FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
OUR BUSINESS
The Coca-Cola Company is the largest manufacturer, distributor and marketer of
nonalcoholic beverage concentrates and syrups in the world. When used in this
report, the terms "Company," "we," "us" or "our" mean The Coca-Cola Company and
its divisions and subsidiaries. Our Company manufactures beverage concentrates
and syrups as well as some finished beverages, which we sell to bottling and
canning operations, distributors, fountain wholesalers and some fountain
retailers. We are also the largest producer of ready-to-drink juices and juice
drinks in the world. In addition, we have ownership interests in numerous
bottling and canning operations.
Our Company exists to benefit and refresh everyone who is touched by our
business. We believe our success ultimately depends on our ability to build and
nurture relationships with constituents essential to our business: consumers,
customers, bottlers, business partners, government agencies, communities,
employees and share owners. In order to serve and create value for these
constituents, our Company executes a business strategy to drive profitable
volume growth focused on the following strategic priorities:
(1) accelerate carbonated soft-drink growth, led by Coca-Cola;
(2) selectively broaden our family of beverage brands to drive profitable
growth;
(3) grow system profitability and capability together with our bottling
partners;
(4) serve customers with creativity and consistency to generate growth across
all channels;
(5) direct investments to highest-potential areas across markets;
(6) drive efficiency and cost effectiveness everywhere.
Significant Growth Opportunities
- --------------------------------
The following table illustrates how we view various markets for our
Company's products and reflects information as of and for the year ended
December 31, 2002, as applicable:
- ------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Developing Markets Developed Markets Leading-Edge Markets
- ------------------------------------------------------------------------------------------------------------------------------
Sample countries (1) China, India, Russia, Korea, Brazil, Japan, Great Britain, Mexico, Spain,
Indonesia, Nigeria Italy, Turkey South Africa U.S., Australia
Annual per capita consumption
of our Company's products Less than 50 servings 50-149 servings 150-249 servings 250+ servings
Population 4.3 billion 800 million 600 million 500 million
Percentage of the world's
population 69% 13% 10% 8%
Percentage of Company's unit
case volume 11% 17% 25% 47%
(1) Includes selected countries within each of the identified markets and
is not intended to include all countries within the given markets.
Leading-edge markets generated 47 percent of the Company's unit case volume
in 2002. Annual per capita consumption of our Company's beverages in these
leading-edge markets is 250 or more servings. However, even in our highest per
capita consumption market, Mexico, less than one-third of the population drinks
brand Coca-Cola on a daily basis. Emerging markets, where annual per capita
consumption is less than 50 servings, contributed only 11 percent of the
Company's unit case volume in 2002. More than 4 billion people live in these
emerging markets.
In emerging and developing markets, our focus is on availability of
affordable products for consumers and building brand preference. In developed
and leading-edge markets, our approach to consumers is more sophisticated. Along
with ensuring our products are affordable and building brand preference, we
must activate points of purchase so that consumers have greater connections with
our brands.
2002 ANNUAL REPORT - 45
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
In all markets, we need a consistent approach to always:
- - provide quality products and superior customer service;
- - strive to manage our brand/price/package/channel strategy to meet consumer
needs in a way that maximizes value for our system and leverages the unique
and unparalleled strengths of our bottlers and our system infrastructure.
We believe significant growth potential exists for our family of brands.
Profitable Growth
- -----------------
To add value to our Company, our growth must be profitable. Carbonated soft
drinks have attractive historical margins, and we expect these attractive
margins to continue in the future. As a result, we intend to accelerate
carbonated soft-drink growth, led by Coca-Cola. Additionally, our Company is
continuing to profitably broaden our family of brands. In particular, we are
expanding and growing our noncarbonated offerings to provide more alternatives
to consumers. We plan to introduce and/or expand both carbonated soft drinks and
noncarbonated beverages as profitable introduction and/or expansion is warranted
in identified markets. Increasing consumption of our entire family of beverages
on more occasions is a key success factor in all markets.
System Economics
- ----------------
For our Company to be successful, the bottler system must be successful. Bottler
returns have been improving, and equity income from our bottlers is also
steadily improving. The following are examples of joint initiatives to drive
profitability:
- - We established a process for top management level meetings with our
bottling partners.
- - We established a bottler Information Technology Advisory Board whose
mission is to prioritize, recommend and enable execution of the highest
impact system-wide information technology initiatives.
- - In North America, we supported our bottlers as they formed Coca-Cola
Bottlers' Sales & Services Company to generate significant system-wide
savings in procurement, route to market optimization and account
management.
Corporate Governance
- --------------------
Corporate governance received significant attention in 2002. While strategic
priorities and execution are critical to our business, we have always been and
will continue to be committed to the highest standards of corporate governance.
The following two examples demonstrate our commitment.
First, in July 2002, our Company announced that we would expense the cost
of all forms of stock-based compensation, including stock options granted by the
Company. We concluded that stock options are a form of employee compensation
expense, and it would therefore be appropriate to reflect these costs in our
financial results. Voluntarily changing to this preferable method of accounting
for employee stock options and other forms of stock-based compensation ensures
that our earnings more clearly reflect economic reality when all compensation
costs are recorded in the financial statements. Refer to the heading
"Application of Critical Accounting Policies-Stock-Based Compensation" and to
Notes 1 and 13. (Throughout this report, references to "Notes" refer to the
Notes to Consolidated Financial Statements included as part of this report.)
Second, in December 2002, our Company changed our policy of providing
future earnings guidance. Our Company will no longer provide quarterly or annual
earnings per share guidance. We will continue to provide investors with
perspective on our value drivers, our strategic initiatives and those factors
critical to understanding our business and operating environment. Our Company,
with the support of the Board of Directors, concluded that establishing
short-term guidance can impede a more meaningful investor focus on the strategic
initiatives that companies are taking to build businesses and succeed over the
long run.
Our Company's Board of Directors is composed of qualified directors
providing appropriate oversight. Various committees of our Board of Directors
review and approve Company transactions, as appropriate. Our Audit Committee
members are all independent directors. Furthermore, we defined new guiding
principles for how our suppliers conduct business and reaffirmed a code of
ethics for our own employees and directors.
46 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
INVESTMENTS
With a business system that operates locally in more than 200 countries and
generates superior cash flows, we consider our Company to be uniquely positioned
to capitalize on profitable investment opportunities. Our criteria for
investment are simple: New investments should directly enhance our existing
operations and generally be expected to provide cash returns that exceed our
long-term, after-tax, weighted-average cost of capital (calculated on a book
basis), currently estimated at between 8 and 10 percent.
Because the beverage business has consistently generated high returns, we
consider it to be a particularly attractive investment for us. Our expenditures
in developed and leading-edge markets focus primarily on marketing our Company's
brands. In emerging and developing markets, our objective is to increase the
penetration of our products. In these markets, we allocate most of our
investments to enhancing our brands and infrastructure such as production
facilities, distribution networks, sales equipment and technology. We make these
investments by forming strategic business alliances with local bottlers and by
matching local expertise with our experience, resources and strategy.
We pursue our strategic investment priorities in a way that capitalizes on
the combination of our most fundamental and enduring attributes-our brands, our
people and our bottling partners. The more than 6 billion people in the world
represent current and potential consumers of our Company's products. As we
increase and meet consumer demand for our family of brands, we produce growth
throughout the Coca-Cola system.
Our Brands
- ----------
Our offerings in the nonalcoholic beverages business include some of the world's
most valuable brands -- more than 300 in all. These include carbonated soft
drinks and noncarbonated beverages such as juices and juice drinks, sports
drinks, water products, teas and coffees. Ultimately, consumer demand determines
the Company's optimal brand offerings. To meet our long-term growth objectives,
we make significant expenditures to support our brands. This process involves
investments to support existing brands, to develop new global or local brands,
and to acquire global or local brands when appropriate.
In 2002, our Company introduced a variety of new brands and products
including Vanilla Coke and diet Vanilla Coke. Our existing brands such as diet
Coke with lemon, Fanta, Qoo and POWERade were introduced into new markets. Our
Company acquired brands during 2002 such as Risco water in Mexico, Dorna water
and Valser water in Europe, and Rio Beverages in New Zealand. Along with Danone
Waters of North America, Inc., we established a joint venture, of which our
Company owns 51 percent, with the rights to the Dannon, Sparkletts and Alhambra
brands in the United States. Our Company acquired long-term global license
rights for Seagram's nonalcoholic carbonated soft drinks and certain assets
related to the Seagram's mixer business. We entered into a master license
agreement for the Evian water brand in the United States and Canada. Also during
2002, our Company continued our collaboration with The Walt Disney Company to
market noncarbonated children's beverages.
We make significant investments in marketing to support our brands.
Marketing investments enhance consumer awareness and increase consumer
preference for our brands. This produces long-term growth in profitable volume,
per capita consumption and our share of worldwide nonalcoholic beverage sales.
Our People
- ----------
Our people -- the 56,000 employees of our Company who work with our bottling
partners and other key constituents -- are essential to our success. To meet our
long-term growth objectives, we recruit and actively cultivate a diverse
workforce and establish a culture that fosters learning, innovation and value
creation on a daily basis. This means maintaining and refining a corporate
culture that encourages our people to develop to their fullest potential, which
enhances enjoyment and satisfaction in the Company's work environment. Our
Company values the uniqueness of all employees and the contributions they make.
We put the responsibility and accountability for ensuring local relevance and
maximizing business performance in the hands of those closest to the market.
Additionally, we have made innovation an explicit priority for all our
associates. Our associates work together with bottling partners to understand
markets and what consumers want. Then we meet that need by delivering products
through our unparalleled system.
The increase in the number of employees from 38,000 as of December 31, 2001
to 56,000 as of December 31, 2002 is primarily due to 2002 acquisitions. For a
description of these acquisitions, refer to Note 18.
2002 ANNUAL REPORT - 47
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Our Bottling Partners
- ---------------------
The financial health and success of our bottling partners are critical
components of the Company's ability to deliver leading brands. Our people work
with our bottling partners to continuously look for ways to improve system
economics. Our Company has business relationships with three types of bottlers:
(1) independently owned bottlers, in which we have no ownership interest;
(2) bottlers in which we have invested and have a noncontrolling ownership
interest;
(3) bottlers in which we have invested and have a controlling ownership
interest.
During 2002, independently owned bottling operations produced and
distributed approximately 23 percent of our worldwide unit case volume. Bottlers
in which we own a noncontrolling ownership interest produced and distributed
approximately 59 percent of our worldwide unit case volume in 2002. Controlled
bottling operations accounted for 8 percent of 2002 volume. Fountain operations
and The Minute Maid Company produced and distributed approximately 10 percent of
2002 volume.
The independently owned bottling operations and the bottlers in which we
have a noncontrolling interest generally have significant funding from majority
owners and other financing sources that are otherwise unrelated to our Company.
Bottlers in which we have a noncontrolling ownership interest are accounted
for under the cost or equity method, as appropriate. Equity income or loss,
included in our consolidated net income, represents our share of the net
earnings or losses of our equity method investees. In 2002, our Company's share
of income from equity method investments totaled $384 million.
In July 2001, our Company and San Miguel Corporation (San Miguel) acquired
Coca-Cola Bottlers Philippines, Inc. (CCBPI) from Coca-Cola Amatil Limited
(Coca-Cola Amatil). Upon completion of this transaction, our Company owned 35
percent of the common shares and 100 percent of the Preferred B shares, and San
Miguel owned 65 percent of the common shares of CCBPI. Additionally, as a result
of this transaction, our Company's interest in Coca-Cola Amatil was reduced from
approximately 38 percent to approximately 35 percent.
During 2000, the Company entered into a joint venture in China with China
National Oils and Foodstuffs Imports/Exports Corporation (COFCO), completion of
which occurred in 2001. COFCO contributed to the joint venture its minority
equity interests in 11 Chinese bottlers. Our Company contributed its equity
interests in two Chinese bottlers plus cash in exchange for a 35 percent equity
interest in the venture.
On December 31, 1999, we owned approximately 51 percent of Coca-Cola
Beverages plc (Coca-Cola Beverages). In July 2000, a merger of Coca-Cola
Beverages and Hellenic Bottling Company S.A. was completed to create Coca-Cola
Hellenic Bottling Company S.A. (CCHBC). This merger resulted in a decrease of
our Company's equity ownership interest from approximately 51 percent of
Coca-Cola Beverages to approximately 24 percent of the combined entity, CCHBC.
This change in ownership resulted in the Company recognizing a $118 million
tax-free, noncash gain in the third quarter of 2000.
The following table presents the difference between calculated fair values,
based on quoted closing prices of publicly traded shares, and our Company's
carrying values for significant publicly traded equity method investees (in
millions):
- --------------------------------------------------------------------------------
Fair Carrying
DECEMBER 31, 2002 Value Value Difference (1)
- --------------------------------------------------------------------------------
Coca-Cola Enterprises Inc. $ 3,670 $ 972 $ 2,698
Coca-Cola FEMSA, S.A. de C.V. 785 347 438
Coca-Cola Hellenic
Bottling Company S.A. 745 872 (127)
Coca-Cola Amatil Limited 711 492 219
Panamerican Beverages, Inc. 636 441 195
Grupo Continental, S.A. 264 164 100
Coca-Cola Bottling
Company Consolidated 160 63 97
Coca-Cola Embonor S.A. 63 100 (37)
Coca-Cola West Japan
Company Ltd. 59 107 (48)
Embotelladoras Polar S.A. 20 37 (17)
- --------------------------------------------------------------------------------
$ 7,113 $ 3,595 $ 3,518
================================================================================
(1) In instances where carrying value exceeds fair value, the decline in
value is considered to be temporary.
- --------------------------------------------------------------------------------
Historically, in certain situations, we have viewed it to be advantageous
for our Company to acquire a controlling interest in a bottling operation, often
on a temporary basis. Owning such a controlling interest has allowed us to
48 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
compensate for limited local resources and has enabled us to help focus the
bottler's sales and marketing programs, assist in developing its business and
information systems and establish appropriate long-term capital structures.
Effective February 2002, our Company acquired control of Coca-Cola
Erfrischungsgetraenke AG (CCEAG), the largest bottler in Germany. This
transaction was accounted for as a business combination, and the results of
CCEAG's operations have been included in the Company's financial statements
since February 2002. Prior to February 2002, CCEAG was accounted for by our
Company under the equity method of accounting. As of December 31, 2002, our
Company had an approximate 41 percent ownership interest in the outstanding
shares of CCEAG. In accordance with the terms of a Control and Profit and Loss
Transfer Agreement (CPL) with CCEAG, our Company obtained control of CCEAG for a
period of up to five years. In return for the control of CCEAG, the Company
guaranteed annual payments, in lieu of dividends by CCEAG, to all other CCEAG
share owners. Additionally, all other CCEAG share owners entered into either a
put or put/call option agreement with the Company, exercisable at the end of the
term of the CPL at agreed prices. Our Company entered into either put or
put/call agreements for shares representing an approximate 59 percent interest
in CCEAG.
