCOME: |
Net income - | - - 4,129 - - - 4,129
Translation adjustments - | - - - - (710) - (710)
Net change in unrealized |
gain on securities - | - - - - (98) - (98)
Minimum pension liability - | - - - - (6) - (6)
| --------
|
COMPREHENSIVE INCOME | 3,315
Stock issued to employees | --------
exercising stock options 10 | 3 147 - - - - 150
Tax benefit from employees' |
stock option and restricted |
stock plans - | - 312 - - - - 312
Stock issued under restricted |
stock plans, less |
amortization of $10 - | - 10 - 11 - - 21
Purchases of stock for |
treasury (20){1}| - - - - - (1,262) (1,262)
Dividends (per share - $.56) - | - - (1,387) - - - (1,387)
- ---------------------------------------|---------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 2,471 | 861 1,527 17,869 (50) (1,351) (11,582) 7,274
- ---------------------------------------|---------------------------------------------------------------------------
COMPREHENSIVE INCOME: |
Net income - | - - 3,533 - - - 3,533
Translation adjustments - | - - - - 52 - 52
Net change in unrealized |
gain on securities - | - - - - (47) - (47)
Minimum pension liability - | - - - - (4) - (4)
| --------
COMPREHENSIVE INCOME | 3,534
| --------
Stock issued to employees |
exercising stock options 16 | 4 298 - - - - 302
Tax benefit from employees' |
stock option and restricted |
stock plans - | - 97 - - - - 97
Stock issued under restricted |
stock plans, less amortization |
of $5 1 | - 47 - (34) - - 13
Stock issued by an equity |
investee - | - 226 - - - - 226
Purchases of stock for treasury (22){1}| - - - - - (1,563) (1,563)
Dividends (per share - $.60) - | - - (1,480) - - - (1,480)
- ---------------------------------------|---------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 2,466 | $865 $2,195 $19,922 $ (84) $(1,350) $(13,145) $ 8,403
===================================================================================================================
{1} Common stock purchased from employees exercising stock options numbered 1.4 million, 1.1 million
and .9 million shares for the years ending December 31, 1998, 1997 and 1996, respectively.
See Notes to Consolidated Financial Statements.
- 44 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTE 1: ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - The Coca-Cola Company and subsidiaries (our
Company) is predominantly a manufacturer, marketer and
distributor of soft-drink and noncarbonated beverage concentrates
and syrups. Operating in nearly 200 countries worldwide, we
primarily sell our concentrates and syrups to bottling and
canning operations, fountain wholesalers and fountain retailers.
We have significant markets for our products in all the world's
geographic regions. We record revenue when title passes to our
customers.
BASIS OF PRESENTATION - Certain amounts in the prior years'
financial statements have been reclassified to conform to the
current year presentation.
CONSOLIDATION - Our Consolidated Financial Statements include
the accounts of The Coca-Cola Company and all subsidiaries except
where control is temporary or does not rest with our Company. Our
investments in companies in which we have the ability to exercise
significant influence over operating and financial policies,
including certain investments where there is a temporary majority
interest, are accounted for by the equity method. Accordingly,
our Company's share of the net earnings of these companies is
included in consolidated net income. Our investments in other
companies are carried at cost or fair value, as appropriate. All
significant intercompany accounts and transactions are eliminated
upon consolidation.
ISSUANCES OF STOCK BY EQUITY INVESTEES - When one of our equity
investees issues additional shares to third parties, our
percentage ownership interest in the investee decreases. In the
event the issuance price per share is more or less than our
average carrying amount per share, we recognize a noncash gain
or loss on the issuance. This noncash gain or loss, net of any
deferred taxes, is generally recognized in our net income in the
period the change of ownership interest occurs.
If gains have been previously recognized on issuances of an
equity investee's stock and shares of the equity investee are
subsequently repurchased by the equity investee, gain recognition
does not occur on issuances subsequent to the date of a
repurchase until shares have been issued in an amount equivalent
to the number of repurchased shares. This type of transaction is
reflected as an equity transaction and the net effect is
reflected in the accompanying consolidated balance sheets. For
specific transaction details, refer to Note 3.
ADVERTISING COSTS - Our Company expenses production costs of
print, radio and television advertisements as of the first date
the advertisements take place. Advertising expenses included in
selling, administrative and general expenses were $1,597 million
in 1998, $1,576 million in 1997 and $1,441 million in 1996. As of
December 31, 1998 and 1997, advertising costs of approximately
$365 million and $317 million, respectively, were recorded
primarily in prepaid expenses and other assets in the
accompanying consolidated balance sheets.
NET INCOME PER SHARE - Basic net income per share is computed by
dividing net income by the weighted-average number of shares
outstanding. Diluted net income per share includes the dilutive
effect of stock options.
CASH EQUIVALENTS - Marketable securities that are highly liquid
and have maturities of three months or less at the date of
purchase are classified as cash equivalents.
INVENTORIES - Inventories consist primarily of raw materials and
supplies and are valued at the lower of cost or market. In
general, cost is determined on the basis of average cost or
first-in, first-out methods.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated at cost and are depreciated principally by the straight-
line method over the estimated useful lives of the assets.
OTHER ASSETS - Our Company invests in infrastructure programs
with our bottlers which are directed at strengthening our
bottling system and increasing unit case sales. The costs of
these programs are recorded in other assets and are subsequently
amortized over the periods to be directly benefited.
GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill and other
intangible assets are stated on the basis of cost and are
amortized, principally on a straight-line basis, over the
estimated future periods to be benefited (not exceeding 40
years). Goodwill and other intangible assets are periodically
reviewed for impairment based on an assessment of future
operations to ensure they are appropriately valued. Accumulated
amortization was approximately $119 million and $105 million on
December 31, 1998 and 1997, respectively.
USE OF ESTIMATES - In conformity with generally accepted
accounting principles, the preparation of our financial
statements requires our management to make estimates and
assumptions that affect the amounts reported in our financial
statements and accompanying notes. Although these estimates are
based on our knowledge of current events and actions we may
undertake in the future, actual results may ultimately differ
from estimates.
NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The new statement requires all derivatives
to be recorded on the balance sheet at fair value and establishes
new accounting rules for hedging
- 45 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
instruments. The statement is effective for years beginning after
June 15, 1999. We are assessing the impact this statement will
have on the Consolidated Financial Statements.
In March 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for the various types of costs incurred for computer
software developed or obtained for internal use. Also, in June
1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires costs of start-up
activities and organizational costs, as defined, to be expensed
as incurred. We will adopt these SOPs on January 1, 1999, and
they will not materially impact our Company's Consolidated
Financial Statements.
NOTE 2: BOTTLING INVESTMENTS
COCA-COLA ENTERPRISES INC. - Coca-Cola Enterprises is the largest
soft-drink bottler in the world, operating in seven countries,
and is one of our anchor bottlers. At December 31, 1998, our
Company owned approximately 42 percent of the outstanding common
stock of Coca-Cola Enterprises, and accordingly, we account for
our investment by the equity method of accounting. The excess of
our equity in the underlying net assets of Coca-Cola Enterprises
over our investment is primarily amortized on a straight-line
basis over 40 years. The balance of this excess, net of
amortization, was approximately $442 million at December 31,
1998. A summary of financial information for Coca-Cola
Enterprises is as follows (in millions):
December 31, 1998 1997
- -----------------------------------------------------------------
Current assets $ 2,285 $ 1,813
Noncurrent assets 18,847 15,674
- -----------------------------------------------------------------
Total assets $ 21,132 $ 17,487
=================================================================
Current liabilities $ 3,397 $ 3,032
Noncurrent liabilities 15,297 12,673
- -----------------------------------------------------------------
Total liabilities $ 18,694 $ 15,705
=================================================================
Share-owners' equity $ 2,438 $ 1,782
=================================================================
Company equity investment $ 584 $ 184
=================================================================
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------
Net operating revenues $ 13,414 $ 11,278 $ 7,921
Cost of goods sold 8,391 7,096 4,896
- -----------------------------------------------------------------
Gross profit $ 5,023 $ 4,182 $ 3,025
=================================================================
Operating income $ 869 $ 720 $ 545
=================================================================
Cash operating profit{1} $ 1,989 $ 1,666 $ 1,172
=================================================================
Net income $ 142 $ 171 $ 114
=================================================================
Net income available
to common share owners $ 141 $ 169 $ 106
=================================================================
Company equity income $ 51 $ 59 $ 53
=================================================================
{1} Cash operating profit is defined as operating income plus
depreciation expense, amortization expense and other noncash
operating expenses.
