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COCA-COLA ENTERPRISES INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 26, 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 September 26, 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.
(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.
454,902,272 Shares of $1 Par Value Common Stock as of October 27, 2003
================================================================================
COCA-COLA ENTERPRISES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 26, 2003
INDEX
Page
-------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Income Statements for the Quarters
ended September 26, 2003 and September 27, 2002..................................... 1
Condensed Consolidated Income Statements for the Nine Months
ended September 26, 2003 and September 27, 2002..................................... 2
Condensed Consolidated Balance Sheets as of September 26, 2003
and December 31, 2002............................................................... 3
Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 26, 2003 and September 27, 2002..................................... 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.............................. 35
Item 4. Controls and Procedures................................................................. 35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 36
Item 6. Exhibits and Reports on Form 8-K........................................................ 36
Signatures.......................................................................................... 38
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 26, September 27,
2003 2002
------------------ ------------------
Net Operating Revenues........................................................ $ 4,734 $ 4,328
Cost of sales, transactions with The Coca-Cola Company
$1,195 and $1,179, respectively.......................................... 2,778 2,548
-------- -------
Gross Profit.................................................................. 1,956 1,780
Selling, delivery, and administrative expenses................................ 1,432 1,339
-------- -------
Operating Income.............................................................. 524 441
Interest expense, net......................................................... 150 166
Other nonoperating (expense) income, net...................................... (2) 2
-------- -------
Income Before Income Taxes.................................................... 372 277
Income tax expense............................................................ 113 86
-------- -------
Net Income.................................................................... 259 191
Preferred stock dividends..................................................... - 1
-------- -------
$ 259 $ 190
Net Income Applicable to Common Shareowners................................... ======== =======
$ 0.57 $ 0.42
Basic Net Income Per Share Applicable to Common Shareowners................... ======== =======
$ 0.56 $ 0.42
Diluted Net Income Per Share Applicable to Common Shareowners................. ======== =======
$ 0.04 $ 0.04
Dividends Per Share Applicable to Common Shareowners.......................... ======== =======
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 26, September 27,
2003 2002
------------------ ------------------
Net Operating Revenues........................................................ $ 13,018 $ 12,028
Cost of sales, transactions with The Coca-Cola Company
$3,333 and $3,159, respectively.......................................... 7,616 7,081
--------- --------
Gross Profit.................................................................. 5,402 4,947
Selling, delivery, and administrative expenses................................ 4,172 3,834
--------- --------
Operating Income.............................................................. 1,230 1,113
Interest expense, net......................................................... 446 495
Other nonoperating income, net................................................ 4 3
--------- --------
Income Before Income Taxes.................................................... 788 621
Income tax expense............................................................ 241 205
--------- --------
Net Income.................................................................... 547 416
Preferred stock dividends..................................................... 2 2
--------- --------
$ 545 $ 414
Net Income Applicable to Common Shareowners................................... ========= ========
$ 1.20 $ 0.92
Basic Net Income Per Share Applicable to Common Shareowners................... ========= ========
$ 1.19 $ 0.91
Diluted Net Income Per Share Applicable to Common Shareowners................. ========= ========
$ 0.12 $ 0.12
Dividends Per Share Applicable to Common Shareowners.......................... ========= ========
See Notes to Condensed Consolidated Financial Statements.
- 2 -
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
September 26, December 31,
ASSETS 2003 2002
----------------- ---------------
(Unaudited)
Current
Cash and cash investments, at cost approximating market...................... $ 172 $ 68
Trade accounts receivable, less allowance reserves of $50 and $60,
respectively............................................................... 1,878 1,661
Amounts receivable from The Coca-Cola Company, net .......................... 76 20
Inventories:
Finished goods............................................................. 554 464
Raw materials and supplies................................................. 263 255
--------- ---------
817 719
Current deferred income tax assets........................................... 25 51
Prepaid expenses and other current assets.................................... 330 325
--------- ---------
Total Current Assets..................................................... 3,298 2,844
Property, Plant, and Equipment
Land......................................................................... 434 424
Buildings and improvements................................................... 1,958 1,869
Machinery and equipment...................................................... 10,337 9,552
--------- ---------
12,729 11,845
Less allowances for depreciation............................................. 6,434 5,638
--------- ---------
6,295 6,207
Construction in progress..................................................... 156 186
--------- ---------
Net Property, Plant, and Equipment......................................... 6,451 6,393
Goodwill........................................................................ 578 578
License Intangible Assets....................................................... 13,718 13,450
Long-Term Customer Contracts and Other Noncurrent Assets........................ 1,146 1,110
--------- ---------
$ 25,191 $ 24,375
========= =========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions except share data)
September 26, December 31,
LIABILITIES AND SHAREOWNERS' EQUITY 2003 2002
----------------- ---------------
(Unaudited)
Current
Accounts payable and accrued expenses........................................ $ 2,730 $ 2,588
Deferred cash payments from The Coca-Cola Company............................ 83 80
Current portion of long-term debt............................................ 1,184 787
--------- ---------
Total Current Liabilities................................................ 3,997 3,455
Long-Term Debt, Less Current Maturities......................................... 10,696 11,236
Retirement and Insurance Programs and Other Long-Term Obligations............... 1,339 1,372
Deferred Cash Payments from The Coca-Cola Company............................... 370 426
Long-Term Deferred Income Tax Liabilities....................................... 4,744 4,539
Shareowners' Equity
Preferred stock.............................................................. - 37
Common stock, $1 par value - Authorized - 1,000,000,000 shares;
Issued - 461,154,608 and 458,215,369 shares, respectively................. 461 458
Additional paid-in capital................................................... 2,598 2,581
Reinvested earnings.......................................................... 1,130 639
Accumulated other comprehensive income (loss)................................ (58) (236)
Common stock in treasury, at cost - 6,415,732 and 8,515,072 shares,
respectively.............................................................. (86) (132)
--------- ---------
Total Shareowners' Equity................................................ 4,045 3,347
--------- ---------
$ 25,191 $ 24,375
========= =========
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 26, September 27,
2003 2002
----------------- -----------------
Cash Flows From Operating Activities
Net income................................................................. $ 547 $ 416
Adjustments to reconcile net income to net cash derived from operating
activities:
Depreciation............................................................. 756 711
Amortization............................................................. 66 56
Deferred income tax expense.............................................. 167 133
Deferred cash payments from The Coca-Cola Company........................ (61) (64)
Pension contributions in excess of expense............................... (111) (34)
Net changes in current assets and current liabilities.................... (345) (128)
Other.................................................................... 51 14
--------- ---------
Net cash derived from operating activities................................. 1,070 1,104
Cash Flows From Investing Activities
Investments in capital assets.............................................. (702) (661)
Proceeds from fixed asset disposals, $58 from The Coca-Cola
Company in 2003......................................................... 83 9
Cash investments in bottling operations, net of cash acquired.............. (13) (26)
Other investing activities................................................. (43) (39)
--------- ---------
Net cash used in investing activities...................................... (675) (717)
Cash Flows From Financing Activities
Net increase (decrease) in commercial paper................................ 152 (406)
Issuances of debt.......................................................... 365 1,704
Payments on long-term debt................................................. (815) (1,021)
Cash dividend payments on common and preferred stock....................... (38) (38)
Cash received from stock option exercises.................................. 17 19
Cash received from settlement of interest rate swap........................ 28 -
--------- ---------
Net cash (used in) derived from financing activities....................... (291) 258
--------- ---------
Net Increase in Cash and Cash Investments..................................... 104 645
Cash and cash investments at beginning of period........................... 68 284
--------- ---------
Cash and Cash Investments at End of Period.................................... $ 172 $ 929
========= =========
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. (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."
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 $234 million and $649 million of direct marketing support from The
Coca-Cola Company (TCCC) and other licensors previously included in net
operating revenues, and approximately $28 million and $64 million of cold drink
equipment placement funding from TCCC previously included as a reduction in
selling, delivery, and administrative expenses for the quarter and nine months
ended September 27, 2002, respectively. We also classified in net operating
revenues $13 million and $38 million of net payments for dispensing equipment
repair services received from TCCC, previously included in selling, delivery,
and administrative expenses for the quarter and nine months ended September 27,
2002, respectively.