In January 2002, our Company and CCBPI finalized the purchase of RFM
Corp.'s (RFM) approximate 83 percent interest in Cosmos Bottling Corporation
(CBC), a publicly traded Philippine beverage company. The original sale and
purchase agreement with RFM was entered into in November 2001. As of the date of
this sale and purchase agreement, the Company began supplying concentrate for
this operation. In March 2002, a tender offer was completed with our Company and
CCBPI acquiring all shares of the remaining minority share owners except for
shares representing a 1 percent interest in CBC. As of December 31, 2002, our
Company's direct ownership interest in CBC was approximately 61 percent, and our
indirect ownership interest in CBC was approximately 13 percent. This
transaction was accounted for as a business combination, and the results of
CBC's operations have been included in the Company's financial statements since
January 2002. CBC is an established carbonated soft-drink business in the
Philippines. Our Company's goal is to leverage our partnership with San Miguel
in the Philippines, as well as leverage our sales, marketing and system
resources, to expand CBC volume and profit over time. The Company and CCBPI have
agreed to restructure the operations of CBC, and this restructuring will result
in the Company owning all acquired trademarks and CCBPI owning all acquired
bottling assets. Upon expected completion of the restructuring in 2003, our
Company does not expect a significant gain or loss.
In February 2001, our Company reached agreement with Carlsberg A/S
(Carlsberg) for the dissolution of Coca-Cola Nordic Beverages A/S (CCNB), a
joint venture in which our Company had a 49 percent ownership interest. At that
time, CCNB had bottling operations in Sweden, Norway, Denmark, Finland and
Iceland. Under this agreement with Carlsberg, our Company acquired CCNB's Sweden
and Norway bottling operations in June 2001, increasing our Company's ownership
in those bottlers to 100 percent. Carlsberg acquired CCNB's Denmark and Finland
bottling operations, increasing Carlsberg's ownership in those bottlers to 100
percent. Pursuant to the agreement, CCNB sold its Iceland bottling operations to
a third-party group of investors in May 2001.
During the first half of 2001, in separate transactions, our Company
purchased two bottlers in Brazil: Refrescos Guararapes Ltda. and Sucovalle Sucos
e Concentrados do Vale S.A. In separate transactions during the first half of
2000, our Company purchased two other bottlers in Brazil: Companhia Mineira de
Refrescos, S.A. and Refrigerantes Minas Gerais Ltda. In October 2000, the
Company purchased a 58 percent interest in Paraguay Refrescos S.A. (Paresa), a
bottler in Paraguay. In December 2000, the Company made a tender offer for the
remaining 42 percent of the shares in Paresa. In January 2001, following the
completion of the tender offer, we owned approximately 95 percent of Paresa.
In line with our long-term bottling strategy, we consider alternatives for
reducing our ownership interests in bottlers in which we have controlling
ownership interests. One alternative is to combine our bottling interests with
the bottling interests of others to form strategic business alliances. Another
alternative is to sell our interest in a bottling operation to one of our equity
investee bottlers. In both of these situations, we continue to participate in
the bottler's results of operations through our share of the equity investee's
earnings or losses.
In the first quarter of 2002, our Company sold our Baltics bottling
operations to CCHBC. The proceeds from the sale
2002 ANNUAL REPORT - 49
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
of the Baltics bottlers were approximately equal to the carrying value of the
investment.
In November 2001, our Company sold nearly all of its ownership interests in
various Russian bottling operations to CCHBC for approximately $170 million in
cash and notes receivable, of which $146 million in notes receivable remained
outstanding as of December 31, 2001. This amount was fully collected in 2002.
These interests consisted of the Company's 40 percent ownership interest in a
joint venture with CCHBC that operated bottling territories in Siberia and parts
of western Russia, together with our Company's nearly 100 percent interests in
bottling operations with territories covering the remainder of Russia.
Refer to Notes 2 and 18 for further discussion of the above bottler
transactions.
FINANCIAL STRATEGIES
The following strategies are intended to optimize our cost of capital,
increasing our ability to maximize share-owner value.
Debt Financing
- --------------
Our Company maintains debt levels we consider prudent based on our cash flow,
interest coverage and percentage of debt to capital. We use debt financing to
lower our overall cost of capital, which increases our return on share-owners'
equity.
As of December 31, 2002, our long-term debt was rated "A+" by Standard &
Poor's and "Aa3" by Moody's, and our commercial paper program was rated "A-1"
and "P-1" by Standard & Poor's and Moody's, respectively. In assessing our
credit strength, both Standard & Poor's and Moody's consider our capital
structure and financial policies as well as aggregated balance sheet and other
financial information for the Company and certain bottlers including Coca-Cola
Enterprises Inc. (Coca-Cola Enterprises) and CCHBC. While the Company has no
legal obligation for the debt of these bottlers, the rating agencies believe the
strategic importance of the bottlers to the Company's business model provides
the Company with an incentive to keep these bottlers viable. If our credit
ratings were reduced by the rating agencies, our interest expense could
increase. Additionally, if certain bottlers' credit ratings were to decline, the
Company's share of equity income could be reduced as a result of the potential
increase in interest expense for these bottlers.
The interest coverage ratio is a key item monitored by rating agencies.
Generally, this ratio is computed as income before taxes (excluding unusual
items) plus interest expense, divided by the sum of interest expense and
capitalized interest. In accordance with this definition, our Company's interest
coverage ratio on a stand-alone basis was 29x, 20x and 12x, respectively, for
the years ended December 31, 2002, 2001 and 2000. If the unusual items were
included in the calculation, the interest coverage ratio would have been 28x,
20x and 8x, respectively, for the years ended December 31, 2002, 2001 and 2000.
The interest coverage ratio is monitored by our Company for trends and is
one measurement generally used by rating agencies in assessing debt ratings for
companies. However, as described above, the rating agencies aggregate financial
data for certain bottlers with our Company when assessing our debt rating. As
such, the key measure is the aggregate interest coverage ratio of the Company
and these bottlers. Both Standard & Poor's and Moody's employ different
aggregation methodologies and have different thresholds for the aggregate
interest coverage ratio. These thresholds are not necessarily permanent nor are
they fully disclosed to our Company.
Our global presence and strong capital position give us easy access to key
financial markets around the world, enabling us to raise funds with a low
effective cost. This posture, coupled with active management of our percentage
mix of short-term and long-term debt, results in a lower overall cost of
borrowing. Our debt management policies, in conjunction with our share
repurchase programs and investment activity, can result in current liabilities
exceeding current assets.
In managing our use of debt, we also monitor the following financial
measurements and ratios:
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 2001 2000
- --------------------------------------------------------------------------------
Net debt (in billions) $ 3.2 $ 3.3 $3.9
Net debt-to-net capital 21% 23% 29%
Ratio of earnings to
fixed charges 23.2x 18.1x 8.7x
================================================================================
- --------------------------------------------------------------------------------
Our Company monitors the financial measurements and ratios discussed above
in conjunction with our percentage mix of fixed-rate and variable-rate debt and
other business and financial risks. The above financial measurements and
50 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
ratios trended positively in 2002 and 2001, reflecting improved business results
and effective capital management strategies. Additionally, the 2000 ratio of
earnings to fixed charges was negatively impacted by items discussed under the
heading "Other Operating Charges."
Share Repurchases
- ------------------
In October 1996, our Board of Directors authorized a plan to
repurchase up to 206 million shares of our Company's common stock through 2006.
In 2002 and 2001, we repurchased approximately 14 million shares at an average
price of $48.42 and 5 million shares at an average price of $48.53,
respectively, under the 1996 plan.
In 2000, we did not repurchase any shares under the 1996 plan. This was due
to our utilization of cash for an organizational realignment (the Realignment),
as discussed under the heading "Other Operating Charges," and the impact on cash
from the reduction in concentrate inventory levels by certain bottlers, as
discussed under the headings "Net Operating Revenues and Gross Profit" and
"Operating Income and Operating Margin."
Since the inception of our initial share repurchase program in 1984 through
our current program as of December 31, 2002, we have purchased more than 1
billion shares of our Company's common stock. This represents 32 percent of the
shares outstanding as of January 1, 1984 at an average price per share of
$13.13.
Our Company expects to make share repurchases of approximately $1.5 billion
in 2003. As cash flows are expected to increase in subsequent years, our
subsequent share repurchases are also expected to increase.
Dividend Policy
- ---------------
At its February 2003 meeting, our Board of Directors again increased our
quarterly dividend, raising it to $.22 per share, equivalent to a full-year
dividend of $.88 per share in 2003. This is our 41st consecutive annual
increase. Our annual common stock dividend was $.80 per share, $.72 per share
and $.68 per share in 2002, 2001 and 2000, respectively.
In 2002, our dividend payout ratio was approximately 65 percent of our net
income. To free up additional cash for reinvestment in our high-return beverage
business, our Board of Directors intends to gradually reduce our dividend payout
ratio over time.
FINANCIAL RISK MANAGEMENT
Our Company uses derivative financial instruments primarily to reduce our
exposure to adverse fluctuations in interest rates and foreign exchange rates
and, to a lesser extent, adverse fluctuations in commodity prices and other
market risks. We do not enter into derivative financial instruments for trading
purposes. As a matter of policy, all our derivative positions are used to reduce
risk by hedging an underlying economic exposure. Because of the high correlation
between the hedging instrument and the underlying exposure, fluctuations in the
value of the instruments are generally offset by reciprocal changes in the value
of the underlying exposure. Virtually all of our derivatives are
straightforward, over-the-counter instruments with liquid markets.
Foreign Currency
- ----------------
We manage most of our foreign currency exposures on a consolidated basis, which
allows us to net certain exposures and take advantage of any natural offsets.
With approximately 77 percent of 2002 Operating Income, excluding Corporate,
generated outside the United States, weakness in one particular currency is
often offset by strengths in others over time. We use derivative financial
instruments to further reduce our net exposure to currency fluctuations.
Our Company enters into forward exchange contracts and collars and
purchases currency options (principally euro and Japanese yen) to hedge certain
portions of forecasted cash flows denominated in foreign currencies.
Additionally, the Company enters into forward exchange contracts to offset the
earnings impact relating to exchange rate fluctuations on certain monetary
assets and liabilities. The Company also enters into forward exchange contracts
as hedges of net investments in international operations.
2002 ANNUAL REPORT - 51
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Interest Rates
- --------------
Our Company monitors our percentage mix of fixed-rate and variable-rate debt, as
well as our percentage mix of term debt versus nonterm debt. This monitoring
includes a review of business and other financial risks as noted above. We also
enter into interest rate swap agreements to manage these risks.
Value at Risk
- -------------
Our Company monitors our exposure to financial market risks using several
objective measurement systems, including value-at-risk models. Our value-at-risk
calculations use a historical simulation model to estimate potential future
losses in the fair value of our derivatives and other financial instruments that
could occur as a result of adverse movements in foreign currency and interest
rates. We have not considered the potential impact of favorable movements in
foreign currency and interest rates on our calculations. We examined historical
weekly returns over the previous 10 years to calculate our value at risk. The
average value at risk represents the simple average of quarterly amounts over
the past year. As a result of our foreign currency value-at-risk calculations,
we estimate with 95 percent confidence that the fair values of our foreign
currency derivatives and other financial instruments, over a one-week period,
would decline by less than $34 million, $43 million and $37 million,
respectively, using 2002, 2001 or 2000 average fair values and by less than $31
million and $37 million, respectively, using December 31, 2002 and 2001 fair
values. According to our interest rate value-at-risk calculations, we estimate
with 95 percent confidence that any increase in our net interest expense due to
an adverse move in our 2002 average or in our December 31, 2002 interest rates
over a one-week period would not have a material impact on our financial
statements. Our December 31, 2001 and 2000 estimates also were not material to
our financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
VOLUME
We measure our sales volume in two ways: (1) gallons and (2) unit cases of
finished products. "Gallons" represent our primary business and measure the
volume of concentrates, syrups, beverage bases, finished beverages and powders
(in all cases, expressed in equivalent gallons of syrup) for all beverage
products which are reportable as unit case volume. Most of our revenues are
based on this measure of primarily wholesale activity, which consists mainly of
our sales to bottlers and customers.
We also measure volume in unit cases. "Unit case" means a unit of
measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce
servings). "Unit case volume" means the number of unit cases (or unit case
equivalents) of Company trademark or licensed beverage products directly or
indirectly sold by the Coca-Cola system to customers. Volume primarily consists
of beverage products bearing Company trademarks. Also included in volume are
certain products licensed to our Company or owned by our bottling partners, for
which our Company provides marketing support and derives profit from the sales.
Such products licensed to our Company or owned by our bottling partners account
for a minimal portion of total unit case volume. Although most of our Company's
revenue is not based directly on unit case volume, we believe unit case volume
is one of the measures of the underlying strength of the Coca-Cola system
because it measures trends at the consumer level.
Our worldwide unit case volume increased 5 percent in 2002, on top of a 4
percent increase in 2001. The increase reflects acquisitions (refer to Note 18)
and consistent performance across certain key operations despite difficult
global economic conditions. The Coca-Cola system sold 18.7 billion unit cases in
2002.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management has discussed with our Audit Committee the development, selection and
disclosure of our critical accounting policies and estimates and the application
of these policies and estimates.
52 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Consolidation and Basis of Presentation
- ---------------------------------------
Our financial statements include the accounts of The Coca-Cola Company and all
subsidiaries. We consolidate all entities that our Company controls, and we do
not have any unconsolidated "special purpose" entities. Under current accounting
guidance, our Company is not permitted to consolidate companies we do not
control. For investments in companies in which we have the ability to exercise
significant influence over operating and financial policies, such entities are
accounted for by the equity method. Our judgments regarding the level of
influence of each equity method investment include considering key factors such
as our ownership interest, representation on the board of directors,
participation in policy making decisions and material intercompany transactions.
Consolidated net income includes our Company's share of the net earnings of
these companies. The difference between consolidation and the equity method
impacts certain financial ratios because of the presentation of the detailed
line items reported in the financial statements. However, our consolidated net
income for the period and our share-owners' equity at the end of the period are
the same whether the investment in the company is accounted for under the equity
method or the company is consolidated. We record our investments in other
companies that we do not control and for which we do not have the ability to
exercise significant influence under the cost method. In accordance with the
cost method, the assets are recorded at cost or fair value, as appropriate. Our
Company eliminates from our financial results all significant intercompany
transactions, including transactions with equity method investees.
