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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File No. 1-2217
THE COCA-COLA COMPANY
(Exact name of registrant as specified in its Charter)
Delaware 58-0628465
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Coca-Cola Plaza 30313
Atlanta, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (404) 676-2121
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock as of the latest practicable date.
Class of Common Stock Outstanding at October 10, 2003
--------------------- -------------------------------
$.25 Par Value 2,451,512,292 Shares
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THE COCA-COLA COMPANY AND SUBSIDIARIES
Index
Part I. Financial Information
Page Number
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
Three and nine months ended
September 30, 2003 and 2002 3
Condensed Consolidated Balance Sheets
September 30, 2003 and December 31, 2002 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 41
Item 4. Controls and Procedures 41
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 42
2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
NET OPERATING REVENUES $ 5,662 $ 5,322 $ 15,851 $ 14,769
Cost of goods sold 2,150 2,083 5,865 5,404
-------- -------- -------- --------
GROSS PROFIT 3,512 3,239 9,986 9,365
Selling, general and
administrative expenses 2,006 1,789 5,573 5,197
Other operating charges 55 - 284 -
-------- -------- -------- --------
OPERATING INCOME 1,451 1,450 4,129 4,168
Interest income 37 46 138 156
Interest expense 42 52 130 156
Equity income (loss) - net 86 113 325 350
Other income (loss) - net (42) (62) (99) (292)
Gains on issuances of stock
by equity investees 8 - 8 -
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 1,498 1,495 4,371 4,226
Income taxes 275 404 951 1,180
-------- -------- -------- --------
NET INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 1,223 1,091 3,420 3,046
Cumulative effect of
accounting change for SFAS
No. 142, net of income taxes:
Company operations - - - (367)
Equity investees - - - (559)
-------- -------- -------- --------
NET INCOME $ 1,223 $ 1,091 $ 3,420 $ 2,120
======== ======== ======== ========
BASIC NET INCOME PER SHARE (1):
Before accounting change $ .50 $ .44 $ 1.39 $ 1.23
Cumulative effect of
accounting change - - - (.37)
-------- -------- -------- --------
$ .50 $ .44 $ 1.39 $ .85
======== ======== ======== ========
3
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
DILUTED NET INCOME PER SHARE (1):
Before accounting change $ .50 $ .44 $ 1.39 $ 1.23
Cumulative effect of
accounting change - - - (.37)
-------- -------- -------- --------
$ .50 $ .44 $ 1.39 $ .85
======== ======== ======== ========
DIVIDENDS PER SHARE $ .22 $ .20 $ .66 $ .60
======== ======== ======== ========
AVERAGE SHARES OUTSTANDING 2,455 2,478 2,462 2,479
Dilutive effect of
stock options 3 5 3 6
-------- -------- -------- --------
Average Shares Outstanding
Assuming Dilution 2,458 2,483 2,465 2,485
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
(1) The sum of Basic and Diluted Net Income Per Share Before Accounting Change
and Cumulative Effect of Accounting Change for the nine months ended
September 30, 2002 does not agree to reported Basic and Diluted Net Income
Per Share due to rounding.
4
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except share data)
ASSETS
September 30, December 31,
2003 2002
------------ -----------
CURRENT
Cash and cash equivalents $ 3,656 $ 2,126
Marketable securities 191 219
-------- --------
3,847 2,345
Trade accounts receivable, less
allowances of $60 at September 30
and $55 at December 31 2,142 2,097
Inventories 1,293 1,294
Prepaid expenses and other assets 1,762 1,616
-------- --------
TOTAL CURRENT ASSETS 9,044 7,352
-------- --------
INVESTMENTS AND OTHER ASSETS
Equity method investments
Coca-Cola Enterprises Inc. 1,234 972
Coca-Cola Hellenic Bottling Company S.A. 1,010 872
Coca-Cola FEMSA, S.A. de C.V. 716 347
Coca-Cola Amatil Limited 572 492
Other, principally bottling companies 1,576 2,054
Cost method investments,
principally bottling companies 283 254
Other assets 2,953 2,694
-------- --------
8,344 7,685
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land 396 385
Buildings and improvements 2,495 2,332
Machinery and equipment 6,252 5,888
Containers 385 396
-------- --------
9,528 9,001
Less allowances for depreciation 3,464 3,090
-------- --------
6,064 5,911
TRADEMARKS WITH INDEFINITE LIVES 1,867 1,724
GOODWILL AND OTHER INTANGIBLE ASSETS 2,088 1,829
-------- --------
TOTAL ASSETS $ 27,407 $ 24,501
======== ========
5
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except share data)
LIABILITIES AND SHARE-OWNERS' EQUITY
September 30, December 31,
2003 2002
------------- -----------
CURRENT
Accounts payable and accrued expenses $ 4,663 $ 3,692
Loans and notes payable 2,762 2,475
Current maturities of long-term debt 307 180
Accrued income taxes 859 994
-------- --------
TOTAL CURRENT LIABILITIES 8,591 7,341
-------- --------
LONG-TERM DEBT 2,479 2,701
-------- --------
OTHER LIABILITIES 2,415 2,260
-------- --------
DEFERRED INCOME TAXES 397 399
-------- --------
SHARE-OWNERS' EQUITY
Common stock, $.25 par value
Authorized: 5,600,000,000 shares
Issued: 3,493,232,231 shares at September 30;
3,490,818,627 shares at December 31 873 873
Capital surplus 4,251 3,857
Reinvested earnings 26,300 24,506
Accumulated other comprehensive income (loss) (2,574) (3,047)
-------- --------
28,850 26,189
Less treasury stock, at cost
(1,041,846,089 shares at September 30;
1,019,839,490 shares at December 31) 15,325 14,389
-------- --------
13,525 11,800
-------- --------
TOTAL LIABILITIES AND SHARE-OWNERS' EQUITY $ 27,407 $ 24,501
======== ========
See Notes to Condensed Consolidated Financial Statements.
6
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
Nine Months Ended
September 30,
-----------------
2003 2002
------- -------
OPERATING ACTIVITIES
Net income $ 3,420 $ 2,120
Depreciation and amortization 622 599
Stock-based compensation expense 329 311
Deferred income taxes (69) (131)
Equity income or loss, net of dividends (246) (252)
Foreign currency adjustments (121) (12)
Gains on issuances of stock by equity investees (8) -
Gains on sale of assets, including bottling interests (22) (8)
Cumulative effect of accounting change - 926
Other operating charges 164 -
Other items 281 244
Net change in operating assets and liabilities (229) (392)
------- -------
Net cash provided by operating activities 4,121 3,405
------- -------
INVESTING ACTIVITIES
Acquisitions and investments,
principally trademarks and bottling companies (306) (415)
Purchases of investments and other assets (190) (115)
Proceeds from disposals of investments
and other assets 172 277
Purchases of property, plant and equipment (565) (582)
Proceeds from disposals of property, plant
and equipment 54 55
Other investing activities 29 49
------- -------
Net cash used in investing activities (806) (731)
------- -------
FINANCING ACTIVITIES
Issuances of debt 1,121 1,402
Payments of debt (1,007) (1,939)
Issuances of stock 48 97
Purchases of stock for treasury (938) (478)
Dividends (1,086) (994)
------- -------
Net cash used in financing activities (1,862) (1,912)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS 77 19
------- -------
CASH AND CASH EQUIVALENTS
Net increase during the period 1,530 781
Balance at beginning of period 2,126 1,866
------- -------
Balance at end of period $ 3,656 $ 2,647
======= =======
See Notes to Condensed Consolidated Financial Statements.
7
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
------------------------------
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information
and notes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been no
material change in the information disclosed in the notes to the consolidated
financial statements included in the Annual Report on Form 10-K of The Coca-Cola
Company for the year ended December 31, 2002. When used in these notes, the
terms "Company," "we," "us" or "our" mean The Coca-Cola Company and its
divisions and subsidiaries. In the opinion of management, all adjustments
(including normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003.
Certain amounts in our prior period financial statements have been
reclassified to conform to the current period presentation. Additionally, 2002
results were restated to reflect the Company's adoption of the preferable fair
value recognition provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" under the modified
prospective transition method selected by our Company as described in SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
Refer to Note H.
NOTE B - SEASONALITY
--------------------
Sales of nonalcoholic beverages are somewhat seasonal, with the second and
third calendar quarters accounting for the highest sales volumes in the Northern
Hemisphere. The volume of sales in the beverages business may be affected by
weather conditions.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE C - COMPREHENSIVE INCOME
-----------------------------
Total Comprehensive Income for the three months ended September 30, 2003
and 2002 was comprised of the following:
For the three months ended September 30,
---------------------------------------
2003 2002
------- -------
Net income $ 1,223 $ 1,091
Net foreign currency translation
loss (369) (241)
Net gain/(loss) on derivative financial
instruments (20) 17
Net change in unrealized gain/(loss) on
available-for-sale securities 14 (68)
Net change in minimum pension liability - -
------- -------
Total comprehensive income $ 848 $ 799
======= =======
Total Comprehensive Income for the nine months ended September 30, 2003 and
2002 was comprised of the following:
For the nine months ended September 30,
--------------------------------------
2003 2002
------- -------
Net income $ 3,420 $ 2,120
Net foreign currency translation
gain/(loss) 501 (157)
Net loss on derivative financial
instruments (39) (99)
Net change in unrealized gain/(loss) on
available-for-sale securities 29 (1)
Net change in minimum pension liability (18) (33)
------- -------
Total comprehensive income $ 3,893 $ 1,830
======= =======
Net foreign currency translation loss for the three months ended September
30, 2003 resulted primarily from the weakening of certain currencies against the
U.S. dollar from the beginning of the quarter through September 30, 2003,
particularly the euro and Mexican peso. Net foreign currency translation gain
for the nine months ended September 30, 2003 resulted primarily from the
strengthening of certain currencies against the U.S. dollar from the beginning
of the year through September 30, 2003, particularly the euro and Japanese yen,
partially offset by weakening of certain Latin American currencies. Net loss on
derivative financial instruments for the nine months ended September 30, 2002
resulted primarily from decreases in the fair value of outstanding hedging
instruments, primarily related to the Japanese yen. Fluctuations in the value of
the hedging instruments are generally offset by changes in the fair value or
cash flows of the underlying exposures being hedged.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D - ACCOUNTING PRONOUNCEMENTS
----------------------------------
Effective January 1, 2002, our Company adopted the fair value method
defined in SFAS No. 123. For information regarding the adoption of the fair
value method defined in SFAS No. 123, refer to Note H.