Note C - Seasonality of Business
Operating results for the third quarter and nine months ended September 26, 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.
- 6 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note D - Income Taxes
Our effective tax rate was 31% for the first nine months of 2003 and 33% for the
first nine months of 2002. These rates include the net benefit of settling
various income tax related items, offset by income tax accruals, of $11 million
in 2003 and $4 million in 2002. A reconciliation of the income tax provisions at
the statutory federal rate to our actual income tax provisions follows (in
millions):
Nine Months ended
----------------------------------------
September 26, September 27,
2003 2002
------------------ ------------------
U.S. federal statutory expense................................ $ 276 $ 217
State expense, net of federal expense......................... 12 6
Impact of lower taxes on European and Canadian
operations, net............................................ (54) (28)
Valuation allowance provision................................. 5 5
Nondeductible items........................................... 13 9
Settlement of tax items....................................... (11) (4)
----- -----
$ 241 $ 205
===== =====
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):
September 26, December 31,
2003 2002
------------------ ----------------
U.S. dollar commercial paper (weighted average rates of 1.1% and
1.4%)......................................................... $ 1,458 $ 1,415
Euro commercial paper (weighted average rates of 2.2% and 3.0%).. 312 242
Canadian dollar commercial paper (weighted average rate of 2.8%). 172 87
U.S. dollar notes due 2004-2037 (weighted average rate of 3.5%).. 4,034 4,059
Euro and pound sterling notes due 2003-2021 (weighted average
rates of 5.9% and 6.5%)(A).................................... 1,397 1,498
Canadian dollar notes due 2003-2009 (weighted average rates of
5.4% and 4.7%)(B)............................................. 401 536
U.S. dollar debentures due 2012-2098 (weighted average rate of
7.4%)......................................................... 3,783 3,783
U.S. dollar zero coupon notes due 2020 net of unamortized
discount of $469 and $478 (rate of 8.35%)..................... 160 151
Various foreign currency debt arrangements...................... 90 172
Additional debt.................................................. 73 80
-------- ---------
Total long-term debt $ 11,880 $ 12,023
======== =========
- 7 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note E - Long-Term Debt (continued)
(A) In May 2003, a British pound sterling note of approximately $276 million
matured and approximately $276 million in British pound sterling
borrowings were issued. In February 2003, approximately $157 million in
Eurobonds matured; short-term borrowings of approximately $283 million
were issued and used to pay off debt. In January 2003, approximately $27
million of French franc notes matured.
(B) In March 2003, approximately $65 million in Canadian dollar notes matured.
In July 2003, approximately $129 million in Canadian dollar notes matured.
At September 26, 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 September 26, 2003 and December 31, 2002, we had $3.3 billion and $3.2
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
September 26, 2003, we had no short-term borrowings outstanding under domestic
and international credit facilities. At December 31, 2002, we had $53 million of
short-term borrowings outstanding under these facilities.
On September 29, 2003, we issued $500 million under registration statements with
the Securities and Exchange Commission. This debt issuance was comprised of $250
million of 2.5% notes due 2006 and $250 million of 4.25% notes due 2010.
Proceeds were used to pay down commercial paper as we took advantage of the low
interest rate environment to fix a greater portion of our debt portfolio.
After the September 29, 2003 issuances, we had $6.7 billion of amounts available
under our public debt facilities which could be used for long-term financing,
refinancing of debt maturities, and refinancing of commercial paper. After the
September 29, 2003 issuances, we had available for issuance (i) $3.2 billion
available under registration statements with the Securities and Exchange
Commission, (ii) $2.1 billion in debt securities under a Euro Medium-Term Note
Program, and (iii) $1.4 billion ($2.0 billion Canadian) in Canadian dollar debt
securities under a Canadian Medium-Term Note Program. The registration statement
we filed with the Securities and Exchange Commission in October 2002 to increase
the amounts of registered debt securities available for issuance by $3.5 billion
became effective in August 2003.
Aggregate maturities of long-term debt for the five twelve-month periods
subsequent to September 26, 2003 and thereafter are as follows (in millions):
2004 - $1,184; 2005 - $2,227; 2006 - $743; 2007 - $866; 2008 - $297; and
thereafter - $6,563.
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 $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 instrument due September
30, 2009. The fair value settlement will be amortized over the
- 8 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note E - Long-Term Debt (continued)
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
In connection with the 1998 acquisition of Great Plains Bottlers and Canners,
Inc., we issued 401,528 shares of $1 par value voting convertible preferred
stock ("Great Plains Series"). Prior to 2003, 35,000 shares of the Great Plains
Series were converted into 154,778 shares of common stock. During the third
quarter of 2003, the remaining 366,528 outstanding preferred shares were
converted into 2,119,518 shares of common stock from treasury stock.
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 nine months 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 also granted 1.24 million shares of restricted stock and 77,000 restricted
stock units to certain employees during the first nine months of 2003. These
awards vest upon continued employment for a period of at least 3 years.
An aggregate of 1.6 million shares of common stock were issued during the first
nine months 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.
- 9 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note G - Stock-Based Compensation Plans (continued)
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 quarters and nine
months ended September 26, 2003 and September 27, 2002 (in millions, except per
share data):
Quarter ended Nine Months ended
---------------------------------------- --------------------------------------
September 26, September 27, September 26, September 27,
2003 2002 2003 2002
------------------- -------------------- ------------------ ------------------
Net income applicable to common
shareowners before effects of
stock-based employee compensation
costs included in net income, net
of tax............................ $ 261 $ 191 $ 551 $ 418
Deduct: Total stock-based employee
compensation expense, net of tax,
included in net income applicable
to common shareowners............. (2) (1) (6) (4)
------- --------- -------- -------
Net income applicable to common 259 190 545 414
shareowners, as reported..........
Deduct: Incremental
stock-based employee compensation
expense determined under fair
value based method for all
awards, net of tax................ (16) (10) (46) (31)
------- --------- -------- -------
Pro forma net income applicable to
common shareowners................ $ 243 $ 180 $ 499 $ 383
======= ========= ======== =======
Net income per share
applicable to common
shareowners:
Basic - as reported............... $ 0.57 $ 0.42 $ 1.20 $ 0.92
======= ========= ======== =======
Basic - pro forma................. $ 0.53 $ 0.40 $ 1.10 $ 0.85
======= ========= ======== =======
Diluted - as reported............. $ 0.56 $ 0.42 $ 1.19 $ 0.91
======= ========= ======== =======
Diluted - pro forma............... $ 0.53 $ 0.39 $ 1.09 $ 0.84
======= ========= ======== =======
- 10 -
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, under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended.
We enter into certain nonfunctional currency borrowings to hedge net investments
in international subsidiaries. During the first nine months of 2003, the net
amount recorded in comprehensive income (loss) related to these borrowings was a
loss of approximately $46 million.