Our net concentrate/syrup sales to Coca-Cola Enterprises were
$3.1 billion in 1998, $2.5 billion in 1997 and $1.6 billion in
1996, or approximately 16 percent, 13 percent and 9 percent of
our 1998, 1997 and 1996 net operating revenues. Coca-Cola
Enterprises purchases sweeteners through our Company; however,
related collections from Coca-Cola Enterprises and payments to
suppliers are not included in our consolidated statements of
income. These transactions amounted to $252 million in 1998,
$223 million in 1997 and $247 million in 1996. We also provide
certain administrative and other services to Coca-Cola
Enterprises under negotiated fee arrangements.
Our direct support for certain marketing activities of
Coca-Cola Enterprises and participation with them in cooperative
advertising and other marketing programs amounted to
approximately $899 million in 1998, $604 million in 1997 and $448
million in 1996. Additionally, in 1998 and 1997, we committed
approximately $324 million and $190 million, respectively, to
Coca-Cola Enterprises under a Company program that encourages
bottlers to invest in building and supporting beverage
infrastructure.
If valued at the December 31, 1998, quoted closing price of
publicly traded Coca-Cola Enterprises shares, the calculated
value of our investment in Coca-Cola Enterprises would have
exceeded its carrying value by approximately $5.5 billion.
COCA-COLA AMATIL LIMITED - We own approximately 43 percent of
Coca-Cola Amatil, an Australian-based anchor bottler that
operates in seven countries. Accordingly, we account for our
investment in Coca-Cola Amatil by the equity method. The excess
of our investment over our equity in the underlying net assets
of Coca-Cola Amatil is being amortized on a straight-line basis
over 40 years. The balance of this excess, net of amortization,
was approximately $205 million at December 31, 1998. A summary
of financial information for Coca-Cola Amatil is as follows
(in millions):
December 31, 1998{1} 1997
- -----------------------------------------------------------------
Current assets $ 1,057 $ 1,470
Noncurrent assets 4,002 4,590
- -----------------------------------------------------------------
Total assets $ 5,059 $ 6,060
=================================================================
Current liabilities $ 1,065 $ 1,053
Noncurrent liabilities 1,552 1,552
- -----------------------------------------------------------------
Total liabilities $ 2,617 $ 2,605
=================================================================
Share-owners' equity $ 2,442 $ 3,455
=================================================================
Company equity investment $ 1,255 $ 1,204
=================================================================
Year Ended December 31, 1998{1} 1997 1996
- -----------------------------------------------------------------
Net operating revenues $ 2,731 $ 3,290 $ 2,905
Cost of goods sold 1,567 1,856 1,737
- -----------------------------------------------------------------
Gross profit $ 1,164 $ 1,434 $ 1,168
=================================================================
Operating income $ 237 $ 276 $ 215
=================================================================
Cash operating profit{2} $ 435 $ 505 $ 384
=================================================================
Net income $ 65 $ 89 $ 80
=================================================================
Company equity income $ 15 $ 27 $ 27
=================================================================
{1} 1998 reflects the spin-off of Coca-Cola Amatil's European
operations.
{2} Cash operating profit is defined as operating income plus
depreciation expense, amortization expense and other noncash
operating expenses.
- 46 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
Our net concentrate sales to Coca-Cola Amatil were
approximately $546 million in 1998, $588 million in 1997 and
$450 million in 1996. We also participate in various marketing,
promotional and other activities with Coca-Cola Amatil.
If valued at the December 31, 1998, quoted closing price of
publicly traded Coca-Cola Amatil shares, the calculated value
of our investment in Coca-Cola Amatil would have exceeded its
carrying value by approximately $364 million.
In August 1998, we exchanged our Korean bottling operations
with Coca-Cola Amatil for an additional ownership interest in
Coca-Cola Amatil.
OTHER EQUITY INVESTMENTS - Operating results include our
proportionate share of income from our equity investments. A
summary of financial information for our equity investments in
the aggregate, other than Coca-Cola Enterprises and Coca-Cola
Amatil, is as follows (in millions):
December 31, 1998 1997
- -----------------------------------------------------------------
Current assets $ 4,453 $ 2,946
Noncurrent assets 16,825 11,371
- -----------------------------------------------------------------
Total assets $ 21,278 $ 14,317
=================================================================
Current liabilities $ 4,968 $ 3,545
Noncurrent liabilities 6,731 4,636
- -----------------------------------------------------------------
Total liabilities $ 11,699 $ 8,181
=================================================================
Share-owners' equity $ 9,579 $ 6,136
=================================================================
Company equity investment $ 4,452 $ 3,049
=================================================================
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------
Net operating revenues $ 15,244 $ 13,688 $ 11,640
Cost of goods sold 9,555 8,645 8,028
- -----------------------------------------------------------------
Gross profit $ 5,689 $ 5,043 $ 3,612
=================================================================
Operating income $ 668 $ 869 $ 835
=================================================================
Cash operating profit{1} $ 1,563 $ 1,794 $ 1,268
=================================================================
Net income $ 152 $ 405 $ 366
=================================================================
Company equity
income (loss) $ (34) $ 69 $ 131
=================================================================
Equity investments include certain non-bottling investees.
{1} Cash operating profit is defined as operating income plus
depreciation expense, amortization expense and other noncash
operating expenses.
Net sales to equity investees other than Coca-Cola Enterprises
and Coca-Cola Amatil were $2.1 billion in 1998, $1.5 billion in
1997 and $1.5 billion in 1996. Our direct support for certain
marketing activities with equity investees other than Coca-Cola
Enterprises, the majority of which are located outside the United
States, was approximately $640 million, $528 million and $354
million for 1998, 1997 and 1996, respectively.
In June 1998, we sold our wholly owned Italian bottling
operations in northern and central Italy to Coca-Cola Beverages
plc (Coca-Cola Beverages). This transaction resulted in proceeds
valued at approximately $1 billion and an after-tax gain of
approximately $.03 per share (basic and diluted).
In February 1997, we sold our 49 percent interest in Coca-Cola
& Schweppes Beverages Ltd. to Coca-Cola Enterprises. This
transaction resulted in proceeds for our Company of approximately
$1 billion and an after-tax gain of approximately $.08 per share
(basic and diluted). In August 1997, we sold our 48 percent
interest in Coca-Cola Beverages Ltd. of Canada and our 49 percent
ownership interest in The Coca-Cola Bottling Company of New York,
Inc., to Coca-Cola Enterprises in exchange for aggregate
consideration valued at approximately $456 million. This sale
resulted in an after-tax gain of approximately $.04 per share
(basic and diluted).
If valued at the December 31, 1998, quoted closing prices of
shares actively traded on stock markets, the calculated value
of our equity investments in publicly traded bottlers other than
Coca-Cola Enterprises and Coca-Cola Amatil would have exceeded
our carrying value by approximately $559 million.
NOTE 3: ISSUANCES OF STOCK BY EQUITY INVESTEES
In December 1998, Coca-Cola Enterprises completed its
acquisition of certain independent bottling operations operating
in parts of Texas, New Mexico and Arizona (collectively known as
the Wolslager Group). The transactions were funded primarily
with the issuance of shares of Coca-Cola Enterprises common
stock. The Coca-Cola Enterprises common stock issued in exchange
for these bottlers was valued at an amount greater than the book
value per share of our investment in Coca-Cola Enterprises. As a
result of this transaction, our equity in the underlying net
assets of Coca-Cola Enterprises increased, and we recorded a $116
million increase to our Company's investment basis in Coca-Cola
Enterprises. Due to Coca-Cola Enterprises' share repurchase
program, the increase in our investment in Coca-Cola Enterprises
was recorded as an equity transaction, and no gain was
recognized. We recorded a deferred tax liability of approximately
$46 million on this increase to our investment in Coca-Cola
Enterprises. At the completion of this transaction, our ownership
in Coca-Cola Enterprises was approximately 42 percent.
In September 1998, Coca-Cola Erfrischungsgetraenke AG (CCEAG),
our anchor bottler in Germany, issued new shares valued at
approximately $275 million to effect a merger with Nordwest
Getraenke GmbH & Co. KG, another German bottler. Approximately 7.5
million shares were issued, resulting in a one-time noncash
pretax gain for our Company of approximately $27 million. We
provided deferred taxes of approximately $10 million on this
gain. This issuance reduced our ownership in CCEAG from
approximately 45 percent to approximately 40 percent.