Effective January 1, 2003, the Company adopted SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
plan be recognized when the liability is incurred. Under SFAS 146, an exit or
disposal plan exists when the following criteria are met:
* Management, having the authority to approve the action, commits to a
plan of termination.
* The plan identifies the number of employees to be terminated, their job
classifications or functions and their locations, and the expected
completion date.
* The plan establishes the terms of the benefit arrangement, including the
benefits that employees will receive upon termination (including but not
limited to cash payments), in sufficient detail to enable employees to
determine the type and amount of benefits they will receive if they are
involuntarily terminated.
* Actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be
withdrawn.
SFAS No. 146 establishes that fair value is the objective for initial
measurement of the liability. In cases where employees are required to render
service until they are terminated in order to receive termination benefits, a
liability for termination benefits is recognized ratably over the future service
period. Under EITF Issue No. 94-3, a liability for the entire amount of the exit
cost was recognized at the date that the entity met the four criteria described
above. For information regarding the impact of adopting SFAS No. 146 and the
impact of the streamlining initiatives that the Company has undertaken during
the three and nine months ended September 30, 2003, refer to Note G.
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45 (Interpretation 45), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation elaborates on the disclosures to be
made by a guarantor in interim and annual financial statements about the
obligations under certain guarantees. Our Company adopted the disclosure
provisions of Interpretation 45 as of December 31, 2002. Interpretation 45 also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. We do not
currently provide significant guarantees on a routine basis. As a result, this
interpretation has not had a material impact on our financial statements.
In January 2003, the FASB issued Interpretation No. 46 (Interpretation 46),
"Consolidation of Variable Interest Entities." This interpretation addresses the
consolidation of business enterprises (variable interest entities) to which the
usual condition (ownership of a majority voting interest) of consolidation does
not apply. This interpretation focuses on financial interests that indicate
control. It concludes that in the absence of clear control through voting
interests, a company's exposure (variable interest) to the economic risks and
potential rewards from the variable interest entity's assets and activities are
the best evidence of control. Variable interests are rights and obligations that
convey economic gains or losses from changes in the values of the variable
interest entity's assets and liabilities. Variable interests may arise from
financial instruments, service contracts, nonvoting ownership interests and
other arrangements. If an enterprise holds a majority of the variable interests
of an entity, it would be considered the primary beneficiary. The primary
beneficiary would be required to include assets, liabilities and the results of
operations of the variable interest entity in its financial statements.
Interpretation 46 applies immediately to variable interest entities that are
created after or for which control is obtained after January 31, 2003.
FASB Staff Position No. FIN 46-6, "Effective Date of FASB Interpretation
No. 46, Consolidation of Variable Interest Entities," was issued with an
effective date of October 9, 2003. This FASB Staff Position deferred the
effective date for applying the provisions of Interpretation 46 for interests
held by public entities in variable interest entities or potential variable
interest entities created before February 1, 2003. A public entity need not
apply the provisions of Interpretation 46 to an interest held in a variable
interest entity or potential variable interest entity until the end of the first
interim or annual period ending after December 15, 2003 if both of the following
apply:
1. The variable interest entity was created before February 1, 2003.
2. The public entity has not issued financial statements reporting
interests in variable interest entities in accordance with Interpretation
46, other than certain required disclosures.
Our Company will implement the provisions of Interpretation 46 for our
financial statements for the year ending December 31, 2003 for any variable
interest entities created before February 1, 2003.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our Company holds interests in certain entities, primarily bottlers,
currently accounted for under the equity method of accounting, that we believe
may be considered variable interest entities. These variable interests relate to
profit guarantees or subordinated financial support for these entities. We
believe it is reasonably possible that the Company will be required to
consolidate these variable interest entities as of December 31, 2003.
Based on our current understanding, we do not expect Interpretation 46 to
have a material impact on our finanancial statements; however, we understand the
FASB expects to issue certain implementation guidance regarding Interpretation
46. Our current understanding of Interpretation 46 could be impacted by this
implementation guidance.
NOTE E - ACQUISITIONS AND INVESTMENTS
-------------------------------------
In March 2003, our Company acquired a 100 percent ownership interest in
Truesdale Packaging Company LLC (Truesdale) from Coca-Cola Enterprises Inc. for
cash consideration of approximately $60 million. Truesdale owns noncarbonated
beverage production facilities. The purchase price was allocated primarily to
the property, plant and equipment acquired. No amount has been allocated to
intangible assets. Truesdale is included in our North America operating segment.
In November 2001, we entered into a Control and Profit and Loss Transfer
Agreement (CPL) with Coca-Cola Erfrischungsgetraenke AG (CCEAG). Under the terms
of the CPL, our Company acquired management control of CCEAG. In November 2001,
we also entered into a Pooling Agreement with certain share owners of CCEAG that
provided our Company with voting control of CCEAG. Both agreements became
effective in February 2002, when our Company acquired control of CCEAG, for a
term ending no later than December 31, 2006. CCEAG is included in our Europe,
Eurasia and Middle East operating segment. As a result of acquiring control of
CCEAG, our Company is working to help focus its sales and marketing programs and
assist in developing the business. This transaction was accounted for as a
business combination, and the results of CCEAG's operations have been included
in the Company's financial statements since February 2002. Prior to February
2002, our Company accounted for CCEAG under the equity method of accounting. As
of December 31, 2002, our Company had an approximate 41 percent ownership
interest in the outstanding shares of CCEAG. In return for control of CCEAG,
pursuant to the CPL we guaranteed annual payments, in lieu of dividends by
CCEAG, to all other CCEAG share owners. These guaranteed annual payments equal
..76 euro for each CCEAG share outstanding. Additionally, all other CCEAG share
owners entered into either a put or a put/call option agreement with the
Company, exercisable at the end of the term of the CPL at agreed prices. Our
Company entered into either put or put/call agreements for shares representing
an approximate 59 percent interest in CCEAG. The spread in the strike prices of
the put and call options is approximately 3 percent.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of the date of the transaction, the Company concluded that the exercise
of the put and/or call agreements was a virtual certainty based on the minimal
differences in the strike prices. We concluded that either the holder of the put
option would require the Company to purchase the shares at the agreed-upon put
strike price, or the Company would exercise its call option and require the
share owner to tender its shares at the agreed-upon call strike price. The
holders of the puts or calls may exercise their rights at any time up to the
December 31, 2006 expiration date. If these rights are exercised, the actual
transfer of shares would not occur until the end of the term of the CPL. Coupled
with the guaranteed payments in lieu of dividends for the term of the CPL, these
instruments represented the financing vehicle for the transaction. As such, the
Company determined that the economic substance of the transaction resulted in
the acquisition of the remaining outstanding shares of CCEAG and required the
Company to account for the transaction as a business combination. Furthermore,
the terms of the CPL transferred control and all of the economic risks and
rewards of CCEAG to the Company immediately.
The present value of the total amount likely to be paid by our Company to
all other CCEAG share owners, including the put or put/call payments and the
guaranteed annual payments in lieu of dividends, is approximately $823 million
at September 30, 2003. This amount has increased from the initial liability of
approximately $600 million due to the accretion of the discounted value to the
ultimate maturity of the liability, as well as approximately $170 million of
translation adjustment related to this liability. This liability is included in
the caption Other Liabilities. The accretion of the discounted value to its
ultimate maturity value is recorded in the caption Other Income (Loss) - Net,
and this amount was approximately $13 million and $11 million, respectively, for
the three months ended September 30, 2003 and September 30, 2002, and
approximately $38 million and $27 million, respectively, for the nine months
ended September 30, 2003 and September 30, 2002.
In July 2002, our Company and Danone Waters of North America, Inc. (DWNA)
formed a new limited liability company, CCDA Waters, LLC (CCDA), for the
production, marketing and distribution of DWNA's bottled spring and source water
business in the United States. In forming CCDA, DWNA contributed assets of its
retail bottled spring and source water business in the United States. These
assets include five production facilities, a license for the use of the Dannon
and Sparkletts brands, as well as ownership of several value brands. Our Company
made a cash payment to acquire a controlling 51 percent equity interest in CCDA
and is also providing marketing, distribution and management expertise. This
transaction was accounted for as a business combination, and the consolidated
results of CCDA's operations have been included in the Company's Condensed
Consolidated Financial Statements since July 2002. This business combination
expanded our water brands to include a national offering in all sectors of the
water category with purified, spring and source waters. CCDA is included in our
North America operating segment.
In January 2002, our Company and Coca-Cola Bottlers Philippines, Inc.
(CCBPI) finalized the purchase of RFM Corp.'s (RFM) approximate 83 percent
interest in Cosmos Bottling Corporation
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(CBC), a publicly traded Philippine beverage company. CBC is an established
carbonated soft drink business in the Philippines and is included in our Asia
operating segment. The originalsale and purchase agreement with RFM was entered
into in November 2001. As of the date of this sale and purchase agreement, the
Company began supplying concentrate for this operation. The purchase of RFM's
interest was finalized on January 3, 2002. In March 2002, a tender offer was
completed with our Company and CCBPI acquiring all shares of the remaining
minority share owners except for shares representing a one percent interest in
CBC. This transaction was accounted for as a business combination, and the
results of CBC's operations were included in the Company's Consolidated
Financial Statements from January 2002 to March 2003.