- 11 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note I - Related Party Transactions
The following table presents transactions with The Coca-Cola Company (TCCC) in
millions for the periods presented:
Quarter ended Nine Months ended
------------------------------------- -------------------------------------
September 26, September 27, September 26, September 27,
2003 2002 2003 2002
----------------- ------------------ ------------------ ------------------
Amounts affecting net operating revenues:
Fountain syrup and packaged product
sales............................... $ 137 $ 100 $ 368 $ 285
Dispensing equipment repair services.. 13 13 40 38
Other transactions.................... 3 1 11 3
-------- --------- -------- ---------
$ 153 $ 114 $ 419 $ 326
======== ========= ======== =========
Amounts affecting cost of sales:
Purchases of syrup and concentrate.... $ (1,207) $ (1,186) $ (3,397) $ (3,245)
Purchases of sweetener................ (82) (94) (238) (236)
Purchases of finished products........ (155) (145) (414) (349)
Marketing support funding earned...... 229 218 647 607
Cold drink equipment placement
funding earned...................... 20 28 61 64
Cost recovery from sale of hot-fill
production facility................. - - 8 -
-------- --------- -------- ---------
$ (1,195) $ (1,179) $ (3,333) $ (3,159)
======== ========= ======== =========
Amounts affecting selling,
delivery, and administrative
expenses:
Marketing programs $ 1 $ - $ 2 $ -
Operating expense reimbursements:
Payable to TCCC.................... (4) (4) (12) (13)
Due from TCCC...................... 8 9 26 26
-------- --------- -------- ---------
$ 5 $ 5 $ 16 $ 13
======== ========= ======== =========
- 12 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note I - Related Party Transactions (continued)
Of the $200 million available to be earned by us in 2003 under the Sales Growth
Initiative (SGI) agreement with TCCC, $30 million is being recognized as sales
are achieved. The remaining $170 million "Volume Growth Funding" is earned by
attaining mutually established sales volume growth targets for brands owned by
The Coca-Cola Company. The annual and quarterly target minimums are established
for each program year through mutual agreement with TCCC based on expected sales
volume. 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. If these minimum targets are not
met, the SGI agreement provides for penalties of $1 per equivalent case that are
offset against the Volume Growth Funding of $170 million available under the
program. Under the SGI agreement, quarterly funding commitments are advanced at
the beginning of each quarter less penalties from any year-to-date shortfall to
targets. We currently expect we will earn $130 million of the $170 million
"Volume Growth Funding" available to us under the SGI agreement for 2003 after
adjustments for penalties.
In applying the terms of the SGI agreement to our volume performance for the
first nine months of 2003, we recognized approximately $39 million and $116
million of the 2003 Volume Growth Funding in the third quarter and first nine
months of 2003, respectively. Nine month 2003 target minimums were not achieved
resulting in an accrual of $11.5 million for penalties to be offset against
future funding payments.
We participate in cooperative trade marketing arrangements (CTM) for the U.S.
Coca-Cola system administered by TCCC. Beginning in 2002, we became responsible
for all costs of the program in our territories, except for a limited number of
specified customers. We transfer amounts to TCCC under the program for payment
to customers. Pursuant to these arrangements, amounts paid or payable to TCCC
for the nine months ended September 26, 2003 totaled $189 million.
Deferred cash payments from TCCC include amounts deferred under Jumpstart and
other miscellaneous programs.
Support funding recognized under the Jumpstart programs with TCCC is shown as
cold drink equipment placement funding in the table above. In the third quarter
of 2003, we recognized approximately $20 million of Jumpstart funding as a
reduction of cost of sales compared to $28 million for the third quarter of
2002. We recognized $61 million for the nine months ended September 26, 2003
compared to $64 million for the same period in 2002. We expect Jumpstart funding
earned for full-year 2003 will approximate $76 million.
We continue to work with TCCC to develop and implement initiatives designed to
achieve stronger marketing results, administrative efficiencies, and other
synergies in our respective companies.
Note J - Geographic Operating Information
We operate in one industry: the marketing, distribution, and production of
liquid nonalcoholic refreshments. On September 26, 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).
- 13 -
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 nine months ended
September 26, 2003 and September 27, 2002 and long-lived assets as of September
26, 2003 and December 31, 2002 by geographic territory (in millions):
2003 2002
---------------------------------- ----------------------------------
Net Long- Net Long-
Operating Lived Operating Lived
Revenues Assets Revenues(B) Assets
---------------- ---------------- ---------------- ----------------
North American.................... $ 9,409 $ 17,030 $ 9,201 $ 16,918
European(A)....................... 3,609 4,863 2,827 4,613
----------- ----------- ------------ -----------
Consolidated...................... $ 13,018 $ 21,893 $ 12,028 $ 21,531
=========== =========== ============ ===========
(A) Great Britain contributed approximately 48% and 50% of European net
operating revenues for the first nine months of 2003 and 2002,
respectively, and at September 26, 2003 and December 31, 2002,
represented approximately 63% and 65%, respectively, of European
long-lived assets.
(B) To conform to the current year presentation, approximately $523 million
and $126 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 $38 million of payments
for dispensing equipment repair services in North America previously
included in selling, delivery, and administrative expenses have been
classified as net operating revenues under EITF 02-16.
We have no material amounts of sales or transfers between our North American and
European territories and no significant United States export sales.
Note K - Restructuring and Other Charges
At December 31, 2002, the amount remaining to be paid for restructuring charges
recognized for North America in 2001 and Great Britain in 2002 was $17 million.
We made payments during the first nine months of 2003 totaling $11 million,
including all remaining amounts related to Great Britain's 2002 restructuring.
The remaining balance of $6 million at September 26, 2003 represents remaining
severance benefits to be paid.
- 14 -
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 Nine Months ended
-------------------------------------- --------------------------------------
September 26, September 27, September 26, September 27,
2003 2002 2003 2002
------------------ ------------------ ------------------ -------------------
Net income ......................... $ 259 $ 191 $ 547 $ 416
Preferred stock dividends........... - 1 2 2
------ ------ ------- -------
Net income applicable to common
shareowners...................... $ 259 $ 190 $ 545 $ 414
====== ====== ======= =======
Basic average common shares
outstanding...................... 454 450 453 449
Effect of dilutive securities:
Stock compensation awards........ 6 8 7 8
------ ------ ------- -------
Diluted average common shares
outstanding...................... 460 458 460 457
====== ====== ======= =======
Basic net income per share
applicable to common shareowners. $ 0.57 $ 0.42 $ 1.20 $ 0.92
====== ====== ======= =======
Diluted net income per share
applicable to common shareowners. $ 0.56 $ 0.42 $ 1.19 $ 0.91
====== ====== ======= =======
The impact of the Great Plains Series preferred stock prior to the conversion in
the third quarter of 2003, as discussed in Note F, is not included in our
computations of diluted earnings per share because the effect would be
antidilutive.
- 15 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 include
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, changes in the fair value of
certain derivative financial instruments qualifying as cash flow hedges, and
minimum pension liability adjustments, where applicable. We adjust for the
income tax effect on all currency items excluding the impact of currency
translations as earnings from subsidiaries domiciled outside of the U.S. are
determined to be indefinitely reinvested.
Quarter ended Nine Months ended
-------------------------------------- --------------------------------------
September 26, September 27, September 26, September 27,
2003 2002 2003 2002
------------------ ------------------ ------------------- ------------------
Net income........................... $ 259 $ 191 $ 547 $ 416
Currency translations................ (36) 124 236 166
Hedges of net investments, net of tax 7 (53) (46) (69)
Unrealized (losses) gains on
securities, net of tax............ (2) 2 (6) 5
Realized gains on securities
included in net income, net of tax - - (2) -
Unrealized (losses) gains on cash
flow hedges, net of tax........... - (22) 5 (27)
Realized (gains) losses on cash
flow hedges, net of tax........... (1) 18 (9) 21
-------- -------- --------- --------
Net change to derive comprehensive
income (loss) for the period...... (32) 69 178 96
-------- -------- --------- --------
Comprehensive income (loss).......... $ 227 $ 260 $ 725 $ 512
======== ======== ========= ========
- 16 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note N - Commitments and Contingencies
We guarantee debt and other obligations of certain third parties. In North
America, we guarantee repayment of indebtedness owed by PET (plastic) bottle
manufacturing cooperatives. We also guarantee repayment of indebtedness owed by
a vending partnership in which we have a limited partnership interest.
The following table presents amounts owed by third parties that we guarantee and
amounts outstanding on these guarantees as of September 26, 2003 and December
31, 2002:
Amounts Guaranteed Amounts Outstanding
--------------------------------------- --------------------------------------
Category Expiration September 26, 2003 December 31, 2002 September 26, 2003 December 31, 2002
- ----------------- --------------- ------------------- ------------------- ------------------- ------------------
Manufacturing
cooperatives..... 2014 $ 236 $ 236 $ 175 $ 138
Vending partnership. Renewable 25 25 19 19
Other............... Renewable 1 1 1 1
------- -------- -------- --------
$ 262 $ 262 $ 195 $ 158
======= ======== ======== ========
Should we determine under FASB Interpretation No. 46 (FIN 46) "Consolidation of
Variable Interest Entities, an Interpretation of ARB 51", currently required to
be implemented on these entities as of December 31, 2003, we are required to
consolidate the manufacturing cooperatives and vending partnership, our debt
balances will increase by the amounts then owed by these entities.