In June 1998, Coca-Cola Enterprises completed its acquisition
of CCBG Corporation and Texas Bottling Group, Inc., (collectively
known as Coke Southwest). The transaction was valued at
approximately $1.1 billion. Approximately 55 percent of the
transaction was funded with the issuance of approximately 17.7
million shares of Coca-Cola Enterprises common stock, and the
remaining portion was
- 47 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
funded through debt and assumed debt. The Coca-Cola Enterprises
common stock issued in exchange for Coke Southwest was valued at
an amount greater than the book value per share of our investment
in Coca-Cola Enterprises. As a result of this transaction, our
equity in the underlying net assets of Coca-Cola Enterprises
increased, and we recorded a $257 million increase to our
Company's investment basis in Coca-Cola Enterprises. Due to
Coca-Cola Enterprises' share repurchase program, the increase in
our investment in Coca-Cola Enterprises was recorded as an equity
transaction, and no gain was recognized. We recorded a deferred
tax liability of approximately $101 million on this increase to
our investment in Coca-Cola Enterprises. At the completion of
this transaction, our ownership in Coca-Cola Enterprises was
approximately 42 percent.
In the second quarter of 1997, our Company and San Miguel
Corporation sold our respective interests in Coca-Cola Bottlers
Philippines, Inc. to Coca-Cola Amatil in exchange for
approximately 293 million shares of Coca-Cola Amatil stock. In
connection with this transaction, Coca-Cola Amatil issued
approximately 210 million shares to San Miguel valued at
approximately $2.4 billion. The issuance to San Miguel resulted
in a one-time noncash pretax gain for our Company of
approximately $343 million. We provided deferred taxes of
approximately $141.5 million on this gain. This transaction
resulted in a dilution of our Company's 36 percent interest in
Coca-Cola Amatil to 33 percent.
Also in the second quarter of 1997, our Company and the
Cisneros Group sold our respective interests in Coca-Cola y Hit
de Venezuela, S.A. to Panamerican Beverages, Inc. (Panamco) in
exchange for approximately 30.6 million shares of Panamco stock.
In connection with this transaction, Panamco issued approximately
13.6 million shares to the Cisneros Group valued at approximately
$402 million. The issuance to the Cisneros Group resulted in a
one-time noncash pretax gain for our Company of approximately $20
million. We provided deferred taxes of approximately $7.2 million
on this gain. At the completion of this transaction, our
ownership in Panamco was approximately 23 percent.
In the third quarter of 1996, our previously wholly owned
subsidiary, Coca-Cola Erfrischungsgetraenke G.m.b.H. (CCEG),
issued approximately 24.4 million shares of common stock as part
of a merger with three independent German bottlers of our
products. The shares were valued at approximately $925 million,
based on the fair values of the assets of the three acquired
bottling companies. In connection with CCEG's issuance of shares,
a new corporation was established, Coca-Cola Erfrischungsgetraenke
AG, and our ownership was reduced to 45 percent of the resulting
corporation. As a result, we began accounting for our related
investment by the equity method of accounting prospectively from
the transaction date. This transaction resulted in a noncash
pretax gain of $283 million for our Company. We provided deferred
taxes of approximately $171 million related to this gain.
Also in the third quarter of 1996, Coca-Cola Amatil issued
approximately 46 million shares in exchange for approximately
$522 million. This issuance reduced our Company's ownership
interest in Coca-Cola Amatil from approximately 39 percent to
approximately 36 percent. This transaction resulted in a noncash
pretax gain of $130 million for our Company. We provided deferred
taxes of approximately $47 million on this gain.
In 1996, Coca-Cola FEMSA de Buenos Aires, S.A. (CCFBA) issued
approximately 19 million shares to Coca-Cola FEMSA, S.A. de C.V.
This issuance reduced our ownership in CCFBA from 49 percent to
approximately 32 percent. We recognized a noncash pretax gain of
approximately $18 million as a result of this transaction. In
subsequent transactions, we disposed of our remaining interest
in CCFBA.
NOTE 4: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following
(in millions):
December 31, 1998 1997
- -----------------------------------------------------------------
Accrued marketing $ 967 $ 992
Container deposits 14 30
Accrued compensation 166 152
Sales, payroll and other taxes 183 173
Accounts payable and
other accrued expenses 1,811 1,902
- -----------------------------------------------------------------
$ 3,141 $ 3,249
=================================================================
NOTE 5: SHORT-TERM BORROWINGS AND CREDIT ARRANGEMENTS
Loans and notes payable consist primarily of commercial paper
issued in the United States. On December 31, 1998, we had $4.3
billion outstanding in commercial paper borrowings. In addition,
we had $1.6 billion in lines of credit and other short-term
credit facilities available, under which approximately $89
million was outstanding. Our weighted-average interest rates
for commercial paper were approximately 5.2 and 5.8 percent at
December 31, 1998 and 1997, respectively.
These facilities are subject to normal banking terms and
conditions. Some of the financial arrangements require
compensating balances, none of which is presently significant to
our Company.
- 48 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTE 6: LONG-TERM DEBT
Long-term debt consists of the following (in millions):
December 31, 1998 1997
- ---------------------------------------------------------------
53/4% German mark notes due 1998 $ - $ 141
77/8% U.S. dollar notes due 1998 - 250
6% U.S. dollar notes due 2000 251 251
65/8% U.S. dollar notes due 2002 150 150
6% U.S. dollar notes due 2003 150 150
73/8% U.S. dollar notes due 2093 116 116
Other, due 1999 to 2013 23 140
- ---------------------------------------------------------------
690 1,198
Less current portion 3 397
- ---------------------------------------------------------------
$ 687 $ 801
===============================================================
After giving effect to interest rate management instruments
(see Note 9), the principal amount of our long-term debt that
had fixed and variable interest rates, respectively, was $190
million and $500 million on December 31, 1998, and $480 million
and $718 million on December 31, 1997. The weighted-average
interest rate on our Company's long-term debt was 6.2 percent
for the years ended December 31, 1998 and 1997. Total interest
paid was approximately $298 million, $264 million and $315
million in 1998, 1997 and 1996, respectively.
Maturities of long-term debt for the five years succeeding
December 31, 1998, are as follows (in millions):
1999 2000 2001 2002 2003
- -------------------------------------------------------------
$ 3 $ 254 $ 17 $ 150 $ 150
=============================================================
The above notes include various restrictions, none of which is
presently significant to our Company.
NOTE 7: COMPREHENSIVE INCOME
Accumulated other comprehensive income consists of the following
(in millions):
December 31, 1998 1997
- ------------------------------------------------------------
Foreign currency
translation adjustment $ (1,320) $ (1,372)
Unrealized gain on
available-for-sale securities 11 58
Minimum pension liability (41) (37)
- ------------------------------------------------------------
$ (1,350) $ (1,351)
============================================================
A summary of the components of other comprehensive income for
the years ended December 31, 1998, 1997 and 1996 is as follows
(in millions):
Before-Tax Income After-Tax
December 31, Amount Tax Amount
- -------------------------------------------------------------------
1998
Net change in unrealized gain
(loss) on available-for-sale
securities $ (70) $ 23 $ (47)
Net foreign currency
translation 52 - 52
Minimum pension liability (5) 1 (4)
- -------------------------------------------------------------------
Other comprehensive income $ (23) $ 24 $ 1
===================================================================
Before-Tax Income After-Tax
December 31, Amount Tax Amount
- -------------------------------------------------------------------
1997
Net change in unrealized gain
(loss) on available-for-sale
securities $ (163) $ 65 $ (98)
Net foreign currency
translation (710) - (710)
Minimum pension liability (10) 4 (6)
- -------------------------------------------------------------------
Other comprehensive income $ (883) $ 69 $ (814)
===================================================================
Before-Tax Income After-Tax
December 31, Amount Tax Amount
- -------------------------------------------------------------------
1996
Net change in unrealized gain
(loss) on available-for-sale
securities $ 107 $ (33) $ 74
Net foreign currency
translation (238) - (238)
Minimum pension liability (13) 5 (8)
- -------------------------------------------------------------------
Other comprehensive income $ (144) $ (28) $ (172)
===================================================================
NOTE 8: FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts
reflected in our consolidated balance sheets for cash, cash
equivalents, marketable equity securities, marketable cost method
investments, receivables, loans and notes payable and long-term
debt approximate their respective fair values. Fair values are
based primarily on quoted prices for those or similar
instruments. A comparison of the carrying value and fair value of
our hedging instruments is included in Note 9.
