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[COCA-COLA ENTERPRISES INC. LOGO]
FORM 10-Q
QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 27, 2002
FILED PURSUANT TO SECTION 13
OF THE
SECURITIES EXCHANGE ACT OF 1934
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 27, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-09300
[COCA-COLA ENTERPRISES INC. LOGO]
(Exact name of registrant as specified in its charter)
DELAWARE 58-0503352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 WINDY RIDGE PARKWAY, SUITE 700
ATLANTA, GEORGIA 30339
(Address of principal executive offices) (Zip Code)
770-989-3000
(Registrant's telephone number, including area code)
---------
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 the number of shares outstanding of each of the
issuer's classes of common stock.
449,377,591 SHARES OF $1 PAR VALUE COMMON STOCK AS OF NOVEMBER 1, 2002
===============================================================================
COCA-COLA ENTERPRISES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 27, 2002
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Income Statements for the Quarters
ended September 27, 2002 and September 28, 2001.................. 1
Condensed Consolidated Income Statements for the Nine Months
ended September 27, 2002 and September 28, 2001.................. 2
Condensed Consolidated Balance Sheets as of September 27, 2002
and December 31, 2001............................................ 3
Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 27, 2002 and September 28, 2001.................. 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 31
Item 4. Controls and Procedures............................................. 31
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................... 32
Signatures.................................................................. 33
Certifications.............................................................. 33
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED; IN MILLIONS EXCEPT PER SHARE DATA)
QUARTER ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
------------- -------------
NET OPERATING REVENUES ......................... $ 4,549 $ 4,250
Cost of sales .................................. 2,810 2,660
------- -------
GROSS PROFIT ................................... 1,739 1,590
Selling, delivery, and administrative
expenses .................................... 1,298 1,375
------- -------
OPERATING INCOME ............................... 441 215
Interest expense, net .......................... 166 189
Other nonoperating expenses
(income), net ............................... (2) (1)
------- -------
INCOME BEFORE INCOME TAXES ..................... 277 27
Income tax expense before rate
change benefit .............................. 86 22
Income tax rate change (benefit) ............... -- (6)
------- -------
NET INCOME ..................................... 191 11
Preferred stock dividends ...................... 1 1
------- -------
NET INCOME APPLICABLE TO COMMON
SHAREOWNERS ................................. $ 190 $ 10
======= =======
BASIC NET INCOME PER SHARE APPLICABLE
TO COMMON SHAREOWNERS ....................... $ 0.42 $ 0.02
======= =======
DILUTED NET INCOME PER SHARE APPLICABLE
TO COMMON SHAREOWNERS ....................... $ 0.42 $ 0.02
======= =======
DIVIDENDS PER SHARE APPLICABLE TO
COMMON SHAREOWNERS .......................... $ 0.04 $ 0.04
======= =======
INCOME (EXPENSE) AMOUNTS FROM TRANSACTIONS
WITH THE COCA-COLA COMPANY
Net operating revenues ......................... $ 259 $ 221
Cost of sales .................................. (1,425) (1,191)
Selling, delivery, and administrative
expenses .................................... 46 20
See Notes to Condensed Consolidated Financial Statements.
-1-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED; IN MILLIONS EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
------------- -------------
NET OPERATING REVENUES ............................ $ 12,639 $ 11,661
Cost of sales ..................................... 7,794 7,273
-------- --------
GROSS PROFIT ...................................... 4,845 4,388
Selling, delivery, and administrative expenses .... 3,732 3,879
-------- --------
OPERATING INCOME .................................. 1,113 509
Interest expense, net ............................. 495 568
Other nonoperating expenses (income), net ......... (3) (1)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ......... 621 (58)
Income tax expense (benefit) before rate
change benefit ................................. 205 (23)
Income tax rate change (benefit) .................. -- (52)
-------- --------
NET INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE ........................... 416 17
Cumulative effect of accounting change, net of
taxes .......................................... -- (302)
-------- --------
NET INCOME (LOSS) ................................. 416 (285)
Preferred stock dividends ......................... 2 3
-------- --------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREOWNERS ............................. $ 414 $ (288)
======== ========
BASIC NET INCOME PER SHARE APPLICABLE TO COMMON
SHAREOWNERS BEFORE CUMULATIVE EFFECT ........... $ 0.92 $ 0.03
======== ========
BASIC NET INCOME (LOSS) PER SHARE
APPLICABLE TO COMMON SHAREOWNERS ............... $ 0.92 $ (0.67)
======== ========
DILUTED NET INCOME PER SHARE APPLICABLE TO COMMON
SHAREOWNERS BEFORE CUMULATIVE EFFECT ........... $ 0.91 $ 0.03
======== ========
DILUTED NET INCOME (LOSS) PER SHARE APPLICABLE
TO COMMON SHAREOWNERS .......................... $ 0.91 $ (0.67)
======== ========
DIVIDENDS PER SHARE APPLICABLE TO
COMMON SHAREOWNERS ............................. $ 0.12 $ 0.12
======== ========
INCOME (EXPENSE) AMOUNTS FROM TRANSACTIONS WITH
THE COCA-COLA COMPANY:
Net operating revenues ............................ $ 675 $ 609
Cost of sales ..................................... (3,830) (3,377)
Selling, delivery, and administrative expenses .... 115 63
See Notes to Condensed Consolidated Financial Statements.
-2-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
SEPTEMBER 27, DECEMBER 31,
ASSETS 2002 2001
------------- ------------
(Unaudited)
CURRENT
Cash and cash investments, at cost
approximating market ..................... $ 929 $ 284
Trade accounts receivable, less allowance
reserves of $59 and $73, respectively .... 1,844 1,540
Inventories:
Finished goods ........................... 522 458
Raw materials and supplies ............... 267 232
------- -------
789 690
Prepaid expenses and other current assets .. 357 362
------- -------
Total Current Assets ................... 3,919 2,876
PROPERTY, PLANT, AND EQUIPMENT
Land ....................................... 437 390
Buildings and improvements ................. 1,789 1,718
Machinery and equipment .................... 9,295 8,614
------- -------
11,521 10,722
Less allowances for depreciation ........... 5,442 4,726
------- -------
6,079 5,996
Construction in progress ................... 188 210
------- -------
Net Property, Plant, and Equipment ....... 6,267 6,206
GOODWILL ...................................... 575 569
FRANCHISE LICENSE INTANGIBLE ASSETS ........... 13,387 13,124
OTHER NONCURRENT ASSETS, NET .................. 1,029 944
------- -------
$25,177 $23,719
======= =======
See Notes to Condensed Consolidated Financial Statements.
-3-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT SHARE DATA)
SEPTEMBER 27, DECEMBER 31,
LIABILITIES AND SHAREOWNERS' EQUITY 2002 2001
----------- ------------
(Unaudited)
CURRENT
Accounts payable and accrued expenses ....... $ 2,681 $ 2,610
Amounts payable to The Coca-Cola Company, net 205 38
Deferred cash payments from
The Coca-Cola Company ................... 75 70
Current portion of long-term debt ........... 1,719 1,804
-------- --------
Total Current Liabilities ............... 4,680 4,522
LONG-TERM DEBT, LESS CURRENT MATURITIES ........ 11,078 10,365
RETIREMENT AND INSURANCE PROGRAMS AND OTHER
LONG-TERM OBLIGATIONS ....................... 1,157 1,166
DEFERRED CASH PAYMENTS FROM
THE COCA-COLA COMPANY ....................... 441 510
DEFERRED INCOME TAX LIABILITIES ................ 4,513 4,336
SHAREOWNERS' EQUITY
Preferred stock ............................. 37 37
Common stock, $1 par value - Authorized -
1,000,000,000 shares; Issued - 457,026,914
and 453,262,107 shares, respectively ...... 457 453
Additional paid-in capital .................. 2,562 2,527
Reinvested earnings ......................... 580 220
Accumulated other comprehensive income (loss) (196) (292)
Common stock in treasury, at cost - 8,517,712
and 8,146,325 shares, respectively ........ (132) (125)
-------- --------
Total Shareowners' Equity ............... 3,308 2,820
-------- --------
$ 25,177 $ 23,719
======== ========
See Notes to Condensed Consolidated Financial Statements.
-4-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN MILLIONS)
NINE MONTHS ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .......................... $ 416 $ (285)
Adjustments to reconcile net income
(loss) to net cash derived from
operating activities:
Cumulative effect of accounting change .. -- 302
Depreciation ............................ 711 665
Amortization ............................ 56 338
Deferred income tax expense (benefit) ... 133 (134)
Deferred cash payments from The
Coca-Cola Company ..................... (64) 66
Net changes in current assets and
current liabilities ................... (128) (372)
Other ................................... (20) (23)
------- -------
Net cash derived from operating
activities .............................. 1,104 557
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in capital assets .............. (661) (605)
Capital asset disposals .................... 9 2
Cash investments in bottling
operations, net of cash acquired ........ (26) (906)
Other investing activities ................. (39) (31)
------- -------
Net cash used in investing activities ...... (717) (1,540)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in
commercial paper ........................ (406) 181
Proceeds from issuance of debt ............. 1,704 1,189
Payments on long-term debt ................. (1,021) (483)
Stock purchases for treasury ............... -- (8)
Cash dividend payments on common and
preferred stock ......................... (38) (36)
Exercise of employee stock options ......... 19 26
------- -------
Net cash derived from financing
activities .............................. 258 869
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH INVESTMENTS ........................... 645 (114)
Cash and cash investments at
beginning of period ..................... 284 294
------- -------
CASH AND CASH INVESTMENTS AT
END OF PERIOD .............................. $ 929 $ 180
======= =======
SUPPLEMENTAL NONCASH INVESTING AND
FINANCING ACTIVITIES
Investments in bottling operations:
Debt issued and assumed .................. $ -- $ (15)
Equity issued ............................ -- (404)
Other liabilities assumed ................ -- (331)
Fair value of assets acquired ............ 26 1,656
------- -------
Cash paid, net of cash acquired .......... $ 26 $ 906
======= =======
See Notes to Condensed Consolidated Financial Statements.