The table below presents Equity Income (Loss) and Income Before Income
Taxes and Cumulative Effect of Accounting Change, of which Equity Income (Loss)
is a component. The purpose of the table is to present the relative significance
of Equity Income (Loss) to Income Before Income Taxes and Cumulative Effect of
Accounting Change.
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- --------------------------------------------------------------------------------
(In millions)
Equity income (loss) $ 384 $ 152 $ (289)
Income before income taxes
and cumulative effect
of accounting change $5,499 $ 5,670 $ 3,399
- --------------------------------------------------------------------------------
The table below presents our Equity Method Investments, Cost Method
Investments, Principally Bottling Companies and Total Assets. The purpose of the
table is to present the relative significance of our equity and cost method
investments to Total Assets.
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
- --------------------------------------------------------------------------------
(In millions)
Equity method investments $ 4,737 $ 5,128
Cost method investments,
principally bottling companies $ 254 $ 294
Total assets $ 24,501 $ 22,417
- --------------------------------------------------------------------------------
Our CCEAG business combination represents a good example related to
consolidation and management's consideration regarding control. We concluded
that CCEAG should be consolidated with our Company based on the following.
Prior to February 2002, our Company accounted for CCEAG under the equity
method of accounting. Our Company has an approximate 41 percent ownership
interest in the outstanding shares of CCEAG. In accordance with the terms of the
CPL, our Company obtained control of CCEAG for a period of up to five years. In
return for control of CCEAG, the Company guaranteed annual payments, in lieu of
dividends by CCEAG, to all other CCEAG share owners. Additionally, all other
CCEAG share owners entered into either a put or put/call option agreement with
the Company, exercisable at the end of the term of the CPL at agreed prices. Our
Company entered into either put or put/call agreements for shares representing
an approximate 59 percent interest in CCEAG. The spread in the strike prices of
the put and call options is only approximately 3 percent.
Since the terms of the CPL transfer control and all of the economic risks
and rewards of CCEAG to the Company immediately, we determined consolidation was
appropriate. Refer to Note 18.
2002 ANNUAL REPORT - 53
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Recoverability of Noncurrent Assets
- -----------------------------------
Management's assessment of the recoverability of noncurrent assets involves
critical accounting estimates. The relevant factors for assessing recoverability
for each classification of noncurrent assets are discussed below. For the
following assets, tests of impairment are performed if certain conditions exist
that may indicate the carrying value may not be recoverable.
- --------------------------------------------------------------------------------
December 31, Percentage of
2002 Total Assets
- --------------------------------------------------------------------------------
(In millions except percentages)
Equity method investments $ 4,737 19
Cost method investments,
principally bottling companies $ 254 1
Other assets $ 2,694 11
Property, plant and equipment, net $ 5,911 24
Amortized intangible assets, net
(various, principally trademarks) $ 100 Less than 1
- --------------------------------------------------------------------------------
For the year ended December 31, 2002, depreciation expense for Property,
Plant and Equipment was $614 million, and amortization expense, primarily
related to infrastructure programs (recorded in Other Assets) and amortized
intangible assets, was $192 million.
For the following assets, tests of impairment are performed at least
annually. Impairment tests would be performed more frequently if events or
circumstances indicate that an asset may be impaired.
- --------------------------------------------------------------------------------
December 31, Percentage of
2002 Total Assets
- --------------------------------------------------------------------------------
(In millions except percentages)
Trademarks with
indefinite lives $ 1,724 7
Bottlers' franchise rights $ 846 3
Goodwill $ 726 3
Other intangible assets not
subject to amortization $ 157 1
- --------------------------------------------------------------------------------
Operating in more than 200 countries subjects our Company to many
uncertainties and potential changes in various economic, political and
regulatory environments. As a result, many assumptions about the recoverability
of noncurrent assets must be made by management. Two examples of such economic,
political and regulatory changes are as follows. First, Germany recently enacted
changes in the deposit laws on nonreturnable packages. Many retailers
significantly lowered their inventory level on selected package types. Looking
forward, the Coca-Cola system is well positioned to manage trends in both
returnable and nonreturnable packages. Second, if the political and economic
situation in the Middle East results in a continued deterioration of the
business environment, our business results and the valuation of our noncurrent
assets could be impacted. Currently, these items have not required a charge;
however, we will continue to monitor these situations as they develop.
Equity Method and Cost Method Investments
- -----------------------------------------
The most significant judgment in management's recoverability assessments is the
determination of the fair value of our equity method and cost method
investments. For most publicly traded investments, the fair value of our
Company's investment is often readily available based on quoted market prices.
For non-publicly traded investments, management's assessment of fair value is
based on valuation methodologies including discounted cash flows, estimates of
sales proceeds and external appraisals, as appropriate. The ability to
accurately predict future cash flows, especially in markets such as the Middle
East, Africa and Latin America, may impact the determination of fair value. The
current unstable economic and political conditions and civil unrest in the
Middle East, northern Africa and Venezuela could have an adverse impact on our
Company's business results and valuation of assets in those regions.
In the event a decline in fair value of an investment occurs, management
may be required to determine if the decline in market value is other than
temporary. Management's assessments as to the nature of a decline in fair value
are based on the valuation methodologies discussed above and our ability and
intent to hold the investment. If the fair value is less than the carrying value
and the decline in value is considered to be other than temporary, an
appropriate write-down is recorded.
Management's assessments of fair value in accordance with these valuation
methodologies represent our best estimates as of the time of the impairment
review and are consistent with our internal planning. The estimates used by
management can change over time as such amounts are influenced by future events
and factors. If different fair values were estimated, this could have a material
impact on the
54 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
financial statements. Furthermore, conditions in markets around the world
change, and thus our accounting estimates may change from period to period.
External factors outside the control of management can be elements in
determining estimates related to these investments. Factors that management must
estimate when performing impairment tests include, among other items, sales
volume, prices, inflation, marketing spending, exchange rates and capital
spending.
An example of management's assessment and recognition of impairment of an
investment is as follows. In the first quarter of 2002, our Company recorded a
noncash pretax charge of approximately $157 million (recorded in the caption
Other Income (Loss)--Net) primarily related to the write-down of our
investments in Latin America. This write-down reduced the carrying value of the
investments in Latin America to fair value. The charge was primarily the result
of the economic developments in Argentina during the first quarter of 2002,
including the devaluation of the Argentine peso and the severity of the
unfavorable economic outlook.
Other Assets
- ------------
Our Company invests in infrastructure programs with our bottlers that are
directed at strengthening our bottling system and increasing unit case volume.
Additionally, our Company advances payments to certain customers to fund
marketing activities intended to generate profitable volume. Advance payments
are also made to certain customers for distribution rights. Payments under these
programs are generally capitalized as Other Assets on our balance sheets.
Management periodically evaluates the recoverability of these assets by
preparing estimates of sales volume, the resulting gross profit, cash flows and
other factors. Accuracy of our recoverability assessments is based on
management's ability to accurately predict certain key variables such as sales
volume, prices, inflation, marketing spending, exchange rates and capital
spending. Predicting these key variables involves uncertainty about future
events; however, the assumptions used are consistent with our internal planning.
If the assets are assessed to be recoverable, they are amortized over the
periods benefited. If the carrying value of these assets is considered to be not
recoverable, such assets are written down as appropriate.
The assumptions and conditions for Other Assets reflect management's best
assumptions and estimates. However, these items involve inherent uncertainties,
as described above, which may or may not be controllable by management. An
example of a variable we can influence is increasing marketing spending in a
particular market. Bankruptcy or economic challenges of a particular customer
represent uncertainties that are not controllable by management. As a result, if
other assumptions and estimates had been used in the current period, the
balances for Other Assets could have been materially impacted. Furthermore, if
management uses different assumptions or if different conditions occur in future
periods, future operating results could be materially impacted.
During each quarter in 2002, management considered and analyzed impairment
indicators related to Other Assets. Based on our analysis, we concluded that no
material items recorded in Other Assets required an impairment charge.
Property, Plant and Equipment
- -----------------------------
Certain events or changes in circumstances may indicate that the recoverability
of the carrying amount of Property, Plant and Equipment should be assessed. Such
events or changes may include a significant decrease in market value, a
significant change in the business climate in a particular market, or a
current-period operating or cash flow loss combined with historical losses or
projected future losses. If an event occurs or changes in circumstances are
present, we estimate the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount, we recognize an impairment loss. The impairment loss recognized is the
amount by which the carrying amount exceeds the fair value.
The ability to accurately predict future cash flows, especially in emerging
and developing markets such as the Middle East, Africa and Latin America, may
impact the determination of fair value. Management's assessments of cash flows
represent our best estimate as of the time of the impairment review and are
consistent with our internal planning. If different cash flows had been
estimated in the current period, the Property, Plant and Equipment balances
could have been materially impacted. Furthermore, our accounting estimates may
change from period to period as conditions in markets around the world change,
and this could materially impact our results in future periods. Factors that
management must estimate when performing impairment tests include, among other
items, sales volume,
2002 ANNUAL REPORT - 55
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
prices, inflation, marketing spending, exchange rates and capital spending.
During each quarter in 2002, management considered and analyzed impairment
indicators related to Property, Plant and Equipment. Based on our analysis, we
concluded that no material items recorded in Property, Plant and Equipment
required an impairment charge.
Goodwill, Trademarks and Other Intangible Assets
- ------------------------------------------------
Effective January 1, 2002, our Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." The adoption
of SFAS No. 142 was required in accordance with accounting principles generally
accepted in the United States, and no adoption alternatives are allowed. Such
statement required an initial impairment assessment involving a comparison of
the fair value of goodwill, trademarks and other intangible assets to current
carrying value. Upon adoption, we recorded a loss for the cumulative effect of
accounting change for SFAS No. 142, net of income taxes, of $367 million for
Company operations and $559 million for equity investees. As required by the
standard, we did not restate prior periods. The adoption of SFAS No. 142
resulted in a pretax reduction in 2002 amortization expense of approximately $60
million, and 2002 equity income increased by approximately $150 million.
SFAS No. 142 classifies intangible assets into three categories: (1)
intangible assets with definite lives subject to amortization; (2) intangible
assets with indefinite lives not subject to amortization; and (3) goodwill. For
intangible assets with definite lives, tests for impairment must be performed if
conditions exist that indicate the carrying value may not be recoverable. For
intangible assets with indefinite lives and goodwill, tests for impairment must
be performed at least annually. Such tests for impairment are also required for
intangible assets recorded by our equity method investees.
Our trademarks and other intangible assets determined to have definite
lives are amortized over their useful lives. In accordance with SFAS No. 142, if
conditions exist that indicate the carrying value may not be recoverable, we
review such trademarks and other intangible assets with definite lives for
impairment to ensure they are appropriately valued. Such conditions may include
an economic downturn in a market or a change in the assessment of future
operations. Trademarks and other intangible assets determined to have an
indefinite useful life are not amortized. We test such trademarks and other
intangible assets with indefinite useful lives for impairment annually or more
frequently if events or circumstances indicate that assets might be impaired.
Goodwill is not amortized. We perform tests for impairment of goodwill annually
or more frequently if events or circumstances indicate it might be impaired.
Such tests include comparing the fair value of a reporting unit with its
carrying value, including goodwill. Impairment assessments are performed using a
variety of methodologies, including cash flow analysis, estimates of sales
proceeds and independent appraisals. Where applicable, an appropriate discount
rate is used, based on the Company's cost of capital rate or location-specific
economic factors. In 2002, we tested goodwill for impairment. Based on these
assessments, we concluded that such assets did not require an impairment charge.
Management estimates the future cash flows expected to result from the use
and, if applicable, the eventual disposition of the assets. The key variables
that management must estimate include, among other items, sales volume, prices,
inflation, marketing spending, exchange rates and capital spending. Significant
management judgment is involved in estimating these variables, and they include
inherent uncertainties; however, the assumptions used are consistent with our
internal planning. Management periodically evaluates and updates the estimates
based on the conditions that influence these variables. If such assets are
considered impaired, they are written down to fair value as appropriate.
The assumptions and conditions for goodwill, trademarks and other
intangible assets reflect management's best assumptions and estimates. However,
these items involve inherent uncertainties, as described above, that may or may
not be controllable by management. An example of a variable we can influence is
increasing marketing spending in a particular market. Economic and political
conditions, such as civil unrest in the Middle East, represent uncertainties
that are not controllable by management. As a result, if other assumptions and
conditions had been used in the current period, the balances for goodwill,
trademarks and other intangible assets could have been materially impacted.
Furthermore, if management uses different assumptions or if different conditions
occur in future periods, future operating results could be materially impacted.
56 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Contingencies
- -------------
Our Company is involved in various legal proceedings. Refer to Note 11. Due to
their nature, such legal proceedings involve inherent uncertainties including,
but not limited to, court rulings, negotiations between affected parties and
governmental intervention. Management assesses the probability of loss for such
contingencies and accrues a liability and/or discloses the relevant
circumstances, as appropriate. Management believes that any liability to the
Company that may arise as a result of currently pending legal proceedings will
not have a material adverse effect on the financial condition of the Company
taken as a whole.
Adoption of New Accounting Policy-Stock-Based Compensation
- ----------------------------------------------------------
Our Company currently sponsors stock option plans and restricted stock award
plans. Prior to 2002, our Company accounted for those plans under the
recognition and measurement provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25) and related interpretations. No
stock-based employee compensation expense for stock options was reflected in Net
Income for the years ended December 31, 2001 and 2000, as all stock options
granted under those plans had an exercise price equal to the fair market value
of the underlying common stock on the date of grant. Effective January 1, 2002,
our Company adopted the preferable fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Under the modified prospective
transition method selected by our Company as described in SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure,"
compensation cost recognized in 2002 of approximately $365 million is the same
as that which would have been recognized had the fair value method of SFAS No.
123 been applied from its original effective date. The 2002 expense was recorded
in the caption Selling, General and Administrative Expenses. In accordance with
the modified prospective method of adoption, results for prior years have not
been restated.
Our Company voluntarily made a choice to change to the preferable method of
accounting for employee stock options in accordance with SFAS No. 123. We
concluded that stock options are a form of employee compensation expense, and
therefore it is appropriate that these costs be recorded in our financial
results to more clearly reflect economic reality. Refer to the heading
"Corporate Governance."
Our Company uses the Black-Scholes option-pricing model to determine the
fair value of each option grant. To ensure the best market-based assumptions
were used to determine the estimated fair value of stock options granted in
2002, we obtained two independent market quotes. Our Black-Scholes value was not
materially different from the independent quotes. The Black-Scholes model
includes assumptions regarding dividend yields, expected volatility, expected
lives and risk-free interest rates. These assumptions reflect management's best
estimates, but these items involve inherent uncertainties based on market
conditions generally outside of the control of our Company. As a result, if
other assumptions had been used in the current period, stock-based compensation
expense could have been materially impacted. Furthermore, if management uses
different assumptions in future periods, stock-based compensation expense could
be materially impacted in future years.