CERTAIN DEBT AND MARKETABLE EQUITY SECURITIES - Investments in
debt and marketable equity securities, other than investments
accounted for by the equity method, are categorized as either
trading, available for sale or held to maturity. On December 31,
1998 and 1997, we had no trading securities. Securities
categorized as available for sale
- 49 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
are stated at fair value, with unrealized gains and losses, net
of deferred income taxes, reported as a component of accumulated
other comprehensive income. Debt securities categorized as held
to maturity are stated at amortized cost.
On December 31, 1998 and 1997, available-for-sale and held-to-
maturity securities consisted of the following (in millions):
Gross Gross Estimated
Unrealized Unrealized Fair
December 31, Cost Gains Losses Value
- --------------------------------------------------------------------------
1998
Available-for-sale
securities
Equity securities $ 304 $ 67 $ (48) $ 323
Collateralized
mortgage
obligations 89 - (1) 88
Other debt
securities 11 - - 11
- --------------------------------------------------------------------------
$ 404 $ 67 $ (49) $ 422
==========================================================================
Held-to-maturity
securities
Bank and
corporate debt $ 1,339 $ - $ - $ 1,339
Other debt
securities 92 - - 92
- --------------------------------------------------------------------------
$ 1,431 $ - $ - $ 1,431
==========================================================================
Gross Gross Estimated
Unrealized Unrealized Fair
December 31, Cost Gains Losses Value
- --------------------------------------------------------------------------
1997
Available-for-sale
securities
Equity securities $ 293 $ 93 $ (3) $ 383
Collateralized
mortgage
obligations 132 - (2) 130
Other debt
securities 23 - - 23
- --------------------------------------------------------------------------
$ 448 $ 93 $ (5) $ 536
==========================================================================
Held-to-maturity
securities
Bank and
corporate debt $ 1,569 $ - $ - $ 1,569
Other debt
securities 22 - - 22
- --------------------------------------------------------------------------
$ 1,591 $ - $ - $ 1,591
==========================================================================
On December 31, 1998 and 1997, these investments were included
in the following captions in our consolidated balance sheets
(in millions):
Available-for-Sale Held-to-Maturity
December 31, Securities Securities
- --------------------------------------------------------------------------
1998
Cash and cash equivalents $ - $ 1,227
Current marketable securities 79 80
Cost method investments,
principally bottling companies 251 -
Marketable securities and
other assets 92 124
- --------------------------------------------------------------------------
$ 422 $ 1,431
==========================================================================
1997
Cash and cash equivalents $ - $ 1,346
Current marketable securities 64 42
Cost method investments,
principally bottling companies 336 -
Marketable securities and
other assets 136 203
- --------------------------------------------------------------------------
$ 536 $ 1,591
==========================================================================
The contractual maturities of these investments as of
December 31, 1998, were as follows (in millions):
Available-for-Sale Held-to-Maturity
Securities Securities
------------------ --------------------
Fair Amortized Fair
Cost Value Cost Value
- -----------------------------------------------------------------------
1999 $ 7 $ 7 $ 1,307 $ 1,307
2000-2003 4 4 124 124
Collateralized
mortgage
obligations 89 88 - -
Equity securities 304 323 - -
- -----------------------------------------------------------------------
$ 404 $ 422 $ 1,431 $ 1,431
=======================================================================
For the years ended December 31, 1998 and 1997, gross realized
gains and losses on sales of available-for-sale securities were
not material. The cost of securities sold is based on the
specific identification method.
NOTE 9: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
Our Company uses derivative financial instruments primarily to
reduce our exposure to adverse fluctuations in interest rates and
foreign exchange rates and, to a lesser extent, to reduce our
exposure to adverse fluctuations in commodity prices and other
market risks. When entered into, these financial instruments are
designated as hedges of underlying exposures. Because of the high
correlation between the hedging instrument and the underlying
exposure being hedged, fluctuations in the value of the
instruments are generally offset by changes in the value of the
underlying exposures. Virtually all our derivatives are
- 50 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
"over-the-counter" instruments. Our Company does not enter into
derivative financial instruments for trading purposes.
The estimated fair values of derivatives used to hedge or
modify our risks fluctuate over time. These fair value amounts
should not be viewed in isolation but rather in relation to the
fair values of the underlying hedging transactions and
investments and to the overall reduction in our exposure to
adverse fluctuations in interest rates, foreign exchange rates,
commodity prices and other market risks.
The notional amounts of the derivative financial instruments
do not necessarily represent amounts exchanged by the parties
and, therefore, are not a direct measure of our exposure
through our use of derivatives. The amounts exchanged are
calculated by reference to the notional amounts and by other
terms of the derivatives, such as interest rates, exchange rates
or other financial indices.
We have established strict counterparty credit guidelines and
enter into transactions only with financial institutions of
investment grade or better. We monitor counterparty exposures
daily and any downgrade in credit rating receives immediate
review. If a downgrade in the credit rating of a counterparty
were to occur, we have provisions requiring collateral in the
form of U.S. government securities for substantially all our
transactions. To mitigate presettlement risk, minimum credit
standards become more stringent as the duration of the derivative
financial instrument increases. To minimize the concentration of
credit risk, we enter into derivative transactions with a
portfolio of financial institutions. As a result, we consider the
risk of counterparty default to be minimal.
INTEREST RATE MANAGEMENT - Our Company maintains a percentage of
fixed and variable rate debt within defined parameters. We enter
into interest rate swap agreements that maintain the fixed/
variable mix within these parameters. These contracts had
maturities ranging from one to five years on December 31, 1998.
Variable rates are predominantly linked to the London Interbank
Offered Rate. Any differences paid or received on interest rate
swap agreements are recognized as adjustments to interest expense
over the life of each swap, thereby adjusting the effective
interest rate on the underlying obligation.
FOREIGN CURRENCY MANAGEMENT - The purpose of our foreign currency
hedging activities is to reduce the risk that our eventual dollar
net cash inflows resulting from sales outside the United States
will be adversely affected by changes in exchange rates.
We enter into forward exchange contracts and purchase currency
options (principally European currencies and Japanese yen) to
hedge firm sale commitments denominated in foreign currencies.
We also purchase currency options (principally European
currencies and Japanese yen) to hedge certain anticipated sales.
Premiums paid and realized gains and losses, including those on
any terminated contracts, are included in prepaid expenses and
other assets. These are recognized in income along with
unrealized gains and losses in the same period the hedging
transactions are realized. Approximately $43 million of realized
losses and $52 million of realized gains on settled contracts
entered into as hedges of firmly committed transactions that have
not yet occurred were deferred on December 31, 1998 and 1997,
respectively. Deferred gains/losses from hedging anticipated
transactions were not material on December 31, 1998 or 1997. In
the unlikely event that the underlying transaction terminates or
becomes improbable, the deferred gains or losses on the
associated derivative will be recorded in our income statement.
Gains and losses on derivative financial instruments that are
designated and effective as hedges of net investments in
international operations are included in share-owners' equity as
a foreign currency translation adjustment, a component of
accumulated other comprehensive income.
The following table presents the aggregate notional principal
amounts, carrying values, fair values and maturities of our
derivative financial instruments outstanding on December 31,
1998 and 1997 (in millions):
Notional
Principal Carrying Fair
December 31, Amounts Values Values Maturity
- --------------------------------------------------------------------------
1998
Interest rate
management
Swap agreements
Assets $ 325 $ 2 $ 19 1999-2003
Liabilities 200 (2) (13) 2000-2003
Foreign currency
management
Forward contracts
Assets 809 6 (54) 1999-2000
Liabilities 1,325 (6) (73) 1999-2000
Swap agreements
Assets 344 4 6 1999-2000
Liabilities 704 - (51) 1999-2002
Purchased options
Assets 232 5 3 1999
Other
Liabilities 243 (25) (26) 1999-2000
- --------------------------------------------------------------------------
$ 4,182 $ (16) $ (189)
==========================================================================
- 51 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
Notional
Principal Carrying Fair
December 31, Amounts Values Values Maturity
- --------------------------------------------------------------------------
1997
Interest rate
management
Swap agreements
Assets $ 597 $ 4 $ 15 1998-2003
Liabilities 175 (1) (12) 2000-2003
Foreign currency
management
Forward contracts
Assets 1,286 27 93 1998-1999
Liabilities 465 (6) 18 1998-1999
Swap agreements
Assets 178 1 3 1998
Liabilities 1,026 (4) (28) 1998-2002
Purchased options
Assets 1,051 34 109 1998
Other
Assets 470 2 53 1998
Liabilities 68 (2) - 1998
- --------------------------------------------------------------------------
$ 5,316 $ 55 $ 251
==========================================================================
Maturities of derivative financial instruments held on
December 31, 1998, are as follows (in millions):
1999 2000 2001 2002-2003
- --------------------------------------------------------------------------
$ 3,125 $ 641 $ 204 $ 212
==========================================================================
NOTE 10: COMMITMENTS AND CONTINGENCIES
On December 31, 1998, we were contingently liable for
guarantees of indebtedness owed by third parties in the amount
of $391 million, of which $7 million related to independent
bottling licensees. 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.