-5-
COCA-COLA ENTERPRISES INC.
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 (GAAP) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments consisting
of normal recurring accruals considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes included in the Coca-Cola Enterprises Inc. ("the
Company") Annual Report on Form 10-K for the year ended December 31, 2001.
As of January 1, 2001, the Company changed its method of accounting for
payments received under the Jumpstart market development programs. The Company
previously recognized the payments as an offset to operating expenses as
incurred in the period for which the payments were designated. As of January 1,
2001, the payments are recognized primarily as offsets to operating expenses as
cold drink equipment is placed, through 2008, and over the period the Company
has the potential requirement to move equipment, through 2020. The change in
accounting resulted in a noncash cumulative effect adjustment in first-quarter
2001 of $(302) million, net of $185 million taxes, or $(0.70) per common share.
NOTE B - RECLASSIFICATIONS
Reclassifications have been made in the 2001 income statements to conform to
classifications used in the current year, under Emerging Issues Task Force
("EITF") No. 01-09, "Accounting for Consideration Given by a Vendor to a
Customer or Reseller of the Vendor's Products." EITF 01-09 requires certain
payments made to customers by the Company, previously classified as selling
expenses, to be classified as deductions from revenue. The Company
reclassified, as deductions in net operating revenues, approximately $26
million and $72 million of selling expenses which were previously classified as
selling, delivery, and administrative expenses in the statement of operations
for the quarter and nine months ended September 28, 2001, respectively.
NOTE C - SEASONALITY OF BUSINESS
Operating results for the third quarter and nine months ended September 27,
2002 are not indicative of results that may be expected for the year ending
December 31, 2002 because of business seasonality. Business seasonality results
from a combination of higher unit sales of the Company's products in the second
and third quarters versus the first and fourth quarters of the year and the
methods of accounting for fixed costs such as depreciation, amortization, and
interest expense which are not significantly impacted by business seasonality.
-6-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - INCOME TAXES
The Company's effective tax rates for the first nine months of 2002 and 2001
were approximately 34% and 40%, respectively, excluding a $4 million
nonrecurring accrual reversal in 2002 and the rate change benefit in 2001. The
Company is currently implementing a corporate structuring of certain
subsidiaries, which, if fully implemented as expected in fourth-quarter 2002,
will reduce our full-year 2002 effective tax rate by approximately 1/2 percent.
A reconciliation of the income tax provision at the statutory federal rate to
the Company's actual income tax provision follows (in millions):
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
------------- -------------
U.S. federal statutory expense (benefit) ........ $ 217 $(21)
State expense (benefit), net of federal
effect ........................................ 6 (2)
Taxation of European and Canadian operations,
net ........................................... (28) 3
Valuation allowance provision ................... 5 --
Nondeductible items ............................. 9 (1)
Other, net ...................................... (4) (2)
----- ----
$ 205 $(23)
===== ====
NOTE E - LONG-TERM DEBT
Long-term debt balances summarized below are adjusted for the effects of
interest rate and currency swap agreements (in millions):
SEPTEMBER 27, DECEMBER 31,
2002 2001
------------- ------------
U.S. commercial paper (weighted
average rates of 1.8% and 2.0%) ............ $ 1,281 $ 1,759
Canadian dollar commercial paper (weighted
average rates of 2.9% and 2.5%) (C) ........ 258 251
Canadian dollar notes due 2002 - 2009
(weighted average rates of 4.9% and
4.7%) (C) .................................. 709 686
Notes due 2002 - 2037 (weighted average
rates of 5.4% and 6.5%) (A) (B) ............ 4,050 2,885
Debentures due 2012 - 2098 (weighted
average rate of 7.4%) ...................... 3,783 3,783
Euro notes due 2002 - 2021 (weighted
average rates of 6.5% and 6.3%) (C) ........ 2,211 2,268
Various foreign currency debt ................. 250 236
Additional debt ............................... 251 254
------- -------
Long-term debt including effect of
net asset positions of currency swaps .... 12,793 12,122
Net asset positions of currency
swap agreements .......................... 4 47
------- -------
$12,797 $12,169
======= =======
-7-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - LONG-TERM DEBT (CONTINUED)
(A) In April 2002, the Company issued $500 million in floating rate notes due
2004 and $500 million in fixed rate notes due 2007 under the Company's
shelf registration statement with the Securities and Exchange Commission.
The initial interest rate on the floating rate notes was 2.19 percent and
the interest rate on the fixed notes is 5.25 percent.
(B) In September 2002, the Company issued $500 million in fixed rate notes due
2009 under the Company's shelf registration statement with the Securities
and Exchange Commission. The interest rate on the notes is 4.38 percent.
(C) After the end of the quarter, on September 30, 2002, the Company retired
$500 million maturing Eurobonds. On October 15, 2002, the Company retired
approximately $111 million in maturing Canadian dollar notes and
approximately $248 million in Canadian commercial paper.
Aggregate maturities of long-term debt for the five twelve-month periods
subsequent to September 27, 2002 are as follows (in millions): 2003 - $1,719;
2004 - $1,313; 2005 - $1,396; 2006 - $460; and 2007 - $956.
At September 27, 2002 and December 31, 2001, the Company had $3.2 billion and
$3.3 billion, respectively, available under domestic and international credit
facilities. These facilities serve as a back-up to the Company's domestic and
international commercial paper programs and support working capital needs. At
September 27, 2002 and December 31, 2001, the Company had $49 million and $-0-
million, respectively, of short-term borrowings outstanding under these credit
facilities.
At September 27, 2002 and December 31, 2001, approximately $1.8 billion and
$2.3 billion, respectively, of borrowings due in the next 12 months were
classified as maturing after one year due to the Company's intent and ability
through its credit facilities to refinance these borrowings on a long-term
basis.
At September 27, 2002 and December 31, 2001, the Company had available for
issuance approximately $0.2 billion and $1.7 billion, respectively, under a
registration statement with the Securities and Exchange Commission. In October
2002, the Company filed a new registration statement with the Securities and
Exchange Commission which, when effective, will increase the amount available
for issuance by $3.5 billion. At September 27, 2002 and December 31, 2001, the
Company had available for issuance approximately $1.2 billion and $1.3 billion,
respectively, under a Canadian Medium Term Note Program. In addition, at
September 27, 2002 and December 31, 2001, the Company had available for
issuance approximately $1.7 billion and $1.0 billion, respectively, under a
Euro Medium Term Note Program.
The credit facilities and outstanding notes and debentures contain various
provisions that, among other things, require the Company to maintain a defined
leverage ratio and limit the incurrence of certain liens or encumbrances in
excess of defined amounts. These requirements currently are not, and it is not
anticipated they will become, restrictive to the Company's liquidity or capital
resources.
-8-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - PREFERRED STOCK
In connection with the 1998 acquisition of Great Plains Bottlers and Canners,
Inc., the Company issued 401,528 shares of $1 par value voting convertible
preferred stock ("Great Plains series"). The mandatory conversion date for the
Great Plains series is August 7, 2003. As of September 27, 2002, 35,000 shares
of the Great Plains series have been voluntarily converted into 154,778 shares
of common stock.
NOTE G - STOCK-BASED COMPENSATION PLANS
The Company granted approximately 7.9 million service-vested stock options to
certain executive and management level employees during the first nine months
of 2002. These options vest over a period of 3 years and expire 10 years from
the date of grant. All of the options were granted at an exercise price equal
to the fair market value of the stock on the grant date.
The Company granted 966,000 restricted stock shares and 124,000 restricted
stock units to certain key employees of the Company during the first nine
months of 2002. These awards vest upon continued employment for a period of at
least 4 years.
An aggregate of 3.0 million shares of common stock were issued during the first
nine months of 2002 from the exercise of stock options.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. FAS 123, if fully adopted,
would change the method for cost recognition on the Company's stock-based
compensation plans.
If compensation cost for the Company's grants under stock-based compensation
plans had been determined under FAS 123, the Company's net income applicable to
common shareowners, and basic and diluted net income per share applicable to
common shareowners for the quarter and nine months ending September 27, 2002,
would approximate the pro forma amounts below (in millions, except per share
data):
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 27, 2002 SEPTEMBER 27, 2002
--------------------- --------------------
REPORTED PRO FORMA REPORTED PRO FORMA
-------- --------- -------- ---------
Net income applicable to
common shareowners ............. $ 190 $ 180 $ 414 $ 383
===== ===== ===== =====
Basic net income applicable
to common shareowners .......... $0.42 $0.40 $0.92 $0.85
===== ===== ===== =====
Diluted net income applicable
to common shareowners .......... $0.42 $0.39 $0.91 $0.84
===== ===== ===== =====
FAS 123, if fully adopted, would change the method for cost recognition on the
Company's stock-based compensation plans. FAS 123 does not apply to awards
prior to 1995, and additional awards in future years are possible. The
estimated effect on full-year 2002 earnings from adopting FAS 123 for grants
made solely in the current year (assuming adoption on current grants only and
not previous grants still outstanding) on both basic and diluted earnings per
share is approximately $(0.02).
-9-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - SHARE REPURCHASES
Under the 1996 and 2000 share repurchase programs authorizing the repurchase of
up to 60 million shares, the Company can repurchase shares in the open market
and in privately negotiated transactions. During the first nine months of 2002,
the Company did not repurchase any shares. A total of 26.7 million shares have
been repurchased under the programs since their inception.