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 arose as a result of our ongoing business
relationships. No amounts are recorded for our obligations 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 as collateral for claims incurred
under self-insurance programs for workers' compensation and large deductible
casualty insurance programs aggregating $276 million and letters of credit
provided for operating activities aggregating $5 million.
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.
In addition, we are also the subject of an investigation by Belgian competition
law authorities for alleged infringement of competition laws in Belgium. These
proceedings are subject to further review and we intend to continue to
vigorously defend against an unfavorable outcome. At this time, it is not
possible for us to determine the ultimate outcome of this matter.
- 17 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note N - Commitments and Contingencies (continued)
Our California subsidiary has been sued by several current and former employees
over alleged violations of state wage and hour rules. Our California subsidiary
is vigorously defending against the claims but at this time it is not possible
to predict the outcome.
In 2000, CCE and TCCC were found by a Texas jury to be jointly liable in a
combined 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. The trial court's verdict was upheld by
the Texas Court of Appeals in July 2003; we and TCCC have applied to the Texas
Supreme Court for leave to appeal to that court. We believe our accruals are
adequate to cover the damages awarded by the trial court if its verdict is
allowed to stand. The claims of the three remaining plaintiffs in this case
remain to be tried and four additional competitors have filed similar claims
against us. We have not provided for any potential awards under these additional
claims. We intend to vigorously defend against these claims.
In June 2003 Riverwood International Corporation filed a patent infringement
suit against MeadWestvaco Corporation in the United States District Court for
the Northern District of Georgia. We currently hold a multi-year supply contract
with MeadWestvaco for the supply of paperboard cartons, including the cartons
known as the "fridge pack." Riverwood's suit seeks a preliminary injunction
enjoining MeadWestvaco from supplying us with fridge pack packaging.
MeadWestvaco has denied the material allegations of Riverwood's complaint and
has opposed the preliminary injunction. We have indemnification rights against
MeadWestvaco in the event we suffer monetary damages, and we have taken measures
to ensure that we will have sufficient packaging available for our cans if the
parties are unable to resolve the dispute and a preliminary injunction is
granted against MeadWestvaco.
In addition to these cases outlined above, 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 litigation matters,
management believes, based on discussions with counsel, that any ultimate
liability would not materially affect our financial position or liquidity.
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 programs 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 these programs, and we believe the probability of a partial
refund of amounts previously paid under the programs is remote. We believe we
would in all cases resolve any matters that might arise with TCCC.
- 18 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note N - Commitments and Contingencies (continued)
Under the Sales Growth Initiative (SGI) agreement with TCCC, we are eligible to
receive up to $170 million of "Volume Growth Funding" in 2003 which is to be
earned by attaining mutually established sales volume growth targets for brands
owned by The Coca-Cola Company. The annual and quarterly target minimums are
established for each program year through mutual agreements with TCCC based on
expected sales volume. 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. If these minimum
targets are not met, the SGI agreement provides for penalties of $1 per
equivalent case that are offset against the Volume Growth Funding of $170
million available under the program. Under the SGI agreement, quarterly funding
commitments are advanced at the beginning of each quarter less penalties from
any year-to-date shortfall to targets. We currently expect we will earn $130
million of the $170 million "Volume Growth Funding" available to us under the
SGI agreement for 2003 after adjustments for penalties.
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 our
subsidiary in Canada, that may not be resolved in the foreseeable future. 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 September 30, 2003, we reached a settlement agreement in principle related to
our claims against our insurance carriers for the losses we incurred in the 1999
Belgian recall. Under the agreement, we are to receive $47.5 million upon the
execution of a final settlement agreement in exchange for a release of our
claims. We expect this to occur in the fourth quarter of 2003. We do not
anticipate any additional recoveries associated with the product recall in
Belgium.
- 19 -
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 territories. 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
At the end of third-quarter 2003, we released 2003 operating results projections
that project (i) consolidated full-year sales volume growth of 1% to 2% in 2003,
(ii) operating income in a range of $1.46 billion to $1.48 billion in 2003,
compared to operating income of $1.36 billion in 2002, (iii) reported net income
applicable to common shareowners for full-year 2003 of approximately $603 to
$612 million, compared to reported net income applicable to common shareowners
of $491 million in 2002, and (iv) reported earnings per diluted common share in
a range of $1.31 to $1.33 in 2003, including a gain from the sale of a hot-fill
manufacturing facility to The Coca-Cola Company, and net favorable tax items
totaling $0.03 per share realized in the first nine months of 2003. These
projections exclude the impact of the Belgian recall settlement proceeds and
other potential fourth quarter events discussed below.
On September 30, 2003, we reached a settlement agreement in principle related to
our claims against our insurance carriers for the losses we incurred in the 1999
Belgian recall. Under the agreement, we are to receive $47.5 million upon the
execution of a final settlement agreement in exchange for a release of our
claims. We expect this to occur in the fourth quarter of 2003. We do not
anticipate any additional recoveries associated with the product recall in
Belgium. We are evaluating other one-time items that could occur in the
fourth-quarter that could reduce the impact on net income of these proceeds. Our
earnings projections do not include any impact from these settlement proceeds or
any impact resulting from other fourth quarter items that may offset this
positive impact on our projected earnings in fourth-quarter 2003.
Project Pinnacle, our multi-year effort to redesign business processes and
implement the SAP software platform is progressing favorably in achieving our
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. Our first stage
of financial systems implementation was completed for Canada in October 2003
with complete roll-out of financial processes in North America projected to
occur in third-quarter 2004. We anticipate our implementation of the initial
phase will be executed over a five-year period ending in 2006. Including the
costs of our internal resources assigned to the project, we project we will
spend approximately $125 million in 2003, $80 million of which will be capital
costs. The estimated capital costs of this project total approximately $215
million.
In third-quarter 2003, we continued migration of certain administrative,
financial, and accounting functions for all of our North American divisions into
a single shared services center. This consolidation has resulted in improved
efficiencies, enhanced consistency in practices, and improved information
delivery from common processes.
- 20 -
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 third quarter of 2003 reflect continued strong
year-over-year growth in Europe partially because of favorable weather
conditions, meaningful pricing initiatives in North America and Europe, and
moderating operating expense trends in North America. Third quarter 2003
currency-neutral bottle and can net price per case increased 1 1/2 % in North
America and 3 1/2 % in Europe over the same period last year.
For the third quarter of 2003, net income applicable to common shareowners
increased to $259 million, or $0.56 per diluted common share, including a $0.01
per share net benefit from the favorable resolution of tax items. This
represents an increase of approximately 36% over net income applicable to common
shareowners of $190 million for the same quarter last year. Operating income
increased 19% over third quarter 2002 results to $524 million for third quarter
2003, impacted by strong growth in our European operations, favorable pricing
results in both North America and Europe, and our ability to successfully manage
operating expenses.
We are applying EITF 02-16 to all existing programs and amounts within all
reported periods are classified consistently between periods. Upon adoption of
EITF 02-16 we classified as a reduction in cost of sales approximately $234
million and $649 million of marketing funding previously included in net
operating revenues and approximately $28 million and $64 million of cold drink
equipment placement funding previously included as a reduction in selling,
delivery, and administrative expenses for the third quarter and nine month
period ended September 27, 2002, respectively. We also classified in net
operating revenues $13 million and $38 million of net payments for dispensing
equipment repair services received from TCCC, previously included in selling,
delivery, and administrative expenses for the third quarter and nine month
period ended September 27, 2002, respectively.
On September 30, 2003, we reached a settlement agreement in principle related to
our claims against our insurance carriers for the losses we incurred in the 1999
Belgian recall. Under the agreement, we are to receive $47.5 million upon the
execution of a final settlement agreement in exchange for a release of our
claims. We expect this to occur in the fourth quarter of 2003. We do not
anticipate any additional recoveries associated with the product recall in
Belgium.