The Company and CCBPI agreed to restructure the ownership of the operations
of CBC, and this transaction was completed in April 2003. This transaction
resulted in the Company owning all the acquired trademarks and CCBPI owning all
the acquired bottling assets. Accordingly, CBC's bottling assets were
deconsolidated by the Company in April 2003. No gain or loss was recorded by our
Company upon completion of the transaction, as the fair value of the assets
exchanged was approximately equal. Additionally, there was no impact on our cash
flows related to this transaction.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - OPERATING SEGMENTS
---------------------------
The Company's operating structure includes the following operating
segments: North America; Africa; Europe, Eurasia and Middle East; Latin America;
Asia; and Corporate. North America includes the United States, Canada and Puerto
Rico. Prior period amounts have been reclassified to conform to the current
period presentation. Information about our Company's operations as of and for
the three months ended September 30, 2003 and 2002, by operating segment, is as
follows (in millions):
Europe,
North Eurasia & Latin
America Africa Middle East America Asia Corporate Consolidated
------- ------- ----------- -------- ------- --------- ------------
2003
----
Net operating
revenues $ 1,707 $ 197 $ 1,803 $ 522 $ 1,382 $ 51 $ 5,662
Operating
income (1) 361 65 589 250 410 (224) 1,451
Income before
income taxes and
cumulative effect
of accounting
change (1) (2) 370 67 617 168 417 (141) 1,498
Identifiable
operating
assets 5,186 731 4,895 1,252 2,233 7,719 22,016
Investments 111 141 1,288 1,312 1,241 1,298 5,391
2002
----
Net operating
revenues $ 1,706 $ 164 $ 1,518 $ 487 $ 1,400 $ 47 $ 5,322
Operating income 399 62 464 235 486 (196) 1,450
Income before
income taxes and
cumulative effect
of accounting
change 405 63 467 223 492 (155) 1,495
Identifiable
operating
assets 5,153 539 4,665 1,032 2,545 6,584 20,518
Investments 143 79 1,050 1,366 1,144 1,000 4,782
Intercompany transfers between operating segments are not material.
(1) Operating Income and Income Before Income Taxes and Cumulative Effect of
Accounting Change for the three months ended September 30, 2003 were
reduced by approximately $13 million for North America, approximately $1
million for Africa, approximately $23 million for Europe, Eurasia and
Middle East, approximately $13 million for Latin America and
approximately $5 million for Corporate as a result of other operating
charges. Refer to Note G.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Income Before Income Taxes and Cumulative Effect of Accounting Change
for Latin America for the three months ended September 30, 2003 was
reduced by $95 million primarily for a charge related to one of our
equity method investees. Refer to Note I.
Information about our Company's operations for the nine months ended
September 30, 2003 and 2002, by operating segment, is as follows (in millions):
Europe,
North Eurasia & Latin
America Africa Middle East America Asia Corporate Consolidated
------- ------- ----------- -------- ------- --------- ------------
2003
----
Net operating
revenues $ 4,856 $ 553 $ 4,901 $ 1,490 $ 3,912 $ 139 $ 15,851
Operating income (1) 1,017 183 1,531 725 1,244 (571) 4,129
Income before
income taxes and
cumulative effect
of accounting
change (1) (2) 1,051 179 1,562 695 1,279 (395) 4,371
2002
----
Net operating
revenues $ 4,712 $ 493 $ 3,993 $ 1,584 $ 3,858 $ 129 $ 14,769
Operating income 1,167 170 1,249 772 1,397 (587) 4,168
Income before
income taxes and
cumulative effect
of accounting
change (3) 1,184 166 1,225 773 1,416 (538) 4,226
Intercompany transfers between operating segments are not material.
(1) Operating Income and Income Before Income Taxes and Cumulative Effect of
Accounting Change for the nine months ended September 30, 2003 were
reduced by approximately $147 million for North America, approximately
$1 million for Africa, approximately $92 million for Europe, Eurasia and
Middle East, approximately $16 million for Latin America and
approximately $28 million for Corporate as a result of other operating
charges. Operating Income and Income Before Income Taxes and Cumulative
Effect of Accounting Change for the nine months ended September 30, 2003
were increased by $52 million for Corporate as a result of the Company's
receipt of a settlement related to a vitamin antitrust litigation
matter. Refer to Note G.
(2) Income Before Income Taxes and Cumulative Effect of Accounting Change
for Latin America for the nine months ended September 30, 2003 was
reduced by $95 million primarily for a charge related to one of our
equity method investees. Refer to Note I.
(3) Income Before Income Taxes and Cumulative Effect of Accounting Change
for Latin America in 2002 was negatively impacted by a charge related to
a write-down of investments in
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Latin America partially offset by the Company's share of a gain recorded
by one of our investees in Latin America. Refer to Note G.
NOTE G - SIGNIFICANT OPERATING AND NON-OPERATING ITEMS
------------------------------------------------------
In the first quarter of 2003, the Company reached a settlement with certain
defendants in a vitamin antitrust litigation matter. In that litigation, the
Company alleged that certain vitamin manufacturers participated in a global
conspiracy to fix the price of some vitamins, including vitamins used in the
manufacture of some of the Company's products. During the first quarter of 2003,
the Company received a settlement relating to this litigation of approximately
$52 million on a pretax basis, or $0.01 per share on an after-tax basis. The
amount was recorded as a reduction to Cost of Goods Sold.
During the first quarter of 2003, the Company initiated steps to streamline
and simplify its operations, primarily in North America and Germany. In North
America, the Company is integrating the operations of our three separate North
American business units - Coca-Cola North America, The Minute Maid Company and
Fountain. In Germany, CCEAG is taking steps to improve efficiency in sales,
distribution and manufacturing. As described in Note D, under SFAS No. 146, a
liability is accrued only when certain criteria are met. Of the Company's total
streamlining initiatives, certain components of these initiatives have met these
criteria as of September 30, 2003. The total cost expected to be incurred for
these components of the streamlining initiatives that, as of September 30, 2003,
meet the criteria described in Note D is approximately $329 million.
Employees separated from the Company as a result of these streamlining
initiatives were offered severance or early retirement packages, as appropriate,
which included both financial and non-financial components. The expenses
recorded during the nine-month period ended September 30, 2003 included costs
associated with involuntary terminations and other direct costs associated with
implementing these initiatives. Other direct costs included the relocation of
employees; contract termination costs; costs associated with the development,
communication and administration of these initiatives; and asset write-offs. In
the third quarter of 2003, the Company incurred total pretax expenses related to
these streamlining initiatives of approximately $43 million, or $0.01 per share
after tax. For the nine months ended September 30, 2003, the Company incurred
total pretax expenses related to these streamlining initiatives of approximately
$272 million, or $0.07 per share after tax. These expenses were recorded in
Other Operating Charges. The table below provides more details related to these
costs. As of September 30, 2003, approximately 1,600 associates had been
separated pursuant to these streamlining initiatives.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below summarizes the costs incurred to date, the balance of
accrued streamlining expenses and the movement in that accrual as of and for the
three months ended September 30, 2003 (in millions):
Accrued Accrued
Balance Costs Noncash Balance
June 30, Incurred and Sept. 30,
Cost Summary 2003 July-Sept. Payments Exchange 2003
------------ ------- --------- -------- --------- ---------
Severance pay and benefits $ 93 $ 20 $ (41) $ (8) $ 64
Retirement related benefits 37 - - - 37
Outside services - legal,
outplacement, consulting 4 5 (7) - 2
Other direct costs 13 18 (19) - 12
------ ------ ------ ------ -----
Total $ 147 $ 43 $ (67) $ (8) $ 115
====== ====== ====== ====== =====
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below summarizes the total costs expected to be incurred for the
components of the streamlining initiatives which have met the criteria described
in SFAS No. 146, the costs incurred to date, the balance of accrued streamlining
expenses and the movement in that accrual as of and for the nine months ended
September 30, 2003 (in millions):
Total
Costs Accrued
Expected Costs Noncash Balance
Expected Incurred and Sept. 30,
Cost Summary to be incurred to date Payments Exchange 2003
------------ -------------- -------- -------- -------- ---------
Severance pay and benefits $ 197 $ 143 $ (74) $ (5) $ 64
Retirement related benefits 37 37 - - 37
Outside services - legal,
outplacement, consulting 23 22 (20) - 2
Other direct costs 50 48 (36) - 12
------- ------- ------- ------- -------
Total $ 307 $ 250 $ (130) $ (5) $ 115
======= ======= ======= ======= =======
Asset impairments $ 22 $ 22
------- -------
Total Costs Incurred $ 329 $ 272
======= =======
The total amount of costs expected to be incurred for the components of the
streamlining initiatives which have met the criteria described in SFAS No. 146
and the costs incurred to date for the nine months ended September 30, 2003 by
operating segment is as follows (in millions):
Total
Costs Costs
Expected Incurred
to be Incurred to Date
-------------- --------
North America $ 148 $ 147
Africa 4 1
Europe, Eurasia and Middle East 132 92
Latin America 7 4
Asia 9 -
Corporate 29 28
-------- --------
Total $ 329 $ 272
======== ========
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our Company had direct and indirect ownership interests totaling
approximately 18 percent in Cervejarias Kaiser S.A. (Kaiser S.A.). In March
2002, Kaiser S.A. sold its investment in Cervejarias Kaiser Brazil Ltda to
Molson Inc. (Molson) for cash of approximately $485 million and shares of Molson
valued at approximately $150 million. Our Company's pretax share of the gain
related to this sale was approximately $43 million, of which approximately $21
million was recorded in the caption Equity Income (Loss) and approximately $22
million was recorded in the caption Other Income (Loss) - Net.