Management considers market conditions and alternative uses of cash and/or
debt, balance sheet ratios, and shareowner returns when evaluating share
repurchases. Repurchased shares are added to treasury stock and are available
for general corporate purposes including acquisition financing and the funding
of various employee benefit and compensation plans. In 2002 and 2003, the
Company plans to use free cash flow primarily for debt reduction.
NOTE I - DERIVATIVES
The Company uses certain risk management instruments to manage its interest
rate and foreign exchange exposures. These instruments are accounted for as
fair value and cash flow hedges, as appropriate, in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended.
At September 27, 2002, there was less than $100,000 in accumulated other
comprehensive income related to cash flow hedges of forecasted international
raw materials purchases. Further, during the first nine months of 2002, the
amount of ineffectiveness related to cash flow hedges of international raw
materials purchases was a gain of approximately $1 million.
The Company enters into certain nonfunctional currency borrowings to hedge net
investments in international subsidiaries. During the first nine months of
2002, the net amount included in comprehensive income related to these
borrowings was a loss, net of tax, of approximately $(69) million.
-10-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - RELATED PARTY TRANSACTIONS
The following table details amounts included in the income statements for
transactions with The Coca-Cola Company ("TCCC"):
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Income (expense) in
millions:
Net operating
revenues:
Direct marketing
support ........ $ 218 $ 162 $ 607 $ 434
Fountain syrup and
packaged product
sales .......... 100 104 285 296
Cooperative trade
arrangements ... (60) (46) (220) (123)
Other transactions 1 1 3 2
------- ------- ------- -------
$ 259 $ 221 $ 675 $ 609
======= ======= ======= =======
Cost of sales:
Purchases of syrup
and concentrate $(1,186) $(1,001) $(3,245) $(2,820)
Purchases of
sweetener ...... (94) (66) (236) (220)
Purchases of
finished
products ....... (145) (124) (349) (337)
------- ------- ------- -------
$(1,425) $(1,191) $(3,830) $(3,377)
======= ======= ======= =======
Selling, delivery,
and administrative
expenses:
Operating expense
support payments $ 28 $ 16 $ 64 $ 58
Cooperative
advertising
programs ....... -- (14) -- (40)
Operating expense
reimbursements:
To TCCC ........ (4) (3) (13) (10)
From TCCC ...... 9 6 26 14
Reimbursement of
dispensing
equipment repair
costs .......... 13 15 38 41
------- ------- ------- -------
$ 46 $ 20 $ 115 $ 63
======= ======= ======= =======
As of January 1, 2002 all costs in North America associated with customer
cooperative trade marketing programs ("CTM"), excluding certain specific
customers, are funded by the Company, and all costs for local media programs in
North America are funded by TCCC. The amount of marketing support funding from
TCCC that the Company will receive for 2002 was established based on historical
funding levels and increased for the net effect of increased 2001 CTM cost and
decreased 2001 local media cost. The shift of CTM and local media costs impacts
income statement comparisons between 2002 and 2001, but does not have an impact
on the Company's 2001 net income. The impact of this shift on 2002 and future
operating income is dependent upon the level of CTM spending by the Company.
In early 2002, the Company entered into a multi-year agreement with TCCC to
support profitable growth in brands of TCCC in our territories (Sales Growth
Initiative, "SGI", agreement). Total cash support expected to be received by
the Company under the agreement in 2002 is $150 million. Of this amount, $30
million is being recognized during 2002 as sales occur. The remaining $120
million ("volume growth funding") is earned only by attaining mutually
established sales volume
-11-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - RELATED PARTY TRANSACTIONS (CONTINUED)
growth rates. The agreement establishes minimum targets for 2002 of 3 percent
192 ounce equivalent unit case sales volume ("Unit Case") growth in North
America and 5 percent Unit Case growth in Europe. Sales volume growth is
determined through a formula with adjustments for brand conversions, brand
acquisitions, and new brand introductions. Growth that exceeds the target in
North America offsets any shortfalls in Europe and vice versa. For the first
nine months of 2002, the shortfall in Europe was more than offset by the
Company's performance in North America. Because of the offset provisions in the
agreement, the Company expects the total $120 million available will be earned
in full-year 2002.
The entire SGI agreement can be canceled by either party at the end of a fiscal
year with at least six months' prior written notice. In addition, during the
first three quarters of any year, either party may cancel for ensuing quarters
the sales volume growth targets and cash support funding provisions of the
agreement for that year by providing ten days notice prior to the end of such
quarter. Upon such quarterly cancellation, all other provisions of the
agreement will remain in full force and effect. Volume growth funding is
advanced to the Company equally over the four quarters of the program year
within thirty days after the beginning of each quarter. The Company recognizes
quarterly volume growth funding as sales volume growth is attained as a
reduction of sales discounts and allowances within net revenues. Based on
year-to-date performance, the Company recognized the entire amount specified
for the third quarter and first nine months of 2002 of $30 million and $90
million, respectively.
The agreement provides for refunds of volume growth funding advances should the
Company not attain specified minimum sales volume growth targets and upon the
failure of performance by either party in specified circumstances. Accordingly,
should the Company not attain specified minimum sales volume growth targets in
the ensuing quarters of a given year, amounts recognized to date for that year
would be subject to refund to TCCC.
The Company recently reached agreement with TCCC modifying the terms of
the SGI agreement relating to 2003 and beyond. Under the amended agreement,
funding for 2003, anticipated to be $250 million under the old agreement, will
decrease to $200 million. The new amendment, however, brings an additional
$275 million in funding to the Company over the next nine years (2003 - 2011)
and significantly reduces the annual reductions in funding that were a
part of the original agreement. In addition, the amendment provides for each
company to retain all cost savings it generates from future system
efficiency initiatives. The previous agreement called for a 50/50 sharing
between the Company and TCCC of combined proceeds above set targets.
Under the terms of the SGI agreement, the Company and TCCC negotiate
concentrate price increases. Based on the progress of the 2003 business
planning discussions, the Company expects concentrate prices to increase 1
percent in North America in 2003.
The Company also entered into two new arrangements with TCCC, the first of
which assigns responsibility for hot-fill production in North America to
TCCC. Accordingly, the Company will sell its Truesdale, Missouri hot fill plant
to TCCC for its carrying value of approximately $55 million in 2003. The second
arrangement, beginning in 2003, provides for the Company to receive 50% of
TCCC's profits generated from the Danone joint venture in CCE territories. This
arrangement is not expected to have a significant impact on the Company's 2003
results.
-12-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - GEOGRAPHIC OPERATING INFORMATION
The Company operates in one industry: the marketing, distribution, and
production of liquid nonalcoholic refreshments. On September 27, 2002, the
Company operated in 46 states in the United States, the District of Columbia,
the 10 provinces of Canada (collectively referred to as the "North American"
territories), and in Belgium, continental France, Great Britain, Luxembourg,
Monaco, and the Netherlands (collectively referred to as the "European"
territories).
The following presents net operating revenues for the nine months ended
September 27, 2002 and September 28, 2001 and long-lived assets as of September
27, 2002 and December 31, 2001 by geographic territory (in millions):
2002 2001
----------------------- -----------------------
NET LONG- NET LONG-
OPERATING LIVED OPERATING LIVED
REVENUES ASSETS REVENUES ASSETS
--------- ------- --------- -------
North American ... $ 9,686 $16,806 $ 8,917 $16,695
European ......... 2,953 4,452 2,744 4,148
------- ------- ------- -------
Consolidated ..... $12,639 $21,258 $11,661 $20,843
======= ======= ======= =======
The Company has no material amounts of sales or transfers between its North
American and European territories and no significant United States export
sales.
NOTE L - RESTRUCTURING AND OTHER CHARGES
During 2001, the Company recorded restructuring and other charges totaling $78
million. In third quarter 2002, the total estimate was reduced by $3 million as
a result of a revised estimate of costs to be incurred. The restructuring
charge related to a series of steps designed to improve the Company's cost
structure including the elimination of unnecessary support functions following
the consolidation of North America into one operating unit and streamlining
management of the North American operations responsive to the current business
environment.
Employees affected by the restructuring were provided both financial and
nonfinancial benefits. Restructuring costs include costs associated with
involuntary terminations and other direct costs associated with
implementation of the restructuring. Salary and other benefits are being paid
over the severance period. Other direct costs include relocation costs
and costs of development, communication, and administration which
are expensed as incurred.
In third quarter 2002, the Company recorded an additional restructuring charge
of approximately $5 million for severance benefits related to the elimination
of the use of refillable bottles in Great Britain. The elimination of the use
of refillable bottles in Great Britain will result in the elimination of
approximately 100 positions. The estimated severance benefits will be paid over
the benefit period.
-13-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L - RESTRUCTURING AND OTHER CHARGES (CONTINUED)
The table below summarizes the activity in the restructuring accrual for the
nine months ended September 27, 2002 (in millions):
ACCRUED ACCRUED
BALANCE BALANCE
RESTRUCTURING DECEMBER 31, ESTIMATE SEPTEMBER 27,
SUMMARY 2001 PROVISIONS PAYMENTS ADJUSTMENTS 2002
- --------------------------------------------------------------------------------
Employee
terminations
Severance pay
and benefits ... $40 $5 $(20) $(3) $22
Other direct
costs .......... 1 -- (1) -- --
--- -- ---- --- ---
Total .............. $41 $5 $(21) $(3) $22
=== == ==== === ===
NOTE M - EARNINGS PER SHARE
The following table presents information concerning basic and diluted earnings
per share (in millions, except per share data; per share data is calculated
prior to rounding to millions). Diluted loss per share equals basic loss per
share because dilutive securities are not considered in loss calculations.