Net Operating Revenues
Our third quarter 2003 net operating revenues increased 9% to $4.7 billion. This
increase was primarily a result of favorable currency exchange rate movement
(4%), an increase in pricing (2 1/2%), and improved volume (2 1/2%). For the
first nine months of 2003, the percentage of consolidated net operating revenues
derived from our North American and European groups was 72% and 28%,
respectively. In the third quarter and first nine months of 2003, Great Britain
contributed approximately 48% of European revenues.
- 21 -
"Bottle and Can Net Pricing per Case" and "Currency-Neutral Bottle and Can Net
Pricing per Case" are provided to assist in evaluation of bottle and can pricing
trends in the marketplace and to distinguish the impact of foreign currency
exchange rate changes to our operations. Bottle and can net price per case is
based on the invoice price charged to customers reduced by promotional
allowances. Our bottle and can sales accounted for 91% of our net revenue for
the first nine months of 2003. The following table presents the reconciliation
of these measures to the change in net revenues per case for the third quarter
and the first nine months of 2003. All per case percentage changes are rounded
to the nearest 1/2% and are based on wholesale physical case volume.
Third-Quarter 2003 Change Nine-Months 2003 Change
------------------------------------- ---------------------------------------
North North
Total America Europe Total America Europe
----------- ------------- ----------- ----------- -------------- ------------
Change in Net Revenues per Case........ 6% 2 1/2% 15 1/2% 6% 2% 17 1/2%
Impact of excluding post-mix and
agency sales..................... - - - 1/2 1/2 1/2
-------- ------- -------- ------ ------ --------
Bottle and Can Net Pricing per Case.... 6% 2 1/2% 15 1/2% 6 1/2% 2 1/2% 18%
Impact of currency exchange rate
changes.......................... (3 1/2) (1) (12) (4) (1/2) (15 1/2)
-------- ------- -------- ------ ------ --------
Currency-Neutral Bottle and Can Net
Pricing per Case.................... 2 1/2% 1 1/2% 3 1/2% 2 1/2% 2% 2 1/2%
======== ======= ======== ====== ====== ========
We earn revenues from products when the product is delivered or when we collect
cash from vending machines. We earn funding from licensors as performance
measures are met. We earn service revenues for equipment maintenance and
production when services are performed.
Third quarter 2003 consolidated bottle and can net price per case increased 6%
from the same quarter last year. On a currency-neutral basis, this increase was
2 1/2 %. Bottle and can net pricing per case, excluding the impact of currency
exchange rate changes, increased 1 1/2% in North America and 3 1/2% in Europe
for the quarter. These increases were due to our continued commitment to pricing
initiatives in both North America and 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 for the purpose of
increasing sales by all customers. The cost of these programs, included as
deductions in net operating revenues, totaled approximately $496 million and
$445 million for the quarters ended September 26, 2003 and September 27, 2002,
respectively. The increase in the cost of these programs is principally due to
an increase in volume attributable to key customers.
Cost of Sales
"Bottle and Can Cost of Sales per Case" and "Currency-Neutral Bottle and Can
Cost of Sales per Case" are provided to assist in evaluating cost trends for
bottle and can products and to distinguish the impact of foreign currency
exchange rate changes to our operations. These
- 22 -
measures exclude the impact of fountain ingredient costs, as well as marketing
credits and Jumpstart funding in order to isolate the change in bottle and can
ingredient and packaging costs. The following table presents the reconciliation
between these measures and change in cost of sales per case for the third
quarter and the first nine months of 2003. All per case percentage changes are
rounded to the nearest 1/2% and are based on wholesale physical case volume.
Third-Quarter 2003 Change Nine-Months 2003 Change
------------------------------------- ---------------------------------------
North North
Total America Europe Total America Europe
---------- ------------ ------------- ------------ ------------ -------------
Change in Cost of Sales per Case....... 5 1/2% 2 1/2% 12% 5% 1% 15 1/2%
Impact of excluding bottle and can
marketing credits and Jumpstart
funding......................... (1) (1 1/2) - (1/2) (1/2) 1/2
Impact of excluding cost of
post-mix and agency sales....... 1/2 1/2 - 1 1/2 -
------- -------- ------- -------- ------ --------
Bottle and Can Cost of Sales per Case.. 5% 1 1/2% 12% 5 1/2% 1% 16%
Impact of currency exchange rate
changes......................... (4) (1) (12) (4 1/2) (1/2) (15 1/2)
------- -------- ------- -------- ------ --------
Currency-Neutral Bottle and Can Cost
of Sales per Case................... 1% 1/2% -% 1% 1/2% 1/2%
======= ======== ======= ======== ====== ========
Consolidated cost of sales per case increased 1% over the third quarter of 2002
on a currency-neutral basis. Our bottle and can cost of sales per case, on a
currency-neutral basis, has increased 1/2% in North America and remained flat in
Europe from the third quarter of 2002 to the third quarter of 2003. For the
first nine months of the year, our bottle and can cost of sales per case has
increased 1/2% in both North America and Europe, excluding the impact of
currency exchange rate changes. For 2003, we continue to expect concentrate
prices to increase 1% in North America and 2% in Europe.
Volume
Comparable volume results, as adjusted for one less selling day in the first
quarter of 2003 and the acquisition of Chaudfontaine in the second quarter of
2003, are reconciled to volume changes for the third-quarter and first
nine-month period of 2003 in the following table:
Third-Quarter 2003 Change Nine-Months 2003 Change
------------------------------------ --------------------------------------
North North
Total America Europe Total America Europe
---------- ------------ ----------- ------------ ------------ ------------
Change in Volume....................... 3 1/2% 1/2% 12% 2 1/2% 1/2% 9%
Impact of acquisitions............. (1) - (2) (1) (1/2) (2)
Impact of selling day shift........ - - - 1/2 1/2 1/2
------- ------- ------- ------- ------ ------
Comparable Bottle and Can Volume....... 2 1/2% 1/2% 10% 2% 1/2% 7 1/2%
======= ======= ======= ======= ====== ======
- 23 -
Comparable volume growth for the first nine months of 2003 reflects the impact
of a one-day reduction in the number of selling days in the first nine months of
2002 to equal the same number of days as the first nine months of 2003.
Comparable volume computations for both the third quarter and the first nine
months of 2002 are adjusted by including the additional volume attributable to
Chaudfontaine, acquired in June 2003.
Consolidated comparable bottle and can volume for the third quarter of 2003
increased 2 1/2% over the same quarter last year. Volume in North America was up
1/2%. Strong sales of Dasani, solid growth in our diet portfolio, and growth in
our lemon-lime category from the introduction of Sprite Remix were offset by
slower sales of flavored drinks and overcoming the extraordinary volume
generated by the introduction of Vanilla Coke in 2002. Strong volume increases
in Belgium, Great Britain, and France contributed to comparable volume growth in
Europe of 10%.
In North America, we continued to work through the hurdle of 2002 volume growth
created by strong Minute Maid performance and by the introduction of Vanilla
Coke. We benefited from very strong North American diet soft drink growth of 8%
in the quarter, with improvement from diet Coke, up 5%, diet Cherry Coke, with
volume more than double versus a year ago, and from diet Vanilla Coke, which has
performed very steadily since its introduction in late 2002. In flavored soft
drinks, Sprite Remix has proven a solid addition to our portfolio, with more
than a third of its volume in our 20-ounce package. In packaging, we are
expanding our distribution of 6-pack 24-ounce carbonated soft drink products
with good consumer response. We are also steadily moving forward with the
implementation of Fridge Pack throughout North America, which is now available
in markets constituting more than 75% of our volume. Full-year North American
volume is expected to remain essentially flat.
As discussed further in the following Contingencies section, in June 2003,
Riverwood International Corporation filed a patent infringement suit seeking a
preliminary injunction enjoining our supply of Fridge Pack packaging. We have
taken measures to ensure we will have sufficient packaging available for our
cans if the parties are unable to resolve the dispute and a preliminary
injunction is granted against MeadWestvaco.