Refer to Notes 1 and 13.
2002 ANNUAL REPORT - 57
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
OPERATIONS
Analysis of Consolidated Statements of Income
- ---------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Percent Change
---------------------
Year Ended December 31, 2002 2001 2000 02 vs. 01 01 vs. 00
- -------------------------------------------------------------------------------------------------------------
(In millions except per share data
and percentages)
NET OPERATING REVENUES $ 19,564 $ 17,545 $ 17,354 12 1
Cost of goods sold 7, 6,044 6,204 18 (3)
- -------------------------------------------------------------------------------------------------------------
GROSS PROFIT 12,459 11,501 11,150 8 3
GROSS PROFIT MARGIN 63.7% 65.6% 64.3%
Selling, general and administrative
expenses 7,001 6,149 6,016 14 2
Other operating charges - - 1,443 * *
- -------------------------------------------------------------------------------------------------------------
OPERATING INCOME 5,458 5,352 3,691 2 45
OPERATING MARGIN 27.9% 30.5% 21.3%
Interest income 209 325 345 (36) (6)
Interest expense 199 289 447 (31) (35)
Equity income (loss) 384 152 (289) 153 *
Other income (loss)--net (353) 39 99 * (61)
Gains on issuances of stock by quity
investee - 91 - * *
- -------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 5,499 5,670 3,399 (3) 67
Income taxes 1,523 1,691 1,222 (10) 38
Effective tax rate 27.7% 29.8% 36.0%
NET INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 3,976 3,979 2,177 - 83
Cumulative effect of accounting change
for SFAS No. 142, net of income taxes:
Company operations (367) - - * *
Equity investees (559) - - * *
Cumulative effect of accounting change
for SFAS No. 133, net of income taxes - (10) - * *
- -------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,050 $ 3,969 $ 2,177 (23) 82
=============================================================================================================
PERCENTAGE OF NET OPERATING REVENUES 15.6% 22.6% 12.5%
=============================================================================================================
NET INCOME PER SHARE:
Basic $ 1.23 $ 1.60 $ .88 (23) 82
- -------------------------------------------------------------------------------------------------------------
Diluted $ 1.23 $ 1.60 $ .88 (23) 82
- -------------------------------------------------------------------------------------------------------------
*Calculation is not meaningful.
Refer to the above Analysis of Consolidated Statements of Income in condensed form while reading the
operations review below.
- -------------------------------------------------------------------------------------------------------------------
58 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Net Operating Revenues and Gross Profit
- ---------------------------------------
Net Operating Revenues increased by $2,019 million in 2002 versus 2001. The
2001 increase compared to 2000 was $191 million.
The following table indicates, on a percentage basis, the estimated impact
of key factors resulting in significant increases (decreases) in Net Operating
Revenues:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 vs. 2001 2001 vs. 2000
- -----------------------------------------------------------------------------
Increase in gallon shipments,
including acquisitions 5% 5%
Price and product/geographic mix 3 -
Structural changes 6 -
Negative impact of the stronger
U.S. dollar (2) (4)
- -----------------------------------------------------------------------------
Total percentage increase 12% 1%
=============================================================================
- --------------------------------------------------------------------------------
Increases in gallon shipments, price increases and product/geographic mix
in selected countries positively impacted our 2002 Net Operating Revenues. The
improvements in these core business factors reflected a positive trend in 2002.
Furthermore, the acquisitions of our interests in Odwalla, Inc. (Odwalla), CCDA
Waters, L.L.C. (CCDA) and CBC also contributed to the increased 2002 Net
Operating Revenues.
The most significant structural change (defined by the Company as
purchasing and disposing of bottling and canning operations) in 2002 was the
consolidation of CCEAG. This consolidation was partially offset by the sale and
resulting deconsolidation of our Russian and Baltics bottling operations.
The combined 2002 Net Operating Revenues for the structural change of CCEAG
and the acquisitions of our interests in Odwalla, CCDA and CBC were
approximately $1.5 billion. The Russian and Baltics bottling operations
accounted for approximately $150 million of 2001 Net Operating Revenues.
The continued strength of the U.S. dollar in 2002 relative to most major
currencies had a negative impact on Net Operating Revenues. The stronger U.S.
dollar compared to the Japanese yen, the Argentine peso, the Mexican peso, the
Brazilian real, the Venezuelan bolivar and the South African rand was partially
offset by strength in the euro. For further discussion of the impact of exchange
and expected trends, refer to the heading "Exchange."
In 2001, gallon shipments and price increases in selected countries
positively impacted Net Operating Revenues, offset by a negative impact for
product/geographic mix.
Consolidation of the Nordic and Brazilian bottling operations in 2001
represented structural changes increasing Net Operating Revenues. The sale of
our previously owned vending operations in Japan and canning operations in
Germany offset these increases.
Again, a stronger U.S. dollar in 2001 relative to most major currencies had
a negative impact on Net Operating Revenues.
Our Cost of Goods Sold increased in 2002 compared to 2001 primarily as a
result of the acquisitions of our interests in Odwalla, CCDA and CBC and the
structural change of CCEAG. Total combined 2002 Cost of Goods Sold for these
entities was $844 million.
Our decrease in 2002 Gross Profit margin was due primarily to the
consolidation of lower-margin operations, primarily the CCEAG structural change
and the acquisitions of our interests in Odwalla, CCDA and CBC. These decreases
were partially offset by the sale and resulting deconsolidation of our Russian
and Baltics bottling operations. Our Gross Profit margin increase in 2001
compared to 2000 was primarily due to the sale in 2001 of our Japan vending and
German canning operations, partially offset by the consolidation in 2001 of the
Nordic and Brazilian bottling operations. Generally, bottling, canning and
vending operations produce higher net revenues but lower gross margins compared
to concentrate and syrup operations.
In 2000, certain bottlers reduced their concentrate inventory levels. This
was based on a joint review performed by the Company and our bottlers around the
world in order to determine the optimum level of bottler concentrate
inventories. The joint review established that opportunities existed to reduce
the level of concentrate inventory carried by bottlers in various regions of the
world. During the first half of 2000, bottlers in these regions reduced
concentrate inventory levels, the majority of which occurred during the first
three months of 2000. This reduction in bottler concentrate inventory levels
negatively impacted our Company's concentrate sales, thereby reducing Net
Operating Revenues, Cost of Goods Sold and Gross Profit.
2002 ANNUAL REPORT - 59
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Information about our Net Operating Revenues by operating segment on a
percentage basis is as follows:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- -----------------------------------------------------------------------------
North America 32.0% 32.7% 32.7%
Africa 3.5 3.6 3.6
Europe, Eurasia & Middle East 26.9 22.6 22.6
Latin America 10.7 12.4 11.7
Asia 25.8 27.7 28.5
Corporate 1.1 1.0 0.9
- ----------------------------------------------------------------------------
Net Operating Revenues 100.0% 100.0% 100.0%
============================================================================
- --------------------------------------------------------------------------------
The 2002 Net Operating Revenues for Europe, Eurasia and Middle East
increased primarily due to the consolidation of CCEAG. Net Operating Revenues in
2002 for Latin America were negatively impacted by exchange fluctuations and
challenging economic conditions, primarily in Argentina, Venezuela and Brazil.
As indicated by the table, changes from 2000 to 2001 were not significant.
Selling, General and Administrative Expenses
- --------------------------------------------
The following table includes the significant components of Selling, General and
Administrative Expenses (in millions):
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Selling expenses $ 4,690 $ 4,365 $ 4,315
General and administrative
expenses 1,946 1,743 1,658
Stock-based compensation
expense 365 41 43
- ----------------------------------------------------------------------------
Selling, General and
Administrative Expenses $ 7,001 $ 6,149 $ 6,016
============================================================================
- --------------------------------------------------------------------------------
Acquisitions of our interests in Odwalla, CCDA and CBC and the structural
change of CCEAG increased selling expenses by $430 million and general and
administrative expenses by $136 million in 2002. These increases were partially
offset by the sale and resulting deconsolidation of our Russian and Baltics
bottling operations.
The adoption of SFAS No. 142 and its related impact is discussed under
"Application of Critical Accounting Policies" and in Notes 1 and 4. Upon
adoption of SFAS No. 142, intangible assets that have indefinite lives and
goodwill previously amortized are no longer amortized. Due to the adoption of
SFAS No. 142, amortization expense for 2002 was reduced by approximately $60
million, and future years will be reduced by approximately $60 million annually.
Substantially all such amortization expense was included in the general and
administrative expenses line item.
As discussed under "Application of Critical Accounting Policies" and in
Notes 1 and 13, effective January 1, 2002, our Company adopted the preferable
fair value recognition provisions of SFAS No. 123 and selected the modified
prospective transition method under the provisions of SFAS No. 148. Prior to
2002, our Company accounted for stock-based compensation under the recognition
and measurement provisions of APB No. 25 and related interpretations. No
stock-based employee compensation expense for stock options was reflected in Net
Income for the years ended December 31, 2001 and 2000. In 2002, compensation
expense was recognized as if the fair value method of SFAS No. 123 had been
applied from its original effective date.
Acquisitions and structural changes increased Selling, General and
Administrative Expenses by approximately $45 million in 2001 compared to 2000.
The consolidation in 2001 of the Nordic and Brazilian bottling operations
accounted for a majority of the increase. The sale in 2001 of our Japan vending
and German canning operations partially offset this increase.
A stronger U.S. dollar relative to most major currencies decreased Selling,
General and Administrative Expenses in 2002 compared to 2001 and also in 2001
compared to 2000.
Pension Benefits
- ----------------
Net periodic cost for our defined benefit pension plans was $72 million, $62
million and $39 million, respectively, for the years ended December 31, 2002,
2001 and 2000. These expenses are included in general and administrative
expenses.
To develop our expected long-term rate of return assumption on our pension
plan assets, our Company uses long-term historical actual return experience, the
expected investment mix of the plans' assets and estimates of future long-term
investment returns. The expected long-term rate of return assumption is used in
the net periodic pension cost calculation. This assumption is reviewed and set
annually. For 2003, our weighted-average expected long-term rate of return
assumption will be approximately 7 1/4 percent compared to 8 1/4 percent in
2002. The discount rate assumption used for pension accounting reflects rates
available on high-quality, fixed-income debt instruments on December 31 of each
year.
60 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
The rate of compensation increase is another assumption used for pension
accounting and is determined by the Company based upon annual reviews.
The decrease in our expected weighted-average, long-term rate of return
assumption, a decrease in our discount rate assumption and increased
amortization of actuarial losses is expected to increase our net periodic
pension cost by $30 million to $40 million in 2003 compared to 2002.
Our Company funds the U.S. qualified pension plans in accordance with
Employee Retirement Income Security Act (ERISA) regulations for the minimum
annual contribution and with Internal Revenue Service (IRS) regulations for the
maximum annual contribution allowable as a tax deduction. International pension
plans are funded in accordance with local laws and income tax regulations.
As of December 31, 2002, the projected benefit obligation of the primary
qualified U.S. pension plan was $1,205 million, and the fair value of plan
assets was $1,028 million. In 2002, we made a contribution to this plan of $124
million, which was the maximum tax-deductible contribution allowed by the IRS.
In January 2003, we made a contribution to the plan of $145 million.
As of December 31, 2002, the projected benefit obligation of all other
pension plans was $977 million, and the fair value of all other pension plan
assets was $424 million. The majority of this difference is attributable to an
international pension plan for certain non-U.S. employees that is unfunded due
to tax law restrictions, as well as our unfunded U.S. nonqualified pension
plans. These U.S. nonqualified pension plans provide benefits for certain
members of management that are not permitted to be funded through a qualified
plan because of limits imposed by the Internal Revenue Code.
Refer to Note 14.
Other Operating Charges
- -----------------------
During 2000, we recorded total Other Operating Charges of approximately $1,443
million. Of this $1,443 million, approximately $405 million related to the
impairment of certain bottling, manufacturing and intangible assets;
approximately $850 million related to the Realignment; and approximately $188
million related to the settlement terms of a class action discrimination
lawsuit.
In the first quarter of 2000, we recorded charges of approximately $405
million related to the impairment of certain bottling, manufacturing and
intangible assets, primarily within our Indian bottling operations. These
impairment charges were recorded to reduce the carrying value of the identified
assets to fair value. Fair value was derived using cash flow analysis. The
assumptions used in the cash flow analysis were consistent with those used in
our internal planning. The assumptions included estimates of future growth in
unit cases, gross margins, the impact of exchange rates and tax rates and
incentives. The charge was primarily the result of our revised outlook for the
Indian beverage market including the future expected tax environment. The
remaining carrying value of long-lived assets within our Indian bottling
operations, immediately after recording the impairment charge, was approximately
$300 million.
In the first quarter of 2000, the Company initiated the Realignment, which
reduced our workforce around the world and transferred responsibilities from our
corporate headquarters to local revenue-generating operating units. The intent
of the Realignment was to effectively align our corporate resources, support
systems and business culture to fully leverage the local capabilities of our
system.
Employees were separated from almost all functional areas of the Company's
operations, and certain activities were outsourced to third parties. The total
number of employees separated as of December 31, 2000 was approximately 5,200.
Employees separated from the Company as a result of the Realignment were offered
severance or early retirement packages, as appropriate, which included both
financial and nonfinancial components. The Realignment expenses included costs
associated with involuntary terminations, voluntary retirements and other direct
costs associated with implementing the Realignment. Other direct costs included
repatriating and relocating employees to local markets; asset write-downs; lease
cancellation costs; and costs associated with the development, communication and
administration of the Realignment. We recorded total charges of approximately
$850 million related to the Realignment. During 2000, the Company achieved
approximately $150 million in savings from the Realignment. Refer to Note 17.
In the fourth quarter of 2000, we recorded charges of approximately $188
million related to the settlement terms of, and direct costs related to, a class
action discrimination lawsuit. The monetary settlement included cash payments to
fund back pay, compensatory damages, a promotional achievement fund and
attorneys' fees. In addition, the Company introduced a wide range of training,
monitoring
2002 ANNUAL REPORT - 61
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
and mentoring programs. Of the $188 million, $50 million was donated to The
Coca-Cola Foundation to continue its broad range of community support programs.
In 2001, our Company paid out substantially all of this settlement.
Operating Income and Operating Margin
- -------------------------------------
Information about our Operating Income by operating segment on a percentage
basis is as follows:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- -----------------------------------------------------------------------------
North America 27.4% 27.7% 38.2%
Africa 4.1 5.2 4.4
Europe, Eurasia & Middle East 29.5 27.3 35.5
Latin America 19.0 20.4 24.6
Asia 33.3 32.9 25.9
Corporate (13.3) (13.5) (28.6)
- -----------------------------------------------------------------------------
Operating Income 100.0% 100.0% 100.0%
=============================================================================
- --------------------------------------------------------------------------------
As demonstrated by the table above, the percentage contribution by each
operating segment to Operating Income fluctuated from year to year. Operating
Income was influenced by a variety of factors and events, primarily the
following items:
- In 2002, Latin America was negatively impacted by exchange fluctuations and
challenging economic conditions, primarily in Argentina, Venezuela and
Brazil.