We have committed to make future marketing expenditures of
$722 million payable over the next 13 years. Additionally, under
certain circumstances, we have committed to make future
investments in bottling companies. However, we do not consider
any of these commitments to be individually significant.
In December 1998, our Company signed an agreement with Cadbury
Schweppes plc to purchase beverage brands in countries around the
world, (except in the United States, France and South Africa) and
its concentrate plants in Ireland and Spain for approximately
$1.85 billion. These brands include Schweppes and Canada Dry
mixers, such as tonic water, club soda and ginger ale; Crush;
Dr Pepper; and certain regional brands. These transactions are
subject to certain conditions including approvals from regulatory
authorities in various countries.
In December 1997, our Company announced its intent to acquire
from beverage company Pernod Ricard, its Orangina brands, three
bottling operations and one concentrate plant in France for
approximately 5 billion French francs (approximately $890 million
based on December 1998 exchange rates). This transaction remains
subject to approvals from regulatory authorities of the French
government.
NOTE 11: NET CHANGE IN OPERATING ASSETS AND LIABILITIES
The changes in operating assets and liabilities, net of effects
of acquisitions and divestitures of businesses and unrealized
exchange gains/losses, are as follows (in millions):
1998 1997 1996
- ------------------------------------------------------------------
Increase in trade accounts
receivable $ (237) $ (164) $ (230)
Increase in inventories (12) (43) (33)
Increase in prepaid expenses
and other assets (318) (145) (219)
Increase (decrease) in
accounts payable and
accrued expenses (70) 299 361
Increase (decrease) in
accrued taxes 120 393 (208)
Increase (decrease) in
other liabilities (33) (387) 211
- ------------------------------------------------------------------
$ (550) $ (47) $ (118)
==================================================================
- 52 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTE 12: RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS
Our Company currently sponsors restricted stock award plans and
stock option plans. Our Company applies Accounting Principles
Board Opinion No. 25 and related Interpretations in accounting
for our plans. Accordingly, no compensation cost has been
recognized for our stock option plans. The compensation cost
charged against income for our restricted stock award plans was
$14 million in 1998, $56 million in 1997 and $63 million in 1996.
For our Incentive Unit Agreements and Performance Unit
Agreements, which were both paid off in 1997, the charge against
income was $31 million in 1997 and $90 million in 1996. Had
compensation cost for the stock option plans been determined
based on the fair value at the grant dates for awards under the
plans, our Company's net income and net income per share (basic
and diluted) would have been as presented in the following table.
The pro forma amounts are indicated below (in millions, except
per share amounts):
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------
Net income
As reported $ 3,533 $ 4,129 $ 3,492
Pro forma $ 3,405 $ 4,026 $ 3,412
Basic net income per share
As reported $ 1.43 $ 1.67 $ 1.40
Pro forma $ 1.38 $ 1.63 $ 1.37
Diluted net income per share
As reported $ 1.42 $ 1.64 $ 1.38
Pro forma $ 1.36 $ 1.60 $ 1.35
===============================================================
Under the amended 1989 Restricted Stock Award Plan and the
amended 1983 Restricted Stock Award Plan (the Restricted Stock
Award Plans), 40 million and 24 million shares of restricted
common stock, respectively, may be granted to certain officers
and key employees of our Company.
On December 31, 1998, 33 million shares were available for
grant under the Restricted Stock Award Plans. In 1998 there were
three grants totaling 707,300 shares of restricted stock, granted
at an average price of $67.03. In 1997 and 1996, 162,000 and
210,000 shares of restricted stock were granted at $59.75 and
$48.88, respectively. Participants are entitled to vote and
receive dividends on the shares, and under the 1983 Restricted
Stock Award Plan, participants are reimbursed by our Company for
income taxes imposed on the award, but not for taxes generated by
the reimbursement payment. The shares are subject to certain
transfer restrictions and may be forfeited if a participant
leaves our Company for reasons other than retirement, disability
or death, absent a change in control of our Company.
Under our 1991 Stock Option Plan (the Option Plan), a maximum
of 120 million shares of our common stock was approved to be
issued or transferred to certain officers and employees pursuant
to stock options and stock appreciation rights granted under the
Option Plan. The stock appreciation rights permit the holder,
upon surrendering all or part of the related stock option, to
receive cash, common stock or a combination thereof, in an amount
up to 100 percent of the difference between the market price and
the option price. Options to purchase common stock under the
Option Plan have been granted to Company employees at fair market
value at the date of grant. Generally, stock options become
exercisable over a three-year vesting period and expire 10 years
from the date of grant.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998,
1997 and 1996, respectively: dividend yields of 0.9, 1.0 and 1.0
percent; expected volatility of 24.1, 20.1 and 18.3 percent; risk-
free interest rates of 4.0, 6.0 and 6.2 percent; and expected
lives of four years for all years. The weighted-average fair
value of options granted was $15.41, $13.92 and $11.43 for the
years ended December 31, 1998, 1997 and 1996, respectively.
- 53 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
A summary of stock option activity under all plans is as
follows (shares in millions):
1998 1997 1996
--------------------------- --------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------
Outstanding on
January 1, 80 $ 33.22 78 $ 26.50 74 $ 20.74
Granted 17 65.91 13 59.79 14 48.86
Exercised (16) 18.93 (10) 14.46 (9) 13.72
Forfeited/Expired (1) 55.48 (1) 44.85 (1) 31.62
- -------------------------------------------------------------------------------------------------------------
Outstanding on
December 31, 80 $ 42.77 80 $ 33.22 78 $ 26.50
=============================================================================================================
Exercisable on
December 31, 52 $ 32.41 55 $ 24.62 51 $ 18.69
=============================================================================================================
Shares available
on December 31,
for options that
may be granted 18 34 46
=============================================================================================================
The following table summarizes information about stock options
at December 31, 1998 (shares in millions):
Outstanding Stock Options Exercisable Stock Options
---------------------------------------------- --------------------------
Weighted-Average
Remaining Weighted-Average Weighted-Average
Range of Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------
$ 4.00 to $ 10.00 4 1.3 years $ 9.71 4 $ 9.71
$ 10.01 to $ 20.00 4 2.5 years $ 14.65 4 $ 14.65
$ 20.01 to $ 30.00 18 5.0 years $ 23.27 18 $ 23.27
$ 30.01 to $ 40.00 13 6.8 years $ 35.63 13 $ 35.63
$ 40.01 to $ 50.00 12 7.8 years $ 48.86 9 $ 48.86
$ 50.01 to $ 60.00 12 8.8 years $ 59.75 4 $ 59.74
$ 60.01 to $ 86.75 17 9.8 years $ 65.91 - $ -
============================================================================================================
$ 4.00 to $ 86.75 80 7.0 years $ 42.77 52 $ 32.41
============================================================================================================
In 1988, our Company entered into Incentive Unit Agreements
whereby, subject to certain conditions, certain officers were
given the right to receive cash awards based on the market value
of 2.4 million shares of our common stock at the measurement
dates. Under the Incentive Unit Agreements, an employee is
reimbursed by our Company for income taxes imposed when the value
of the units is paid, but not for taxes generated by the
reimbursement payment. At December 31, 1996, approximately 1.6
million units were outstanding. In 1997, all outstanding units
were paid at a price of $58.50 per unit.
In 1985, we entered into Performance Unit Agreements whereby
certain officers were given the right to receive cash awards
based on the difference in the market value of approximately
4.4 million shares of our common stock at the measurement dates
and the base price of $2.58, the market value as of January 2,
1985. At December 31, 1996, approximately 2.9 million units
were outstanding. In 1997, all outstanding units were paid based
on a market price of $58.50 per unit.