In the first quarter of 2002, our Company recorded a non-cash pretax charge
of approximately $157 million (recorded in the caption Other Income (Loss) -
Net) primarily related to the write-down of our investments in Latin America.
This write-down reduced the carrying value of the investments in Latin America
to fair value. The charge was primarily the result of the economic developments
in Argentina during the first quarter of 2002, including the devaluation of the
Argentine peso and the severity of the unfavorable economic outlook.
NOTE H - RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS
--------------------------------------------------------------
Our Company currently sponsors stock option plans and restricted stock
award plans. Prior to 2002, our Company accounted for those plans under the
recognition and measurement provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25) and related interpretations. No
stock-based employee compensation expense for stock options was reflected in Net
Income for years prior to 2002, as all stock options granted under those plans
had an exercise price equal to the fair market value of the underlying common
stock on the date of grant. Effective January 1, 2002, our Company adopted the
preferable fair value recognition provisions of SFAS No. 123. Under the modified
prospective transition method selected by our Company as described in SFAS No.
148, compensation cost recognized for the three and nine months ended September
30, 2003 and 2002 is the same as that which would have been recognized had the
fair value method of SFAS No. 123 been applied from its original effective date.
The impact of the adoption of the fair value method of accounting for
stock-based compensation was an increase to stock-based compensation expense of
approximately $104 million and approximately $95 million, respectively, for the
three-month periods ended September 30, 2003 and September 30, 2002. The impact
of this adoption was an increase to stock-based compensation expense of
approximately $323 million and approximately $282 million, respectively, for the
nine-month periods ended September 30, 2003 and September 30, 2002. This stock
compensation expense was recorded in the caption Selling, General and
Administrative Expenses. As a result of adopting SFAS No. 123 and SFAS No. 148,
our results for the three months and nine months ended September 30, 2002 were
restated to reflect the impact of the adoption of the fair value method under
SFAS No. 123. For the quarter ended September 30, 2002, the impact of this
restatement on Selling, General and Administrative Expenses was an increase of
approximately $95 million; and the impact on Income Taxes was a decrease of
approximately $25 million, resulting in a negative impact to Net Income of
approximately $70 million. For the nine months ended September 30, 2002, the
impact of this
20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
restatement on Selling, General and Administrative Expenses was an increase of
approximately $282 million; and the impact on Income Taxes was a decrease of
approximately $76 million, resulting in a negative impact to Net Income of
approximately $206 million. The income per share impact of this restatement was
a reduction of $0.03 per share and $0.08 per share, respectively, for the three
months and nine months ended September 30, 2002. In accordance with the modified
prospective method of adoption, results for years prior to 2002 have not been
restated.
NOTE I - EQUITY INVESTEES
-------------------------
Effective May 6, 2003, one of our Company's equity method investees,
Coca-Cola FEMSA, S.A. de C.V. (Coca-Cola FEMSA) consummated a merger with
another of the Company's equity method investees, Panamerican Beverages, Inc.
(Panamco). Our Company received new Coca-Cola FEMSA shares in exchange for all
Panamco shares previously held by the Company. Our Company's ownership interest
in Coca-Cola FEMSA increased from 30 percent to 39.6 percent as a result of this
merger. This exchange of shares was treated as a non-monetary exchange of
similar productive assets, and no gain was recorded by our Company as a result
of this merger.
In connection with the merger, Coca-Cola FEMSA management initiated steps
to streamline and integrate the operations. This process includes the closing of
various distribution centers and manufacturing plants. Furthermore, due to the
challenging economic conditions and an uncertain political situation in
Venezuela, certain intangible assets were determined to be impaired and written
down to their fair market value. During the third quarter of 2003, our Company
recorded a non-cash charge of $95 million primarily related to these matters.
This charge is included in the line item Equity Income (Loss) - Net.
The Company and the major share owner of Coca-Cola FEMSA have an
understanding which will permit this share owner to purchase from our Company an
amount of Coca-Cola FEMSA shares sufficient for this share owner to regain a 51
percent ownership interest in Coca-Cola FEMSA. Pursuant to this understanding,
which is in place until May 2006, this share owner would pay the higher of the
prevailing market price per share at the time of the sale or the sum of
approximately $2.22 per share plus the Company's carrying costs.
NOTE J - GAINS ON ISSUANCES OF STOCK BY EQUITY INVESTEES
--------------------------------------------------------
For the quarter ended September 30, 2003, our Company recorded
approximately $8 million for gains on issuances of stock by equity investees.
These gains primarily related to the issuance by Coca-Cola Enterprises Inc.
(Coca-Cola Enterprises) of common stock valued at an amount greater than the
book value per share of our investment in Coca-Cola Enterprises. As a result,
the issuance of these shares resulted in a one-time non-cash pretax gain for our
Company. This transaction reduced our ownership interest in the total
outstanding shares of Coca-Cola Enterprises common stock by less than 1 percent.
No gains or losses on issuances of stock by equity investees were recorded
during 2002.
21
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE K - INCOME TAXES
---------------------
In the third quarter of 2003, the Company reduced its estimated full year
2003 effective income tax rate on operations to approximately 22 percent. As of
June 30, 2003, the Company estimated the full year income tax rate on operations
at approximately 24 percent. The impact of this change in effective tax rate
related to income from operations was approximately $70 million (approximately
$0.03 per share). This rate reduction was reflected in the third quarter 2003
income tax expense. The overall effective income tax rate, including the impact
of this rate reduction, for the third quarter of 2003 was approximately 18
percent.
NOTE L - COMMITMENTS AND CONTINGENCIES
--------------------------------------
In 2003, we have adopted the initial recognition and measurement provisions
of Interpretation 45. Because we do not currently provide significant guarantees
on a routine basis, there has been no material effect to our financial
statements. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002.
As of September 30, 2003, we were contingently liable for guarantees of
indebtedness owed by third parties in the amount of approximately $493 million.
These guarantees are related to third-party customers and bottlers and have
arisen through the normal course of business. These guarantees have various
terms, and none of these guarantees are individually significant. The amount
represents the maximum potential future payments that we could be required to
make under the guarantees; however, we do not consider it probable that we will
be required to satisfy these guarantees.
Additionally, the Company is presently negotiating the extension of a $250
million stand-by line of credit to Coca-Cola FEMSA. This line of credit contains
normal market terms and is subject to the execution of final agreements.
We believe our exposure to concentrations of credit risk is limited due to
the diverse geographic areas covered by our operations.
The Company is also involved in various legal proceedings. Management
believes that any liability to the Company that may arise as a result of
currently pending legal proceedings, including those discussed below, will not
have a material adverse effect on the financial condition of the Company taken
as a whole.
During the period from 1970 to 1981, our Company owned Aqua-Chem, Inc.
(Aqua-Chem). A division of Aqua-Chem manufactured certain boilers that contained
gaskets that Aqua-Chem purchased from outside suppliers. Several years after our
Company sold this entity, Aqua-Chem received its first lawsuit relating to
asbestos, a component of some of the gaskets. Aqua-Chem has notified our Company
that it believes we are obligated to them for certain costs and expenses
associated with the litigation. Aqua-Chem has demanded that our Company
reimburse it for approximately $10 million for out-of-pocket litigation-related
expenses incurred over the
22
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
last 18 years. Aqua-Chem has also demanded that the Company acknowledge a
continuing obligation to Aqua-Chem for any future liabilities and expenses that
are excluded from coverage under the applicable insurance or for which there is
no insurance. Our Company disputes Aqua-Chem's claims, and we believe we have no
obligation to Aqua-Chem for any of its past, present or future liabilities,
costs or expenses. Furthermore, we believe we have substantial legal and factual
defenses to Aqua-Chem's claims. The parties have entered into litigation to
resolve this dispute. The Company believes Aqua-Chem has substantial insurance
coverage to pay Aqua-Chem's asbestos claimants. An estimate of possible losses
over time, if any, cannot be made at this time.
The Competition Authority of the European Commission made unannounced
visits to the offices of the Company and our bottling partners in Austria,
Belgium, Denmark, Germany and Great Britain several years ago. Similarly, the
Spanish competition authorities made unannounced visits to our own offices and
those of certain bottlers in Spain in 2000. The European Commission and the
Spanish competition authorities continue their investigations into unspecified
market practices in their respective jurisdictions. The Company believes we have
substantial legal and factual defenses in these matters.
Additionally, at the time of divesting our interest in a consolidated
entity, we sometimes agree to indemnify the buyer for specific liabilities
related to the period we owned the entity. Management believes that any
liability to the Company that may arise as a result of any such indemnification
agreements will not have a material adverse effect on the financial condition of
the Company taken as a whole.
NOTE M - SUBSEQUENT EVENT
-------------------------
Effective October 1, 2003, the Company and all of its bottling partners in
Japan created a nationally integrated supply chain management company to
centralize procurement, production and logistics operations for the entire
Coca-Cola system in Japan. As a result of the creation of this supply chain
management company in Japan, a portion of our Company's business has essentially
been converted from a finished product business model to a concentrate
business model. This will affect certain line items of our Company's income
statement in the future but is not expected to impact our Company's underlying
Operating Income.
23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
BEVERAGE VOLUME
---------------
We measure our sales volume in two ways: (1) gallons and (2) unit cases of
finished products. "Gallons" represent our primary business and measure the
volume of concentrates, syrups, beverage bases, finished beverages and powders
(in all cases, expressed in equivalent gallons of syrup) for all beverage
products which are reportable as unit case volume. Most of our revenues are
based on this measure of primarily wholesale activity, which consists mainly of
our sales to bottlers and customers.
