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[COCA-COLA ENTERPRISES INC. LOGO]
FORM 10-Q
QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 28, 2003
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 March 28, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock.
452,119,850 SHARES OF $1 PAR VALUE COMMON STOCK AS OF APRIL 30, 2003
================================================================================
COCA-COLA ENTERPRISES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED MARCH 28, 2003
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Income Statements for the Quarters
ended March 28, 2003 and March 29, 2002............................ 1
Condensed Consolidated Balance Sheets as of March 28, 2003
and December 31, 2002.............................................. 2
Condensed Consolidated Statements of Cash Flows for the Quarters
ended March 28, 2003 and March 29, 2002............................ 4
Notes to Condensed Consolidated Financial Statements................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 24
Item 4. Controls and Procedures.............................................. 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders.................. 26
Item 6. Exhibits and Reports on Form 8-K..................................... 27
Signatures................................................................... 29
Certifications............................................................... 30
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
----------------------
MARCH 28, MARCH 29,
2003 2002
--------- ---------
NET OPERATING REVENUES ................................ $3,667 $3,466
Cost of sales, transactions with The
Coca-Cola Company $932 and $832, respectively ....... 2,148 2,063
------ ------
GROSS PROFIT .......................................... 1,519 1,403
Selling, delivery, and administrative expenses ........ 1,341 1,223
------ ------
OPERATING INCOME ...................................... 178 180
Interest expense, net ................................. 140 164
Other nonoperating income, net ........................ 4 --
------ ------
INCOME BEFORE INCOME TAXES ............................ 42 16
Income tax expense .................................... 14 6
------ ------
NET INCOME ............................................ 28 10
Preferred stock dividends ............................. 1 1
------ ------
NET INCOME APPLICABLE TO COMMON SHAREOWNERS ........... $ 27 $ 9
====== ======
BASIC AND DILUTED NET INCOME PER SHARE APPLICABLE
TO COMMON SHAREOWNERS ............................... $ 0.06 $ 0.02
====== ======
DIVIDENDS PER SHARE APPLICABLE TO COMMON SHAREOWNERS .. $ 0.04 $ 0.04
====== ======
See Notes to Condensed Consolidated Financial Statements.
-1-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
MARCH 28, DECEMBER 31,
ASSETS 2003 2002
----------- ------------
(Unaudited)
CURRENT
Cash and cash investments, at cost
approximating market........................... $ 16 $ 68
Trade accounts receivable, less allowance
reserves of $60 at each period end............. 1,829 1,661
Amounts receivable from The Coca-Cola
Company, net .................................. 53 20
Inventories:
Finished goods................................. 530 464
Raw materials and supplies..................... 265 255
------- -------
795 719
Current deferred income taxes.................... 58 51
Prepaid expenses and other current assets........ 317 325
------- -------
Total Current Assets........................... 3,068 2,844
PROPERTY, PLANT, AND EQUIPMENT
Land............................................. 429 424
Buildings and improvements....................... 1,900 1,869
Machinery and equipment.......................... 9,814 9,552
------- -------
12,143 11,845
Less allowances for depreciation................. 5,949 5,638
------- -------
6,194 6,207
Construction in progress......................... 204 186
------- -------
Net Property, Plant, and Equipment............. 6,398 6,393
GOODWILL........................................... 578 578
LICENSEE INTANGIBLE ASSETS......................... 13,619 13,450
LONG-TERM CUSTOMER CONTRACTS AND OTHER
NONCURRENT ASSETS................................ 1,124 1,110
------- -------
$24,787 $24,375
======= =======
See Notes to Condensed Consolidated Financial Statements.
-2-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT SHARE DATA)
MARCH 28, DECEMBER 31,
LIABILITIES AND SHAREOWNERS' EQUITY 2003 2002
----------- ------------
(Unaudited)
CURRENT
Accounts payable and accrued expenses............ $ 2,343 $ 2,588
Deferred cash payments from The Coca-Cola
Company........................................ 80 80
Current portion of long-term debt................ 1,252 787
------- -------
Total Current Liabilities...................... 3,675 3,455
LONG-TERM DEBT, LESS CURRENT MATURITIES............ 11,206 11,236
RETIREMENT AND INSURANCE PROGRAMS AND OTHER
LONG-TERM OBLIGATIONS.......................... 1,436 1,372
DEFERRED CASH PAYMENTS FROM THE COCA-COLA
COMPANY........................................ 409 426
LONG-TERM DEFERRED INCOME TAX LIABILITIES.......... 4,593 4,539
SHAREOWNERS' EQUITY
Preferred stock.................................. 37 37
Common stock, $1 par value - Authorized -
1,000,000,000 shares; Issued - 460,245,721
and 458,215,369 shares, respectively........... 460 458
Additional paid-in capital....................... 2,592 2,581
Reinvested earnings.............................. 648 639
Accumulated other comprehensive income (loss).... (136) (236)
Common stock in treasury, at cost - 8,514,747
and 8,515,072 shares, respectively............. (133) (132)
------- -------
Total Shareowners' Equity...................... 3,468 3,347
------- -------
$24,787 $24,375
======= =======
See Notes to Condensed Consolidated Financial Statements.
-3-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN MILLIONS)
QUARTER ENDED
---------------------
MARCH 28, MARCH 29,
2003 2002
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................... $ 28 $ 10
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation ....................................... 255 230
Amortization ....................................... 21 19
Deferred income tax expense (benefit) .............. 1 (6)
Deferred cash payments from The Coca-Cola
Company .......................................... (17) (13)
Net changes in current assets and current
liabilities ...................................... (506) (265)
Other .............................................. (1) 24
------ ------
Net cash used in operating activities ................ (219) (1)
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in capital assets ........................ (208) (144)
Proceeds from fixed asset disposals, $58 from The
Coca-Cola Company in 2003 .......................... 60 2
Other investing activities ........................... (10) (12)
------ ------
Net cash used in investing activities ................ (158) (154)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in commercial paper ..................... 320 552
Issuances of debt .................................... 291 64
Payments on long-term debt ........................... (292) (573)
Cash dividend payments on common and preferred
stock .............................................. (1) (1)
Exercise of employee stock options ................... 7 7
------ ------
Net cash derived from financing activities ........... 325 49
------ ------
NET DECREASE IN CASH AND CASH INVESTMENTS .............. (52) (106)
Cash and cash investments at beginning of period ..... 68 284
------ ------
CASH AND CASH INVESTMENTS AT END OF PERIOD ............. $ 16 $ 178
====== ======
See Notes to Condensed Consolidated Financial Statements.