Third quarter 2003 European volume benefited from favorable weather for much of
the quarter, success from the introductions of Vanilla Coke and diet Vanilla
Coke and the success of local marketing programs. Carbonated soft drink volume
for third quarter 2003 in Europe increased approximately 9% over third quarter
2002, with brand Coca-Cola growing 4%, diet Coke and Coca-Cola light growing
approximately 10%, and Fanta, our third largest brand in Europe growing more
than 11% on top of substantial growth in 2002. European volume is expected to
grow 5% to 6% for full year 2003.
- 24 -
Selling, Delivery, and Administrative Expenses
The following table presents selling, delivery, and administrative expenses as a
percentage of net operating revenues for the periods presented (in millions):
Quarter ended Nine Months ended
------------------------------------- -------------------------------------
September 26, September 27, September 26, September 27,
2003 2002 2003 2002
------------------ ------------------ ------------------ ------------------
Selling, Delivery, and
Administrative Expenses........ $ 1,432 $ 1,339 $ 4,172 $ 3,834
Net Operating Revenues............ $ 4,734 $ 4,328 $ 13,018 $ 12,028
Selling, Delivery, and
Administrative Expenses as a
percentage of Net Operating
Revenues....................... 30.2 % 30.9 % 32.0 % 31.9 %
The following table presents the impact of currency exchange rate changes on the
change in selling, delivery, and administrative expenses from prior year for the
periods presented:
Third Quarter Nine Months
2003 Change 2003 Change
------------------ ------------------
Reported Change in Selling, Delivery, and Administrative Expenses.......... 7 % 9 %
Impact of currency exchange rate changes.............................. (3) (3)
--------- ---------
Currency-Neutral Change in Selling, Delivery, and Administrative Expenses.. 4 % 6 %
========= =========
On a currency-neutral basis, the increases for the quarter and nine months of
2003, respectively, reflect our commitment to closely manage our costs and
moderate operating expense growth. The decline as a percentage of revenues in
third quarter 2003 results from our increase in net revenues for third quarter
2003.
Interest Expense
Net interest expense for the third quarter of 2003 decreased 10% from the same
period of 2002 to $150 million due to a decline in our weighted average cost of
debt and a decline in our average debt balance. The weighted average interest
rate for the first nine month period of 2003 was 5.0% compared to 5.5% for the
first nine months of 2002.
Income Taxes
Our effective tax rate was 31% for the first nine months of 2003 and 33% for the
first nine months of 2002. These rates include the net benefit of settling
various income tax related items, offset by income tax accruals, of $11 million
in 2003 and $4 million in 2002. Our effective tax rate for full-year 2003,
projected to be 31%, reflects expected full-year 2003 pretax earnings combined
with the net beneficial year-to-date items totaling $11 million and 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.
- 25 -
Transactions with The Coca-Cola Company
The following table presents transactions with The Coca-Cola Company (TCCC) in
millions for the periods presented:
Quarter ended Nine Months ended
------------------------------------- -------------------------------------
September 26, September 27, September 26, September 27,
2003 2002 2003 2002
----------------- ------------------ ------------------ ------------------
Amounts affecting net operating revenues:
Fountain syrup and packaged product
sales............................... $ 137 $ 100 $ 368 $ 285
Dispensing equipment repair services.. 13 13 40 38
Other transactions.................... 3 1 11 3
-------- --------- -------- ---------
$ 153 $ 114 $ 419 $ 326
======== ========= ======== =========
Amounts affecting cost of sales:
Purchases of syrup and concentrate.... $ (1,207) $ (1,186) $ (3,397) $ (3,245)
Purchases of sweetener................ (82) (94) (238) (236)
Purchases of finished products........ (155) (145) (414) (349)
Marketing support funding earned...... 229 218 647 607
Cold drink equipment placement
funding earned...................... 20 28 61 64
Cost recovery from sale of hot-fill
production facility................. - - 8 -
-------- --------- -------- ---------
$ (1,195) $ (1,179) $ (3,333) $ (3,159)
======== ========= ======== =========
Amounts affecting selling,
delivery, and administrative
expenses:
Marketing programs $ 1 $ - $ 2 $ -
Operating expense reimbursements:
Payable to TCCC.................... (4) (4) (12) (13)
Due from TCCC...................... 8 9 26 26
-------- --------- -------- ---------
$ 5 $ 5 $ 16 $ 13
======== ========= ======== =========
- 26 -
Of the $200 million available to be earned by us in 2003 under the Sales Growth
Initiative (SGI) agreement with TCCC, $30 million is being recognized as sales
are achieved. The remaining $170 million "Volume Growth Funding" is earned by
attaining mutually established sales volume growth targets for brands owned by
The Coca-Cola Company. The annual and quarterly target minimums are established
for each program year through mutual agreement with TCCC based on expected sales
volume. 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. If these minimum targets are not
met, the SGI agreement provides for penalties of $1 per equivalent case that are
offset against the Volume Growth Funding of $170 million available under the
program. Under the SGI agreement, quarterly funding commitments are advanced at
the beginning of each quarter less penalties from any year-to-date shortfall to
targets. We currently expect we will earn $130 million of the $170 million
"Volume Growth Funding" available to us under the SGI agreement for 2003 after
adjustments for penalties.
In applying the terms of the SGI agreement to our volume performance for the
first nine months of 2003, we recognized approximately $39 million and $116
million of the 2003 Volume Growth Funding in the third quarter and first nine
months of 2003, respectively. Nine month 2003 target minimums were not achieved
resulting in an accrual of $11.5 million for penalties to be offset against
future funding payments.
We participate in cooperative trade marketing arrangements (CTM) for the U.S.
Coca-Cola system administered by TCCC. Beginning in 2002, we became responsible
for all costs of the program in our territories, except for a limited number of
specified customers. We transfer amounts to TCCC under the program for payment
to customers. Pursuant to these arrangements, amounts paid or payable to TCCC
for the nine months ended September 26, 2003 totaled $189 million.
Deferred cash payments from TCCC include amounts deferred under Jumpstart and
other miscellaneous programs.
Support funding recognized under the Jumpstart programs with TCCC is shown as
cold drink equipment placement funding in the table above. In the third quarter
of 2003, we recognized approximately $20 million of Jumpstart funding as a
reduction of cost of sales compared to $28 million for the third quarter of
2002. We recognized $61 million for the nine months ended September 26, 2003
compared to $64 million for the same period in 2002. We expect Jumpstart funding
earned for full-year 2003 will approximate $76 million.
We continue to work with TCCC to develop and implement initiatives designed to
achieve stronger marketing results, administrative efficiencies, and other
synergies in our respective companies.
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Pensions and Other Postretirement Benefits
On September 12, 2003 the FASB issued an Exposure Draft related to Employers'
Disclosures about Pensions and Other Postretirement Benefits. When issued, the
new statement is expected to amend FASB Statements No. 87, 88, and 106 and
replace FASB Statement No. 132. The following disclosures are based on
recommendations included in the Exposure Draft. As provided by FAS 87, we
revalue pension liabilities annually. Pension expense for the current year is
based on the prior year-end valuation of liabilities and the expected average
value of pension assets. The following tables outline significant assumptions
used in the determination of pension obligations and expense:
Weighted-average assumptions used to determine benefit obligations at December
31:
Pension Benefits Other Benefits
-------------------- --------------------
2002 2001 2002 2001
-------- -------- --------- ---------
Discount Rate................... 6.8% 6.9% 7.0% 7.0%
Rate of compensation increase... 4.7% 4.8% - -
Weighted-average assumptions used to determine net cost for years ended December
31:
Pension Benefits Other Benefits
-------------------- --------------------
2003 2002 2003 2002
-------- -------- --------- ---------
Discount Rate..................... 6.8% 6.9% 7.0% 7.0%
Expected return on plan assets.... 8.4% 9.2% - -
Rate of compensation increase..... 4.7% 4.8% - -
Components of Net Periodic Pension Costs are as follows:
Quarter ended Nine Months ended
------------------------------------- -------------------------------------
September 26, September 27, September 26, September 27,
2003 2002 2003 2002
----------------- ------------------- ------------------ ------------------
Service cost............................ $ 20 $ 17 $ 61 $ 53
Interest cost........................... 28 26 86 76
Expected return on plan assets.......... (28) (31) (87) (93)
Amortization............................ 3 - 8 1
-------- -------- --------- --------
Net periodic benefit cost............... $ 23 $ 12 $ 68 $ 37
======== ======== ========= ========
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Pension assets of the North American and UK plans represent approximately 95% of
pension plan assets. Below is a summary of pension plan asset allocation of
those assets at the end of the third quarters of 2003 and 2002 along with
expected long-term rate of return by asset category.