We also measure volume in unit cases. "Unit case" means a unit of
measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce
servings). "Unit case volume" means the number of unit cases (or unit case
equivalents) of Company trademark or licensed beverage products directly or
indirectly sold by the Coca-Cola system to customers. Volume primarily consists
of beverage products bearing Company trademarks. Also included in unit case
volume are certain products licensed to our Company or owned by our bottling
partners, for which our Company provides marketing support and derives profit
from the sales. Such products licensed to our Company or owned by our bottling
partners account for a minimal portion of total unit case volume. Although most
of our Company's revenues are not based directly on unit case volume, we believe
unit case volume is one of the measures of the underlying strength of the
Coca-Cola system because it measures trends at the consumer level.
Third quarter and year-to-date 2003 unit case volume results are as
follows:
Percentage Change
2003 versus 2002
-----------------
Third
Quarter Year-to-Date
------- ------------
Worldwide 4 4
International Operations - Total 5 5
Latin America 5 5
Europe, Eurasia and Middle East 9 6
Africa 5 4
Asia 1 4
North America Operations 1 2
24
RESULTS OF OPERATIONS (Continued)
Latin America
-------------
Strong growth in Mexico and improving trends in Argentina primarily led the
Latin America volume increases for the third quarter of 2003 and for the first
nine months of 2003 compared to the prior year periods. Partially offsetting
these increases was a decrease in Brazil's unit case volume. The Coca-Cola
system significantly increased prices in Brazil, resulting in decreased unit
case volume.
Europe, Eurasia and Middle East
-------------------------------
During the third quarter of 2003, the Company's unit case volume benefited
from sound business fundamentals and innovation, strong marketing strategies and
favorable weather trends, especially in key countries in Western Europe such as
Spain, Great Britain, France and Belgium. The Central Europe, Eurasia and Middle
East Group generated strong growth throughout the region, specifically in the
Italy and Alpine Division, Russia and the South East Europe Division.
In Germany, year-to-date 2003 unit case volume decreased 1 percent versus
the comparable prior period. In the third quarter of 2003, Germany unit case
volume increased 4 percent compared to the prior year third quarter. The
year-to-date volume decrease reflects the implementation of a deposit law on
non-returnable packages that created a difficult industry environment; however,
the increase in the third quarter 2003 reflects a positive trend. We believe
that the Coca-Cola system remains well positioned to take advantage of the move
by German consumers back to returnable packaging.
Africa
------
Performance in South Africa, the Company's largest market in Africa, and
results in Morocco and Algeria contributed significantly to the unit case
volume growth in Africa for the third quarter of 2003 and year-to-date 2003.
Morocco and Algeria benefited from improved bottler execution and marketing
initiatives surrounding the family of Coca-Cola brands and Fanta. These results
were partially offset by uncertain economic and political conditions in
Zimbabwe.
Asia
----
Results during the third quarter of 2003 were led by growth in China and
Thailand. Results during the first nine months of 2003 were led by growth in
China, Australia, Thailand and India. Core carbonated soft drinks continued to
drive growth across Asia, particularly in single-serve packages, along with
strong performance of local brands such as Qoo. The results were partially
offset by Japan. In Japan, unit case volume declined 6 percent in the third
quarter of 2003 with cool and wet weather in July and August, followed by solid
growth during the month of September.
25
RESULTS OF OPERATIONS (Continued)
In India, the beverage industry was impacted by false accusations that soft
drinks contained high levels of pesticides. As a result, India's unit case
volume declined 11 percent during the third quarter of 2003. This decline
follows several consecutive quarters of strong volume growth. Following the
accusations, the Company took proactive steps to provide facts to the Indian
government and consumers, reassuring them as to the safety of the Company's
products. Looking forward, even though unit case volume trends have stabilized
over the past few weeks, the Company continues to monitor the situation
closely.
North America
-------------
Third quarter 2003 results and year-to-date 2003 results in the Retail
Division benefited from strong performance from Vanilla Coke, diet Vanilla Coke,
diet Coke, and the expansion of Fridge Pack availability. Further, the family of
Sprite brands for year-to-date 2003 grew significantly led by the introduction
of Sprite Remix. The Company has captured increased value from the entire water
category by continuing to implement its three-tiered water strategy.
Overall
-------
The Company is focused on continuing to broaden its family of brands. In
particular, we are expanding and growing our noncarbonated offerings to provide
more alternatives to consumers. The Company's unit case volume for 2003 as
compared to 2002 has been favorably impacted by several strategic acquisitions
and license agreements involving noncarbonated brands such as Evian and Danone
waters in North America and Risco, a water brand in Mexico. The Company also
entered into a long-term license agreement in June 2002 involving Seagram's
mixers, a carbonated line of drinks. These brands and other acquired brands that
have impacted volume growth for 2003 as compared to 2002, had annual volume in
the year before we acquired them of approximately 450 million unit cases.
Gallon sales increased 4 percent and 3 percent, respectively, for the
three-month and nine-month periods ended September 30, 2003, as compared to the
same periods in 2002. The growth rates for gallon sales are not precisely in
line with the growth rates for unit case volume for year-to-date 2003 due
primarily to the timing of shipments. On a full-year basis, the Company expects
the growth in gallons to be similar to the growth in unit case volume.
NET OPERATING REVENUES AND GROSS MARGIN
---------------------------------------
Net Operating Revenues were $5,662 million in the third quarter of 2003,
compared to $5,322 million in the third quarter of 2002, an increase of $340
million or 6 percent. The following table indicates, on a percentage basis, the
estimated impact of key factors resulting in significant increases (decreases)
in Net Operating Revenues:
26
RESULTS OF OPERATIONS (Continued)
Three months ended September 30, 2003 vs. 2002
-------------------------------------------------------------------------
Increase in gallon shipments, including acquisitions 4%
Favorable impact of the weaker U.S. dollar 3
Structural changes 1
Price and product/geographic mix (2)
-------------------------------------------------------------------------
Total percentage increase 6%
=========================================================================
Net Operating Revenues were $15,851 million for the first nine months of
2003, compared to $14,769 million for the first nine months of 2002, an increase
of $1,082 million or 7 percent. The following table indicates, on a percentage
basis, the estimated impact of key factors resulting in significant increases in
Net Operating Revenues:
Nine months ended September 30, 2003 vs. 2002
-------------------------------------------------------------------------
Increase in gallon shipments, including acquisitions 3%
Favorable impact of the weaker U.S. dollar 3
Structural changes 1
-------------------------------------------------------------------------
Total percentage increase 7%
=========================================================================
The increase in gallon shipments for the third quarter of 2003 includes the
favorable impact of acquisitions, primarily the Risco water brand in Mexico. The
increase in gallon shipments for year-to-date 2003 also includes the favorable
impact of acquisitions, primarily the Danone and Evian water brands and
Seagram's mixers. Structural changes had a positive impact on Net Operating
Revenues in 2003 due primarily to the inclusion of one additional month of
revenue from our German bottler, Coca-Cola Erfrischungsgetraenke AG (CCEAG).
CCEAG was consolidated in February 2002, therefore, the first quarter of 2002
contained only two months of CCEAG revenue versus three months of CCEAG revenue
included in the first quarter of 2003. This positive impact was partially offset
by the deconsolidation of Cosmos Bottling Corporation (CBC) during the second
quarter of 2003. Refer to Note E.
The structural change related to CCEAG impacted the Europe, Eurasia and
Middle East operating segment and the structural change related to CBC impacted
the Asia operating segment. The impact of acquisitions mentioned above was
primarily related to the 2002 transactions involving the Danone and Evian water
brands and Seagram's mixers which impacted the North America operating segment.
The impact of the weaker U.S. dollar mentioned above was driven primarily
by the stronger euro that favorably impacted the Europe, Eurasia and Middle East
operating segment and the stronger Japanese yen that favorably impacted the Asia
operating segment, partially offset by generally weaker currencies negatively
impacting the Latin America operating segment. For further discussion related to
the impact of exchange and expected trends, refer to the heading "Exchange"
elsewhere in this report.
27
RESULTS OF OPERATIONS (Continued)
The contribution to Net Operating Revenues from Company operations is as
follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------ ------
Company Operations, Excluding Bottling
Operations $ 4,967 $ 4,684 $ 13,783 $ 12,921
Company-Owned Bottling Operations 695 638 2,068 1,848
------- ------- -------- --------
Consolidated Net Operating Revenues $ 5,662 $ 5,322 $ 15,851 $ 14,769
======= ======= ======== ========
Our gross profit margin increased to 62.0 percent in the third quarter of
2003 from 60.9 percent in the third quarter of 2002. This increase was primarily
the result of favorable product mix positively impacting CCEAG's gross margin.
Our gross profit margin decreased to 63.0 percent in the first nine months
of 2003 from 63.4 percent for the first nine months of 2002. This slight
decrease was primarily the result of the inclusion of the higher revenue, lower
margin Evian and Danone results in the first nine months of 2003, partially
offset by the deconsolidation of CBC during the second quarter of 2003 and our
receipt during the first quarter of 2003 of a settlement of approximately $52
million from certain defendants in a vitamin antitrust litigation. Refer to Note
G.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, General and Administrative Expenses were $2,006 million in the
third quarter of 2003, compared to $1,789 million in the third quarter of 2002,
an increase of $217 million or 12 percent. The increase reflected increased
stock-based compensation expense of approximately $9 million and the impact
(approximately 3 percentage points) of a weaker U.S. dollar. The remainder of
the increase primarily relates to increased marketing expenses. These increases
were partially offset by effective management of operating expenses.
Selling, General and Administrative Expenses were $5,573 million in the
first nine months of 2003, compared to $5,197 million in the first nine months
of 2002, an increase of $376 million or 7 percent. The increase reflected
increased stock-based compensation expense of approximately $41 million,
increased expenses for structural changes (primarily impacted by one additional
month of CCEAG expenses included in 2003) and acquisitions of approximately $100
million and the impact (approximately 3 percentage points) of a weaker U.S.
dollar. These increases were partially offset by effective management of
operating expenses.