-4-
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. (CCE) Annual
Report on Form 10-K for the year ended December 31, 2002.
NOTE B - EITF 02-16
Classifications in the 2002 income statement have been conformed to
classifications used in the current year under Emerging Issues Task Force (EITF)
No. 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor." Under the provisions of EITF 02-16, cash
consideration received by a customer from a vendor is presumed to be a reduction
of the prices of the vendor's products or services and are, therefore, to be
accounted for as a reduction of cost of sales in the income statement unless
those payments are specific reimbursements of costs or payments for services.
Payments we receive from TCCC and other licensors for marketing support and cold
drink equipment placement funding are subject to the requirements of EITF 02-16.
Upon adoption of EITF 02-16 in the first quarter of 2003, we classified the
following amounts in the 2002 income statement as reductions in cost of sales:
approximately $189 million of marketing support from TCCC and other licensors
previously included in net operating revenues, and approximately $13 million
of cold drink equipment placement funding from TCCC previously included as a
reduction in selling, delivery, and administrative expenses. We also
classified $13 million of payments for dispensing equipment repair services
received from TCCC in the 2002 income statement in net operating revenues which
was previously included in selling, delivery, and administrative expenses.
NOTE C - SEASONALITY OF BUSINESS
Operating results for the first quarter ended March 28, 2003 are not indicative
of results that may be expected for the year ending December 31, 2003 because of
business seasonality. Business seasonality results from a combination of higher
unit sales of our 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.
-5-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - INCOME TAXES
Our effective tax rates for the first quarters of 2003 and 2002 were 33% and
35%, respectively. A reconciliation of the income tax provisions at the
statutory federal rate to our actual income tax provisions follows (in
millions):
QUARTER ENDED
---------------------
MARCH 28, MARCH 29,
2003 2002
--------- ---------
U.S. federal statutory expense.......................... $ 15 $ 5
State expense, net of federal benefit................... 1 --
Taxation of European and Canadian operations, net....... (3) (1)
Nondeductible items..................................... 1 --
Other, net.............................................. -- 2
---- ----
$ 14 $ 6
==== ====
NOTE E - LONG-TERM DEBT
Total long-term debt balances summarized below are adjusted for the effects of
interest rate and currency swap agreements (in millions):
MARCH 28, DECEMBER 31,
2003 2002
--------- ------------
U.S. commercial paper (weighted average rates
of 1.3% and 1.4%).................................. $1,630 $1,415
Euro commercial paper (weighted average rates
of 2.7% and 3.0%).................................. 258 242
Canadian dollar commercial paper (weighted average
rates of 3.1% and 2.8%)............................ 197 87
Notes due 2004-2037 (weighted average rates of
3.4% and 3.5%)..................................... 4,048 4,059
Euro and Pound Sterling notes due 2003-2021
(weighted average rates of 6.4% and 6.5%)(A)....... 1,397 1,498
Canadian dollar notes due 2003-2009 (weighted
average rates of 4.9% and 4.7%)(B)................. 485 536
Debentures due 2012-2098 (weighted average rate
of 7.4%)........................................... 3,783 3,783
8.35% zero coupon notes due 2020 (net of
unamortized discount of $475 and $478)............. 154 151
Various foreign currency debt arrangements(A)(C)..... 431 172
Additional debt...................................... 75 80
------- -------
Total long-term debt............................. $12,458 $12,023
======= =======
(A) In February 2003, approximately $157 million in Eurobonds matured;
short-term borrowings of approximately $283 million were issued and
used to pay off debt.
(B) In March 2003, approximately $65 million in Canadian dollar notes
matured.
(C) In January 2003, approximately $27 million of French franc notes
matured.
-6-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - LONG-TERM DEBT (CONTINUED)
At March 28, 2003 and December 31, 2002, approximately $2.4 billion and $2.3
billion, respectively, of borrowings due in the next 12 months, including
commercial paper balances outstanding, are classified as maturing after one year
due to our intent and ability through our credit facilities to refinance these
borrowings on a long-term basis.
At March 28, 2003 and December 31, 2002, we had $3.7 billion and $3.4 billion,
respectively, of amounts available under domestic and international credit
facilities. These facilities serve as back-up to our domestic and international
commercial paper programs and support working capital needs. At March 28, 2003
and December 31, 2002, we had $208 million and $53 million, respectively, of
short-term borrowings outstanding under domestic and international credit
facilities.
At March 28, 2003 and December 31, 2002, we had available for issuance
approximately $0.2 billion under a registration statement with the Securities
and Exchange Commission. At March 28, 2003 and December 31, 2002, we had
available for issuance approximately $1.3 billion and $1.2 billion,
respectively, available for issuance under a Canadian Medium Term Note Program.
In addition, at March 28, 2003 and December 31, 2002, we had approximately $2.2
billion and $2.0 billion, respectively, in debt securities available for
issuance under a Euro Medium Term Note Program. In October 2002, we filed a
new registration statement with the Securities and Exchange Commission
which, when effective, will increase the amounts of registered debt
securities available for issuance by $3.5 billion.
Aggregate maturities of long-term debt for the five twelve-month periods
subsequent to March 28, 2003 are as follows (in millions): 2004 - $1,252; 2005 -
$1,024; 2006 - $1,979; 2007 - $802; and 2008 - $798.
On March 31, 2003, we terminated a fixed-to-floating interest rate swap with a
notional amount of $150 million and received a payment of approximately $28
million, equal to the fair value of the hedge on the termination date. The swap
was previously designated as a fair value hedge of a fixed rate debt issuance
due September 16, 1999. The related debt adjustment will be amortized over the
remaining term of the debt using the effective interest method, thereby
decreasing the interest expense on that previously hedged debt over the
remaining term.
The credit facilities and outstanding notes and debentures contain various
provisions that, among other things, require us 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 our liquidity or capital resources.
NOTE F - PREFERRED STOCK
When we acquired Great Plains Bottlers and Canners, Inc. in 1998, we 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 March 28, 2003, 35,000 shares of the Great Plains Series have been
converted into 154,778 shares of common stock. The remaining 366,528 outstanding
preferred shares were convertible into approximately 1.9 million common shares
at March 28, 2003.