QUARTER ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income before
cumulative
effect of
accounting
change ........... $ 191 $ 11 $ 416 $ 17
Cumulative effect
of accounting
change ........... -- -- -- (302)
----- ----- ----- ------
Net income (loss) ... 191 11 416 (285)
Preferred stock
dividends ........ 1 1 2 3
----- ----- ----- ------
Basic and diluted
net income (loss)
applicable to
common shareowners $ 190 $ 10 $ 414 $ (288)
===== ===== ===== ======
Basic average common
shares outstanding 450 442 449 427
Effect of dilutive
securities:
Stock
compensation
awards ......... 8 7 8 8
----- ----- ----- ------
Diluted average
common shares
outstanding ...... 458 449 457 435
===== ===== ===== ======
Basic net income
(loss) per
share applicable
to common
shareowners ...... $0.42 $0.02 $0.92 $(0.67)
===== ===== ===== ======
Diluted net income
(loss) per share
applicable to
common shareowners $0.42 $0.02 $0.91 $(0.67)
===== ===== ===== ======
-14-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE N - COMPREHENSIVE INCOME (LOSS)
The following table (in millions) presents a calculation of comprehensive
income (loss), comprised of net income (loss) and other adjustments. Other
adjustments to comprehensive income (loss) may include minimum pension
liability adjustments as defined by FAS 87, currency items such as foreign
currency translation adjustments and hedges of net investments in international
subsidiaries, unrealized gains and losses on certain investments in debt and
equity securities, and changes in the fair value of certain derivative
financial instruments which qualify as cash flow hedges. The Company provides
income taxes on currency items, except for income taxes on the impact of
currency translations, as earnings from international subsidiaries are
considered to be indefinitely reinvested.
QUARTER ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income (loss) ...... $191 $ 11 $416 $(285)
Currency translations .. 124 25 166 48
Hedges of net
investments, net
of tax .............. (53) (11) (69) (24)
Unrealized gain on
securities, net
of tax .............. 2 -- 5 1
Unrealized (loss) gain
on cash flow hedges,
net of tax .......... (22) (9) (27) 17
Reclassifications into
earnings on cash flow
hedges, net of tax .. 18 3 21 11
Cumulative effect of
adopting SFAS 133,
net of tax .......... -- -- -- (26)
---- ---- ---- -----
Net adjustments to
accumulated
comprehensive
income (loss) ....... 69 8 96 27
---- ---- ---- -----
Comprehensive income
(loss) .............. $260 $ 19 $512 $(258)
==== ==== ==== =====
NOTE O - ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement 141, "Business Combinations" ("FAS 141"), and Statement 142,
"Goodwill and Other Intangible Assets" ("FAS 142"), that supersede APB Opinion
No. 16, "Business Combinations," and APB Opinion No. 17, "Intangible Assets".
The two statements modify the method of accounting for business combinations
entered into after June 30, 2001 and address the accounting for intangible
assets.
As of January 1, 2002, the Company no longer amortizes goodwill and franchise
license intangible assets with an indefinite life, but will instead evaluate
them for impairment annually under FAS 142.
-15-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE O - ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
(CONTINUED)
The Company completed initial impairment tests under FAS 142 in the first
quarter of 2002. The Company's impairment tests for goodwill and franchise
license intangible assets compared the carrying amounts of the assets to their
fair values. Fair value was determined in accordance with the provisions of FAS
142 using present value techniques similar to those used internally by the
Company for evaluating acquisitions; comparisons to estimated market values
were also made. These valuation techniques, performed in consultation with
independent valuation professionals, involved projections of cash flows for ten
years, adopting a perpetuity valuation technique with an assumed long-term
growth rate of 3 percent, and discounting the projected cash flows, including
the perpetuity value, based on the Company's weighted average cost of capital.
A weighted average cost of capital of approximately 7 percent was utilized
based on an assumed capitalization structure of 55% debt and 45% equity. The
Company's actual weighted average cost of capital under its current
capitalization structure also approximates 7 percent. Changes in these
assumptions could materially impact the fair value estimates.
The Company performed goodwill impairment tests at its North American and
European group levels under FAS 142, which requires goodwill impairment testing
at the reporting unit level. In late 2001 and during first quarter 2002, the
Emerging Issues Task Force (EITF) of the FASB addressed the topic of when, if
ever, different indefinite-lived intangible assets, such as the Company's
territory-specific franchise license agreements, should be combined into a
single unit for purpose of performing impairment tests. This topic directly
impacted the Company's completion of impairment analyses. At the March 20-21,
2002 meeting, the EITF reached a consensus on Issue No. 02-7, "Unit of
Accounting for Testing Impairment of Indefinite-Lived Intangible Assets" that
outlines a number of factors to evaluate for determining whether
indefinite-lived intangible assets should be combined for impairment testing.
These factors include whether the assets are used together, whether the
marketing and branding strategy provide evidence that the intangible assets are
complementary, and whether the intangible assets as a group represent the
highest and best use of the assets. The Company concluded that the provisions
of EITF 02-7 require the Company to also test franchise license intangible
assets at the North American and European group levels.
The fair value impairment analyses under FAS 142 and EITF 02-7 concluded that
the fair values of goodwill and franchise license intangible assets exceed the
carrying book values of those assets. Impairment testing under FAS 142 at the
country level for each country the Company has license territories in would not
change the impact of adoption.
The transition provisions of FAS 141 prohibit changing amounts assigned to
assets and liabilities assumed in business combinations prior to July 1, 2001,
except in certain limited situations. Before adoption of FAS 141, the Company
allocated the excess of costs over net assets acquired on acquisitions to
franchise license intangible assets. The Company also provides deferred income
taxes on franchise license intangible assets that are not deductible for tax
purposes under FASB Statement 109, "Accounting for Income Taxes". FAS 141
specifically defines intangible assets and provides specific criteria to apply
in recognizing those intangible assets. Accordingly, effective with the Herb
acquisition in July 2001, the Company assigns values to franchise license
-16-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE O - ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
(CONTINUED)
intangibles under FAS 141 and recognizes goodwill for the excess of costs over
net assets and franchise license intangible assets acquired.
Prior to FAS 142, franchise license intangible assets were amortized over the
maximum allowed period of 40 years. As this amortization cost was recognized,
the related deferred tax liability was recognized as a decrease to income tax
expense. Under FAS 142, previously recognized unamortized balances of franchise
license intangible assets and associated deferred income tax liabilities will
remain unchanged except for any impairment in the value of these assets or any
ultimate sale of territories. At December 31, 2001, the Company had
approximately $4.6 billion of deferred tax liabilities on franchise license
intangible assets. These deferred tax liabilities, while impacted by tax rate
changes and currency translations, will only decrease for the reasons above but
will increase for the effect of any tax deductions realized on tax deductible
franchise license assets.
Adoption of the non-amortization provisions of FAS 142 as of January 1, 2001
would have increased net income by approximately $62 million, net of $36
million in income taxes, or $0.14 per common share, for the quarter ended
September 28, 2001 and by approximately $186 million, net of $107 million in
income taxes, or $0.44 per common share, for the nine months ended September
28, 2001.
Changes in the carrying values of the Company's consolidated goodwill balance
in the first nine months of 2002 were due to adjustments to the purchase price
allocations of acquisitions completed in 2001. The Company's consolidated
franchise license intangibles balance in the first nine months of 2002
increased approximately $225 million primarily due to the effects of foreign
currency translations. The Company completed acquisitions during the first nine
months of 2002 at a cost totaling approximately $26 million.
On July 10, 2001, the Company completed the acquisition of 100% of the
outstanding common and preferred shares of Hondo Incorporated and Herbco
Enterprises, Inc., collectively known as Herb Coca-Cola, for consideration of
approximately $1.4 billion, including cash of $1 billion and 25 million shares
of common stock valued at approximately $400 million. The cost of Herb
Coca-Cola was reduced in the second quarter of 2002 by approximately $7 million
due to the final settlement of working capital balances. This settlement
resulted in a return to CCE of approximately 400,000 shares held in escrow and
returned to treasury stock. The Company finalized the purchase price allocation
for Herb Coca-Cola in the third quarter of 2002.
-17-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE P - COMMITMENTS AND CONTINGENCIES
In North America, the Company purchases PET (plastic) bottles from
manufacturing cooperatives. The Company has guaranteed payment of up to $285
million of indebtedness owed by these manufacturing cooperatives to third
parties. At September 27, 2002, these cooperatives had approximately $178
million of indebtedness guaranteed by the Company.
In addition, the Company has issued letters of credit principally under
self-insurance programs aggregating approximately $267 million.
Under the Jumpstart programs with TCCC, the Company received payments from TCCC
for a portion of the cost of developing the infrastructure (consisting
primarily of people and systems) necessary to support accelerated placements of
cold drink equipment. The Company recognizes the payments primarily as cold
drink equipment is placed, through 2008, and over the period the Company has
the potential requirement to move equipment, through 2020.
Under the programs, the Company agrees to: (1) purchase and place specified
numbers of venders/coolers or cold drink equipment each year through 2008; (2)
maintain the equipment in service, with certain exceptions, for a period of at
least 12 years after placement; (3) maintain and stock the equipment in
accordance with specified standards for marketing TCCC products; and (4) during
the period the equipment is in service report to TCCC whether, on average, the
equipment purchased under the programs has generated a stated minimum volume of
products of TCCC. Should the Company not satisfy these or other provisions of
the program, the agreement provides for the parties to meet to work out
mutually agreeable solutions. If the parties were unable to agree on an
alternative solution, TCCC would be able to seek a partial refund of amounts
previously paid. No refunds have ever been paid under this program, and the
Company believes the probability of a partial refund of amounts previously paid
under the program is remote. The Company believes it would in all cases resolve
any matters that might arise with TCCC.
The Company's and its subsidiaries' tax filings are routinely subjected to
audit by tax authorities in most jurisdictions where they conduct business.