28
RESULTS OF OPERATIONS (Continued)
OTHER OPERATING CHARGES
-----------------------
In the third quarter of 2003, the Company recorded charges of approximately
$43 million, or $0.01 per share after tax, related to the streamlining
initiatives, primarily in North America and Germany, announced during the first
quarter of 2003. Of these charges, approximately $13 million impacted the North
America operating segment, approximately $1 million impacted the Africa
operating segment, approximately $23 million impacted the Europe, Eurasia and
Middle East operating segment, approximately $1 million impacted the Latin
America operating segment, and approximately $5 million impacted the Corporate
segment.
For the first nine months of 2003, the Company recorded charges of
approximately $272 million, or $0.07 per share after tax, related to the
streamlining initiatives, primarily in North America and Germany. Of these
charges, approximately $147 million impacted the North America operating
segment, approximately $1 million impacted the Africa operating segment,
approximately $92 million impacted the Europe, Eurasia and Middle East operating
segment, approximately $4 million impacted the Latin America operating segment,
and approximately $28 million impacted the Corporate operating segment. As of
September 30, 2003, approximately 1,600 associates had been separated pursuant
to these streamlining initiatives.
In North America, the Company is integrating the operations of our three
separate North American business units - Coca-Cola North America, The Minute
Maid Company and Fountain. In Germany, the German division office has been
relocated to Berlin to more closely align with CCEAG, and CCEAG has taken steps
to improve efficiency in sales, distribution and manufacturing.
These initiatives are expected to result in the separation of a total of
approximately 2,800 associates in 2003, primarily in North America, Germany and
Asia. Further, these initiatives are expected to result in a full-year 2003
charge to earnings of approximately $500 million on a pretax basis. Of this $500
million amount, $272 million has been recognized through September 30, 2003, and
the remaining amount is expected to be recorded during the fourth quarter of
2003. This expected $500 million charge is composed of costs associated with
involuntary terminations and other direct costs, including the relocation of
employees; contract termination costs; costs associated with the development,
communication and administration of these initiatives; and asset write-offs.
During the third quarter of 2003, management further reviewed all worldwide
operations to improve our overall efficiency and effectiveness. In connection
with this review, we increased the expected charge from approximately $400
million (as previously estimated) to approximately $500 million as noted above.
This increase relates to the closing of a plant in the U.S. and other planned
activities in the fourth quarter of 2003. The increase in the number of
associates to be separated from the Company from approximately 1,900 (as
previously estimated) to approximately 2,800 as noted above mainly relates to
our Company-owned bottlers in Asia. As a result of the above initiatives, apart
from the charge to earnings, the
29
RESULTS OF OPERATIONS (Continued)
Company's financial results are expected to benefit by at least $50 million
(pretax) in 2003 and at least $100 million (pretax) on an annualized basis
beginning in 2004.
OPERATING INCOME AND OPERATING MARGIN
-------------------------------------
Operating Income was $1,451 million in the third quarter of 2003, compared
to $1,450 million in the third quarter of 2002, an increase of $1 million. Our
consolidated operating margin for the third quarter of 2003 was 25.6 percent,
compared to 27.2 percent for the comparable period in 2002. Operating Income for
the third quarter of 2003 reflected the increase in gallon shipments, the
effective management of operating expenses, and a favorable impact of a weaker
U.S. dollar, partially offset by expenses related to the 2003 streamlining
initiatives of approximately $43 million, increased stock-based compensation
expense of approximately $9 million, and increased marketing expenses. The
decrease in the Company's operating margin was due primarily to increased
marketing expenses and the 2003 streamlining initiatives, partially offset by
the effective management of operating expenses.
Operating Income was $4,129 million in the first nine months of 2003,
compared to $4,168 million in the first nine months of 2002, a decrease of $39
million or 1 percent. Our consolidated operating margin for the first nine
months of 2003 was 26.0 percent, compared to 28.2 percent for the comparable
period in 2002. The decrease in Operating Income for the first nine months of
2003 reflected expenses related to the 2003 streamlining initiatives of
approximately $272 million and increased stock-based compensation expense of
approximately $41 million, partially offset by the increase in gallon shipments,
the effective management of operating expenses, receipt of a $52 million
settlement related to the vitamin litigation in the first quarter of 2003, and a
favorable impact of a weaker U.S. dollar. The decrease in the Company's
operating margin was due primarily to the expenses related to the 2003
streamlining initiatives and inclusion of the acquired lower-margin Evian and
Danone results mentioned above, partially offset by the effective management of
operating expenses. Generally, bottling operations and other finished products
operations produce higher revenues but lower operating margins compared to
concentrate and syrup operations.
INTEREST INCOME AND INTEREST EXPENSE
------------------------------------
Interest Income decreased to $37 million for the third quarter of 2003 from
$46 million for the third quarter of 2002. This decrease was primarily due to
lower interest rates earned on short-term investments. Nevertheless, the Company
continues to benefit from cash invested in locations outside the United States
earning interest at higher rates than could be obtained within the United
States. Interest Expense decreased $10 million in the third quarter of 2003
relative to the comparable period in 2002, due mainly to lower interest rates
for commercial paper debt.
Interest Income decreased to $138 million for the first nine months of 2003
from $156 million for the first nine months of 2002. This decrease was primarily
due to lower interest
30
RESULTS OF OPERATIONS (Continued)
rates earned on short-term investments. Interest Expense decreased $26 million
in the first nine months of 2003 relative to the comparable period in 2002, due
mainly to both a decrease in average commercial paper debt balances and lower
interest rates for commercial paper debt.
EQUITY INCOME (LOSS) - NET
--------------------------
Our Company's share of income from equity method investments for the third
quarter of 2003 totaled $86 million, compared to $113 million in the third
quarter of 2002, a decrease of $27 million or approximately 24 percent. This
decrease was primarily because of a $95 million charge primarily related to a
Latin American equity investee discussed below.
Our Company's share of income from equity method investments for the first
nine months of 2003 totaled $325 million, compared to $350 million in the first
nine months of 2002, a decrease of $25 million or approximately 7 percent.
Equity income for the majority of our investees increased during the first nine
months of 2003 due to the overall improving health of the Coca-Cola bottling
system around the world. Again, our equity income for this period was negatively
impacted by the $95 million charge primarily related to a Latin American equity
investee. Equity income for the first nine months of 2002 benefited from our
Company's share of the gain on the sale by Cervejarias Kaiser S.A. (Kaiser S.A.)
of its interests in Brazil to Molson Inc. (refer to Note G). Approximately $21
million of the pretax gain from this sale by Kaiser S.A. was recorded in equity
income with the remaining portion (approximately $22 million) recorded in Other
Income (Loss) - Net.
Effective May 6, 2003, one of our Company's Latin American equity method
investees, Coca-Cola FEMSA, S.A. de C.V. (Coca-Cola FEMSA) consummated a merger
with another of the Company's Latin American equity method investees,
Panamerican Beverages, Inc. (Panamco). Our Company received new Coca-Cola FEMSA
shares in exchange for all Panamco shares previously held by the Company. Our
Company's ownership interest in Coca-Cola FEMSA increased from 30 percent to
39.6 percent as a result of this merger. This exchange of shares was treated as
a non-monetary exchange of similar productive assets, and no gain was recorded
by our Company as a result of this merger.
In connection with the merger, Coca-Cola FEMSA management initiated steps
to streamline and integrate the operations. This process includes the closing of
various distribution centers and manufacturing plants. Furthermore, due to the
challenging economic conditions and an uncertain political situation in
Venezuela, certain intangible assets were determined to be impaired and written
down to their fair market value. During the third quarter of 2003, our Company
recorded a non-cash charge of $95 million primarily related to these matters
This charge is included in the line item Equity Income (Loss) - Net.
OTHER INCOME (LOSS) - NET
-------------------------
Other Income (Loss) - Net was a net loss of $42 million for the third
quarter of 2003 compared to a net loss of $62 million for the third quarter of
2002, a difference of $20
31
RESULTS OF OPERATIONS (Continued)
million. A portion of this difference, approximately $7 million, is related to
the net loss on currency exchange, primarily in Latin America and Africa in
2002. Other Income (Loss) - Net for the third quarter of 2003 was composed
primarily of foreign currency exchange losses of approximately $17 million and
the accretion of the discounted value of the CCEAG liability of approximately
$13 million. Refer to Note E.
Other Income (Loss) - Net was a net loss of $99 million for the first nine
months of 2003 compared to a net loss of $292 million for the first nine months
of 2002, a difference of $193 million. A portion of this difference,
approximately $59 million, is related to the net loss on currency exchange,
primarily in Latin America, which was impacted by the significant devaluation of
the Argentine peso, and in Africa, in 2002. Additionally, Other Income (Loss) -
Net was impacted by two other items which were recorded during the first quarter
of 2002. In the first quarter of 2002, our Company recorded a non-cash pretax
charge of approximately $157 million primarily related to the write-down of our
investments in Latin America. The charge was primarily the result of economic
developments in Argentina during the first quarter of 2002, including the
devaluation of the Argentine peso and the severity of the unfavorable economic
outlook. In the first quarter of 2002, our Company also recorded in Other Income
(Loss) - Net a $22 million pretax gain from the sale by Kaiser S.A. Refer to
Note G. Other Income (Loss) - Net for the first nine months of 2003 was composed
primarily of foreign currency exchange losses of approximately $51 million and
the accretion of the discounted value of the CCEAG liability of approximately
$38 million. Refer to Note E.