-7-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - STOCK-BASED COMPENSATION PLANS
We granted approximately 7.9 million service-vested stock options to certain
executive and management level employees during the first quarter of 2003. 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.
We granted 1.25 million shares of restricted stock and 34,000 restricted
stock units to certain key employees during the first quarter of 2003. These
awards vest upon continued employment for a period of at least 3 years.
An aggregate of 0.8 million shares of common stock were issued during the first
quarter of 2003 from the exercise of stock options.
We apply APB Opinion No. 25 and related interpretations in accounting for our
stock-based compensation plans. FAS 123, if fully adopted, would change the
method for cost recognition on our stock-based compensation plans.
The following table illustrates the effect of stock-based employee compensation
costs on reported net income applicable to common shareowners and also
illustrates the effect on reported net income applicable to common shareowners
and earnings per share as if compensation cost for our grants under stock-based
compensation plans had been determined under FAS 123, for the quarterly periods
ended March 28, 2003, and March 29, 2002 (in millions, except per share data):
QUARTER ENDED
---------------------
MARCH 28, MARCH 29,
2003 2002
--------- ---------
Net income applicable to common shareowners before
effects of stock-based employee compensation
costs included in net income, net of tax.............. $ 29 $ 11
Deduct: Total stock-based employee compensation
costs, net of tax, included in net income
applicable to common shareowners...................... (2) (2)
----- -----
Net income applicable to common shareowners, as
reported.............................................. 27 9
Deduct: Incremental stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax............................ (14) (10)
----- -----
Net income (loss) applicable to common
shareowners, pro forma................................ $ 13 $ (1)
===== =====
Net income (loss) per share applicable to common
shareowners:
Basic and diluted - as reported..................... $0.06 $0.02
===== =====
Basic and diluted - pro forma....................... $0.03 $ --
===== =====
-8-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - DERIVATIVES
We use certain risk management instruments to manage our interest rate and
foreign exchange exposures. These instruments are accounted for as fair value
and cash flow hedges, as appropriate, in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended.
During the quarter, we experienced ineffectiveness resulting from cash flow
hedges of international raw materials purchases, resulting in a loss in other
income of less than $1 million. We enter into certain nonfunctional currency
borrowings to hedge net investments in international subsidiaries. During
the first quarter of 2003, the net amount recorded in comprehensive income
(loss) related to these borrowings was a loss of approximately $27 million.
NOTE I - RELATED PARTY TRANSACTIONS
The following table presents amounts included in the income statements for
transactions with The Coca-Cola Company (TCCC) in millions:
QUARTER ENDED
---------------------
MARCH 28, MARCH 29,
2003 2002
--------- ---------
Net operating revenues:
Fountain syrup and packaged product sales............. $ 101 $ 85
Cooperative trade arrangements with customers......... (58) (74)
Dispensing equipment repairs.......................... 12 13
Other transactions.................................... 4 1
----- -----
$ 59 $ 25
===== =====
Cost of sales:
Purchases of syrup and concentrate.................... $(959) $(852)
Purchases of sweetener................................ (72) (72)
Purchases of finished products........................ (119) (98)
Marketing support funding............................. 193 177
Cold drink equipment placement funding................ 17 13
Cost recovery from sale of hot fill
production facility................................. 8 --
----- -----
$(932) $(832)
===== =====
Selling, delivery, and administrative expenses:
Operating expense reimbursements:
To TCCC........................................... $ (4) $ (4)
From TCCC......................................... 9 9
----- -----
$ 5 $ 5
===== =====
-9-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - RELATED PARTY TRANSACTIONS (CONTINUED)
In the first quarter of 2003, we reached agreement with TCCC modifying our Sales
Growth Initiative agreement (SGI) for 2003 and beyond. Under the amended
agreement, funding for 2003 will be $200 million. In addition, the amendment
outlines that each company will retain its respective cost savings generated
from future system efficiency initiatives.
Of the $200 million to be received in 2003, $30 million is being recognized as
sales are achieved. The remaining $170 million "Volume Growth Funding" is earned
as we attain mutually established sales volume growth rates for products owned
and distributed by The Coca-Cola Company. The annual and quarterly target
minimums are established for each program year through mutual agreement with
TCCC. Sales volume growth is determined through a formula with adjustments for
brand conversions, brand acquisitions, and new brand introductions. In applying
the terms of the SGI agreement to first quarter 2003 volume performance, we
recognized 25% of the 2003 Volume Growth Funding, or approximately $43 million.
The SGI agreement may 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 any such quarterly cancellation, all other provisions of the agreement will
remain in full force and effect.
The agreement provides for refunds of volume growth funding advances should we
not attain specified minimum sales volume growth targets and upon the failure of
performance by either party in specified circumstances. Accordingly, should we
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.
In the first quarter of 2003, we sold a hot fill plant in Truesdale, Missouri to
TCCC for approximately $58 million, realizing cost recoveries for operating,
depreciation, and carrying costs of $8 million as a reduction of cost of sales.
NOTE J - GEOGRAPHIC OPERATING INFORMATION
We operate in one industry: the marketing, distribution, and production of
liquid nonalcoholic refreshments. On March 28, 2003, we operated in 46 states in
the United States, the District of Columbia, all 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).
-10-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - GEOGRAPHIC OPERATING INFORMATION (CONTINUED)
The following presents net operating revenues for the quarters ended March 28,
2003 and March 29, 2002 and long-lived assets as of March 28, 2003 and December
31, 2002 by geographic territory (in millions):
2003 2002
------------------------ -------------------------
NET LONG- NET LONG-
OPERATING LIVED OPERATING LIVED
REVENUES ASSETS REVENUES(C) ASSETS
--------- ------- ----------- -------
North American........ $2,725 $16,905 $2,696 $16,918
European(A)(B)........ 942 4,814 770 4,613
------ ------- ------ -------
Consolidated.......... $3,667 $21,719 $3,466 $21,531
====== ======= ====== =======
We have no material amounts of sales or transfers between our North American and
European territories and no significant United States export sales.
(A) Great Britain contributed approximately 48% of European net operating
revenues for the first quarter of 2003 and 2002.
(B) At March 28, 2003 and December 31, 2002, Great Britain comprised
approximately 65% of European long-lived assets.