These audits may result in assessments of additional taxes that are
subsequently resolved with the authorities or potentially through the courts.
Currently, there are assessments involving certain of the Company's
subsidiaries, including subsidiaries in Canada and France, that may not be
resolved for many years. The Company believes it has substantial defenses to
the questions being raised and intends to pursue all legal remedies available
if it is unable to reach a resolution with the authorities. The Company
believes it has adequately provided for any ultimate amounts that would result
from these proceedings, however, it is too early to predict a final outcome in
these matters.
In January 2002, Kmart Corporation filed for bankruptcy protection. The Company
is exposed to possible preference action claims for amounts paid to the Company
prior to the filing. It is not possible to predict the ultimate amount of
losses, if any, which might result from preference claims.
-18-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE P - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is currently under investigation by the European Commission in
various jurisdictions for alleged abuses of an alleged dominant position under
Article 82 of the EU Treaty. The Company does not believe that it has a
dominant position in the relevant markets, or that its current or past
commercial practices violate EU law. Nonetheless, the Commission has
considerable discretion in reaching conclusions and levying fines, which are
subject to judicial review. The Commission has not notified the Company when it
might reach any conclusions.
The Company's California subsidiary has been sued by several current and former
employees over alleged violations of state wage and hour rules. The subsidiary
is still investigating the claims, and it is too early in the litigation to
predict the outcome. The subsidiary is defending the claims vigorously.
The Company has filed suit against two of its insurers to recover losses
incurred in connection with the 1999 European product recall. We are unable to
predict the final outcome of this action at this time.
In 2000 the Company and TCCC were found by a Texas jury to be jointly liable in
a combined final amount of $15.2 million to five plaintiffs, each of whom is a
distributor of competing beverage products. These distributors had sued
alleging that the Company and TCCC engaged in unfair marketing practices. The
Company is appealing the decision and believes there are substantial grounds
for appeal. The complaint of four remaining plaintiffs is in discovery and has
not yet gone to trial. It is impossible to predict at this time the final
outcome of the Company's appeal in this matter or the ultimate costs under all
of the complaints.
The Company is a defendant in various other matters of litigation generally
arising out of the normal course of business. Although it is difficult to
predict the ultimate outcome of these cases, management believes, based on
discussions with counsel, that any ultimate liability would not materially
affect the Company's financial position, results of operations, or liquidity.
-19-
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS SUMMARY AND OBJECTIVES
The Company is the world's largest marketer, producer, and distributor of
products of The Coca-Cola Company ("TCCC"). The Company also distributes other
beverage brands in select markets. The Company operates in parts of 46 states
in the United States, all 10 provinces of Canada, and in portions of Europe,
including Belgium, continental France, Great Britain, Luxembourg, Monaco, and
the Netherlands.
In the third quarter of 2002, net income applicable to common shareowners rose
to $190 million, or $0.42 per diluted common share, including a $0.01
nonrecurring tax benefit, versus comparable earnings per diluted common share
of $0.20 in the same quarter last year. EBITDA for the third quarter improved
18% to $704 million, versus comparable 2001 results of $597 million. We
achieved these results by expanding our operating margins through a combination
of volume growth, expense control, and favorable cost of goods trends. Our
volume growth accelerated from the second quarter, with North American volume
up 5 1/2 percent in the quarter. Europe finished the quarter with a 3 1/2
percent increase in volume, despite hurdling growth of more than 12% for the
same quarter a year ago. Europe achieved this volume performance while also
increasing pricing by 3 percent.
In North America and in Europe, new products and brand extensions, such as
Vanilla Coke, our Minute Maid juice drinks, diet Coke and Coke light with lemon
have reinvigorated our brand portfolio. We still have significant opportunities
ahead, such as the introduction of diet Vanilla Coke that is just now getting
underway. On the expense side, the programs we began to put into place last
year to control expenses continue to keep our costs under control. Comparable
operating expenses on a currency-neutral basis are up 2 percent for the first
nine months versus a comparable currency-neutral increase of over 10% in
full-year 2001. Cost of goods trends also continued to be favorable, with
currency-neutral bottle and can costs per case down 1/2 percent year to date.
In addition, we continue to benefit from favorable interest rate trends.
The overall pricing environment this year in North America has been generally
flat to slightly down. While the environment has not enabled us to post pricing
improvement to date in 2002, we are expecting improvement in the fourth-quarter
2002. Pricing improvement is essential for us in 2003 and we are working
diligently to achieve it.
OUTLOOK
For fourth-quarter 2002, we now expect earnings of $0.10 to $0.12 per diluted
common share, versus comparable results of $0.10 per diluted common share for
the fourth quarter of 2001. We have raised our estimates for 2002 full-year
earnings per share to a range of $1.00 to $1.03. This includes the adjustment
of our effective tax rate from 35% to 34%, included in our third-quarter 2002
results. We believe that our EBITDA performance will now reach the upper end of
our previous estimates of between $2.35 billion to $2.4 billion, including the
impact of currency translations. We continue to believe that free cash flow
will total more than $400 million for the year, to be used almost exclusively
for debt reduction. Based on the progress of the 2003 business planning
process, the Company expects concentrate prices to increase 1 percent in North
America in 2003. Preliminary expectations for 2003 earnings per diluted common
share are in line with current analyst expectations, with a consensus of $1.16
per common share as reported by First Call.
-20-
We recently reached agreement with TCCC modifying the terms of the Sales
Growth Initiative, "SGI", agreement relating to 2003 and beyond. Under the
amended agreement, funding for 2003, anticipated to be $250 million under
the old agreement, will decrease to $200 million. The new amendment, however,
brings an additional $275 million in funding to the Company over the next
nine years (2003 - 2011) and significantly reduces the annual reductions in
funding that were a part of the original agreement. In addition, the amendment
provides for each company to retain all cost savings it generates from
future system efficiency initiatives. The previous agreement called for a
50/50 sharing between the Company and TCCC of combined proceeds above set
targets.
We also entered into two new arrangements with TCCC, the first of which assigns
responsibility for hot-filled production in North America to TCCC. Accordingly,
we will sell our Truesdale, Missouri hot fill plant to TCCC for its carrying
value of approximately $55 million in 2003. The second arrangement, beginning
in 2003, provides for us to receive 50% of TCCC's profits generated from the
Danone joint venture in our territories. This arrangement is not expected to
have a significant impact on our 2003 results.
Our multi-year business processes redesign, referred to as Project Pinnacle,
continues with the objective of enhancing shareowner value by (i) developing
standard global processes and to leverage synergies, (ii) increasing
information capabilities, and (iii) providing system flexibility. The project
covers all functional areas of the business and is staffed with associates from
all aspects of the business with representatives from both Europe and North
America. We anticipate that completion through implementation will encompass a
three-year period beginning in 2002 and that the cost to our Company will be
approximately $(300) million with approximately $(200) million of that being
capital costs. We project we will spend approximately $(30) million in 2002 in
development costs, none of which represent capital costs. The operating and
capital costs for this project are factored into our current business plans.
Our goal is to recover our investment in this project by decreasing and
sustaining lower administrative costs, reducing the complexity of our core
transaction systems, improving the speed at which new or enhanced systems are
delivered, increasing our information capabilities for customers and suppliers,
and providing flexibility for changes from the business environment with
minimal disruptions to our existing business.
Management's Discussion and Analysis should be read in conjunction with the
Company's accompanying unaudited condensed consolidated financial statements
and the accompanying footnotes along with the cautionary statements at the end
of this section.
RESULTS OF OPERATIONS
OVERVIEW
Reported operating income increased to $441 million, 25% higher than comparable
operating income of $354 million. The increase in comparable operating income
is due to increased margins resulting primarily from lower than expected cost
of goods as well as pricing growth in Europe and favorable foreign currency
translation rates. Consolidated EBITDA, or income before deducting interest,
taxes, depreciation, amortization, and other nonoperating expenses, was $704
million in the third quarter of 2002, 27% higher than reported third-quarter
2001
-21-
results of $556 million and 18% higher than comparable third-quarter 2001
results of $597 million.
Comparable consolidated bottle and can net pricing per case increased 1/2
percent in third-quarter 2002 and in the first nine months of 2002 compared to
third-quarter 2001 and the first nine months of 2001, excluding the impact of
currency exchange rate fluctuations. These consolidated results include a
decrease in unit pricing per case in North America of 1/2 percent and an
increase in European pricing of 3 percent for the same periods. Net price per
case is the invoice price charged to retailers less any promotional allowances
and excludes marketing credits received from franchisers. Our year-to-date
pricing comparisons also exclude the impact of the $22 million settlement of
promotional programs and accruals that occurred in second-quarter 2002. Our
comparable consolidated bottle and can cost of sales per case decreased 1
percent and 1/2 percent on a currency-neutral basis for third-quarter 2002 and
the first nine months of 2002, respectively.
Our net income applicable to common shareowners was $190 million, or $0.42 per
diluted common share for the third quarter of 2002, compared to reported net
income applicable to common shareowners of $0.02 per diluted common share, and
comparable net income applicable to common shareowners of $0.20 per diluted
common share, for the third quarter of 2001, adjusted as discussed below.
EBITDA is used as an indicator of operating performance and not as a
replacement of measures such as cash flows from operating activities and
operating income under generally accepted accounting principles in the United
States. All per case amounts are calculated based on physical cases.
All comparable 2001 results exclude the cumulative effect of $302 million in
first-quarter 2001 for the change in our method of accounting for Jumpstart
payments, exclude franchise amortization of $98 million and $293 million for
third-quarter 2001 and the first nine months of 2001, respectively, as if FASB
Statement No. 142, "Goodwill and Other Intangible Assets", was in effect as of
January 1, 2001, exclude $41 million in restructuring and other charges
incurred in third-quarter 2001, exclude nonrecurring reductions in income taxes
of $6 million and $52 million in third-quarter 2001 and the first nine months
of 2001, respectively, and include the Herb acquisition as of January 1, 2001.