- In 2002, Operating Income was reduced by $119 million for North America,
$24 million for Africa, $51 million for Europe, Eurasia and the Middle
East, $22 million for Latin America, $51 million for Asia and $106 million
for Corporate to include the impact of adopting the fair value method of
accounting for stock-based compensation under SFAS No. 123.
- In the first quarter of 2000, Operating Income was reduced by $3 million
for North America, $397 million for Asia and $5 million for Corporate
related to the other operating charges recorded for asset impairments.
- The Realignment in 2000 accounted for operating charges of $132 million for
North America, $40 million for Africa, $198 million for Europe, Eurasia and
Middle East, $59 million for Latin America, $127 million for Asia and $294
million for Corporate.
- In 2000, a $188 million charge was recorded by Corporate related to the
settlement terms of a discrimination lawsuit, including a donation to The
Coca-Cola Foundation.
- As previously discussed, certain bottlers reduced their concentrate
inventory levels in 2000. This reduction negatively impacted 2000 Operating
Income and Operating Margin.
MARGIN ANALYSIS (Chart converted to table)
2002 2001 2000
- ------------------------------------------------------------------------------
Net Operating Revenues
(in billions) $ 19.6 $ 17.5 $ 17.4
Gross Margin 63.7% 65.6% 64.3%
Operating Margin 27.9% 30.5% 21.3%
- ------------------------------------------------------------------------------
Interest Income and Interest Expense
- ------------------------------------
A majority of the 2002 decrease of $116 million in Interest Income compared to
2001 was due to lower interest rates earned on short-term investments during
2002. Nevertheless, the Company continues to benefit from cash invested in
locations outside the United States earning higher interest rates than could be
obtained within the United States. Conversely, a majority of our Interest
Expense is incurred on borrowings in the United States. The 2002 decrease in
interest expense of $90 million versus 2001 was due mainly to both a decrease in
average commercial paper borrowings and lower interest rates for commercial
paper borrowings. The decrease in interest expense for commercial paper
borrowings was partially offset by increased interest expense on long-term debt
related to the consolidation of CCEAG (refer to Note 18) and the issuance during
2002 of $750 million of notes due June 1, 2005. The proceeds from this $750
million long-term debt issuance were used to reduce current debt (refer to Note
7).
In 2001, our Interest Income decreased by $20 million primarily due to
lower interest rates. Interest Expense decreased in 2001 by $158 million due to
both a decrease in average commercial paper borrowings and lower interest rates.
In 2001, the Company used cash flow from operations after capital expenditures
to reduce commercial paper borrowings.
62 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Equity Income (Loss)
- --------------------
A $232 million increase in 2002 Equity Income (Loss), as compared to 2001, was
due to the overall improving health of the Coca-Cola bottling system around the
world and the favorable impact of reduced amortization resulting from the
adoption of SFAS No. 142. Specific items with a positive impact to Equity Income
(Loss) were the increase in equity income for Coca-Cola Enterprises of
approximately $209 million due to improving trends in operating and financial
performance (which included a $90 million favorable impact resulting from the
adoption of SFAS No. 142) and the reduction in amortization expenses of
approximately $60 million for investments other than Coca-Cola Enterprises
resulting from the implementation of SFAS No. 142. Due to the adoption of SFAS
No. 142, Equity Income (Loss) for 2002 was increased by approximately $150
million, and future years will be increased by approximately $150 million
annually as a result of reduced amortization expense. These increases were
offset by selected equity method investments in Latin America that have been
adversely impacted by ongoing economic difficulties, as well as our Company's
share of impairment and restructuring charges taken by certain equity method
investees in Latin America during the third quarter of 2002. The Company's share
of these charges was approximately $33 million.
For 2002, our Company's share of income from equity method investees was
also favorably impacted by a benefit related to our share of the gain on the
sale by Cervejarias Kaiser S.A. (Kaiser S.A.) of its interests in Cervejarias
Kaiser Brazil, Ltda to Molson Inc. (refer to Note 16). Approximately $21 million
of our share of the pretax gain from the sale by Kaiser S.A. was recorded in
Equity Income (Loss) with the remaining portion, $22 million, recorded in the
caption Other Income (Loss)--Net.
Our Company's share of income from equity method investments in 2001,
versus a loss in 2000, was due primarily to an improvement in operating
performance by the majority of our equity investees and the impact of impairment
charges on equity investees in 2000 as discussed below.
As of January 1, 2001, Coca-Cola Enterprises changed its method of
accounting for infrastructure development payments received from the Company.
Prior to this change, Coca-Cola Enterprises recognized these payments as offsets
to incremental expenses of the programs in the periods in which they were
incurred. Coca-Cola Enterprises now recognizes the infrastructure development
payments received from the Company as income when obligations are performed
under the contracts. Because we eliminate the financial effect of significant
intercompany transactions (including transactions with equity method investees),
this change in accounting method by Coca-Cola Enterprises had no impact on the
results of our operations. Refer to Note 2.
In 2000, our Company's share of losses from equity method investments
totaled $289 million. This included a charge of approximately $306 million for
the Company's portion of a charge recorded by Coca-Cola Amatil to reduce the
carrying value of its investment in the Philippines. In addition, Panamerican
Beverages, Inc. (Panamco) wrote down selected assets, including the impairment
of the value of its Venezuelan operating unit. The Company's portion of this
charge was approximately $124 million. Also contributing to the equity losses
were charges recorded by investees in Eurasia and the Middle East. These charges
were partially offset by an overall improvement in operating performance by our
investee bottlers and the positive impact of lower tax rates on current and
deferred taxes at CCEAG.
Other Income (Loss)--Net
- ------------------------
Other Income (Loss)--Net in 2002 was principally composed of foreign currency
exchange losses of approximately $118 million, the accretion of the discounted
value of the CCEAG liability of approximately $38 million (refer to Note 18),
the items discussed in this section below and minority interest accruals. The
losses on currency exchange primarily occurred in Latin America and Africa,
which experienced significant devaluation of currencies. The increase in the
minority interest accruals primarily related to the acquisitions of our
interests in CBC and CCDA. Refer to Note 18.
In the first quarter of 2002, our Company recorded a noncash pretax charge
of approximately $157 million, primarily related to the write-down of certain
investments in Latin America. This write-down reduced the carrying value of the
investments to fair value. The charge was primarily the result of the economic
developments in Argentina during the first quarter of 2002, including the
devaluation of the Argentine peso and the severity of the unfavorable economic
conditions. The Company expects to realize a minimal tax benefit from this
write-down. The impact on 2002 diluted earnings per share was an after-tax
reduction of approximately $0.06 per share
2002 ANNUAL REPORT - 63
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
As previously noted, $22 million of our share of the pretax gain from the
sale by Kaiser S.A. was recorded in Other Income (Loss)--Net in 2002.
In 2001, Other Income (Loss)--Net declined to $39 million from $99 million
in 2000, primarily reflecting the impact of a gain related to the merger of
Coca-Cola Beverages and Hellenic Bottling Company S.A. during the third quarter
of 2000. This merger resulted in a decrease of our Company's equity ownership
interest from approximately 51 percent of Coca-Cola Beverages to approximately
24 percent of the combined entity, CCHBC. As a result of our Company's decreased
equity ownership, a tax-free noncash gain of approximately $118 million was
recognized.
Gains on Issuances of Stock by Equity Investee
- ----------------------------------------------
If and when an equity investee issues its stock to third parties at a price in
excess of our book value, our Company's equity in the underlying net assets of
that investee increases. We generally record an increase to our investment
account and a corresponding gain for these transactions. In July 2001, Coca-Cola
Enterprises completed its acquisition of Hondo Incorporated and Herbco
Enterprises, Inc., collectively known as Herb Coca-Cola. The transaction was
valued at approximately $1.4 billion, with approximately 30 percent of the
transaction funded with the issuance of approximately 25 million shares of
Coca-Cola Enterprises common stock, and the remaining portion funded through
debt and assumed debt. The issuance of shares resulted in a noncash pretax gain
for our Company of approximately $91 million. This gain represents the increase
in our Company's equity in the underlying net assets of the related investee. No
gains on issuances of stock by equity investees were recorded to our statements
of income during 2002 or 2000. Refer to Note 3.
Income Taxes
- ------------
Our effective tax rate reflects tax benefits derived from significant operations
outside the United States, which are generally taxed at rates lower than the
U.S. statutory rate of 35 percent.
The effective tax rate for 2002 of 27.7 percent was impacted by two
significant items: our share of the gain on the sale of Kaiser S.A. interests
and the write-down of certain investments, primarily in Latin America. Excluding
the impact of these items, our effective tax rate would have been approximately
27 percent for 2002. For 2003, the Company expects the ongoing effective tax
rate to be approximately 27 percent.
The decrease in our effective tax rate in 2001 was primarily due to
effective tax planning and the impact that the impairment charges recorded in
2000 had on the 2000 effective tax rate. The 2000 effective tax rate was
primarily the result of our inability to realize a tax benefit associated with
the impairment charges recorded in 2000, as previously discussed under the
headings "Other Operating Charges" and "Equity Income (Loss)," partially offset
by the tax-free gain of approximately $118 million related to the merger of
Coca-Cola Beverages and Hellenic Bottling Company S.A., previously discussed
under the heading "Other Income (Loss)--Net." Refer to Note 16.
During the first quarter of 2000, the U.S. and Japan taxing authorities
entered into an Advance Pricing Agreement (APA) whereby the level of royalties
paid by Coca-Cola (Japan) Company, Ltd. (our Subsidiary) to our Company was
established for the years 1993 through 2001. Pursuant to the terms of the APA,
our Subsidiary filed amended returns for the applicable periods reflecting the
negotiated royalty rate. These amended returns resulted in the payment during
the first and second quarters of 2000 of additional Japanese taxes. The effect
on our financial performance and our effective tax rate was not material, due
primarily to offsetting tax credits utilized on our U.S. income tax returns. The
majority of the offsetting tax credits were realized in the first quarter of
2002.
64 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Cumulative Effect of Accounting Change for SFAS No. 142,
Net of Income Taxes
- --------------------------------------------------------
The adoption of SFAS No. 142 is a required change in accounting principle, and
the cumulative effect of adopting this standard as of January 1, 2002 resulted
in a noncash, after-tax decrease to net income of $367 million for Company
operations and $559 million for the Company's proportionate share of its equity
method investees. As noted above, the adoption of this accounting standard
resulted in a pretax reduction in 2002 amortization expense of approximately $60
million, and 2002 equity income increased by approximately $150 million. Due to
the adoption of SFAS No. 142, future years' amortization expense will also be
reduced by approximately $60 million annually, and equity income will increase
by approximately $150 million annually as a result of reduced amortization for
equity method investees. Refer to the heading "Application of Critical
Accounting Policies" and Notes 1 and 4.
Recent Developments
- -------------------
During the first quarter of 2003, the Company initiated steps to streamline and
simplify its operations, primarily in North America and Germany.
In North America, the Company is integrating the operations of our three
separate North American business units-Coca-Cola North America (including our
interest in CCDA), The Minute Maid Company (including our Odwalla business) and
Fountain. The integration is expected to result in a headcount reduction of
approximately 1,000 people, with the identification of the individuals expected
to be completed by the end of the first quarter of 2003.
In Germany, CCEAG has taken steps to improve efficiency in sales and
distribution, including the closure of three bottling plants in 2003. The
streamlining initiative is expected to affect approximately 900 employees in
Germany.
The above initiatives are expected to result in a full-year 2003 charge to
earnings of approximately $400 million on a pretax basis. The charge will be
recorded primarily in the first and second quarters of 2003, with certain
amounts impacting the second half of 2003.
As a result of the above initiatives, the Company's financial results are
expected to benefit by at least $50 million (pretax) in 2003 and at least $100
million (pretax) on an annualized basis beginning in 2004.
LIQUIDITY AND CAPITAL RESOURCES
We believe our ability to generate cash from operations to reinvest in our
business is one of our fundamental financial strengths. We expect cash flows
from operations to be strong in 2003 and in future years. For the five-year
period from 2003 through 2007, we estimate that cumulative cash flows from
operations will be approximately $31 billion to $33 billion. Accordingly, our
Company expects to meet all our financial commitments and operating needs during
this time frame. Cash will be used for marketing commitments and other operating
commitments, as well as investing and financing activities, including capital
expenditures, dividends, share repurchases, acquisitions and debt repayment.
Cash Flows from Operating Activities and Investing Activities
- -------------------------------------------------------------
Our statements of cash flows are summarized as follows
(in millions):
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- --------------------------------------------------------------------------------
Net cash provided by
operating activities $ 4,742 $ 4,110 $ 3,585
Cash flows (used in) provided
by investing activities:
Acquisitions and
investments (544) (651) (397)
Purchases of investments
and other assets (156) (456) (508)
Proceeds from
disposals of investments
and other assets 243 455 290
Purchases of property,
plant and equipment (851) (769) (733)
Other 121 233 183
- ----------------------------------------------------------------------------
Net cash used in
investing activities $(1,187) $ (1,188) $ (1,165)
============================================================================
- --------------------------------------------------------------------------------
Cash flows from operating activities increased by 15 percent for 2002
compared to 2001 primarily as a result of improved worldwide business operating
results. Additionally, collection of tax receivables in 2002 of approximately
$280 million in connection with the APA (refer to Note 15) increased our cash
flows. These increases were partially offset by the following:
- pension plan contributions of approximately $124 million made during the
second quarter of 2002;
- a stronger U.S. dollar.
2002 ANNUAL REPORT - 65
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Cash provided by operating activities in 2001 increased 15 percent from
2000. Solid 2001 business results primarily contributed to this increase.
Additionally, 2000 operating cash flows were unfavorably impacted by the
previously mentioned planned inventory reduction by certain bottlers as
discussed under the heading "Net Operating Revenues," cash used in 2000 related
to Realignment payments (refer to Note 17), and tax payments made pursuant to
the terms of the APA. Refer to Note 15. These items were partially offset by a
stronger U.S. dollar in 2001.
During 2002, cash outlays for investing activities included purchases of
property, plant and equipment of $851 million and the acquisitions of our
interests in CBC and CCDA for total combined consideration of approximately $328
million (refer to Note 18). These items were partially offset by the receipt of
approximately $146 million in 2002 related to the 2001 sale of our Company's
ownership interests in various Russian bottling operations.