(C) To conform to the current year presentation, approximately $153 million
and $36 million of marketing support, in North America and Europe
respectively, previously included in net operating revenues, have been
classified as reductions of cost of sales, and $13 million of payments
for dispensing equipment repair services in North America, previously
classified in selling, delivery, and administrative expenses, have
been classified as net operating revenues under EITF 02-16.
NOTE K - RESTRUCTURING AND OTHER CHARGES
At December 31, 2002, our restructuring charge accrual, recorded for North
America in 2001 and Great Britain in 2002, was approximately $17 million.
During first quarter 2003, payments totaling approximately $4 million were made
leaving a balance of approximately $13 million at March 28, 2003.
-11-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L - 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):
QUARTER ENDED
---------------------
MARCH 28, MARCH 29,
2003 2002
--------- ---------
Net income ........................................... $ 28 $ 10
Preferred stock dividends ............................ 1 1
----- -----
Net income applicable to common shareowners .......... $ 27 $ 9
===== =====
Basic average common shares outstanding .............. 452 447
Effect of dilutive securities:
Stock compensation awards ......................... 8 6
----- -----
Diluted average common shares outstanding ............ 460 453
===== =====
Basic and diluted net income per share
applicable to common shareowners..................... $0.06 $0.02
===== =====
The Great Plains Series preferred stock, detailed in Note F, is not included in
our computation of diluted earnings per share in 2003 or 2002 because the
effect would be antidilutive.
NOTE M - COMPREHENSIVE INCOME (LOSS)
The following table (in millions) presents a calculation of comprehensive income
(loss), comprised of net income and other adjustments. Other adjustments 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 qualifying as cash flow hedges. We
provide income taxes on currency items, except for income taxes on the impact of
currency translations because earnings from international subsidiaries are
considered to be indefinitely reinvested.
QUARTER ENDED
---------------------
MARCH 28, MARCH 29,
2003 2002
--------- ---------
Net income............................................ $ 28 $ 10
Currency translations, net of tax..................... 137 (35)
Hedges of net investments, net of tax................. (27) 18
Unrealized (loss) gain on securities, net of tax...... (6) 5
Reclassification adjustments for gains on
securities included in net income, net of tax....... (2) --
Unrealized gain on cash flow hedges, net of tax....... 5 4
Reclassifications into earnings on cash flow
hedges, net of tax.................................. (7) (3)
---- -----
Net adjustments to derive comprehensive income
(loss).............................................. 100 (11)
---- -----
Comprehensive income (loss)........................... $128 $ (1)
==== =====
-12-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE N - COMMITMENTS AND CONTINGENCIES
In North America, we purchase PET (plastic) bottles from manufacturing
cooperatives. We have guaranteed payment of up to $262 million of indebtedness
owed by these manufacturing cooperatives and others to third parties. At March
28, 2003 and December 31, 2002, these cooperatives and others had approximately
$182 million and $158 million, respectively, of indebtedness which we guaranteed
to third parties. We hold no assets as collateral against these guarantees and
no contractual recourse provisions exist under the guarantees that would enable
us to recover amounts we guarantee, in the event of an occurrence of a
triggering event under these guarantees. These guarantees, which expire at
varying dates through 2014, arose as a result of our ongoing business
relationship with the third parties. No liability is recorded for our obligation
under these guarantees as we consider the risk of default associated with these
guarantees to be remote.
In addition, we have issued letters of credit, principally under self-insurance
programs, aggregating approximately $325 million.
We recognize funding previously received under the Jumpstart programs with TCCC
as cold drink equipment is placed and over the period we have the potential
requirement to move equipment. Under the programs, we agree to certain
performance and reporting provisions. Should provisions of the program not be
satisfied, and alternative solutions not be agreed upon, the contract allows
TCCC to pursue a partial refund of amounts previously paid. No refunds have ever
been paid under this program, and we believe the probability of a partial refund
of amounts previously paid under the program is remote. We believe we would in
all cases resolve any matters that might arise with TCCC.
Our tax filings are routinely subjected to audit by tax authorities in most
jurisdictions where we 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 or audits which
may lead to assessments involving certain of our subsidiaries, including
subsidiaries in Canada and France, that may not be resolved for many years. We
believe we have substantial defenses to the questions being raised and intend to
pursue all legal remedies available if we are unable to reach a resolution with
the authorities. We believe we have 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.
On April 23, 2003, the United States Bankruptcy Court for the Northern District
of Illinois entered an order confirming the plan of reorganization for Kmart
Corporation (Kmart). In that plan, all avoidance actions for the recovery of
prepetition payments from the unsecured creditors, including actions to recover
preferences, were waived and released. Therefore, we have no potential exposure
to Kmart for the repayment of preferential transfers.
Our business practices are being reviewed by the European Commission in various
jurisdictions for alleged abuses of an alleged dominant position under Article
82 of the EU Treaty. We do not believe we have a dominant position in the
relevant markets, or that our 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 us when it might reach any conclusions.
Our California subsidiary has been sued by several current and former employees
over alleged violations of state wage and hour rules. Our subsidiary continues
to investigate the claims, and at this time it is not possible to predict
-13-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE N - COMMITMENTS AND CONTINGENCIES (CONTINUED)
the outcome. Our subsidiary is defending against the claims vigorously.
We have filed suit against two of our 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, CCE 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 a distributor of
competing beverage products. These distributors sued alleging that CCE and TCCC
engaged in unfair marketing practices. We are appealing the decision and believe
there are substantial grounds for appeal. The complaint of four remaining
plaintiffs continues in discovery. It is impossible to predict at this time the
final outcome of our appeal in this matter or the ultimate costs under all of
the complaints.
We are 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 our financial
position, results of operations, or liquidity.
-14-
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS SUMMARY AND OBJECTIVES
Coca-Cola Enterprises Inc. (CCE) is the world's largest marketer, producer, and
distributor of products of The Coca-Cola Company (TCCC). We also distribute
other beverage brands in select markets. We operate in 46 states in the United
States, the District of Columbia, all 10 provinces of Canada, and in portions of
Europe, including Belgium, continental France, Great Britain, Luxembourg,
Monaco, and the Netherlands.