NOTE 13: PENSION AND OTHER POSTRETIREMENT BENEFITS
Our Company sponsors and/or contributes to pension and
postretirement health care and life insurance benefits plans
covering substantially all U.S. employees and certain employees
in international locations. We also sponsor nonqualified,
unfunded defined benefit plans for certain officers and other
employees. In addition, our Company and its subsidiaries have
various pension plans and other forms of postretirement
arrangements outside the United States.
Total pension expense for all benefit plans, including defined
benefit plans and postretirement health care and life insurance
benefit plans, amounted to approximately $119 million in 1998,
$109 million in 1997 and $114 million in 1996. Net periodic cost
for our pension and other benefit plans consists of the following
(in millions):
Pension Benefits
----------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------
Service cost $ 56 $ 49 $ 48
Interest cost 105 93 91
Expected return on plan assets (105) (95) (84)
Amortization of prior
service cost 3 7 6
Recognized net actuarial cost 9 14 12
- --------------------------------------------------------------------
Net periodic pension cost $ 68 $ 68 $ 73
====================================================================
Other Benefits
--------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------
Service cost $ 14 $ 11 $ 12
Interest cost 25 23 20
Expected return on plan assets (1) (1) (1)
Recognized net actuarial cost - (1) (2)
- --------------------------------------------------------------------
Net periodic cost $ 38 $ 32 $ 29
====================================================================
- 54 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
In addition, we contribute to a Voluntary Employees'
Beneficiary Association trust, which will be used to partially
fund health care benefits for future retirees. In general,
retiree health benefits are paid as covered expenses are
incurred.
The following table sets forth the change in benefit obligation
for our benefit plans (in millions):
Pension Other
Benefits Benefits
------------------- ------------------
December 31, 1998 1997 1998 1997
- ----------------------------------------------------------------------
Benefit obligation
at beginning of
year $ 1,488 $ 1,375 $ 327 $ 279
Service cost 56 49 14 11
Interest cost 105 93 25 23
Foreign currency
exchange rate changes 25 (48) - -
Divestitures - (14) - -
Amendments 8 2 - -
Actuarial (gain) loss 124 104 31 28
Benefits paid (86) (73) (16) (14)
Other (3) - - -
- ----------------------------------------------------------------------
Benefit obligation
at end of year $ 1,717 $ 1,488 $ 381 $ 327
======================================================================
The following table sets forth the change in plan assets for
our benefit plans (in millions):
Pension Other
Benefits Benefits
------------------- ------------------
December 31, 1998 1997 1998 1997
- ----------------------------------------------------------------------
Fair value of{1}
plan assets
at beginning of
year $ 1,408 $ 1,282 $ 40 $ 41
Actual return on
plan assets 129 210 2 2
Employer contribution 25 28 10 10
Foreign currency
exchange rate
changes 18 (38) - -
Divestitures - (12) - -
Benefits paid (68) (62) (16) (13)
Other 4 - - -
- ----------------------------------------------------------------------
Fair value of plan assets
at end of year $ 1,516 $ 1,408 $ 36 $ 40
======================================================================
{1} Pension benefit plan assets primarily consist of listed
stocks, bonds and government securities. Other benefit plan
assets consist of corporate bonds, government securities and
short-term investments.
The projected benefit obligation, accumulated benefit
obligation and fair value of plan assets for the pension plans
with accumulated benefit obligations in excess of plan assets
were $536 million, $418 million and $149 million, respectively,
as of December 31, 1998, and $472 million, $370 million and $128
million, respectively, as of December 31, 1997.
The accrued pension and other benefit costs recognized in our
accompanying consolidated balance sheets is computed as follows
(in millions):
Pension Other
Benefits Benefits
------------------- ------------------
December 31, 1998 1997 1998 1997
- ----------------------------------------------------------------------
Funded status $ (201) $ (80) $ (345) $ (287)
Unrecognized net
(asset) liability
at transition - (2) - -
Unrecognized prior
service cost 43 41 4 5
Unrecognized net
(gain) loss (10) (98) 10 (27)
- ----------------------------------------------------------------------
Accrued pension
asset (liability)
included in
consolidated
balance sheets $ (168) $ (139) $ (331) $ (309)
======================================================================
Prepaid benefit cost $ 54 $ 52 $ - $ -
Accrued benefit
liability (303) (267) (331) (309)
Accumulated other
comprehensive
income 64 59 - -
Intangible asset 17 17 - -
- ----------------------------------------------------------------------
Net asset (liability)
recognized $ (168) $ (139) $ (331) $ (309)
======================================================================
The assumptions used in computing the preceding information
are as follows:
Pension Benefits
----------------------------
December 31, 1998 1997 1996
- ------------------------------------------------------
Discount rates 6-1/2% 7% 7-1/4%
Rates of increase in
compensation levels 4-1/2% 4-3/4% 4-3/4%
Expected long-term
rates of return on
assets 8-3/4% 9% 8-1/2%
Other Benefits
----------------------------
December 31, 1998 1997 1996
- ------------------------------------------------------
Discount rates 6-3/4% 7-1/4% 7-3/4%
Rates of increase in
compensation levels 4-1/2% 4-3/4% 5%
Expected long-term
rates of return on
assets 3% 3% 3%
The rate of increase in per capita costs of covered health
care benefits is assumed to be 7 percent in 1999, decreasing
gradually to 43/4 percent by the year 2003.
- 55 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
A one percentage point change in the assumed health care cost
trend rate would have the following effects (in millions):
One Percentage One Percentage
Point Increase Point Decrease
-----------------------------------
Effect on accumulated
postretirement benefit
obligation as of
December 31, 1998 $ 45 $ (36)
Effect on net periodic
postretirement benefit
cost in 1998 $ 6 $ (5)
NOTE 14: INCOME TAXES
Income before income taxes consists of the following
(in millions):
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------
United States $ 1,979 $ 1,515 $ 1,168
International 3,219 4,540 3,428
- --------------------------------------------------------------
$ 5,198 $ 6,055 $ 4,596
==============================================================
Income tax expense (benefit) consists of the following
(in millions):
Year Ended United State &
December 31, States Local International Total
- ------------------------------------------------------------------
1998
Current $ 683 $ 91 $ 929 $ 1,703
Deferred (73) 28 7 (38)
1997
Current $ 240 $ 45 $ 1,261 $ 1,546
Deferred 180 21 179 380
1996
Current $ 256 $ 79 $ 914 $ 1,249
Deferred (264) (29) 148 (145)
==================================================================
We made income tax payments of approximately $1,559 million,
$982 million and $1,242 million in 1998, 1997 and 1996,
respectively.
A reconciliation of the statutory U.S. federal rate and
effective rates is as follows:
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income taxes-net of
federal benefit 1.0 1.0 1.0
Earnings in jurisdictions
taxed at rates different
from the statutory U.S.
federal rate (4.3) (2.6) (3.3)
Equity income - (.6) (1.7)
Tax settlement - - (7.0)
Other-net .3 (1.0) -
- ---------------------------------------------------------------
32.0% 31.8% 24.0%
===============================================================
Our effective tax rate reflects the tax benefit derived from
having significant operations outside the United States that are
taxed at rates lower than the U.S. statutory rate of 35 percent,
partially offset by the tax impact of certain gains recognized
from previously discussed bottling transactions. These
transactions are generally taxed at rates higher than our
Company's effective tax rate on operations.
In 1996, we reached an agreement in principle with the U.S.
Internal Revenue Service settling certain U.S.-related income
tax matters, including issues in litigation related to our
operations in Puerto Rico. This agreement resulted in a one-time
reduction of $320 million to our 1996 income tax expense as a
result of reversing previously accrued contingent income tax
liabilities. Our 1996 effective tax rate would have been 31
percent, excluding the favorable impact of the settlement.
Appropriate U.S. and international taxes have been provided for
earnings of subsidiary companies that are expected to be remitted
to the parent company. Exclusive of amounts that would result in
little or no tax if remitted, the cumulative amount of unremitted
earnings from our international subsidiaries that is expected to
be indefinitely reinvested was approximately $3.6 billion on
December 31, 1998. The taxes that would be paid upon remittance
of these indefinitely reinvested earnings are approximately $1.3
billion, based on current tax laws.