The acquisitions of the Brazilian and Nordic bottling operations and
Odwalla, together with the increased purchases of property, plant and equipment,
primarily caused a $23 million increase in cash flows used in investing
activities in 2001 versus 2000. Proceeds received from the sale of our Japan
vending operations partially offset this increase.
Total capital expenditures for property, plant and equipment (including our
investments in information technology) and the percentage of such totals by
operating segment for 2002, 2001 and 2000 are as follows:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Capital expenditures
(in millions) $ 851 $ 769 $ 733
- ----------------------------------------------------------------------------
North America 39% 44% 35%
Africa 2% 1% 1%
Europe, Eurasia & Middle East 19% 14% 27%
Latin America 4% 5% 2%
Asia 25% 14% 18%
Corporate 11% 22% 17%
- ----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Our Company currently estimates that purchases of property, plant and
equipment are not expected to exceed $1 billion for 2003.
Financing Activities
- --------------------
Our cash flows used in financing activities are as follows
(in millions):
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Cash flows (used in) provided
by financing activities:
Issuances of debt $ 1,622 $ 3,011 $ 3,671
Payments of debt (2,378) (3,937) (4,256)
Issuances of stock 107 164 331
Purchases of stock
for treasury (691) (277) (133)
Dividends (1,987) (1,791) (1,685)
- ----------------------------------------------------------------------------
Net cash used in
financing activities $ (3,327) $ (2,830) $ (2,072)
============================================================================
- --------------------------------------------------------------------------------
Issuances and payments of debt included both short-term and long-term
financing activities. The Company's commercial paper borrowings normally mature
in less than three months from the date of issuance. On December 31, 2002, we
had $2,331 million in lines of credit and other short- term credit facilities
available, of which approximately $353 million was outstanding. All of this $353
million relates to our international subsidiaries.
The issuances of debt in 2002 primarily included $832 million of issuances
of commercial paper with maturities over 90 days and $750 million in issuances
of long-term notes due June 1, 2005. The payments of debt in 2002 primarily
included $816 million related to commercial paper with maturities over 90 days,
net payments of $1,280 million related to commercial paper with maturities less
than 90 days and the $150 million redemption of 6 5/8 percent U.S. dollar notes.
The issuances of debt in 2001 and 2000 primarily included $2,383 million
and $3,576 million, respectively, of issuances of commercial paper with
maturities over 90 days. In 2001, we also had a $500 million issuance of
long-term debt. The payments of debt in 2001 and 2000 primarily included $3,864
million and $3,624 million, respectively, related to commercial paper with
maturities over 90 days. Net issuances related to commercial paper with
maturities less than 90 days were $40 million in 2001. Net payments related to
commercial paper with maturities less than 90 days were $317 million in 2000.
66 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
During 2002 and 2001, the Company repurchased common stock under the share
repurchase plan authorized by our Board of Directors in October 1996. Our
Company expects to make share repurchases of approximately $1.5 billion in 2003.
As cash flows are expected to increase in subsequent years, our subsequent share
repurchases are also expected to increase.
Dividends have increased every year for each of the last 41 years, and we
expect these increases to continue in the future.
Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations
- ------------------------------------------
Off-Balance Sheet Arrangements - In accordance with the definition under new
Securities and Exchange Commission rules, the following qualify as off-balance
sheet arrangements:
- - any obligation under certain guarantees or contracts;
- - a retained or contingent interest in assets transferred to an unconsolidated
entity or similar entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets;
- - any obligation under certain derivative instruments;
- - any obligation under a material variable interest held by the registrant in
an unconsolidated entity that provides financing, liquidity, market risk or
credit risk support to the registrant, or engages in leasing, hedging or
research and development services with the registrant.
The discussion below addresses each of the above items for our Company.
On December 31, 2002, our Company was contingently liable for guarantees of
indebtedness owed by third parties in the amount of $494 million. Management
concluded that the likelihood of any material amounts being paid by our Company
is not probable. We do not provide any other guarantees. As of December 31,
2002, we are not liable for the debt of any unconsolidated entity, and we do not
have any retained or contingent interest in assets as defined above.
Additionally, all of our derivative instruments are recorded in our balance
sheets. Refer to Notes 10 and 11.
Our Company has equity ownership interests in bottlers that we currently
account for under the equity method of accounting. For certain bottlers, our
Company holds variable interests such as providing financing and guarantees, in
addition to our equity investments. As a result, these bottlers may be
considered variable interest entities, and it is reasonably possible that the
Company may be required to consolidate such variable interest entities when
Financial Accounting Standards Board (FASB) Interpretation No. 46 becomes
effective on July 1, 2003. The difference between consolidation and the equity
method impacts certain financial ratios because of the presentation of the
detailed line items reported in the financial statements. However, consolidated
net income for the period and our share-owners' equity at the end of the period
are the same whether the investment is accounted for under the equity method or
is consolidated. We do not expect this interpretation to have a material impact
on our financial statements.
2002 ANNUAL REPORT - 67
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
Aggregate Contractual Obligations - As of December 31, 2002, the Company's
contractual obligations, including payments due by period, are as follows (in
millions):
- -------------------------------------------------------------------------------------------------------------------
Payments Due by Period
-------------------------------------------------------------------
2008 and
Total 2003 2004-2005 2006-2007 Thereafter
- ----------------------------------------------------------------------------------------------------------------
Short-term loans and notes payable:
Commercial paper borrowings $ 2,122 $ 2,122 $ - $ - $ -
Lines of credit and other
short-term borrowings 353 353 - - -
Current maturities of long-term debt 180 180 - - -
Long-term debt 2,701 - 1,611 24 1,066
Marketing and other commitments 2,550 403 731 510 906
Purchase obligations 4,577 752 892 524 2,409
Present value of liability to
CCEAG share owners 741 - - 741 -
- ----------------------------------------------------------------------------------------------------------------
Total contractual obligations $ 13,224 $ 3,810 $ 3,234 $ 1,799 $ 4,381
================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
As of December 31, 2002, the total other noncurrent liabilities included in
our balance sheet not presented in the above table were $1,918 million. Refer to
Notes 6, 7, 11, 14, 15 and 18.
Exchange
- --------
Our international operations are subject to certain opportunities and risks,
including currency fluctuations and government actions. We closely monitor our
operations in each country and seek to adopt appropriate strategies that are
responsive to changing economic and political environments and to fluctuations
in foreign currencies.
We use approximately 53 functional currencies. Due to our global
operations, weaknesses in some of these currencies are often offset by strengths
in others. In 2002, 2001 and 2000, the weighted-average exchange rates for
foreign currencies in which the Company conducts operations (all operating
currencies), and for certain individual currencies, strengthened (weakened)
against the U.S. dollar as follows:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- --------------------------------------------------------------------------------
All operating currencies (3)% (8)% (5)%
- ----------------------------------------------------------------------------
Australian dollar 5 % (13)% (8)%
British pound 5 % (5)% (7)%
Euro 5 % (5)% (14)%
Japanese yen (3)% (11)% 4 %
Mexican peso (3)% 1 % 2 %
South African rand (20)% (17)% (15)%
- ----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
68 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
These percentages do not include the effects of our hedging activities and,
therefore, do not reflect the actual impact of fluctuations in exchange on our
operating results. Our foreign currency management program is designed to
mitigate, over time, a portion of the impact of exchange on Net Income and
earnings per share. Taking into account the effects of our hedging activities,
the impact of a stronger U.S. dollar reduced our Operating Income by
approximately 3 percent in 2002, approximately 5 percent in 2001 and
approximately 4 percent in 2000. Based on forecasts as of December 31, 2002, the
Company expects exchange to have a neutral to slightly positive impact on our
2003 operating results when compared to 2002.
Exchange gains (losses)--net amounted to $(118) million in 2002, $(9)
million in 2001 and $(12) million in 2000 and were recorded in Other Income
(Loss)--Net in our statements of income. Exchange gains (losses)--net includes
the remeasurement of monetary assets and liabilities from certain currencies
into functional currencies and the costs of hedging certain exposures of our
balance sheet.
Refer to Note 10.
FINANCIAL POSITION
Our balance sheet as of December 31, 2002, as compared to our balance sheet as
of December 31, 2001, was significantly impacted by our Company's acquisition of
CCEAG. Prior to consolidation, our investment in CCEAG was recorded as an equity
method investment. Thus, the $716 million decrease in Equity Method
Investments-Other, Principally Bottling Companies was primarily driven by the
consolidation of CCEAG. Upon consolidation of CCEAG, the individual balances
were included in the Company's respective balance sheet line items. The
consolidations of CCEAG, CCDA, CBC and Odwalla were the main reason for the
following changes in the Company's balance sheet from December 31, 2001 to
December 31, 2002:
(1) $215 million increase in Trade Accounts Receivable;
(2) $239 million increase in Inventories;
(3) $1,458 million increase in Property, Plant and Equipment;
(4) $974 million increase in goodwill, trademarks and other intangible assets;
(5) $1,299 million increase in Other Liabilities.
Additionally, the asset impairments recorded as a result of the adoption of
SFAS No. 142, which was effective January 1, 2002, also impacted the December
31, 2002 balance sheet, by reducing the balances in both investments and Other
Assets and goodwill, trademarks and other intangible assets. Refer to Notes 1
and 4.
The $1,482 million increase in the Company's Long-Term Debt during 2002 was
primarily due to two factors. The first factor was the consolidation of CCEAG,
which had the effect of increasing debt by $843 million as of December 31, 2002,
of which approximately $800 million is classified as long-term. The second
factor was the issuance during 2002 of $750 million of notes due June 1, 2005.
The proceeds of this $750 million long-term debt issuance were used to reduce
current debt.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation affects the way we operate in many markets around the world. In
general, we believe that over time we are able to increase prices to counteract
the majority of the inflationary effects of increasing costs and to generate
sufficient cash flows to maintain our productive capability.
NEW ACCOUNTING STANDARDS
Effective January 1, 2002, our Company adopted the preferable fair value
recognition provisions of SFAS No. 123 using the modified prospective transition
method under the provisions of SFAS No. 148. Refer to the above heading
"Application of Critical Accounting Policies-Stock-Based Compensation" and Notes
1 and 13.
Effective January 1, 2002, our Company adopted SFAS No. 142. Refer to the
above heading "Application of Critical Accounting Policies-Goodwill, Trademarks
and Other Intangible Assets" and Notes 1 and 4.
Effective January 1, 2002, our Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement requires
the following three-step approach for assessing and recognizing the impairment
of long-lived assets: (1) consider whether indicators of impairment of
long-lived assets are present; (2) if indicators of impairment are present,
determine whether the sum of the estimated undiscounted future cash flows
attributable to the
2002 ANNUAL REPORT - 69
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
assets in question is less than their carrying amount; and (3) if less,
recognize an impairment loss based on the excess of the carrying amount of the
assets over their respective fair values. In addition, SFAS No. 144 provides
more guidance on estimating cash flows when performing a recoverability test,
requires that a long-lived asset to be disposed of other than by sale (such as
abandoned) be classified as "held and used" until it is disposed of, and
establishes more restrictive criteria to classify an asset as "held for sale."
The adoption of SFAS No. 144 did not have a material impact on our financial
statements since it retained the fundamental provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," related to the recognition and measurement of the impairment of
long-lived assets to be "held and used." However, we believe SFAS No. 144 is a
statement impacting our critical accounting estimates for Other Assets and for
Property, Plant and Equipment. For further discussion, refer to the heading
"Application of Critical Accounting Policies--Recoverability of Noncurrent
Assets."
Effective January 1, 2002, our Company adopted the provisions of Emerging
Issues Task Force (EITF) Issue No. 01-9, "Accounting for Consideration Given by
a Vendor to a Customer or a Reseller of the Vendor's Products." EITF Issue No.
01-9 codifies and reconciles the EITF consensuses on all or specific aspects of
EITF Issues No. 00-14, "Accounting for Certain Sales Incentives," No. 00-22,
"Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales
Incentives Offers, and Offers for Free Products or Services to be Delivered in
the Future," and No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products," and identifies other
related interpretive issues. The types of sales incentives provided by our
Company to bottlers, resellers, vendors and customers of our Company's products
principally include participation in sales promotion programs and volume-based
incentives. Our Company adopted the provisions of EITF Issues No. 00-14 and No.
00-22 on January 1, 2001, resulting in the income statement reclassification of
certain sales incentives. Upon adoption of EITF Issues No. 00-14 and No. 00-22,
the Company reduced both Net Operating Revenues and Selling, General and
Administrative Expenses by approximately $580 million and $569 million for the
years ended December 31, 2001 and 2000, respectively. EITF Issue No. 01-9
required certain selling expenses incurred by the Company, not previously
reclassified, to be classified as deductions from revenue. The adoption of the
remaining items included in EITF Issue No. 01-9 resulted in the Company reducing
both Net Operating Revenues and Selling, General and Administrative Expenses by
approximately $2.5 billion in each of the years ended December 31, 2001 and
2000. These reclassifications had no impact on Operating Income. The aggregate
amount of funds provided by our Company to bottlers, resellers, vendors and
customers of our Company's products was approximately $3.4 billion, $3.1 billion
and $3.1 billion, respectively, for the years ended December 31, 2002, 2001 and
2000. The increase in 2002 compared to 2001 was primarily due to structural
changes.
Our Company adopted the provisions of SFAS No. 141, "Business
Combinations," for all business combinations initiated after June 30, 2001. SFAS
No. 141 requires all business combinations to be accounted for by a single
method--the purchase method. Furthermore, SFAS No. 141 requires recognition of
intangible assets apart from goodwill if they arise from contractual or legal
rights or if they are separable from goodwill. This statement did not have a
material impact on our financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost
as defined was recognized at the date of an entity's commitment to an exit plan.
SFAS No. 146 also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is effective for exit and disposal
activities that are initiated after December 31, 2002. This statement will
impact the timing of our recognition of liabilities for costs associated with
exit or disposal activities.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137
and SFAS No. 138. As discussed further in Note 10, the 2002 and 2001
70 - THE COCA-COLA COMPANY
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
financial statements were prepared in accordance with the provisions of SFAS No.
133. Prior years' financial statements have not been restated. The 2000
financial statements were prepared in accordance with the applicable
professional literature for derivatives and hedging instruments in effect at
that time.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor in interim and annual financial statements
about the obligations under certain guarantees. Our Company adopted the
disclosure provisions of FASB Interpretation No. 45 as of December 31, 2002.