OUTLOOK
We expect total volume growth of approximately 3% for 2003, with North American
volume growth of 2% to 3% and volume growth in Europe of 4% to 6%. Full-year
2003 earnings per share is expected to total $1.15 to $1.22, a 12% to 18%
growth over 2002 earnings per share of $1.03, excluding one-time tax benefits of
$0.04. We expect to achieve modest acceleration in the pace of our North
American pricing improvement beyond the 1 1/2 percent we achieved in first
quarter 2003.
We anticipate we will continue to grow volume in 2003 as we benefit from new
brands and packages such as diet Vanilla Coke, Sprite ReMix, and Fridge Pack.
Our brand development activity includes the continued benefit of Vanilla Coke,
diet Vanilla Coke, and Minute Maid Lemonade Light and Pink line extensions. We
will also introduce 24-ounce multipacks for both carbonated soft drinks and
Dasani and a new 24-ounce sports bottle for Dasani. Introduction of the Fridge
Pack package is expected to continue through the end of 2003.
In the first quarter of 2003, we amended the terms of the Sales Growth
Initiative (SGI) agreement for 2003 and beyond. Under the amended agreement,
funding from TCCC for 2003 will be $200 million, $50 million higher than the
funding received under the agreement in 2002. In addition, the amendment
outlines that each company will retain its respective cost savings generated
from future system efficiency initiatives.
Project Pinnacle, our multi-year effort to redesign business processes,
continues with the objective of enhancing shareowner value by (i) developing
standard global processes, (ii) increasing information capabilities, and (iii)
providing system flexibility. The project covers all functional areas of our
business and is staffed with representatives from both Europe and North America.
We anticipate implementation will encompass a five-year period that began in
2002. Including the costs of our internal resources assigned to the project, we
project we will spend approximately $145 million in 2003, $95 million of which
will be capital costs. The estimated capital costs of this project total
approximately $215 million.
In first quarter 2003, we continued implementing our consolidation of certain
administrative processes into a single shared services center to support our
North American business. Transfer of all financial accounting functions to the
shared services center is expected to be completed by August 2003. This
consolidation has resulted in cost savings via improved efficiencies and
enhanced consistency in practices. Another significant benefit is the improved
information delivery accruing from the implementation of common processes and
the deployment of integrated systems technology.
-15-
In late 2002, we announced the formation of Coca-Cola Bottlers' Sales and
Services Company (CCBSS). CCBSS will increase cooperation among North American
Coca-Cola bottlers, thereby increasing revenues and reducing operating costs in
the entire North American Coca-Cola system. We do not anticipate that CCBSS will
have a significant impact on our 2003 results.
Management's Discussion and Analysis should be read in conjunction with our
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
Our operating results in the first 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. Our reported results, including those of previous periods, reflect
our adoption of Emerging Issues Task Force (EITF) No. 02-16, "Accounting by a
Customer (Including a Reseller) for Cash Consideration Received from a Vendor,"
which affects how we classify payments from vendors.
In the first quarter of 2003, net income rose to $27 million, or $0.06 per
diluted common share, which included (i) a cost recovery from the sale of a
manufacturing facility to TCCC of $8 million ($0.01 per diluted common share),
(ii) a reduction in interest expense of $8 million from a retroactive adjustment
on certain interest rate swap agreements from declining interest rates ($0.01
per diluted common share), and (iii) a gain of $3 million from the sale of an
investment. We reported net income of $0.02 per diluted common share for the
same quarter last year.
Our decrease in operating income for first quarter 2003 versus first quarter
2002 results from compressed operating margins. Operating margins declined
slightly because of certain higher operating expenses and depreciation costs,
partially offset by favorable foreign currency exchange rate movements and
increased funding under the SGI agreement with TCCC.
Continued growth in Coca-Cola trademark brands, non-carbonated beverages, and
water, offset by the shift of the Easter holiday, contributed to North American
volume growth of 1 1/2 percent. Strong volume increases in Great Britain and
France contributed to volume growth in Europe of 5 1/2 percent. First quarter
2003 volume, as compared to the prior year, was negatively impacted by
approximately 1% as a result of the Easter holiday occurring in the second
quarter in 2003 versus the first quarter in 2002.
Consolidated bottle and can net price per case increased 5 1/2 percent for
first-quarter 2003 when compared to the same period in 2002. When we exclude the
effect of currency exchange rate movements, consolidated net pricing per case
was up 1 1/2 percent in the first quarter over prior year. North American
pricing improvement efforts which began in fall 2002 contributed to our increase
in pricing. Consolidated cost of goods per case was essentially flat versus
prior year on a currency-neutral basis, including the effect of the sale of the
manufacturing facility to TCCC.
Net unit pricing per case in each operating group, excluding the impact of
currency exchange rate changes, increased 1 1/2 percent in North America and 1%
in Europe for first quarter 2003 as compared to first quarter 2002. Net price
per case is the invoice price charged to retailers less any promotional
allowances.
-16-
Our reported first-quarter 2003 net operating revenues increased 6% to
approximately $3.7 billion primarily reflecting the impact of improved volume
(approximately 2 1/2 percent), the increase in pricing, and favorable currency
exchange rate movement (approximately 2%). The percentage of consolidated
revenues derived from our North American and European groups was 74% and 26%,
respectively.
Under the provisions of EITF 02-16, cash consideration received by a customer
from a vendor is presumed to be a reduction of cost of sales. Under EITF 02-16,
our income statements classify marketing funding and cold drink equipment
placement funding received from The Coca-Cola Company and other licensors in
cost of sales. These payments were previously included in net operating revenues
as a reduction of discounts and allowances given to customers or as a reduction
in selling, delivery, and administrative expenses, respectively. Additionally,
amounts we received from TCCC for dispensing equipment repair services are
included as revenue under EITF 02-16. We have elected to apply EITF 02-16 to
all existing programs, and accordingly, all reported periods reflect this
classification requirement. For the quarter ended March 29, 2002, we
classified in cost of sales approximately $189 million of marketing
funding previously included in net operating revenues and approximately
$13 million of cold drink equipment placement funding previously included in
selling, delivery, and administrative expenses. We also classified in net
operating revenues, $13 million of dispensing equipment repair services
previously included in selling, delivery, and administrative expenses. Our
classifications under EITF 02-16 impact our reported and previously
reported net operating revenues, cost of sales, and selling, delivery, and
administrative expenses; however, the changes have no impact on operating
income or net income.