The tax effects of temporary differences and carryforwards that
give rise to deferred tax assets and liabilities consist of the
following (in millions):
December 31, 1998 1997
- ----------------------------------------------------------
Deferred tax assets:
Benefit plans $ 309 $ 268
Liabilities and reserves 166 172
Net operating loss
carryforwards 49 72
Other 176 89
- ----------------------------------------------------------
Gross deferred tax assets 700 601
Valuation allowance (18) (21)
- ----------------------------------------------------------
$ 682 $ 580
- ----------------------------------------------------------
Deferred tax liabilities:
Property, plant and
equipment $ 244 $ 203
Equity investments 219 107
Intangible assets 139 164
Other 320 288
- ----------------------------------------------------------
$ 922 $ 762
==========================================================
Net deferred tax asset
(liability){1} $ (240) $ (182)
==========================================================
{1} Deferred tax assets of $184 million and $244 million have
been included in the consolidated balance sheet caption
"Marketable securities and other assets" at December 31, 1998
and 1997, respectively.
- 56 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
On December 31, 1998 and 1997, we had approximately $171
million and $139 million, respectively, of gross deferred tax
assets located in countries outside the U.S.
On December 31, 1998, we had $196 million of operating loss
carryforwards available to reduce future taxable income of
certain international subsidiaries. Loss carryforwards of $119
million must be utilized within the next five years; $77 million
can be utilized over an indefinite period. A valuation allowance
has been provided for a portion of the deferred tax assets
related to these loss carryforwards.
NOTE 15: NONRECURRING ITEMS
In the second quarter of 1998, we recorded a nonrecurring
charge in selling, administrative and general expenses primarily
related to the impairment of certain assets in North America of
$25 million and Corporate of $48 million.
In the second quarter of 1997, we recorded a nonrecurring
charge of $60 million in selling, administrative and general
expenses related to enhancing manufacturing efficiencies in
North America.
In 1996, we recorded provisions of approximately $276 million
in selling, administrative and general expenses related to our
plans for strengthening our worldwide system. Of this $276
million, approximately $130 million related to streamlining our
operations, primarily in Greater Europe and Latin America.
The remainder, approximately $146 million, related to
impairment charges to certain production facilities and reserves
for losses on the disposal of other production facilities taken
by The Minute Maid Company.
In connection with the launching of Project Infinity, we
recorded an $80 million impairment charge in administrative
and general expenses to recognize Project Infinity's impact on
existing information systems.
Based on management's commitment to certain strategic actions
during the third quarter of 1996, these impairment charges were
recorded to reduce the carrying value of identified assets to
fair value. Fair values were derived using a variety of
methodologies, including cash flow analysis, estimates of sales
proceeds and independent appraisals.
Also in 1996, we recorded a $28.5 million charge in
administrative and general expenses as a result of our decision
to make a contribution to The Coca-Cola Foundation, a not-for-
profit charitable organization.
NOTE 16: OPERATING SEGMENTS
Our Company's operating structure includes operating segments:
the North America Group (including The Minute Maid Company); the
Africa Group; the Greater Europe Group; the Latin America Group;
the Middle & Far East Group; and Corporate. The North America
Group includes the United States and Canada.
SEGMENT PRODUCTS AND SERVICES - The business of our Company is
nonalcoholic beverages, principally soft drinks, but also a
variety of noncarbonated beverages. Our operating segments derive
substantially all their revenues from the manufacture and sale of
beverage concentrates and syrups with the exception of Corporate,
which derives its revenues primarily from the licensing of our
brands in connection with merchandise.
METHOD OF DETERMINING SEGMENT PROFIT OR LOSS - Management
evaluates the performance of its operating segments separately
to individually monitor the different factors affecting financial
performance. Segment profit or loss includes substantially all of
the segment's costs of production, distribution and
administration. Our Company manages income taxes on a global
basis. Thus, we evaluate segment performance based on profit or
loss before income taxes, exclusive of any significant gains or
losses on the disposition of investments or other assets. Our
Company typically manages and evaluates equity investments and
related income on a segment level. However, we manage certain
significant investments, such as our equity interests in
Coca-Cola Enterprises, at the corporate level. We manage
financial costs, such as exchange gains and losses and interest
income and expense, on a global basis at the Corporate segment.
- 57 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE COCA-COLA COMPANY AND SUBSIDIARIES
Information about our Company's operations by operating segment
is as follows (in millions):
North Greater Latin Middle &
America Africa Europe America Far East Corporate Consolidated
- -----------------------------------------------------------------------------------------------------------------
1998
Net operating revenues $6,915 $603 $4,834 $2,244 $4,040{1} $ 177 $18,813
Operating income 1,460{4} 216 1,473 999 1,299 (480){4} 4,967
Interest income 219 219
Interest expense 277 277
Equity income (1) 3 (40) 68 (70) 72 32
Identifiable operating assets 4,543 381 1,857 1,779 2,105 1,794{2} 12,459
Investments{3} 141 73 2,010 1,629 2,218 615 6,686
Capital expenditures 293 19 216 72 107 156 863
Depreciation and amortization 238 24 92 93 118 80 645
Income before income taxes 1,468 209 1,391 1,075 1,232 (177) 5,198
=================================================================================================================
1997
Net operating revenues $6,443 $582 $5,395 $2,124 $4,110 $ 214 $18,868
Operating income 1,311{5} 165 1,479 957 1,377 (288) 5,001
Interest income 211 211
Interest expense 258 258
Equity income (6) 2 (16) 96 22 57 155
Identifiable operating assets 4,406 418 2,410 1,593 1,625 1,535{2} 11,987
Investments{3} 138 48 1,041 1,461 2,006 200 4,894
Capital expenditures 261 17 327 78 196 214 1,093
Depreciation and amortization 195 22 123 99 106 81 626
Income before income taxes 1,308 158 1,461 1,060 1,380 688 6,055
=================================================================================================================
1996
Net operating revenues $6,050 $482 $5,959 $2,040 $3,964 $ 178 $18,673
Operating income{6} 949 118 1,277 815 1,239 (483) 3,915
Interest income 238 238
Interest expense 286 286
Equity income (16) 1 59 37 73 57 211
Identifiable operating assets 3,796 326 2,896 1,405 1,464 2,056{2} 11,943
Investments{3} 145 20 802 1,234 1,400 568 4,169
Capital expenditures 261 32 379 79 121 118 990
Depreciation and amortization 188 12 190 83 84 76 633
Income before income taxes 919 109 1,326 847 1,290 105 4,596
=================================================================================================================
Intercompany transfers between operating segments are not material.
Certain prior year amounts have been reclassified to conform to the current year presentation.
{1} Japan revenues represent approximately 76 percent of total Middle & Far East operating segment revenues.
{2} Corporate identifiable operating assets are composed principally of marketable securities, finance
subsidiary receivables and fixed assets.
{3} Principally equity investments in bottling companies.
{4} Operating income was reduced by $25 million for North America and $48 million for Corporate for
provisions related to the impairment of certain assets.
{5} Operating income for North America was reduced by $60 million for provisions related to enhancing
manufacturing efficiencies.
{6} Operating income for North America, Africa, Greater Europe, Latin America and the Middle & Far
East was reduced by $153 million, $7 million, $66 million, $32 million and $18 million, respectively,
for provisions related to management's strategic plans to strengthen our worldwide system. Corporate
operating income was reduced by $80 million for Project Infinity's impairment impact to existing systems
and by $28.5 million for our decision to contribute to The Coca-Cola Foundation.
Compound Growth Rates North Greater Latin Middle &
Ending 1998 America Africa Europe America Far East Consolidated
- -----------------------------------------------------------------------------------------------------------------
Net operating revenues
5 years 7% 19% 2% 6% 8% 6%
10 years 7% 15% 10% 15% 8% 9%
=================================================================================================================
Operating income
5 years 13% 7% 7% 12% 6% 10%
10 years 12% 12% 11% 19% 9% 12%
=================================================================================================================
- 58 -
NET OPERATING REVENUES BY OPERATING SEGMENT{1}
THE COCA-COLA COMPANY AND SUBSIDIARIES
[pie charts]
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------
Africa 3% 3% 3%
Latin America 12% 11% 11%
Middle & Far East 22% 22% 21%
Greater Europe 26% 29% 32%
North America 37% 35% 33%
OPERATING INCOME BY OPERATING SEGMENT {1}
{1} Charts and percentages are calculated exclusive of Corporate
[pie charts]
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------
Africa 4% 3% 3%
Latin America 18% 18% 18%
Middle & Far East 24% 26% 28%
Greater Europe 27% 28% 29%
North America 27% 25% 22%
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHARE OWNERS
THE COCA-COLA COMPANY
We have audited the accompanying consolidated balance sheets
of The Coca-Cola Company and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income,
share-owners' equity, and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of The Coca-Cola Company and subsidiaries at
December 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG
Atlanta, Georgia
January 25, 1999
- 59 -
THE COCA-COLA COMPANY AND SUBSIDIARIES
QUARTERLY DATA (UNAUDITED)
(In millions except per share data)
First Second Third Fourth Full
Year Ended December 31, Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------
1998
Net operating revenues $4,457 $5,151 $4,747 $4,458 $18,813
Gross profit 3,139 3,652 3,301 3,159 13,251
Net income 857 1,191 888 597 3,533
Basic net income per share .35 .48 .36 .24 1.43
Diluted net income per share .34 .48 .36 .24 1.42
================================================================================
1997
Net operating revenues $4,138 $5,075 $4,954 $4,701 $18,868
Gross profit 2,843 3,466 3,295 3,249 12,853
Net income 987 1,314 1,011 817 4,129
Basic net income per share .40 .53 .41 .33 1.67
Diluted net income per share .39 .52 .40 .33 1.64
==============================================================================================
The second quarter of 1998 includes a gain of approximately $191
million ($.03 per share after income taxes, basic and diluted)
on the sale of our Italian bottling operations in northern and
central Italy to Coca-Cola Beverages. The second quarter of 1998
also includes provisions of $73 million ($.02 per share after
income taxes, basic and diluted) related to the impairment of
certain assets in North America and Corporate.