Comparable volume growth also includes a one-day reduction to the number of
selling days in the first nine months of 2001 to equate to the same number of
days for the first nine months of 2002.
Our operating results in the third quarter of each year reflect the seasonality
of our business. Our unit sales traditionally are higher in the hotter months
during the second and third quarters, while costs such as interest,
depreciation, and amortization are not as significantly impacted by business
seasonality.
NET OPERATING REVENUES AND COST OF SALES
The Company's reported third-quarter 2002 net operating revenues increased 7
percent to nearly $4.55 billion, primarily reflecting the impact of improved
volume (approximately 5 percent) and favorable currency translation rates
(approximately 2 percent). Comparable net operating revenues, including the
impact of acquisitions and adjusted for the impact of foreign currency
translations, increased 5 percent in the third quarter of 2002. The revenue
split between our North American and European operations was 76% and 24%,
respectively.
Comparable bottle and can net price per case increased 2 1/2 percent (1/2
percent on a currency neutral basis) in third-quarter 2002 and increased 1
percent (1/2 percent on a currency-neutral
-22-
basis) in the first nine months of 2002 compared to the same periods in 2001.
The consolidated currency-neutral results include a decrease in pricing in
North America of 1/2 percent and an increase in European pricing of 3 percent
in third-quarter 2002 and in the first nine months of 2002.
Our comparable consolidated bottle and can cost of sales per case increased 1
1/2 percent (decreased 1 percent on a currency-neutral basis) in third-quarter
2002 and increased nearly 1/2 percent (decreased nearly 1/2 percent on a
currency-neutral basis) in the first nine months of 2002. Lower packaging
material costs offset our increase in ingredient costs for the quarter.
Ingredient costs are impacted by the increase in carbonated beverage
concentrate costs for full-year 2002 of approximately 1 1/2 percent in North
America and 2 1/2 percent in Europe.
VOLUME
Volume results, adjusted for acquisitions completed in 2001, and for one less
selling day in first-quarter 2002 (which increased the nine-month changes shown
below by approximately 1/2 percent), are shown in the table below:
- -------------------------------------------------------------------------------
3RD QUARTER NINE MONTHS
2002 2002
------------------------------
COMPARABLE CHANGE
- -------------------------------------------------------------------------------
Physical Case Bottle and Can Volume:
Consolidated.......................... 5 % 4 %
North American Territories............ 5 1/2% 4 %
European Territories.................. 3 1/2% 4 %
- -------------------------------------------------------------------------------
New brands and brand extensions are driving volume growth in both North America
and Europe. For third-quarter 2002, non-carbonated brand volume in North
America increased nearly 21%, due primarily to Dasani, up 37%, POWERade, up
17%, and the success of Minute Maid Lemonade. In addition, Vanilla Coke
contributed to volume growth in the quarter, particularly in higher margin
20-ounce packages. Our 20-ounce volume overall grew more than 9 percent in the
quarter. Our sugared trademark brands - Coca-Cola classic, Cherry Coke,
caffeine free classic, and Vanilla Coke - enjoyed growth of more than 8 percent
in the quarter, and diet Coke brands grew 4 1/2 percent. With the addition of
diet Vanilla Coke to our portfolio in fourth-quarter 2002, we expect continued
growth in the diet category.
In Europe, overall volume grew 3 1/2 percent on a comparable basis. Fanta grew
more than 43% in Great Britain, based largely on the strong popularity of a new
brand extension, Fanta Fruit Twist, and grew nearly 16% in Europe as a whole.
In addition to Fruit Twist, we also added new flavors on the continent, such as
Latina in France and Sapaya in Belgium, and introduced new, proprietary 500ml
packaging. Our 500ml European PET volume grew more than 11% in the third
quarter of 2002 compared to the third quarter of 2001. Diet Coke with lemon and
Coke light with lemon provided incremental growth in each territory and has
proved extremely popular with European consumers. Diet Coke/Coca-Cola light
volume grew more than 18% overall in Europe.
PER SHARE DATA
For third-quarter 2002, our reported net income applicable to common
shareowners was $190 million, or $0.42 per diluted common share, (including the
nonrecurring reduction in income tax accruals of $4 million, or $0.01 per
diluted common share) versus reported third-quarter 2001 net income applicable
to common shareowners of $10 million, or $0.02 per diluted common share
-23-
and comparable third-quarter 2001 net income applicable to common shareowners
of $91 million, or $0.20 per diluted common share. The comparable results
primarily reflect the impact of improved volume, a favorable cost environment,
and lower interest costs.
SELLING, DELIVERY, AND ADMINISTRATIVE EXPENSES
In third-quarter 2002, consolidated selling, delivery, and administrative
expenses as a percentage of net operating revenues decreased to 28.5% from
reported third-quarter 2001 results of 32.4% and comparable third quarter 2001
results of 28.9%. This decrease from comparable results is largely due to the
benefits of our restructuring announced in 2001. For third-quarter 2002, our
restructuring accrual decreased by approximately $2 million, due to
expenditures for benefits totaling $4 million, an estimate adjustment totaling
$3 million, and an increase of $5 million due to a restructuring in Great
Britain, to approximately $22 million at September 27, 2002. The restructuring
in Great Britain is to record severance benefits related to the elimination of
the use of refillable bottles. The elimination of the use of refillable bottles
in Great Britain will result in the elimination of approximately 100 positions.
In addition, the Company recognized approximately $28 million of Jumpstart
funding as a reduction of selling, delivery, and administrative expenses, as
compared to $16 million in the third quarter of 2001. This increase was a
result of more vending equipment placements in the third quarter of 2002 than
the third quarter of 2001. We expect full-year Jumpstart funding recognized for
2002 to approximate $70 million to $75 million.
As discussed further under Accounting Developments, the Company implemented
Financial Accounting Standards Board Statement 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). Under FAS 142, the Company no longer amortizes
goodwill and franchise license intangible assets. Adoption of the
non-amortization provisions of FAS 142 as of January 1, 2001 would have reduced
amortization expense by approximately $98 million and $293 million for the
quarterly and nine month periods ending September 28, 2001, respectively. We
completed our initial impairment tests under FAS 142 which supported the
carrying values of these assets and, accordingly, no impairment charge resulted
from FAS 142 adoption.
EITF No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer
or Reseller of the Vendor's Products," is effective for the Company beginning
January 1, 2002, and requires certain selling expenses incurred by the Company
to be classified as deductions from revenue. Comparable amounts in prior years
are required to be reclassified in accordance with this EITF consensus. The
Company reclassified approximately $26 million and $72 million of selling
expenses as deductions in net operating revenues which were previously
classified as selling, delivery, and administrative expenses in the third
quarter and first nine months of 2001, respectively.
In January 2002, Kmart Corporation filed for bankruptcy protection. The Company
had approximately $20 million in trade receivables from Kmart at the date of
their bankruptcy filing. We are uncertain how much of these trade receivables
we will ultimately recover. In first-quarter 2002, the Company recognized the
potential losses on these accounts receivable by charging the amounts, net of
estimated recoverable portions, against the reserve for doubtful accounts. This
write-off had no impact on our results of operations for first-quarter 2002 as
the Company was adequately reserved for these losses.
TRANSACTIONS WITH THE COCA-COLA COMPANY
Total costs for purchases of concentrate, finished product, sweetener, and
syrup from TCCC included in cost of sales were $1,425 million for the third
quarter of 2002 as compared to $1,191
-24-
million in the third quarter of 2001. In the third quarter of 2002 the Company
recognized $218 million of direct marketing support in net revenues as compared
to $162 million in the third quarter of 2001. This increase from 2001 to 2002
was a result of higher volume and was impacted by customer cooperative trade
marketing programs ("CTM") and media cost shifts and the $30 million in SGI
funding recognized and discussed further below. In the third quarter of 2002,
the Company recognized approximately $28 million of Jumpstart funding as a
reduction of selling, delivery, and administrative expenses, as compared to $16
million in the third quarter of 2001. The Company expects to recognize
approximately $70 million to $75 million in Jumpstart funding for full-year
2002.
Beginning in 2002, all costs in North America associated with CTM, excluding
certain specific customers, shifted to us and all costs for local media
programs in North America shifted to TCCC. The amount of marketing support
funding from TCCC that we will receive for 2002 was established based on
historical funding levels and increased for the net effect of increased 2001
CTM cost and decreased 2001 local media cost. Amounts paid under customer trade
marketing programs to TCCC are included as a reduction in net operating
revenues and totaled $60 million for the third quarter of 2002, as compared to
$46 million for the third quarter of 2001. The shift of CTM and local media
costs impacts income statement comparisons between 2002 and 2001, but does not
have an impact on the Company's 2001 net income. The impact of this shift on
2002 and future operating income is dependent upon the level of CTM spending by
the Company.
Sales to TCCC of bottle and can products and fountain syrup included in net
revenues totaled $100 million in the third quarter of 2002, as compared to $104
million in the third quarter of 2001.
We have a multi-year agreement with TCCC, referred to as the Sales Growth
Initiative, "SGI" agreement, to support profitable growth in brands of TCCC in
our territories. Total cash support expected to be received by the Company
under the agreement in 2002 is $150 million. Of this amount, $30 million is
being recognized during 2002 as sales are recorded. The remaining $120 million
("volume growth funding") will be earned only by attaining mutually established
sales volume growth rates. The SGI agreement establishes minimum targets for
2002 of 3 percent 192 ounce equivalent unit case sales volume ("Unit Case")
growth in North America and 5 percent Unit Case growth in Europe. Sales volume
growth is determined through a formula with adjustments for brand conversions,
brand acquisitions, and new brand introductions. Growth that exceeds the target
in North America offsets any shortfalls in Europe and vice versa. For the first
nine months of 2002, the shortfall in Europe was more than offset by
performance in North America. Because of the offset provisions in the
agreement, we expect the total $120 million available will be earned in
full-year 2002. As previously discussed, the Company and TCCC have reached
agreement modifying the terms of the SGI agreement as they relate to periods
after 2002.