NET OPERATING REVENUES AND COST OF SALES
All per case amounts are calculated using physical cases. Our net price per case
changes are impacted by changes in our prices by package, changes in the volume
generated in each package, and differences in prices for different channels in
which those packages are sold. To the extent we are able to increase volume in
higher margin packages that are sold through higher margin channels, our bottle
and can net price per case will increase, potentially without an actual increase
to wholesale pricing. As an example, we typically charge a lower net price per
case and realize a lower gross profit per case on a physical case of 12-ounce
cans sold in a supermarket than on a case of 20-ounce bottles sold in
convenience stores, and therefore, an increase in the percentage of our volume
generated through 20-ounce bottles sold in convenience stores will positively
impact our net pricing per case.
Our consolidated bottle and can cost of sales per case increased 4 1/2 percent
on a reported basis but remained flat on a currency-neutral basis for
first-quarter 2003 compared to first-quarter 2002, reflecting a continued
favorable cost of sales environment. Under the terms of the SGI agreement,
concentrate price increases are a function of the wholesale price increase we
realize. For 2003 business, we expect concentrate prices to increase 1% in North
America and 2% in Europe.
We participate in various programs with customers to promote the sale of our
products. Among our programs with customers are arrangements under which
allowances may be earned by the customer for attaining agreed upon sales levels
and/or for participating in specific marketing programs. We also participate in
contractual arrangements providing us with pouring or vending rights in athletic
venues, school districts, or similar venues. Coupon programs and under-the-cap
promotions are also developed in various territories with the intent of
increasing sales by all customers. The cost of these programs, included as
-17-
deductions in net operating revenues, totaled approximately $379 million and
$337 million for the quarters ended March 28, 2003 and March 29, 2002,
respectively. The increase in the cost of these programs is principally due to
an increase in volume attributable to key customers.
Beginning in 2002, all costs in North America associated with customer marketing
arrangements, excluding certain specified customers, shifted to us and all costs
for local media programs in North America shifted to TCCC. We believe our
participation in these marketing programs is essential to ensuring continued
volume and revenue growth in our highly competitive marketplace.
VOLUME
Comparable volume results, as adjusted for one less selling day in first-quarter
2003, are shown in the following table:
1ST QUARTER 2003
COMPARABLE CHANGE
-----------------
Physical Case Bottle and Can Volume:
Consolidated............................................... 2 1/2%
North American Territories................................. 1 1/2%
European Territories....................................... 5 1/2%
Comparable volume growth is adjusted for a one-day reduction in the number of
selling days in the first quarter of 2002 to equal the same number of days as
the first quarter of 2003.
We maintained our volume momentum in the first quarter in both carbonated and
noncarbonated brands. Vanilla Coke, introduced in the second quarter of 2002,
and diet Vanilla Coke, introduced in the fourth quarter of 2002, were
significant brands influencing our first quarter volume growth for North
America. The continued growth of Dasani, up 21% in the quarter, and the
continued success of Minute Maid Light Lemonade and Minute Maid Pink Lemonade
also contributed to our first quarter volume growth for North America. 20-ounce
PET volume grew approximately 4% in North America for the first quarter of 2003
over the first quarter of 2002.
In Europe our carbonated brand volume increased approximately 5%. Fanta growth
of approximately 11% and the continued success of diet Coke with lemon and Coke
Light with Lemon also contributed to our substantial growth. Can volume grew
approximately 5% for Europe in the first quarter of 2003 over the first quarter
of 2002. 500 ml PET volume grew more than 16% in Europe for the first quarter of
2003 over the first quarter of 2002.
The Easter holiday occurred in mid-April in 2003 versus the end of March in
2002, moving the incremental volume generated by this holiday into the second
quarter in 2003. This factor decreased North American volume comparisons by
approximately 1 percentage point.
SELLING, DELIVERY, AND ADMINISTRATIVE EXPENSES
For first-quarter 2003, consolidated selling, delivery, and administrative
expenses as a percentage of net operating revenues increased to 36.6% from 35.3%
in first-quarter 2002. This percentage increase reflects an escalation in fuel
costs and certain higher depreciation costs in the quarter. The level of
-18-
selling, delivery, and administrative expenses is expected to moderate in
the second and third quarters of the year.
Depreciation expense increased approximately $24.6 million, from $230.0 million
to $254.6 million, for the first quarter of 2003 as compared to the first
quarter of 2002. Approximately $19.8 million of this increase was included in
selling, delivery and administrative expenses, with the balance included in cost
of sales. This increase is due to higher capital expenditures in recent years
and the effect of currency rate fluctuations.
At December 31, 2002, our restructuring charge accrual, recorded for North
America in 2001 and Great Britain in 2002, was approximately $17 million. During
first quarter 2003, payments totaling approximately $4 million were made
leaving a balance of approximately $13 million at March 28, 2003.
INTEREST EXPENSE
First-quarter 2003 net interest expense decreased from 2002 for the same period
due to a decline in our weighted average cost of debt, a decline in our average
debt balance, and an adjustment on interest rate swap agreements from declining
interest rates. The weighted average interest expense for the first quarter of
2003 was 4.9% compared to 5.6% and 5.5% for first-quarter and full-year 2002,
respectively.
INCOME TAXES
Our effective tax rates for the first quarter of 2003 and 2002 were
approximately 33% and 35%, respectively. Our first-quarter 2003 effective tax
rate reflects expected full-year 2003 pretax earnings combined with the
beneficial tax impact of certain international operations. Our effective tax
rate for the remainder of 2003 is dependent upon operating results and may
change if the results for the year are different from current expectations.