FASB Interpretation No. 45 also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. We
do not currently provide significant guarantees on a routine basis. As a result,
we do not currently believe this interpretation will have a material impact on
our financial statements. To the extent that our Company enters into any such
guarantees after December 31, 2002, we will record the fair value as an expense.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation addresses the consolidation of
business enterprises (variable interest entities) to which the usual condition
of consolidation does not apply. This interpretation focuses on financial
interests that indicate control. It concludes that in the absence of clear
control through voting interests, a company's exposure (variable interest) to
the economic risks and potential rewards from the variable interest entity's
assets and activities are the best evidence of control. Variable interests are
rights and obligations that convey economic gains or losses from changes in the
values of the variable interest entity's assets and liabilities. Variable
interests may arise from financial instruments, service contracts, nonvoting
ownership interests and other arrangements. If an enterprise holds a majority of
the variable interests of an entity, it would be considered the primary
beneficiary. The primary beneficiary would be required to include assets,
liabilities and the results of operations of the variable interest entity in its
consolidated financial statements. This interpretation applies immediately to
variable interest entities which are created after or for which control is
obtained after January 31, 2003. For variable interest entities created prior to
February 1, 2003, the provisions would be applied effective July 1, 2003. Refer
to the heading "Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations."
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by our Company and subsidiaries or with
the approval of an authorized executive officer of our Company may constitute
"forward-looking statements" as defined under the Private Securities Litigation
Reform Act of 1995, including statements made in this report and other filings
with the Securities and Exchange Commission. Generally, the words "believe,"
"expect," "intend," "estimate," "anticipate," "project," "will" and similar
expressions identify forward-looking statements, which generally are not
historical in nature. All statements which address operating performance, events
or developments that we expect or anticipate will occur in the future--including
statements relating to volume growth, share of sales and earnings per share
growth and statements expressing general optimism about future operating
results--are forward-looking statements. Forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from our Company's historical experience and our present expectations
or projections. As and when made, management believes that these forward-looking
statements are reasonable. However, caution should be taken not to place undue
reliance on any such forward-looking statements since such statements speak only
as of the date when made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
2002 ANNUAL REPORT - 71
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS
The Coca-Cola Company and Subsidiaries
The following are some of the factors that could cause our Company's actual
results to differ materially from the expected results described in or
underlying our Company's forward-looking statements:
- - Economic and political conditions, especially in international markets,
including civil unrest, product boycotts, governmental changes and
restrictions on the ability to transfer capital across borders. Without
limiting the preceding sentence, the current unstable economic and political
conditions and civil unrest in the Middle East and Venezuela, potential or
actual conflicts in Iraq, North Korea or elsewhere, or the continuation or
escalation of terrorism, could have adverse impacts on our Company's business
results or financial condition.
- - Changes in the nonalcoholic beverages business environment. These include,
without limitation, changes in consumer preferences, competitive product and
pricing pressures and our ability to gain or maintain share of sales in the
global market as a result of actions by competitors. Factors such as these
could impact our earnings, share of sales and volume growth.
- - Foreign currency rate fluctuations, interest rate fluctuations and other
capital market conditions. Most of our exposures to capital markets,
including foreign currency and interest rates, are managed on a consolidated
basis, which allows us to net certain exposures and, thus, take advantage of
any natural offsets. We use derivative financial instruments to reduce our
net exposure to financial risks. There can be no assurance, however, that our
financial risk management program will be successful in reducing capital
market exposures.
- - Adverse weather conditions, which could reduce demand for Company products.
- - The effectiveness of our advertising, marketing and promotional programs.
- - Fluctuations in the cost and availability of raw materials and the ability to
maintain favorable supplier arrangements and relationships.
- - Our ability to achieve earnings forecasts, which are generated based on
projected volumes and sales of many product types, some of which are more
profitable than others. There can be no assurance that we will achieve the
projected level or mix of product sales.
- - Changes in laws and regulations, including changes in accounting standards,
taxation requirements (including tax rate changes, new tax laws and revised
tax law interpretations), competition laws and environmental laws in domestic
or foreign jurisdictions.
- - Our ability to penetrate developing and emerging markets, which also depends
on economic and political conditions, and how well we are able to acquire or
form strategic business alliances with local bottlers and make necessary
infrastructure enhancements to production facilities, distribution networks,
sales equipment and technology. Moreover, the supply of products in
developing markets must match the customers' demand for those products, and
due to product, price and cultural differences, there can be no assurance of
product acceptance in any particular market.
- - The uncertainties of litigation, as well as other risks and uncertainties
detailed from time to time in our Company's Securities and Exchange
Commission filings.
The foregoing list of important factors is not exclusive.
ADDITIONAL INFORMATION
For additional information about our operations, cash flows, liquidity and
capital resources, please refer to the information on pages 73 through 107 of
this report. Additional information concerning our operating segments is
presented on pages 104 through 106.
72 - THE COCA-COLA COMPANY
CONSOLIDATED STATEMENTS OF INCOME
The Coca-Cola Company and Subsidiaries
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- --------------------------------------------------------------------------------------------------
(In millions except per share data)
NET OPERATING REVENUES $ 19,564 $ 17,545 $ 17,354
Cost of goods sold 7,105 6,044 6,204
- ------------------------------------------------------------------------------------------------
GROSS PROFIT 12,459 11,501 11,150
Selling, general and administrative expenses 7,001 6,149 6,016
Other operating charges - - 1,443
- ------------------------------------------------------------------------------------------------
OPERATING INCOME 5,458 5,352 3,691
Interest income 209 325 345
Interest expense 199 289 447
Equity income (loss) 384 152 (289)
Other income (loss)--net (353) 39 99
Gains on issuances of stock by equity investee - 91 -
- ------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 5,499 5,670 3,399
Income taxes 1,523 1,691 1,222
- ------------------------------------------------------------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 3,976 3,979 2,177
Cumulative effect of accounting change for SFAS No. 142,
net of income taxes:
Company operations (367) - -
Equity investees (559) - -
Cumulative effect of accounting change for SFAS No. 133,
net of income taxes - (10) -
- ------------------------------------------------------------------------------------------------
NET INCOME $ 3,050 $ 3,969 $ 2,177
================================================================================================
BASIC NET INCOME PER SHARE
Before accounting change $ 1.60 $ 1.60 $ .88
Cumulative effect of accounting change (.37) - -
- ------------------------------------------------------------------------------------------------
$ 1.23 $ 1.60 $ .88
- ------------------------------------------------------------------------------------------------
DILUTED NET INCOME PER SHARE
Before accounting change $ 1.60 $ 1.60 $ .88
Cumulative effect of accounting change (.37) - -
- ------------------------------------------------------------------------------------------------
$ 1.23 $ 1.60 $ .88
- ------------------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING 2,478 2,487 2,477
Effect of dilutive securities 5 - 10
- ------------------------------------------------------------------------------------------------
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,483 2,487 2,487
================================================================================================
See Notes to Consolidated Financial Statements.
2002 ANNUAL REPORT - 73
CONSOLIDATED BALANCE SHEETS
The Coca-Cola Company and Subsidiaries
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
- ----------------------------------------------------------------------------
(In millions except share data)
ASSETS
CURRENT
Cash and cash equivalents $ 2,126 $ 1,866
Marketable securities 219 68
- ----------------------------------------------------------------------------
2,345 1,934
Trade accounts receivable, less allowances of
$55 in 2002 and $59 in 2001 2,097 1,882
Inventories 1,294 1,055
Prepaid expenses and other assets 1,616 2,300
- ----------------------------------------------------------------------------
TOTAL CURRENT ASSETS 7,352 7,171
- ----------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Equity method investments:
Coca-Cola Enterprises Inc. 972 788
Coca-Cola Hellenic Bottling Company S.A. 872 791
Coca-Cola Amatil Limited 492 432
Other, principally bottling companies 2,401 3,117
Cost method investments, principally bottling
companies 254 294
Other assets 2,694 2,792
- ----------------------------------------------------------------------------
7,685 8,214
- ----------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Land 385 217
Buildings and improvements 2,332 1,812
Machinery and equipment 5,888 4,881
Containers 396 195
- ----------------------------------------------------------------------------
9,001 7,105
Less allowances for depreciation 3,090 2,652
- ----------------------------------------------------------------------------
5,911 4,453
- ----------------------------------------------------------------------------
TRADEMARKS WITH INDEFINITE LIVES 1,724 1,697
GOODWILL AND OTHER INTANGIBLE ASSETS 1,829 882
- ----------------------------------------------------------------------------
TOTAL ASSETS $ 24,501 $ 22,417
============================================================================
LIABILITIES AND SHARE-OWNERS' EQUITY
CURRENT
Accounts payable and accrued expenses $ 3,692 $ 3,679
Loans and notes payable 2,475 3,743
Current maturities of long-term debt 180 156
Accrued income taxes 994 851
- ----------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,341 8,429
- ----------------------------------------------------------------------------
LONG-TERM DEBT 2,701 1,219
- ----------------------------------------------------------------------------
OTHER LIABILITIES 2,260 961
- ----------------------------------------------------------------------------
DEFERRED INCOME TAXES 399 442
- ----------------------------------------------------------------------------
SHARE-OWNERS' EQUITY
Common stock, $.25 par value
Authorized: 5,600,000,000 shares;
issued: 3,490,818,627 shares in 2002 and
3,491,465,016 shares in 2001 873 873
Capital surplus 3,857 3,520
Reinvested earnings 24,506 23,443
Accumulated other comprehensive income (loss)
and unearned compensation on restricted stock (3,047) (2,788)
- ----------------------------------------------------------------------------
26,189 25,048
Less treasury stock, at cost (1,019,839,490 shares
in 2002; 1,005,237,693 shares in 2001) 14,389 13,682
- ----------------------------------------------------------------------------
11,800 11,366
- ----------------------------------------------------------------------------
TOTAL LIABILITIES AND SHARE-OWNERS' EQUITY $ 24,501 $ 22,417
============================================================================
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
74 - THE COCA-COLA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Coca-Cola Company and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
(In millions)
OPERATING ACTIVITIES
Net income $ 3,050 $ 3,969 $ 2,177
Depreciation and amortization 806 803 773
Stock-based compensation expense 365 41 43
Deferred income taxes 40 56 3
Equity income or loss, net of dividends (256) (54) 380
Foreign currency adjustments (76) (60) 196
Gain on issuances of stock by equity investee - (91) -
(Gains) losses on sales of assets, including bottling interests 3 (85) (127)
Cumulative effect of accounting changes 926 10 -
Other operating charges - - 916
Other items 291 (17) 76
Net change in operating assets and liabilities (407) (462) (852)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,742 4,110 3,585
- ------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions and investments, principally trademarks and
bottling companies (544) (651) (397)
Purchases of investments and other assets (156) (456) (508)
Proceeds from disposals of investments and other assets 243 455 290
Purchases of property, plant and equipment (851) (769) (733)
Proceeds from disposals of property, plant and equipment 69 91 45
Other investing activities 52 142 138
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,187) (1,188) (1,165)
- ------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuances of debt 1,622 3,011 3,671
Payments of debt (2,378) (3,937) (4,256)
Issuances of stock 107 164 331
Purchases of stock for treasury (691) (277) (133)
Dividends (1,987) (1,791) (1,685)
- ------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,327) (2,830) (2,072)
- ------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 32 (45) (140)
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Net increase during the year 260 47 208
Balance at beginning of year 1,866 1,819 1,611
- ------------------------------------------------------------------------------------------------------------
Balance at end of year $ 2,126 $ 1,866 $ 1,819
============================================================================================================
See Notes to Consolidated Financial Statements.
- ---------------------------------------------------------------------------------------------------------------
2002 ANNUAL REPORT - 75
CONSOLIDATED STATEMENTS OF SHARE-OWNERS' EQUITY
The Coca-Cola Company and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
(In millions except per share data)
NUMBER OF COMMON SHARES OUTSTANDING
Balance at beginning of year 2,486 2,485 2,472
Stock issued to employees exercising stock options 3 7 12
Purchases of stock for treasury (1) (14) (6) (2)
Restricted stock and other stock plans, less cancellations - - 3
Adoption of SFAS No. 123 (4) - -
- --------------------------------------------------------------------------------------------------------------
Balance at end of year 2,471 2,486 2,485
- --------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at beginning of year $ 873 $ 870 $ 867
Stock issued to employees exercising stock options 1 2 2
Restricted stock and other stock plans, less cancellations - 1 1
Adoption of SFAS No. 123 (1) - -
- --------------------------------------------------------------------------------------------------------------
Balance at end of year 873 873 870
- --------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance at beginning of year 3,520 3,196 2,584
Stock issued to employees exercising stock options 111 162 329
Tax benefit from employees' stock option and restricted stock plans 11 58 116
Stock-based compensation 365 - -
Restricted stock and other stock plans, less amortization and
cancellations - 132 167
Unearned restricted stock adjustment - (28) -
Adoption of SFAS No. 123 (150) - -
- --------------------------------------------------------------------------------------------------------------
Balance at end of year 3,857 3,520 3,196
- --------------------------------------------------------------------------------------------------------------
REINVESTED EARNINGS
Balance at beginning of year 23,443 21,265 20,773
Net income 3,050 3,969 2,177
Dividends (per share-$.80, $.72 and $.68 in 2002, 2001 and
2000, respectively) (1,987) (1,791) (1,685)
- --------------------------------------------------------------------------------------------------------------
Balance at end of year 24,506 23,443 21,265
- --------------------------------------------------------------------------------------------------------------
OUTSTANDING RESTRICTED STOCK
Balance at beginning of year (150) (195) (59)
Adoption of SFAS No. 123 150 - -
Restricted stock and other stock plans, less cancellations - (24) (160)
Amortization of restricted stock - 41 24
Unearned restricted stock adjustment - 28 -
- --------------------------------------------------------------------------------------------------------------
Balance at end of year - (150) (195)
- --------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year (2,638) (2,527) (1,492)
Translation adjustments (95) (207) (965)
Cumulative effect of adoption of SFAS No. 133 - 50 -
Net gain (loss) on derivatives (186) 92 -
Net change in unrealized gain (loss) on available-for-sale securities 67 (29) (60)
Net change in minimum pension liability (195) (17) (10)
- --------------------------------------------------------------------------------------------------------------
Net other comprehensive income adjustments (409) (111) (1,035)
- --------------------------------------------------------------------------------------------------------------
Balance at end of year (3,047) (2,638) (2,527)
- --------------------------------------------------------------------------------------------------------------
TREASURY STOCK
Balance at beginning of year (13,682) (13,293) (13,160)
Purchases of treasury stock (707) (277) (133)
Restricted stock and other stock plans, less cancellations - (112) -
- --------------------------------------------------------------------------------------------------------------
Balance at end of year (14,389) (13,682) (13,293)
- --------------------------------------------------------------------------------------------------------------
TOTAL SHARE-OWNERS' EQUITY $ 11,800 $ 11,366 $ 9,316
==============================================================================================================
COMPREHENSIVE INCOME
Net income $ 3,050 $ 3,969 $ 2,177
Net other comprehensive income adjustments (409) (111) (1,035)
- --------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 2,641 $ 3,858 $ 1,142
==============================================================================================================
(1) Common stock purchased from employees exercising stock options numbered .2
million, .3 million and 2.2 million shares for the years ended December 31,
2002, 2001 and 2000, respectively.