The third quarter of 1998 includes a noncash gain on the issuance
of stock by CCEAG of approximately $27 million ($.01 per share
after income taxes, basic and diluted).
The first quarter of 1997 includes a gain of approximately $352
million ($.08 per share after income taxes, basic and diluted) on
the sale of our 49 percent interest in Coca-Cola & Schweppes
Beverages Ltd. to Coca-Cola Enterprises.
The second quarter of 1997 includes noncash gains on the issuance
of stock by Coca-Cola Amatil of approximately $343 million
($.08 per share after income taxes, basic and diluted). The
second quarter of 1997 also includes provisions related to
enhancing manufacturing efficiencies in North America of $60
million ($.02 per share after income taxes, basic and diluted).
The third quarter of 1997 includes a gain of approximately
$156 million ($.04 per share after income taxes, basic and
diluted) on the sale of our 48 percent interest in Coca-Cola
Beverages Ltd. of Canada and our 49 percent interest in
The Coca-Cola Bottling Company of New York, Inc., to Coca-Cola
Enterprises.
STOCK PRICES
Below are the New York Stock Exchange high, low and closing
prices of The Coca-Cola Company's stock for each quarter of 1998
and 1997.
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------
1998
High $ 79.31 $ 86.81 $ 88.94 $ 75.44
Low 62.25 71.88 53.63 55.38
Close 77.44 85.50 57.63 67.00
============================================================================
1997
High $ 63.25 $ 72.63 $ 71.94 $ 67.19
Low 51.13 52.75 55.06 51.94
Close 55.75 68.00 61.00 66.69
============================================================================
- 61 -
SHARE-OWNER INFORMATION
COMMON STOCK
Ticker symbol: KO
The Coca-Cola Company is one of 30 companies in the
Dow Jones Industrial Average.
Share owners of record at year end: 388,641
Shares outstanding at year end: 2.47 billion
STOCK EXCHANGES
INSIDE THE UNITED STATES:
Common stock listed and traded: New York Stock Exchange, the
principal market for our common stock.
Common stock traded: Boston, Chicago, Cincinnati, Pacific and
Philadelphia stock exchanges.
OUTSIDE THE UNITED STATES:
Common stock listed and traded: The German exchange in Frankfurt
and the Swiss exchange in Zurich.
DIVIDENDS
At its February 1999 meeting, our Board increased our quarterly
dividend to 16 cents per share, equivalent to an annual dividend
of 64 cents per share. The Company has increased dividends each
of the last 37 years.
The Coca-Cola Company normally pays dividends four times a
year, usually on April 1, July 1, October 1 and December 15. The
Company has paid 311 consecutive quarterly dividends, beginning
in 1920.
SHARE-OWNER ACCOUNT ASSISTANCE
For address changes, dividend checks, direct deposit of
dividends, account consolidation, registration changes, lost
stock certificates, stock holdings and the Dividend and Cash
Investment Plan, please contact:
Registrar and Transfer Agent
First Chicago Trust Co., a division of EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
Toll-free: (888) COKESHR (265-3747)
For hearing impaired: (201) 222-4955
E-mail: fctc_cocacola@em.fcnbd.com
Internet: www.equiserve.com
DIVIDEND AND CASH INVESTMENT PLAN
The Dividend and Cash Investment Plan permits share owners of
record to reinvest dividends from Company stock in shares of
The Coca-Cola Company. The Plan provides a convenient, economical
and systematic method of acquiring additional shares of our
common stock. All share owners of record are eligible to
participate. Share owners also may purchase Company stock through
voluntary cash investments of up to $125,000 per year.
At year end, 73 percent of the Company's share owners of record
were participants in the Plan. In 1998, share owners invested $41
million in dividends and $98 million in cash in the Plan.
If your shares are held in street name by your broker and you
are interested in participating in the Dividend and Cash
Investment Plan, you may have your broker transfer the shares to
First Chicago Trust Co. electronically through the Direct
Registration System.
For more details on the Dividend and Cash Investment Plan
please contact the Plan Administrator, First Chicago Trust Co.,
or visit the investor section of our Company's Web site,
www.thecoca-colacompany.com, for more information.
SHARE-OWNER INTERNET ACCOUNT ACCESS
Share owners of record may access their accounts via the Internet
to obtain share balance, current market price of shares,
historical stock prices and the total value of their investment.
In addition, they may sell or request issuance of Dividend and
Cash Investment Plan shares.
For information on how to access this secure site, please call
First Chicago Trust Co. toll-free at (877) 843-9327. For share
owners of record outside North America, please call
(201) 536-8071.
ANNUAL MEETING OF SHARE OWNERS
April 21,1999, 9 a.m. local time
The Playhouse Theatre
Du Pont Building
10th and Market Streets
Wilmington, Delaware
CORPORATE OFFICES
The Coca-Cola Company
One Coca-Cola Plaza
Atlanta, Georgia 30313
INSTITUTIONAL INVESTOR INQUIRIES
(404) 676-5766
INFORMATION RESOURCES
PUBLICATIONS
THE COMPANY'S ANNUAL REPORT, PROXY STATEMENT, FORM 10-K AND
FORM 10-Q REPORTS ARE AVAILABLE FREE OF CHARGE UPON REQUEST
FROM OUR INDUSTRY & CONSUMER AFFAIRS DEPARTMENT AT THE COMPANY'S
CORPORATE ADDRESS, LISTED ABOVE.
INTERNET SITE
You can find our stock price, news and earnings releases and
more financial information about our Company on our recently
expanded Web site, www.thecoca-colacompany.com.
HOTLINE
The Company's hotline, (800) INVSTKO (468-7856), offers taped
highlights from the most recent quarter and may be used to
request the most recent quarterly results news release.
AUDIO ANNUAL REPORT
An audiocassette version of this report is available without
charge as a service to the visually impaired. To receive a copy,
please contact our Industry & Consumer Affairs Department at
(800) 571-2653.
DUPLICATE MAILINGS
If you are receiving duplicate or unwanted copies of our
publications, please contact First Chicago Trust Co. at
(888) COKESHR (265-3747).
- 64 -
GLOSSARY
[Following are certain definitions extracted from page 65:]
DIVIDEND PAYOUT RATIO: Calculated by dividing cash dividends on
common stock by net income available to common share owners.
ECONOMIC PROFIT: Income from continuing operations, after taxes,
excluding interest, in excess of a computed capital charge for
average operating capital employed.
FREE CASH FLOW: Cash provided by operations less cash used in
investing activities. The Company uses free cash flow along with
borrowings to pay dividends and make share repurchases.
NET DEBT AND NET CAPITAL: Debt and capital in excess of cash,
cash equivalents and marketable securities not required for
operations and certain temporary bottling investments.
RETURN ON CAPITAL: Calculated by dividing income from continuing
operations - before changes in accounting principles, adjusted
for interest expense - by average total capital.
RETURN ON COMMON EQUITY: Calculated by dividing income from
continuing operations - before changes in accounting principles,
less preferred stock dividends - by average common share-owners'
equity.
TOTAL CAPITAL: Equals share-owners' equity plus interest-bearing
debt.
TOTAL MARKET VALUE OF COMMON STOCK: Stock price at year end
multiplied by the number of shares outstanding at year end.
- 65 -