-19-
TRANSACTIONS WITH THE COCA-COLA COMPANY
The following table presents amounts included in the income statements for
transactions with The Coca-Cola Company (TCCC) in millions:
QUARTER ENDED
----------------------
MARCH 28, MARCH 29,
2003 2002
--------- ---------
Net operating revenues:
Fountain syrup and packaged product sales .......... $ 101 $ 85
Cooperative trade arrangements with customers ...... (58) (74)
Dispensing equipment repairs ....................... 12 13
Other transactions ................................. 4 1
----- -----
$ 59 $ 25
===== =====
Cost of sales:
Purchases of syrup and concentrate ................. $(959) $(852)
Purchases of sweetener ............................. (72) (72)
Purchases of finished products ..................... (119) (98)
Marketing support funding .......................... 193 177
Cold drink equipment placement funding ............. 17 13
Cost recovery from sale of hot fill
production facility .............................. 8 --
----- -----
$(932) $(832)
===== =====
Selling, delivery, and administrative expenses:
Operating expense reimbursements:
To TCCC .......................................... $ (4) $ (4)
From TCCC ........................................ 9 9
----- -----
$ 5 $ 5
===== =====
Upon adoption of EITF 02-16, marketing support previously included in net
operating revenues and cold drink equipment placement funding previously
included in selling, delivery, and administrative expenses have been classified
in cost of sales. In addition, dispensing equipment repair services
previously included in selling, delivery, and administrative expenses have been
classified in net operating revenues. The requirements for consideration of
funding as a cost reimbursement are stringent involving specifically
identifiable and incremental costs. Because of these requirements, our
funding and revenues received as support for our customer programs, the
costs of which are included in net operating revenues and selling, delivery,
and administrative expenses, are to be included in cost of sales.
For the first quarter of 2003, we recognized $193 million of marketing support
from TCCC as a reduction of cost of sales as compared to $177 million in the
first quarter of 2002. This increase is primarily due to the increase in SGI
funding from 2002 to 2003.
Support funding recognized under the Jumpstart programs with TCCC is reflected
as cold drink equipment placement funding above. In the first quarter of 2003,
we recognized approximately $17 million of Jumpstart funding as a reduction
-20-
of cost of sales as compared to $13 million for the first quarter of 2002. We
expect the Jumpstart funding to be earned in full-year 2003 to approximate $80
to $85 million.
Of the $200 million to be received by us in 2003 under the SGI agreement, $30
million is being recognized during 2003 as sales are achieved. The remaining
$170 million "Volume Growth Funding" is earned by attaining mutually established
sales volume growth rates for products owned and distributed by The Coca-Cola
Company. The annual and quarterly target minimums are established in each year
through mutual agreement with TCCC. Sales volume growth is determined through a
formula with adjustments for brand conversions, brand acquisitions, new brand
introductions, and performance in excess of the previous year's performance.
In applying the terms of the SGI agreement to first quarter 2003 volume
performance, we recognized 25% of the 2003 Volume Growth Funding, or
approximately $43 million.
The SGI agreement may 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 any such quarterly cancellation, all other provisions of the agreement will
remain in full force and effect.
The agreement provides for refunds of Volume Growth Funding advances should we
not attain specified minimum sales volume growth targets and upon the failure of
performance by either party in specified circumstances. Accordingly, should we
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.
In the first quarter of 2003, we sold a hot fill plant in Truesdale, Missouri to
TCCC for approximately $58 million, realizing cost recoveries for operating,
depreciation, and carrying costs of $8 million as a reduction of cost of sales.
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 March 28, 2003, we had approximately $3.7 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) $1.3 billion in debt securities available under a Canadian
Medium Term Note Program, and (iii) $2.2 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 registration statement with the
Securities and Exchange Commission in October 2002, which when effective, will
-21-
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 facilities. At March 28, 2003 we had
approximately $2.1 billion outstanding in commercial paper, and approximately
$3.7 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 first-quarter 2003, our
debt portfolio was 61% fixed rate debt and 39% floating rate debt.
SUMMARY OF CASH ACTIVITIES
Cash and cash investments decreased $52 million during the first quarter of 2003
from net cash transactions. Our primary uses of cash were for debt payments
totaling $292 million and capital expenditures totaling $208 million. Our
primary source of cash for first-quarter 2003 was proceeds from the issuance of
debt aggregating $611 million.
Operating Activities: Operating activities resulted in $219 million of net cash
used during first-quarter 2003 compared to $1 million of net cash used during
the first quarter of 2002. The increase in the use of cash was primarily due to
the change in working capital. Of the net receivable of $53 million due from
TCCC at March 28, 2003, we collected approximately $43 million in early April
2003.
Investing Activities: Net cash used in investing activities resulted primarily
from our continued capital investments. We expect full-year 2003 capital
expenditures to total approximately $1.1 billion.
Financing Activities: We continue to refinance portions of our 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 currency translation rate changes, net of depreciation expense.
The increase in licensee intangible assets resulted primarily from currency
translation rate changes. The increase in long-term debt primarily resulted from
proceeds received and translation adjustments in excess of debt payments.
In the first quarter of 2003, changes in currencies, including currency
translations and hedges of net investments, resulted in a gain in comprehensive
income of $110 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
We recognize funding previously received under the Jumpstart programs with TCCC
as cold drink equipment is placed and over the period we have the potential
requirement to move equipment. Under the programs, we agree to certain
performance and reporting provisions. Should provisions of the program not be
satisfied, and alternative solutions not be agreed upon, the contract allows
TCCC to pursue a partial refund of amounts previously paid. No refunds have ever
been paid under this program, and we believe the probability of a partial refund
of amounts previously paid under the program is remote. We believe we would in
all cases resolve any matters that might arise with TCCC.
-22-
Our tax filings are routinely subjected to audit by tax authorities in most
jurisdictions where we 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 or audits
involving certain of our subsidiaries which may lead to assessments, including
subsidiaries in Canada and France, that may not be resolved for many years. We
believe we have substantial defenses to the questions being raised and intend to
pursue all legal remedies available if we are unable to reach a resolution with
the authorities. We believe we have 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.
On April 23, 2003, the United States Bankruptcy Court for the Northern District
of Illinois entered an order confirming the plan of reorganization for Kmart
Corporation (Kmart). In that plan, all avoidance actions for the recovery of
prepetition payments from the unsecured creditors, including actions to recover
preferences, were waived and released. Therefore, we have no potential exposure
to Kmart for the repayment of preferential transfers.
Our business practices are being reviewed by the European Commission in various
jurisdictions for alleged abuses of an alleged dominant position under Article
82 of the EU Treaty. We do not believe we have a dominant position in the
relevant markets, or that our 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 us when it might reach any conclusions.
Our California subsidiary has been sued by several current and former employees
over alleged violations of state wage and hour rules. Our subsidiary continues
to investigate the claims, and at this time it is not possible to predict the
outcome. Our subsidiary is defending against the claims vigorously.
We have filed suit against two of our 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, CCE 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 a distributor of
competing beverage products. These distributors sued alleging that CCE and TCCC
engaged in unfair marketing practices. We are appealing the decision and believe
there are substantial grounds for appeal. The complaint of four remaining
plaintiffs continues in discovery. It is impossible to predict at this time the
final outcome of our appeal in this matter or the ultimate costs under all of
the complaints.