GAINS ON ISSUANCES OF STOCK BY EQUITY INVESTEES
-----------------------------------------------
For the quarter ended September 30, 2003, our Company recorded
approximately $8 million for gains on issuances of stock by equity investees.
These gains primarily related to the issuance by Coca-Cola Enterprises Inc.
(Coca-Cola Enterprises) of common stock valued at an amount greater than the
book value per share of our investment in Coca-Cola Enterprises. As a result,
the issuance of these shares resulted in a one-time non-cash pretax gain for our
Company. This transaction reduced our ownership interest in the total
outstanding shares of Coca-Cola Enterprises common stock by less than 1 percent.
Refer to Note J.
No gains or losses on issuances of stock by equity investees were recorded
during 2002.
INCOME TAXES
------------
Our effective tax rate was approximately 18 percent for the third quarter
of 2003 compared to approximately 27 percent for the third quarter of 2002.
During the third quarter of 2003, the Company's results benefited from a lower
effective tax rate than previously indicated. In July, the Company estimated
that its underlying effective tax rate would be approximately 24 percent for the
full year 2003. The Company now anticipates that the underlying effective tax
rate on operations for the full year 2003 will be approximately 22 percent
because of the continued strong profit contributions from lower taxed locations
where currencies are having a
32
RESULTS OF OPERATIONS (Continued)
favorable impact. The decline in the tax rate resulted in a benefit to net
income per share of approximately $0.03 per share in the third quarter of 2003.
The Company recorded income tax expense for the first nine months of 2003
based on the estimated effective tax rate for the full year 2003. To achieve
this result, the Company recorded income tax expense at an underlying effective
tax rate on operations of approximately 18 percent in the third quarter of 2003.
Our effective tax rate of approximately 22 percent for the nine months
ended September 30, 2003 includes the following:
* The effective tax rate for the costs related to the streamlining
initiatives was approximately 35 percent.
* The effective tax rate for the proceeds received related to the vitamin
antitrust litigation matter was approximately 35 percent.
* The effective tax rate for the charge related to a Latin America equity
investee was approximately 3 percent.
* The effective tax rate for all other pretax income was approximately 22
percent.
Our effective tax rate of approximately 28 percent for the nine months
ended September 30, 2002 includes the following:
* The effective tax rate for our Company's share of the gain on the sale
of Kaiser S.A. interests was approximately 33 percent.
* The effective tax rate for the write-down of our investments primarily
in Latin America was approximately 4 percent.
* The effective tax rate for all other pretax income was approximately 27
percent.
For 2004 and future years, based on current tax laws, the Company's
effective tax rate on operations is expected to be no more than 25.5 percent.
Our effective tax rate reflects tax benefits derived from significant operations
outside the United States which are taxed at lower rates than the U.S. statutory
rates.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR SFAS NO. 142
-------------------------------------------------------
The adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," was a
required change in accounting principle. The cumulative effect of adopting this
standard as of January 1, 2002 resulted in a non-cash, after-tax decrease to net
income of $367 million for Company operations and $559 million for the Company's
proportionate share of its equity method investees in the first quarter of 2002.
The adoption of this accounting standard resulted in a pretax reduction in
amortization expense of approximately $60 million, and an increase in equity
income of approximately $150 million for the year ended December 31, 2002.
33
RESULTS OF OPERATIONS (Continued)
RECENT DEVELOPMENTS
-------------------
Effective October 1, 2003, the Company and all of its bottling partners in
Japan created a nationally integrated supply chain management company to
centralize procurement, production and logistics operations for the entire
Coca-Cola system in Japan. As a result of the creation of this supply chain
management company in Japan, a portion of our Company's business has essentially
been converted from a finished product business model to a concentrate business
model. This will affect certain line items of our Company's income statement in
the future but is not expected to impact our Company's underlying operating
income.
Beginning in the fourth quarter of 2003, the shift of certain products to a
concentrate business model will result in a reduction of revenues and cost of
goods sold, each in approximately the same amount, thus having no impact on the
Company's gross profit or operating income. Net Operating Revenues and Cost of
Goods Sold are both expected to decrease by approximately $1.0 billion on an
annualized basis.
34
FINANCIAL CONDITION
NET CASH PROVIDED BY OPERATING ACTIVITIES
-----------------------------------------
Net Cash Provided by Operating Activities in the first nine months of 2003
amounted to $4,121 million versus $3,405 million for the comparable period in
2002, an increase of $716 million or 21 percent. Increased profits in 2003 led
to this increased cash flow in 2003 versus 2002. Collection by the Company in
2002 of approximately $280 million in connection with an Advance Pricing
Agreement (APA) reached between the United States and Japan in 2000 impacted Net
Change in Operating Assets and Liabilities for 2002. The APA established the
level of royalties paid by Coca-Cola (Japan) Company Limited to our Company for
the years 1993 through 2001. The effect of this item was partially offset by
overall improved worldwide business operating results. Net Cash Provided by
Operating Activities for 2003 and 2002 was also impacted by the funding of our
primary qualified U.S. pension plan: approximately $165 million was funded in
the first nine months of 2003, as compared to approximately $124 million that
was funded in the first nine months of 2002. For additional information related
to Other Operating Charges, refer to Note G. For additional information
regarding the 2002 Cumulative Effect of Accounting Change, refer to the heading
"Cumulative Effect of Accounting Change for SFAS No. 142."
INVESTING ACTIVITIES
--------------------
Net Cash Used in Investing Activities totaled $806 million for the first
nine months of 2003, compared to $731 million for the comparable period in 2002,
an increase of $75 million. During the first nine months of 2003, cash outlays
for investing activities included purchases of property, plant and equipment of
$565 million, plus acquisitions and investments of approximately $306 million,
including the acquisition of Truesdale Packaging Company LLC from Coca-Cola
Enterprises Inc. for approximately $60 million (refer to Note E), and other
acquisitions, primarily trademarks, of $246 million. Our Company currently
estimates that purchases of property, plant and equipment will total less than
$1 billion for 2003. During the first nine months of 2003, proceeds from
disposals of investments and other assets of $54 million resulted primarily from
the disposal of certain investments in short-term marketable equity securities
and the disposal of a portion of the Company's investment in Piedmont Coca-Cola
Bottling Partnership.
Net Cash Used in Investing Activities totaled $731 million for the first
nine months of 2002. During the first nine months of 2002, cash outlays for
investing activities included purchases of property, plant and equipment of
approximately $582 million, plus acquisitions and investments of approximately
$415 million primarily related to the acquisitions of our ownership interests in
Cosmos Bottling Corporation and CCDA.
FINANCING ACTIVITIES
--------------------
Our financing activities include net borrowings, dividend payments, share
issuances and share repurchases. Net Cash Used in Financing Activities totaled
$1,862 million for the first nine months of 2003 compared to Net Cash Used in
Financing Activities of $1,912 million for the first nine months of 2002.
35
FINANCIAL CONDITION (Continued)
In the first nine months of 2003, the Company had issuances of debt of
$1,121 million and payments of debt of $1,007 million. The issuances of debt
primarily included approximately $515 million of issuances of commercial paper
with maturities of less than 90 days and approximately $604 million in issuances
of commercial paper with maturities of over 90 days. The payments of debt
primarily included approximately $832 million related to commercial paper with
maturities over 90 days and $150 million of long-term debt.
For the comparable first nine months of 2002, the Company had issuances of
debt of $1,402 million and payments of debt of $1,939 million. The issuances of
debt primarily included $636 million of issuances of commercial paper with
maturities over 90 days and $750 million in issuances of long-term debt due June
1, 2005. The payments of debt primarily included $616 million primarily related
to commercial paper with maturities over 90 days, and net payments of $1,275
million primarily related to commercial paper with maturities less than 90 days.
During the first nine months of 2003 and 2002, the Company repurchased
common stock under the stock repurchase plan authorized by our Board of
Directors in October 1996. During the first nine months of 2003, the Company
repurchased approximately 21.5 million shares of common stock at an average cost
of $42.48 per share under the 1996 plan. During the first nine months of 2002,
the Company repurchased approximately 9.3 million shares of common stock at an
average cost of $49.79 per share under the 1996 plan. The Company currently
estimates that its share repurchases will total approximately $1.5 billion
during 2003, including the purchases during the first nine months of 2003 just
described. As strong cash flows are expected to continue into the future, the
Company currently expects to increase its 2004 share repurchase levels above the
2003 levels.
FINANCIAL POSITION
------------------
Our balance sheet as of September 30, 2003, as compared to our balance
sheet as of December 31, 2002, was impacted by the following:
* The increase in Cash and Cash Equivalents of $1,530 million was due
primarily to increased cash flows from operations and the accumulation
of cash for the quarterly dividend payments to be paid in the fourth
quarter of 2003.
* The increase in Equity Method Investments, Coca-Cola FEMSA, S.A. de C.V.
of $369 million and the decrease in Equity Method Investments, Other,
Principally Bottling Companies of $478 million were primarily due to the
merger of Coca-Cola FEMSA and Panamerican Beverages, Inc. Refer to Note
I.
* The increase in Accounts Payable and Accrued Expenses of $971 million
was primarily due to dividends payable accrued as of September 30, 2003,
which will be paid during the fourth quarter of 2003.
36
FINANCIAL CONDITION (Continued)
The overall increase in Total Assets as of September 30, 2003 compared to
December 31, 2002 was primarily related to the increase in Cash and Cash
Equivalents mentioned above (which impacted the Corporate operating segment) and
the impact of a stronger euro (which impacted the Europe, Eurasia and Middle
East operating segment) and Japanese yen (which impacted the Asia operating
segment), partially offset by the impact of weakening currencies impacting the
Latin America operating segment. This impact of exchange is reflected in the net
foreign currency translation gain for the first nine months of 2003 of
approximately $501 million. Refer to Note C.