The entire SGI agreement can be canceled by either party at the end of a fiscal
year with at least six months' prior written notice. In addition, during the
first three quarters of any year, either party may cancel for ensuing quarters
the sales volume growth targets and cash support funding provisions of the
agreement for that year by providing ten days notice prior to the end of such
quarter. Upon such quarterly cancellation, all other provisions of the
agreement will remain in full force and effect.
Volume growth funding is advanced to the Company equally over the four quarters
of the program year within thirty days after the beginning of each quarter. The
Company recognizes quarterly volume growth funding as volume growth is attained
as a reduction of sales discounts and allowances within net revenues. Based on
year-to-date performance, the Company recognized the
-25-
entire amount specified for third quarter 2002 and first nine months of 2002 of
$30 million and $90 million, respectively.
The agreement provides for refunds of volume growth funding advances should the
Company not attain specified minimum sales volume growth targets and upon the
failure of performance by either party in specified circumstances. Accordingly,
should the Company not attain specified minimum sales volume growth targets in
the ensuing quarters of a given year, amounts recognized to date for that year
would be subject to refund to TCCC.
INTEREST EXPENSE
Third-quarter 2002 net interest expense decreased from reported 2001 levels due
to a decline in our weighted average cost of debt and a decline in our average
debt balance. Year-to-date 2002 interest expense decreased from reported 2001
levels due to a decline in our weighted average cost of debt partially offset
by a higher average debt balance. The weighted average interest rate for the
third-quarter and first nine months of 2002 was 5.5 percent compared to 6.1
percent and 6.5 percent for third-quarter and full-year 2001, respectively.
INCOME TAXES
The Company's effective tax rates for the first nine months of 2002 and 2001
were approximately 34% and 40%, respectively, excluding a $4 million
nonrecurring accrual adjustment in 2002 and the rate change benefit in 2001.
The Company's third-quarter 2002 effective tax rate reflects expected full-year
2002 pretax earnings combined with the beneficial tax impact of certain
international operations. We are currently implementing a corporate structuring
of certain subsidiaries, which, if fully implemented as expected in
fourth-quarter 2002, will reduce our full-year 2002 effective tax rate by
approximately 1/2 percent. Our effective tax rate for the remainder of 2002 is
also dependent upon operating results and may change if the results for the
year are different from current expectations.
CASH FLOW AND LIQUIDITY REVIEW
CAPITAL RESOURCES
Our sources of capital include, but are not limited to, cash flows from
operations, the issuance of public or private placement debt, bank borrowings,
and the issuance of equity securities. We believe that available short-term and
long-term capital resources are sufficient to fund our capital expenditure and
working capital requirements, scheduled debt payments, interest and income tax
obligations, dividends to our shareowners, acquisitions, and share repurchases.
At September 27, 2002, we had approximately $3.1 billion in available capital
under our public debt facilities which could be used for long-term financing,
refinancing of debt maturities, and refinancing of commercial paper. Of this
amount, we had (i) $0.2 billion in registered debt securities available for
issuance under a registration statement with the Securities and Exchange
Commission, (ii) $1.2 billion in debt securities available under a Canadian
Medium Term Note Program, and (iii) $1.7 billion in debt securities available
under a Euro Medium Term Note Program for long-term financing needs. To
increase the amounts available for issuance, we filed a new registration
statement with the Securities and Exchange Commission in October 2002, which
when effective, will increase the amounts of registered debt securities
available for issuance by $3.5 billion.
In addition, we satisfy seasonal working capital needs and other financing
requirements with short-term borrowings, under our commercial paper programs,
bank borrowings, and other credit
-26-
facilities. At September 27, 2002 we had approximately $1.6 billion outstanding
in commercial paper. At September 27, 2002 we had approximately $3.2 billion
available as a back-up to commercial paper and undrawn working capital lines of
credit. We intend to continue refinancing borrowings under our commercial paper
programs and our short-term credit facilities with longer-term fixed and
floating rate financings. At the end of third-quarter 2002, the Company's debt
portfolio was 68% fixed rate debt and 32% floating rate debt.
SUMMARY OF CASH ACTIVITIES
Cash and cash investments increased $645 million during the first nine months
of 2002 from net cash transactions. Our primary uses of cash were for debt
payments totaling $1,427 million and capital expenditures totaling $661
million. Subsequent to the end of third-quarter 2002, the Company made
additional payments on maturing debt totaling approximately $859 million. Our
primary sources of cash for third-quarter 2002 were proceeds from our
operations totaling $1,104 million and proceeds from the issuance of debt
aggregating $1,704 million.
Operating Activities: Operating activities resulted in $1,104 million of net
cash provided during third-quarter 2002 compared to $557 million of net cash
provided during the third quarter of 2001.
Investing Activities: Net cash used in investing activities resulted primarily
from our continued capital investments. We expect full-year 2002 capital
expenditures to be between $1.0 billion and $1.1 billion.
Financing Activities: The Company continues to refinance portions of its
short-term borrowings as they mature with short-term and long-term fixed and
floating rate debt.
FINANCIAL CONDITION
The increase in net property, plant, and equipment resulted from capital
expenditures and translation adjustments net of depreciation expense. The
increase in franchise license intangible assets resulted primarily from
translation adjustments. The increase in long-term debt primarily resulted from
proceeds received and translation adjustments in excess of debt payments. As
previously discussed, the Company made additional payments on maturing debt
totaling approximately $859 million subsequent to the end of the third quarter
of 2002. The decrease in the reserve for doubtful accounts resulted from the
Company's recognition of potential losses on Kmart accounts receivable, net of
estimated recoverable portions, against the reserve for doubtful accounts. The
increase in treasury stock was a result of the return of approximately 400,000
shares to treasury after the final settlement of working capital balances
associated with the Herb acquisition.
In the first nine months of 2002, changes in currencies, including currency
translations and hedges of net investments, resulted in a gain in comprehensive
income of $97 million. As currency exchange rates fluctuate, translation of the
statements of operations for our international businesses into U.S. dollars
affects the comparability of revenues and expenses between periods.
KNOWN TRENDS AND UNCERTAINTIES
CONTINGENCIES
Under the Jumpstart programs with TCCC, the Company received payments from TCCC
for a portion of the cost of developing the infrastructure (consisting
primarily of people and systems) necessary to support accelerated placements of
cold drink equipment. The Company recognizes
-27-
the payments primarily as cold drink equipment is placed, through 2008, and
over the period the Company has the potential requirement to move equipment,
through 2020.
Under the programs, the Company agrees to: (1) purchase and place specified
numbers of venders/coolers or cold drink equipment each year through 2008; (2)
maintain the equipment in service, with certain exceptions, for a period of at
least 12 years after placement; (3) maintain and stock the equipment in
accordance with specified standards for marketing TCCC products; and (4) during
the period the equipment is in service report to TCCC whether, on average, the
equipment purchased under the programs has generated a stated minimum volume of
products of TCCC. Should the Company not satisfy these or other provisions of
the program, the agreement provides for the parties to meet to work out
mutually agreeable solutions. If the parties were unable to agree on an
alternative solution, TCCC would be able to seek a partial refund of amounts
previously paid. No refunds have ever been paid under this program, and the
Company believes the probability of a partial refund of amounts previously paid
under the program is remote. The Company believes it would in all cases resolve
any matters that might arise with TCCC.
The Company's and its subsidiaries' tax filings are routinely subjected to
audit by tax authorities in most jurisdictions where they conduct business.
These audits may result in assessments of additional taxes that are
subsequently resolved with the authorities or potentially through the courts.
Currently, there are assessments involving certain of the Company's
subsidiaries, including subsidiaries in Canada and France, that may not be
resolved for many years. The Company believes it has substantial defenses to
the questions being raised and intends to pursue all legal remedies available
if it is unable to reach a resolution with the authorities. The Company
believes it has adequately provided for any ultimate amounts that would result
from these proceedings, however, it is too early to predict a final outcome in
these matters.
In January 2002, Kmart Corporation filed for bankruptcy protection. The Company
is exposed to possible preference action claims for amounts paid to the Company
prior to the filing. It is not possible to predict the ultimate amount of
losses, if any, which might result from preference claims.
The Company is currently under investigation by the European Commission in
various jurisdictions for alleged abuses of an alleged dominant position under
Article 82 of the EU Treaty. The Company does not believe that it has a
dominant position in the relevant markets, or that its current or past
commercial practices violate EU law. Nonetheless, the Commission has
considerable discretion in reaching conclusions and levying fines, which are
subject to judicial review. The Commission has not notified the Company when it
might reach any conclusions.
The Company's California subsidiary has been sued by several current and
former employees over alleged violations of state wage and hour rules.
The subsidiary is still investigating the claims, and it is too early in the
litigation to predict the outcome. The subsidiary is defending the claims
vigorously.
The Company has filed suit against two of its insurers to recover losses
incurred in connection with the 1999 European product recall. We are unable to
predict the final outcome of this action at this time.
In 2000 the Company and TCCC were found by a Texas jury to be jointly liable in
a combined final amount of $15.2 million to five plaintiffs, each of whom is a
distributor of competing beverage products. These distributors had sued
alleging that the Company and TCCC engaged in unfair marketing practices.
The Company is appealing the decision and believes there are substantial
grounds for appeal. The complaint of four remaining plaintiffs is in discovery
and has not yet gone to trial. It is impossible to predict at this time the
final outcome of the Company's appeal in this matter or the ultimate costs
under all of the complaints.