Weighted-Average
Weighted Average Expected
Target Long-Term
Asset Category Allocation % of Plan Assets Rate of Return
- ---------------------------------------- ------------------- ------------------------------------ ------------------
September 26, September 26, September 27,
2003 2003(A) 2002
------------------- ----------------- ------------------
Equity Securities...................... 65% 68% 61% 8.7%
Fixed Income Securities................ 20 24 31 5.7
Real Estate............................ 5 3 4 9.6
Other.................................. 10 5 4 10.4
---------- --------- --------- --------
Total.................................. 100% 100% 100% 8.3%
========== ========= ========= ========
(A) The September 26, 2003 allocation of plan assets reflects the expected
allocation of the contribution of $155 million made on September 15, 2003.
The placement of that contribution is expected to be completed by December
31, 2003.
Our Fixed Income Securities portfolio is invested primarily in commingled funds
and managed in terms of overall return expectations rather than matching
duration against plan liabilities, therefore debt maturities are not significant
to the plan performance.
Pension contributions were $184 million and $70 million for the nine months
ended September 26, 2003 and September 27, 2002, respectively. Contributions for
full-year 2003 are expected to be approximately $190 million while contributions
for full-year 2002 were $76 million. Our policy is to fund the U.S. pension
plans at a level to maintain, within established guidelines, the IRS defined 90%
Current Liability Funded status. At January 1, 2003, the date of the most recent
calculation, all U.S. funded defined benefit pension plans reflected Current
Liability Funded status equal to or greater than 90%. In accordance with
calculation guidelines, the January 1, 2003 Current Liability Funded status
reflects the third quarter 2003 contributions as a receivable.
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.
After the September 29, 2003 $500 million issuances, we had $6.7 billion of
amounts available under our public debt facilities which could be used for
long-term financing, refinancing of debt maturities, and refinancing of
commercial paper. After the September 29, 2003 issuances, we had available for
issuance (i) $3.2 billion available under registration statements with the
Securities and Exchange Commission, (ii) $2.1 billion in debt securities under a
Euro Medium-
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Term Note Program, and (iii) $1.4 billion ($2.0 billion Canadian) in
Canadian dollar debt securities under a Canadian Medium-Term Note Program. The
registration statement we filed with the Securities and Exchange Commission in
October 2002 to increase the amounts of registered debt securities available for
issuance by $3.5 billion became effective in August 2003.
In addition, we satisfy seasonal working capital needs and other financing
requirements with short-term borrowings under our commercial paper programs,
bank borrowings, and various lines of credit in the countries in which we
operate. At September 26, 2003 we had approximately $1.9 billion outstanding in
commercial paper and approximately $3.3 billion available as a back-up to
commercial paper under 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. After the
September 29, 2003 $500 million issuances, our debt portfolio contained 70%
fixed rate debt and 30% floating rate debt.
Summary of Cash Activities
Cash and cash investments increased $104 million during the first nine months of
2003 from net cash transactions. Our primary sources of cash for the first nine
months of 2003 were operations, which provided $1,070 million, and proceeds from
the issuance of debt aggregating $517 million. Our primary uses of cash were
debt repayments totaling $815 million and capital expenditures totaling $702
million.
Operating Activities: Operating activities resulted in $1,070 million of net
cash provided during the first nine months of 2003 compared to $1,104 million
for the same period in 2002. Cash provided from operations was reduced by an
increase in pension contributions of $114 million for the nine months ended
September 26, 2003 as compared to the same period in 2002.
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. Exchange rate changes during the third quarter of 2003 resulted in a
decrease in long-term debt of $23 million.
FINANCIAL CONDITION
Net accounts receivable increased 13% from December 31, 2002 to $1,878 million
at September 26, 2003 primarily due to strong sales volume in Europe in third
quarter 2003. Also, Belgium and France normally receive payments on the last
working day of the calendar month, which was two working days after September's
month end close. This caused a higher balance at September 26, 2003 as compared
to December 31, 2002. Also, 3 points of the percentage increase from December
31, 2002 is due to exchange rate changes.
Inventory increased approximately 14% from December 31, 2002 to September 26,
2003. This increase is primarily due to the seasonality of our business. In
addition, inventory balances in Europe increased in anticipation of planned
revisions to production lines and maintenance to be performed in plants in the
fourth quarter of 2003.
The increase in license intangible assets resulted from currency exchange rate
changes.
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The current portion of long-term debt increased from December 31, 2002 primarily
due to the classification of a $500 million note maturing in April 2004 in
current maturities. Total debt outstanding at third-quarter 2003 decreased as a
result of net repayments of $333 million and increased as a result of
translation differences of $190 million from year-end 2002.
For the first nine months of 2003, changes in currencies from currency
translations and hedges of net investments resulted in net gains in
comprehensive income of $190 million. As currency exchange rates change,
translation of the income statements for our businesses outside of the United
States into U.S. dollars affects the comparability of revenues and expenses
between periods.
KNOWN TRENDS AND UNCERTAINTIES
Contingencies
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.
In addition, we are also the subject of an investigation by Belgian competition
law authorities for alleged infringement of competition laws in Belgium. These
proceedings are subject to further review and we intend to continue to
vigorously defend against an unfavorable outcome. At this time, it is not
possible for us to determine the ultimate outcome of this matter.
Our California subsidiary has been sued by several current and former employees
over alleged violations of state wage and hour rules. Our California subsidiary
is vigorously defending against the claims but at this time it is not possible
to predict the outcome.
In 2000, CCE and TCCC were found by a Texas jury to be jointly liable in a
combined 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. The trial court's verdict was upheld by
the Texas Court of Appeals in July 2003; we and TCCC have applied to the Texas
Supreme Court for leave to appeal to that court. We believe our accruals are
adequate to cover the damages awarded by the trial court if its verdict is
allowed to stand. The claims of the three remaining plaintiffs in this case
remain to be tried and four additional competitors have filed similar claims
against us. We have not provided for any potential awards under these additional
claims. We intend to vigorously defend against these claims.
In June 2003 Riverwood International Corporation filed a patent infringement
suit against MeadWestvaco Corporation in the United States District Court for
the Northern District of Georgia. We currently hold a multi-year supply contract
with MeadWestvaco for the supply of paperboard cartons, including the cartons
known as the "fridge pack." Riverwood's suit seeks a preliminary injunction
enjoining MeadWestvaco from supplying us with fridge pack packaging.
MeadWestvaco has denied the material allegations of Riverwood's complaint and
has opposed the preliminary injunction. We have indemnification rights against
MeadWestvaco in the event we suffer monetary damages, and we have taken measures
to ensure that we will have sufficient packaging available for our cans if the
parties are unable to resolve the dispute and a preliminary injunction is
granted against MeadWestvaco.
- 31 -
In addition to these cases outlined above, 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 litigation matters,
management believes, based on discussions with counsel, that any ultimate
liability would not materially affect our financial position or liquidity.
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 programs 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 these programs, and we believe the probability of a partial
refund of amounts previously paid under the programs is remote. We believe we
would in all cases resolve any matters that might arise with TCCC.
Under the Sales Growth Initiative (SGI) agreement with TCCC, we are eligible to
receive up to $170 million of "Volume Growth Funding" in 2003 which is to be
earned by attaining mutually established sales volume growth targets for brands
owned by The Coca-Cola Company. The annual and quarterly target minimums are
established for each program year through mutual agreements with TCCC based on
expected sales volume. 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. If these minimum
targets are not met, the SGI agreement provides for penalties of $1 per
equivalent case that are offset against the Volume Growth Funding of $170
million available under the program. Under the SGI agreement, quarterly funding
commitments are advanced at the beginning of each quarter less penalties from
any year-to-date shortfall to targets. We currently expect we will earn $130
million of the $170 million "Volume Growth Funding" available to us under the
SGI agreement for 2003 after adjustments for penalties.