UPDATE TO APPLICATION OF CRITICAL ACCOUNTING POLICIES
-----------------------------------------------------
In our 2002 Annual Report on Form 10-K, Part II, Item 7, under the heading
"Application of Critical Accounting Policies," we discussed the recoverability
of noncurrent assets, equity method and cost method investments and property,
plant and equipment. We also discussed our assessment of impairment for
goodwill, trademarks and other intangible assets. During the first nine months
of 2003, the following events occurred that required us to assess the
recoverability of these assets:
* The unstable situation in Iraq and the continued overall civil and
political unrest in the Middle East are risks to our Company's business
results and therefore, could impact the valuation of our assets in this
region.
* Germany's operating results have been impacted by what our Company
believes is a short-term disruption caused by the implementation of a
deposit law on non-returnable packages. The change in the law on January
1, 2003 and subsequent developments resulted in major retailers
delisting non-returnable packages. Furthermore, consumers have begun to
shift their consumption back to returnable packages and to other
beverage categories that were not impacted by the deposit law.
In the first nine months of 2003, the Company evaluated the impact that
these events could have on our future business results and the carrying value of
our investments and assets in these regions of the world. Currently, management
believes these events will only have a temporary unfavorable impact on our
operations and therefore, no asset impairment has resulted.
Challenging economic conditions and an uncertain political environment in
Venezuela also negatively impacted our business. As discussed in Note I, during
the third quarter of 2003 we recorded a charge to equity income primarily
related to Coca-Cola FEMSA's business operations in Venezuela.
We plan to closely monitor the above matters and other conditions to
evaluate any impact they might have on our assets and investments. We will
re-assess these items in the fourth quarter of 2003.
37
FINANCIAL CONDITION (Continued)
EXCHANGE
--------
Our international operations are subject to certain opportunities and
risks, including currency fluctuations and government actions. We closely
monitor our operations in each country and seek to adopt appropriate strategies
that are responsive to changing economic and political environments and to
fluctuations in foreign currencies.
We use approximately 50 functional currencies. Due to our global
operations, weaknesses in some of these currencies are often offset by strengths
in others. The U.S. dollar was approximately 5 percent weaker in the third
quarter of 2003 compared to the third quarter of 2002, based on comparable
weighted averages for our functional currencies. This does not include the
effects of our hedging activities and, therefore, does not reflect the actual
impact of fluctuations in exchange rates on our operating results. Our foreign
currency management program mitigates over time a portion of the impact of
exchange on net income and earnings per share. The effective impact of exchange
to our Company after considering hedging activities was an increase to operating
income of approximately 2 percent in the third quarter of 2003 compared to the
third quarter of 2002, resulting from a strengthening euro partially offset by
less attractive hedge rates on the Japanese yen and weakness in Latin American
currencies. The effective impact of exchange to our Company after considering
hedging activities was an increase to operating income of approximately 2
percent in the first nine months of 2003 compared to the first nine months of
2002. For the remainder of 2003, the Company expects exchange to have a slightly
positive impact on its Operating Income.
The Company will continue to manage its foreign currency exposures to
mitigate over time a portion of the impact of exchange on net income and
earnings per share. Our Company conducts business in more than 200 countries
around the world, and we manage foreign currency exposures through the portfolio
effect of the basket of functional currencies in which we do business.
38
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by our Company and subsidiaries or
with the approval of an authorized executive officer of our Company may
constitute "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995, including statements made in this report and
other filings with the Securities and Exchange Commission. Generally, the words
"believe," "expect," "intend," "estimate," "anticipate," "project," "will" and
similar expressions identify forward-looking statements, which generally are not
historical in nature. All statements which address operating performance, events
or developments that we expect or anticipate will occur in the future -
including statements relating to volume growth, share of sales and earnings per
share growth and statements expressing general optimism about future operating
results - are forward-looking statements. Forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from our Company's historical experience and our present expectations
or projections. As and when made, management believes that these forward-looking
statements are reasonable. However, caution should be taken not to place undue
reliance on any such forward-looking statements since such statements speak only
as of the date when made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
The following are some of the factors that could cause our Company's actual
results to differ materially from the expected results described in or
underlying our Company's forward-looking statements:
* Economic and political conditions, especially in international markets,
including civil unrest, product boycotts, governmental changes and
restrictions on the ability to transfer capital across borders. Without
limiting the preceding sentence, the current unstable economic and
political conditions and civil unrest in the Middle East, Venezuela,
North Korea or elsewhere, the unstable situation in Iraq, or the
continuation or escalation of terrorism, could have adverse impacts on
our Company's business results or financial condition.
* Changes in the nonalcoholic beverages business environment. These
include, without limitation, changes in consumer preferences,
competitive product and pricing pressures and our ability to gain or
maintain share of sales in the global market as a result of actions by
competitors. Factors such as these could impact our earnings, share of
sales and volume growth.
39
FORWARD-LOOKING STATEMENTS (Continued)
* Foreign currency rate fluctuations, interest rate fluctuations and other
capital market conditions. Most of our exposures to capital markets,
including foreign currency and interest rates, are managed on a
consolidated basis, which allows us to net certain exposures and, thus,
take advantage of any natural offsets. We use derivative financial
instruments to reduce our net exposure to financial risks. There can be
no assurance, however, that our financial risk management program will
be successful in reducing capital market exposures.
* Adverse weather conditions, which could reduce demand for Company
products.
* The effectiveness of our advertising, marketing and promotional
programs.
* Fluctuations in the cost and availability of raw materials and the
ability to maintain favorable supplier arrangements and relationships.
* Our ability to achieve earnings forecasts, which are generated based on
projected volumes and sales of many product types, some of which are
more profitable than others. There can be no assurance that we will
achieve the projected level or mix of product sales.
* Changes in laws and regulations, including changes in accounting
standards, taxation requirements (including tax rate changes, new tax
laws and revised tax law interpretations), laws concerning food and
beverages, competition laws and environmental laws and in domestic or
foreign jurisdictions.
* Our ability to penetrate developing and emerging markets, which also
depends on economic and political conditions, and how well we are able
to acquire or form strategic business alliances with local bottlers and
make necessary infrastructure enhancements to production facilities,
distribution networks, sales equipment and technology. Moreover, the
supply of products in developing markets must match the customers'
demand for those products, and due to product, price and cultural
differences, there can be no assurance of product acceptance in any
particular market.
* The uncertainties of litigation, as well as other risks and
uncertainties detailed from time to time in our Company's Securities and
Exchange Commission filings.
The foregoing list of important factors is not exclusive.
40
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
We have no material changes to the disclosure on this matter made in our
Annual Report on Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures
The Company, under the supervision and with the participation of its
management, including the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely making known to them material
information relating to the Company and the Company's consolidated subsidiaries
required to be disclosed in the Company's reports filed or submitted under the
Exchange Act. There has been no change in the Company's internal control over
financial reporting during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
41
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3 - By-Laws of The Coca-Cola Company, as amended and restated
through October 16, 2003.
10 - Amendment Number Two to the Executive Medical Plan of The
Coca-Cola Company, dated August 27, 2003.
12 - Computation of Ratios of Earnings to Fixed Charges.
31.1 - Rule 13a-14(a)/15d-14(a) Certification, executed by Douglas N.
Daft, Chairman, Board of Directors, and Chief Executive Officer
of The Coca-Cola Company.
31.2 - Rule 13a-14(a)/15d-14(a) Certification, executed by Gary P.
Fayard, Executive Vice President and Chief Financial Officer of
The Coca-Cola Company.
32 - Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code
(18 U.S.C. 1350), executed by Douglas N. Daft, Chairman, Board
of Directors, and Chief Executive Officer of The Coca-Cola
Company and by Gary P. Fayard, Executive Vice President and
Chief Financial Officer of The Coca-Cola Company.
(b) Reports on Form 8-K:
(1) During the three months ended September 30, 2003, the Company filed a
report on Form 8-K on July 11, 2003.
Item 5. Other Events and Regulation FD Disclosure. Item 7(c). Exhibits.
Press release of the Company, regarding action taken by the United
States Attorney's Office for the Northern District of Georgia.
(2) During the three months ended September 30, 2003, the Company filed a
report on Form 8-K on July 17, 2003.
Item 7(c). Exhibits. Item 9. Regulation FD Disclosure. (A) Press
release of the Company reporting financial results for the second
quarter of 2003 and year to date 2003. (B) Supplemental information
prepared for use in connection with the financial results for the
second quarter of 2003 and year to date 2003.
42
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE COCA-COLA COMPANY
(REGISTRANT)
Date: October 27, 2003 By: /s/ Connie D. McDaniel
------------------------
Connie D. McDaniel
Vice President and Controller
(On behalf of the Registrant and
as Chief Accounting Officer)
43
Exhibit Index
Exhibit Number and Description
(a) Exhibits
3 - By-Laws of The Coca-Cola Company, as amended and
restated through October 16, 2003.
10 - Amendment Number Two to the Executive Medical Plan of
The Coca-Cola Company, dated August 27, 2003.
12 - Computation of Ratios of Earnings to Fixed Charges.
31.1 - Rule 13a-14(a)/15d-14(a) Certification, executed by
Douglas N. Daft, Chairman, Board of Directors, and
Chief Executive Officer of The Coca-Cola Company.
31.2 - Rule 13a-14(a)/15d-14(a) Certification, executed by
Gary P. Fayard, Executive Vice President and Chief
Financial Officer of The Coca-Cola Company.
32 - Certifications required by Rule 13a-14(b) or Rule
15d-14(b) and Section 1350 of Chapter 63 of Title 18
of the United States Code (18 U.S.C. 1350), executed
by Douglas N. Daft, Chairman, Board of Directors,
and Chief Executive Officer of The Coca-Cola Company
and by Gary P. Fayard, Executive Vice President and
Chief Financial Officer of The Coca-Cola Company.
44