At October 14, 2002, there were two federal and one state superfund sites for
which the Company's involvement or liability as a potentially responsible party
("PRP") was unresolved.
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We believe any ultimate liability under these PRP designations will not have a
material adverse effect on our financial position, cash flows, or results of
operations. In addition, there were 34 federal and nine state sites for which
it has been concluded the Company either had no responsibility, the ultimate
liability amounts would be less than $100,000, or payments made to date by the
Company would be sufficient to satisfy the Company's liability.
The Company is a defendant in various other matters of litigation generally
arising out of the normal course of business. Although it is difficult to
predict the ultimate outcome of these cases, management believes, based on
discussions with counsel, that any ultimate liability would not materially
affect the Company's financial position, results of operations, or liquidity.
ACCOUNTING DEVELOPMENTS
ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement 141, "Business Combinations" ("FAS 141"), and Statement 142,
"Goodwill and Other Intangible Assets" ("FAS 142"), that supersede APB Opinion
No. 16, "Business Combinations," and APB Opinion No. 17, "Intangible Assets".
The two statements modify the method of accounting for business combinations
entered into after June 30, 2001 and address the accounting for intangible
assets.
As of January 1, 2002, the Company no longer amortizes goodwill and franchise
license intangible assets with an indefinite life, but will instead evaluate
them for impairment annually under FAS 142.
The Company completed initial impairment tests under FAS 142 in the first
quarter of 2002. The Company's impairment tests for goodwill and franchise
license intangible assets compared the carrying amounts of the assets to their
fair values. Fair value was determined in accordance with the provisions of FAS
142 using present value techniques similar to those used internally by the
Company for evaluating acquisitions; comparisons to estimated market values
were also made. These valuation techniques, performed in consultation with
independent valuation professionals, involved projections of cash flows for ten
years, adopting a perpetuity valuation technique with an assumed long-term
growth rate of 3 percent, and discounting the projected cash flows, including
the perpetuity value, based on the Company's weighted average cost of capital.
A weighted average cost of capital of approximately 7 percent was utilized
based on an assumed capitalization structure of 55% debt and 45% equity. The
Company's actual weighted average cost of capital under its current
capitalization structure also approximates 7 percent. Changes in these
assumptions could materially impact the fair value estimates.
The Company performed goodwill impairment tests at its North American and
European group levels under FAS 142, which requires goodwill impairment testing
at the reporting unit level. In late 2001 and during first quarter 2002, the
Emerging Issues Task Force (EITF) of the FASB addressed the topic of when, if
ever, different indefinite-lived intangible assets, such as the Company's
territory-specific franchise license agreements, should be combined into a
single unit for purpose of performing impairment tests. This topic directly
impacted the Company's completion of impairment analyses. At the March 20-21,
2002 meeting, the EITF reached a consensus on Issue No. 02-7, "Unit of
Accounting for Testing Impairment of Indefinite-Lived Intangible Assets" that
outlines a number of factors to evaluate for determining whether
indefinite-lived intangible assets should be combined for impairment testing.
These factors include whether the assets are used together, whether the
marketing and branding strategy provide evidence that the intangible assets are
complementary, and whether the intangible assets
-29-
as a group represent the highest and best use of the assets. The Company
concluded that the provisions of EITF 02-7 require the Company to also test
franchise license intangible assets at the North American and European group
levels.
The fair value impairment analyses under FAS 142 and EITF 02-7 concluded that
the fair values of goodwill and franchise license intangible assets exceed the
carrying book values of those assets. Impairment testing under FAS 142 at the
country level for each country the Company has license territories in would not
change the impact of adoption.
The transition provisions of FAS 141 prohibit changing amounts assigned to
assets and liabilities assumed in business combinations prior to July 1, 2001,
except in certain limited situations. Before adoption of FAS 141, the Company
allocated the excess of costs over net assets acquired on acquisitions to
franchise license intangible assets. The Company also provides deferred income
taxes on franchise license intangible assets that are not deductible for tax
purposes under FASB Statement 109, "Accounting for Income Taxes". FAS 141
specifically defines intangible assets and provides specific criteria to apply
in recognizing those intangible assets. Accordingly, effective with the Herb
acquisition in July 2001, the Company assigns values to franchise license
intangibles under FAS 141 and recognizes goodwill for the excess of costs over
net assets and franchise license intangible assets acquired. This excess
principally represents the synergistic values expected to be realized from the
acquisition.
Prior to FAS 142, franchise license intangible assets were amortized over the
maximum allowed period of 40 years. As this amortization cost was recognized,
the related deferred tax liability was recognized as a decrease to income tax
expense. Under FAS 142, previously recognized unamortized balances of franchise
license intangible assets and associated deferred income tax liabilities will
remain unchanged except for any impairment in the value of these assets or any
ultimate sale of territories. At December 31, 2001, the Company had
approximately $4.6 billion of deferred tax liabilities on franchise license
intangible assets. These deferred tax liabilities, while impacted by tax rate
changes and currency translations, will only decrease for the reasons above but
will increase for the effect of any tax deductions realized on tax deductible
franchise license assets.
Adoption of the non-amortization provisions of FAS 142 as of January 1, 2001
would have increased net income by approximately $62 million, net of $36
million in income taxes, or $0.14 per common share, for the quarter ended
September 28, 2001 and by approximately $186 million, net of $107 million in
income taxes, or $0.44 per common share, for the nine months ended September
28, 2001.
CAUTIONARY STATEMENTS
Certain expectations and projections regarding future performance of the
Company referenced in this report are forward-looking statements. These
expectations and projections are based on currently available competitive,
financial, and economic data, along with the Company's operating plans and are
subject to future events and uncertainties. Among the events and uncertainties
which could adversely affect future periods are an inability to achieve price
increases, marketing and promotional programs that result in lower than
expected volume, efforts to manage price that adversely affect volume, an
inability to meet performance requirements for expected levels of various
support payments from TCCC, the cancellation or amendment of existing funding
programs with TCCC, material changes from expectations in the costs of raw
materials and ingredients, an inability to achieve the expected timing for
returns on cold drink equipment expenditures, an inability to place cold drink
equipment at required levels under our Jumpstart programs with TCCC, an
inability to meet volume growth requirements on an annual basis under the SGI
program with TCCC, an unfavorable outcome from the European Union
-30-
investigation, material changes in assumptions and the Company's cost of
capital used in completing impairment analyses under FAS 142, an inability to
meet projections for performance in newly acquired territories, potential
assessment of additional taxes resulting from audits conducted by tax
authorities, and unfavorable interest rate and currency fluctuations. We
caution readers that in addition to the above cautionary statements, all
forward-looking statements contained herein should be read in conjunction with
the detailed cautionary statements found on page 48 of the Company's Annual
Report for the fiscal year ended December 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosure on this matter made in
"Management's Financial Review - Interest Rate and Currency Risk Management" on
Page 25 of our Annual Report to Shareowners for the year ended December 31,
2001.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed of the effectiveness of the design and operation of
the Company's disclosure controls and procedures, as of September 27, 2002.
This evaluation was conducted under the supervision and with the participation
of the Company's management, including its Chief Executive Officer and its
Chief Financial Officer. Based on that evaluation, the Company's Chief
Executive Officer and its Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of September 27, 2002.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
September 27, 2002.
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Part II. Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
Exhibit Incorporated by Reference
Number Description or Filed Herewith
- ------- ------------------------------------------ -------------------------
3 Bylaws of Coca-Cola Enterprises, as of
October 15, 2002 Filed Herewith
10.1 Sweetener Sales Agreement - Bottler, dated
October 15, 2002 Filed Herewith
10.2 Amendment to Employment Agreement between
Coca-Cola Enterprises and
Summerfield K. Johnston, Jr., dated April
26, 2002 Filed Herewith
10.3 Consulting Agreement between Coca-Cola
Enterprises and Jean-Claude Killy,
dated October 31, 2002 Filed Herewith
10.4 Separation Summary for Michael
P. Coghlan Filed Herewith
12 Statements regarding computations of ratios Filed Herewith
(b) Reports on Form 8-K:
During third-quarter 2002, the Company filed the following current reports on
Form 8-K:
Date of Report Description
- ----------------- -----------------------------------------------------------
July 17, 2002 Press release reporting second quarter financial results.
August 14, 2002 Statements under oath of principal executive officer and
principal financial officer regarding facts and
circumstances relating to Exchange Act Filings.
September 5, 2002 Press release dated September 5, 2002 announcing webcast on
September 5, 2002.
September 9, 2002 Terms agreements dated as of September 4, 2002 relating to
the offering and sale of $500,000,000 aggregate principal
amount of the Company's 4.375% Notes due 2009; Form of the
4.375% Notes due 2009.
-32-
SIGNATURES
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.
COCA-COLA ENTERPRISES INC.
(Registrant)
Date: November 8, 2002 /s/ Patrick J. Mannelly
-------------------------------------------
Patrick J. Mannelly
Senior Vice President and
Chief Financial Officer
Date: November 8, 2002 /s/ Michael P. Coghlan
-------------------------------------------
Michael P. Coghlan
Vice President, Controller and
Principal Accounting Officer
CERTIFICATIONS
I, Lowry F. Kline, Chief Executive Officer of Coca-Cola Enterprises Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Coca-Cola
Enterprises Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure control
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
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c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 8, 2002 /s/ Lowry F. Kline
----------------------------------
Lowry F. Kline
Chief Executive Officer
I, Patrick J. Mannelly, Chief Financial Officer of Coca-Cola Enterprises Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Coca-Cola
Enterprises Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure control
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
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c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 8, 2002 /s/ Patrick J. Mannelly
-------------------------------------------
Patrick J. Mannelly
Senior Vice President and
Chief Financial Officer
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