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 our
subsidiary in Canada, that may not be resolved in the foreseeable future. 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 September 30, 2003, we reached a settlement agreement in principle related to
our claims against our insurance carriers for the losses we incurred in the 1999
Belgian recall. Under the agreement, we are to receive $47.5 million upon the
execution of a final settlement agreement in exchange for a release of our
claims. We expect this to occur in the fourth quarter of 2003. We do not
anticipate any additional recoveries associated with the product recall in
Belgium.
Accounting Developments
In January 2003, the EITF issued No. 02-16 (EITF 02-16), "Accounting by a
Customer (Including a Reseller) for Cash Consideration Received from a Vendor."
EITF 02-16 addresses accounting and reporting issues related to how a reseller
should account for cash consideration received from vendors.
- 32 -
Under EITF 02-16, our income statements classify funding received from TCCC and
other licensors in cost of sales. These amounts were previously included in net
operating revenues or as a reduction of selling, delivery, and administrative
expenses. Additionally, amounts we receive from TCCC for dispensing equipment
repair services are included as revenue. We are applying EITF 02-16 to all
existing programs and all amounts within reported periods are classified
consistently between periods.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires
variable interest entities to be consolidated by the primary beneficiary of the
entity in certain instances. 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
are to be applied by us in fourth quarter 2003. We participate in manufacturing
cooperatives and have ownership in a vending partnership. Amounts owed by these
entities at September 26, 2003 total $194 million as detailed in Note N. We are
currently evaluating the implications of the adoption of FIN 46 on our financial
position, cash flows, and results of operations. Should we determine under FIN
46 we are required to consolidate the manufacturing cooperatives and vending
partnership, our debt balances will increase by the amounts then owed by these
entities.
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 the footnotes to the
financial statements.
Competition
The non-alcoholic beverage category of the commercial beverages industry in
which we compete is highly competitive. We face competitors that differ not only
between our North American and European territories, but also within individual
markets in these territories. Moreover, competition exists not only in this
category but also between the non-alcoholic and alcoholic categories.
Marketing, breadth of product offering, new product and package innovations, and
pricing are significant factors affecting our competitive position, but the
consumer and customer goodwill associated with our products' trademarks is our
most favorable factor. Other competitive factors include distribution and sales
methods, merchandising productivity, customer service, trade and community
relationships, the management of sales and promotional activities, and access to
manufacturing and distribution. Management of cold drink equipment, including
vending and cooler merchandising equipment, is also a competitive factor. We
face strong competition by companies that produce and sell competing products to
a concentrating retail sector where buyers are able to choose freely between our
products and those of our competitors.
In 2002, our sales represented approximately 13% of total nonalcoholic beverage
sales in our North American territories and approximately 8% of total
nonalcoholic beverage sales in our European territories. Sales of our products
compared to combined alcoholic and nonalcoholic beverage products in our
territories would be significantly less.
Our competitors include the local bottlers of competing products and certain of
our customers that have private label products. For example, we compete with
bottlers of products of PepsiCo,
- 33 -
Inc., Cadbury Schweppes plc, Nestle S.A., Groupe Danone, Kraft Foods Inc., and
private label products including those of certain of our customers. In certain
of our territories, we sell products we compete against in other territories;
however, in all our territories our primary business is the manufacture,
distribution, and sale of products of The Coca-Cola Company. Our primary
competitor in each territory may vary, but within North America, our predominant
competitors are The Pepsi Bottling Group, Inc. and Pepsi Americas, Inc.
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:
o An inability to achieve price increases,
o an inability to achieve cost savings,
o marketing and promotional programs that result in lower than expected
volume,
o efforts to manage price that adversely affect volume,
o an inability to meet performance requirements for funding from TCCC,
o the cancellation or amendment of existing funding programs with TCCC,
o material changes from expectations in the costs of raw materials and
ingredients,
o an inability to achieve the expected timing for returns on cold drink
equipment expenditures,
o an inability to place cold drink equipment at required levels under our
Jumpstart programs with TCCC,
o an inability to meet volume growth requirements on an annual basis
under the SGI program with TCCC,
o an unfavorable outcome from the European Union investigation, the
Belgian competition law investigation, the California wage and hour
case, the Texas unfair marketing practices case, or the Riverwood/Mead
patent infringement case,
o material changes in assumptions used in completing impairment analyses
of intangible assets,
o an inability to meet projections for performance,
o potential assessment of additional taxes resulting from audits
conducted by tax authorities,
o unfavorable interest rate and currency fluctuations,
o competitive pressures that may cause channel and product mix to shift
from more profitable cold drink channels and packages,
o weather conditions in markets we serve,
o potential for market recalls of products,
o unfavorable market performance on our pension plan assets,
o and changes in debt rating.
In addition to the above cautionary statements, all forward-looking statements
contained herein should be read in conjunction with the cautionary statements
found on page 73 of our Annual Report for the fiscal year ended December 31,
2002.
- 34 -
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.
Item 4. Controls and Procedures
We, under the supervision and with the participation of management, including
the Chief Executive Officer and the Chief Financial Officer, evaluated our
"disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely making known to them material information
required to be disclosed in our reports filed or submitted under the Exchange
Act.
- 35 -
Part II. Other Information
Item 1. Legal Proceedings
The civil enforcement action threatened by the City of San Diego against our
subsidiary BCI Coca-Cola Bottling Company of Los Angeles has been settled by
BCI's agreement to pay the city approximately $153,000. This matter, which was
first reported in our first quarter 2003 Form 10-Q, arose out of an alleged
discharge of product into a creek by a BCI can crushing unit. Final settlement
documents are expected to be signed during the fourth quarter of 2003.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit (numbered in accordance with Item 601 of Regulation S-K):
Exhibit Description Incorporated by Reference
Number or Filed Herewith
- ------------------------- ---------------------------------------------------- ----------------------------------
12 Earnings to Combined Fixed Charges and Preferred Filed herewith.
Stock Dividends.
31.1 Certificate of Lowry F. Kline, filed pursuant to Filed herewith.
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Patrick J. Mannelly, filed pursuant Filed herewith.
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Lowry F. Kline, furnished pursuant Furnished herewith.
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Patrick J. Mannelly, furnished Furnished herewith.
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
- 36 -
(b) Reports on Form 8-K:
During third-quarter 2003, we filed the following current reports on Form 8-K:
Date of Report Description
- ----------------- ------------------------------------------------------------
July 8, 2003 Press release announcing webcast to analysts and
investors on July 16, 2003 (Items 7 and 9). Filed July 9,
2003.
July 15, 2003 Press release announcing election of James E. Copeland, Jr.
to Board of Directors and election of Paula G. Rosput as
Audit Committee Chair (Items 5 and 7). Filed July 16, 2003.
July 16, 2003 Press release announcing second quarter 2003 results
(Items 7 and 9). Filed July 16, 2003.
July 24, 2003 Reconciliation of non-GAAP financial measures to most
directly comparable financial measures calculated and
presented in accordance with GAAP (Items 5 and 7). Filed
July 24, 2003.
August 28, 2003 Press release announcing webcast to analysts and
investors on September 4, 2003 (Item 9). Filed August 28,
2003.
September 4, 2003 Press release announcing that management will affirm the
full-year 2003 financial outlook (Item 9). Filed September
4, 2003.
September 19, 2003 Underwriting agreement dated August 9, 2001 (Items 5 and
7). Filed September 19, 2003.
- 37 -
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: October 31, 2003 /s/ Patrick J. Mannelly
------------------------
Patrick J. Mannelly
Senior Vice President and
Chief Financial Officer
Date: October 31, 2003 /s/ Rick L. Engum
------------------------
Rick L. Engum
Vice President, Controller and
Principal Accounting Officer
- 38 -