We are 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 our financial
position, results of operations, or liquidity.
ACCOUNTING DEVELOPMENTS
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities, and Interpretation of ARB No. 51." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. We are currently evaluating the implications of
-23-
the adoption of FIN 46 on our financial position, cash flows, and results of
operations.
In December 2002, the FASB issued Statement No. 148 (FAS 148), "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123." FAS 148 amends, among other things, the disclosure
provisions of FAS 123 and APB 28, "Interim Financial Reporting." The additional
disclosures required under FAS 148 have been included in Note G, Stock-Based
Compensation Plans.
CAUTIONARY STATEMENTS
Certain expectations and projections regarding future performance we referenced
in this report are forward-looking statements. These expectations and
projections are based on currently available competitive, financial, and
economic data, along with our 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, an inability
to achieve cost savings, 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 investigation,
material changes in assumptions used in completing impairment analyses of
intangible assets 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, unfavorable
interest rate and currency fluctuations, competitive pressures that may cause
channel and product mix to shift from more profitable cold drink channels
and packages, weather conditions in markets we service, possible recalls
of products, unfavorable market performance on our pension plan assets, and
changes in debt rating. 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 73 of
our Annual Report for the fiscal year ended December 31, 2002.
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 67 of our Annual Report to Shareowners for the year ended December 31,
2002.
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ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this report, an evaluation was performed
of the effectiveness of the design and operation of our disclosure controls
and procedures. This evaluation was conducted under the supervision and
with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer. Based on that evaluation, our
Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures were effective in alerting them timely to
material information required to be included in our Exchange Act reports. There
have been no significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to the date we
carried out our evaluation.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2002, the City of Los Angeles, California filed a complaint against
eight named and ten unnamed defendants, seeking cost recovery and declaratory
relief for alleged contamination at various boat yards in the Port of Los
Angeles. BCI Coca-Cola Bottling Company of Los Angeles, our subsidiary, was
named as an alleged successor to the liabilities of a company that operated a
boat works business at the port between 1969 and 1974. Our subsidiary answered
the complaint in March 2003, denying liability.
In December 2002, the City of San Diego, California notified BCI Coca-Cola
Bottling Company of Los Angeles that it intended to pursue a civil enforcement
action based upon an alleged discharge of product into Chollas Creek from a can
crushing unit at the subsidiary's San Diego facility. A settlement offer
in excess of $100,000 was made in February 2003 to our subsidiary, which
is in the process of responding.
In April 2003, BCI Coca-Cola Bottling Company of Los Angeles was made a cash-out
settlement offer in excess of $100,000 to settle any liabilities arising out of
allegations that it sent petroleum-contaminated soil and waste water to the
Gibson Environmental Superfund Site in Bakersfield, California in the years
1990-1992. Our subsidiary has not yet responded to the settlement offer.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareowners was held on Friday, April 25, 2003 in
Wilmington, Delaware at which the following matters were submitted to a vote of
the shareowners of the Company:
(a) Votes cast (common and preferred) for or withheld regarding the election of
Directors for terms expiring in 2006:
Howard G. Buffett* 388,129,776 10,253,139
Marvin J. Herb 388,018,614 10,364,296
Steven J. Heyer 387,716,619 10,666,294
Jean-Claude Killy 385,704,510 12,678,403
Lowry F. Kline 387,961,897 10,412,016
* Mr. Buffett has stated that it is his intention to serve only one year of his
term.
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Additional Directors, whose terms of office as Directors continued after the
meeting, are as follows:
TERM EXPIRING IN 2004 TERM EXPIRING IN 2005
- --------------------- ----------------------------
John R. Alm John L. Clendenin
J. Trevor Eyton John E. Jacob
Gary P. Fayard Summerfield K. Johnston, Jr.
L. Phillip Humann Deval L. Patrick
Paula G. Rosput
(b) Votes cast (common and preferred) for or against, and the number of
abstentions and broker nonvotes for each other proposal brought before the
meeting are as follows:
BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
- ---------------------- ----------- ----------- ---------- ------------
Approval of the 2003
Executive Management
Incentive Plan 382,762,787 12,785,463 2,834,647 23
Ratification of the
Audit Committee
Appointment of
independent auditors 368,688,634 6,380,878 23,313,286 122
Shareowner proposal to
link executive stock
options to industry
peer group index 24,062,260 343,928,280 3,799,276 26,593,104
Shareowner proposal to
expense future stock
options 99,089,962 259,632,512 13,067,360 26,593,086
Shareowner proposal
for adoption of goals
for beverage container
recovery 15,350,850 341,268,037 15,170,956 26,593,077
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit (numbered in accordance with Item 601 of Regulation S-K):
EXHIBIT INCORPORATED BY REFERENCE
NUMBER DESCRIPTION OR FILED HEREWITH
- ------- ------------------------------------ -------------------------
12 Earnings to Combined Fixed Charges Filed herewith.
and Preferred Stock Dividends
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(b) Reports on Form 8-K:
During first-quarter 2003, the Company filed the following current reports on
Form 8-K:
DATE OF REPORT DESCRIPTION
- ----------------- ------------------------------------------------------
January 29, 2003 Press release reporting fourth-quarter 2002 and
full-year 2002 results.
March 27, 2003 Announcement of April 2, 2003 webcast of presentation
to analysts and investors.
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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: May 12, 2003 /s/ Patrick J. Mannelly
-------------------------------------------------
Patrick J. Mannelly
Senior Vice President and Chief Financial Officer
Date: May 12, 2003 /s/ Rick L. Engum
-------------------------------------------------
Rick L. Engum
Vice President, Controller and
Principal Accounting Officer
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CERTIFICATION
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 circumstances under
which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
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 registrants other certifying officers and I have indicated in this
quarterly report whether 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: May 12, 2003 /s/ Lowry F. Kline
----------------------
Lowry F. Kline
Chairman of the Board and
Chief Executive Officer
-30-
CERTIFICATION
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 circumstances under
which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
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 registrants other certifying officers and I have indicated in this
quarterly report whether 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: May 12, 2003 /s/ Patrick J. Mannelly
----------------------------
Patrick J. Mannelly
Senior Vice President and
Chief Financial Officer
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