See Notes to Consolidated Financial Statements.
- -----------------------------------------------------------------------------------------------------------------
76 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
The Coca-Cola Company is predominantly a manufacturer, distributor and marketer
of nonalcoholic beverage concentrates and syrups. When used in these notes, the
terms "Company," "we," "us" or "our" mean The Coca-Cola Company and its
divisions and subsidiaries. Operating in more than 200 countries worldwide, we
primarily sell our concentrates and syrups, as well as some finished beverages,
to bottling and canning operations, distributors, fountain wholesalers and
fountain retailers. We also market and distribute juices and juice drinks and
certain water products. Additionally, we have ownership interests in bottling
and canning operations. We have significant markets for our products in all the
world's geographic regions.
Consolidation and Basis of Presentation
- ---------------------------------------
Our Consolidated Financial Statements include the accounts of our Company and
all subsidiaries. We consolidate all entities that our Company controls. Under
current accounting guidance, our Company is not permitted to consolidate
companies we do not control. We use the equity method to account for our
investments in companies in which we have the ability to exercise significant
influence over operating and financial policies. Consolidated net income
includes our Company's share of the net earnings of these companies. The
difference between consolidation and the equity method impacts certain financial
ratios because of the presentation of the detailed line items reported in the
financial statements. We account for our investments in other companies that we
do not control and for which we do not have the ability to exercise significant
influence under the cost method. In accordance with the cost method, the assets
are recorded at cost or fair value, as appropriate. Our Company eliminates from
our financial results all significant intercompany transactions, including
transactions with equity method investees.
Certain amounts in the prior years' financial statements have been reclassified
to conform to the current year presentation.
Revenue Recognition
- -------------------
Our Company recognizes revenue when title of our products is transferred to our
bottling partners or our customers.
Advertising Costs
- -----------------
Our Company expenses production costs of print, radio, television and other
advertisements as of the first date the advertisements take place. Advertising
expenses included in Selling, General and Administrative Expenses were $1,775
million in 2002, $1,970 million in 2001 and $1,655 million in 2000. As of
December 31, 2002 and 2001, advertising production costs of approximately $170
million and $142 million, respectively, were recorded primarily in Prepaid
Expenses and Other Assets and noncurrent Other Assets in our balance sheets.
Stock-Based Compensation
- ------------------------
Our Company currently sponsors stock option plans and restricted stock award
plans. Refer to Note 13. Prior to 2002, our Company accounted for those plans
under the recognition and measurement provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations. No stock-based employee compensation expense for stock options
was reflected in net income for the years ended December 31, 2001 and 2000, as
all stock options granted under those plans had an exercise price equal to the
fair market value of the underlying common stock on the date of grant. Effective
January 1, 2002, our Company adopted the preferable fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Our Company selected the modified
prospective method of adoption described in SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." Compensation cost
recognized in 2002 is the same as that which would have been recognized had the
fair value method of SFAS No. 123 been applied from its original effective date.
In accordance with the modified prospective method of adoption, results for
prior years have not been restated.
2002 ANNUAL REPORT - 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
The following table illustrates the effect on net income and earnings per
share as if the fair value method had been applied to all outstanding and
unvested awards in each period (in millions, except per share amounts):
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- -----------------------------------------------------------------------------
Net income, as reported $ 3,050 $ 3,969 $ 2,177
Add: Stock-based
compensation expense
included in reported
net income, net of
related tax effects 267 29 28
Deduct: Total stock-based
compensation expense
determined under
fair value method
for all awards, net of
related tax effects (267) (231) (210)
- -----------------------------------------------------------------------------
Pro forma net income $ 3,050 $ 3,767 $ 1,995
=============================================================================
Earnings per share:
Basic-as reported $ 1.23 $ 1.60 $ .88
=============================================================================
Basic-pro forma $ 1.23 $ 1.51 $ .81
=============================================================================
Diluted-as reported $ 1.23 $ 1.60 $ .88
=============================================================================
Diluted-pro forma $ 1.23 $ 1.51 $ .80
=============================================================================
- --------------------------------------------------------------------------------
Issuances of Stock by Equity Investees
- --------------------------------------
When one of our equity investees issues additional shares to third parties, our
percentage ownership interest in the investee decreases. In the event the
issuance price per share is more or less than our average carrying amount per
share, we recognize a noncash gain or loss on the issuance. This noncash gain or
loss, net of any deferred taxes, is generally recognized in our net income in
the period the change of ownership interest occurs.
If gains have been previously recognized on issuances of an equity
investee's stock and shares of the equity investee are subsequently repurchased
by the equity investee, gain recognition does not occur on issuances subsequent
to the date of a repurchase until shares have been issued in an amount
equivalent to the number of repurchased shares. This type of transaction is
reflected as an equity transaction, and the net effect is reflected in our
balance sheets. Refer to Note 3.
Net Income Per Share
- --------------------
We compute basic net income per share by dividing net income by the
weighted-average number of shares outstanding. Diluted net income per share
includes the dilutive effect of stock-based compensation awards, if any.
Cash Equivalents
- ----------------
We classify marketable securities that are highly liquid and have maturities of
three months or less at the date of purchase as cash equivalents.
Inventories
- -----------
Inventories consist primarily of raw materials and supplies and are valued at
the lower of cost or market. In general, we determine cost on the basis of
average cost or first-in, first-out methods.
Recoverability of Investments
- -----------------------------
Management periodically assesses the recoverability of our Company's
investments. For publicly traded investments, readily available quoted market
prices are an indication of the fair value of our Company's investments. For
non-publicly traded investments, management assesses fair value based on
valuation methodologies, as appropriate, including discounted cash flows,
estimates of sales proceeds and external appraisals. If an investment is
considered to be impaired and the decline in value is other than temporary, we
record an appropriate write-down.
Other Assets
- ------------
Our Company advances payments to certain customers for marketing to fund
activities intended to generate profitable volume. Advance payments are also
made to certain customers for distribution rights. Additionally, our Company
invests in infrastructure programs with our bottlers that are directed at
strengthening our bottling system and increasing unit case volume. Management
periodically evaluates the recoverability of these assets by preparing estimates
of sales volume, the resulting gross profit, cash flows and other factors. The
costs of these programs are recorded in Prepaid Expenses and Other Assets and
noncurrent Other Assets and are subsequently amortized over the periods to be
directly benefited. Amortization expense for infrastructure programs was $176
million, $222 million and $275 million, respectively, for the years ended
December 31, 2002, 2001 and 2000. Refer to Note 2.
78 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
Property, Plant and Equipment
- -----------------------------
We state Property, Plant and Equipment at cost and depreciate such assets
principally by the straight-line method over the estimated useful lives of the
assets. Management assesses the recoverability of the carrying amount of
Property, Plant and Equipment if certain events or changes occur, such as a
significant decrease in market value of the assets or a significant change in
the business climate in a particular market.
Goodwill, Trademarks and Other Intangible Assets
- ------------------------------------------------
Effective January 1, 2002, our Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." The adoption of SFAS No. 142 required an initial impairment
assessment involving a comparison of the fair value of goodwill, trademarks and
other intangible assets to current carrying value. Upon adoption, we recorded a
loss for the cumulative effect of accounting change for SFAS No. 142, net of
income taxes, of $367 million for Company operations and $559 million for equity
investees. We did not restate prior periods for the adoption of SFAS No. 142.
Trademarks and other intangible assets determined to have indefinite useful
lives are not amortized. We test such trademarks and other intangible assets
with indefinite useful lives for impairment annually or more frequently if
events or circumstances indicate that an asset might be impaired. Trademarks and
other intangible assets determined to have definite lives are amortized over
their useful lives. We review such trademarks and other intangible assets with
definite lives for impairment to ensure they are appropriately valued if
conditions exist that may indicate the carrying value may not be recoverable.
Such conditions may include an economic downturn in a geographic market or a
change in the assessment of future operations. Goodwill is not amortized. We
perform tests for impairment of goodwill annually or more frequently if events
or circumstances indicate it might be impaired. Such tests include comparing the
fair value of a reporting unit with its carrying value, including goodwill.
Impairment assessments are performed using a variety of methodologies, including
cash flow analysis, estimates of sales proceeds and independent appraisals.
Where applicable, an appropriate discount rate is used, based on the Company's
cost of capital rate or location-specific economic factors. Refer to Note 4.
Retirement Related Benefits
- ---------------------------
Using appropriate actuarial methods and assumptions, our Company's defined
benefit pension plans are accounted for in accordance with SFAS No. 87,
"Employers' Accounting for Pensions." Our nonpension postretirement benefits are
accounted for in accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." One of the principal assumptions
used to calculate net periodic pension cost is the expected long-term rate of
return on plan assets. The required use of the expected long-term rate of return
on plan assets may result in recognized returns that are greater or less than
the actual returns on those plan assets in any given year. Over time, however,
the expected long-term rate of return on plan assets is designed to approximate
the actual long-term returns.
Our Company uses long-term historical actual return information, the mix of
investments that comprise plan assets, and future estimates of long-term
investment returns by reference to external sources to develop our assumption of
the expected long-term rate of return on plan assets.
The discount rate assumptions used to account for pension and nonpension
postretirement benefit plans reflect the rates available on high-quality,
fixed-income debt instruments on December 31 of each year. The rate of
compensation increase is another significant assumption used for pension
accounting and is determined by the Company based upon annual reviews.
For postretirement health care plan accounting, our Company reviews
external data and our own historical trends for health care costs to determine
the health care cost trend rate assumptions.
Refer to Note 14.
Contingencies
- -------------
Our Company is involved in various legal proceedings. Due to their nature, such
legal proceedings involve inherent uncertainties including, but not limited to,
court rulings, negotiations between affected parties and governmental
intervention. Management assesses the probability of loss for such contingencies
and accrues a liability and/or discloses the relevant circumstances, as
appropriate. Refer to Note 11.
2002 ANNUAL REPORT - 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
Use of Estimates
- ----------------
In conformity with generally accepted accounting principles, the preparation of
our financial statements requires our management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities in our
financial statements and accompanying notes. Although these estimates are based
on our knowledge of current events and actions we may undertake in the future,
actual results may ultimately differ from estimates.
New Accounting Standards
- ------------------------
As previously mentioned, effective January 1, 2002, our Company adopted the
preferable fair value recognition provisions of SFAS No. 123 using the modified
prospective transition method under the provisions of SFAS No. 148. Refer to
Note 13.
As previously mentioned, effective January 1, 2002, our Company adopted
SFAS No. 142. Refer to Note 4.
Effective January 1, 2002, our Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement requires
the following three-step approach for assessing and recognizing the impairment
of long-lived assets: (1) consider whether indicators of impairment of
long-lived assets are present; (2) if indicators of impairment are present,
determine whether the sum of the estimated undiscounted future cash flows
attributable to the assets in question is less than their carrying amount; and
(3) if less, recognize an impairment loss based on the excess of the carrying
amounts of the assets over their respective fair values. In addition, SFAS No.
144 provides more guidance on estimating cash flows when performing a
recoverability test, requires that a long-lived asset to be disposed of other
than by sale (such as abandoned) be classified as "held and used" until it is
disposed of, and establishes more restrictive criteria to classify an asset as
"held for sale." The adoption of SFAS No. 144 did not have a material impact on
our financial statements since it retained the fundamental provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," related to the recognition and measurement of the
impairment of long-lived assets to be "held and used."
Effective January 1, 2002, our Company adopted the provisions of Emerging
Issues Task Force (EITF) Issue No. 01-9, "Accounting for Consideration Given by
a Vendor to a Customer or a Reseller of the Vendor's Products." EITF Issue No.
01-9 codifies and reconciles the EITF consensuses on all or specific aspects of
EITF Issues No. 00-14, "Accounting for Certain Sales Incentives," No. 00-22,
"Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales
Incentives Offers, and Offers for Free Products or Services to be Delivered in
the Future," and No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products," and identifies other
related interpretive issues. The types of sales incentives provided by our
Company to bottlers, resellers, vendors and customers of our Company's products
principally include participation in sales promotion programs and volume-based
incentives. Our Company adopted the provisions of EITF Issues No. 00-14 and No.
00-22 on January 1, 2001, resulting in the income statement reclassification of
certain sales incentives. Upon adoption of EITF Issues No. 00-14 and No. 00-22,
the Company reduced both Net Operating Revenues and Selling, General and
Administrative Expenses by approximately $580 million and $569 million for the
years ended December 31, 2001 and 2000, respectively. EITF Issue No. 01-9
required certain selling expenses incurred by the Company, not previously
reclassified, to be classified as deductions from revenue. The adoption of the
remaining items included in EITF Issue No. 01-9 resulted in the Company reducing
both Net Operating Revenues and Selling, General and Administrative Expenses by
approximately $2.5 billion in each of the years ended December 31, 2001 and
2000. These reclassifications had no impact on Operating Income.
Our Company adopted the provisions of SFAS No. 141, "Business
Combinations," for all business combinations initiated after June 30, 2001. SFAS
No. 141 requires all business combinations to be accounted for by a single
method-the purchase method. Furthermore, SFAS No. 141 requires recognition of
intangible assets apart from goodwill if they arise from contractual or legal
rights or if they are separable from goodwill. This statement did not have a
material impact on our financial statements.
80 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS No. 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue No.
94-3, a liability for an exit cost as defined was recognized at the date of an
entity's commitment to an exit plan. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit and disposal activities that are initiated after December 31,
2002. This statement will impact the timing of our recognition of liabilities
for costs associated with exit or disposal activities.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137
and SFAS No. 138. As discussed further in Note 10, the 2002 and 2001
Consolidated Financial Statements were prepared in accordance with the
provisions of SFAS No. 133. Prior years' financial statements have not been
restated. The 2000 financial statements were prepared in accordance with the
applicable professional literature for derivatives and hedging instruments in
effect at that time.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor in interim and annual financial statements
about the obligations under certain guarantees. Our Company adopted the
disclosure provisions of FASB Interpretation No. 45 as of December 31, 2002.
FASB Interpretation No. 45 also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. We
do not currently provide significant guarantees on a routine basis. As a result,
we do not currently believe this interpretation will have a material impact on
our financial statements. To the extent that our Company enters into any such
guarantees after December 31, 2002, we will record the fair value as an expense.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation addresses the consolidation of
business enterprises (variable interest entities) to which the usual condition
of consolidation does not apply. This interpretation focuses on financial
interests that indicate control. It concludes that in the absence of clear
control through voting interests, a company's exposure (variable interest) to
the economic risks and potential rewards from the variable interest entity's
assets and activities are the best evidence of control. Variable interests are
rights and obligations that convey economic gains or losses from changes in the
values of the variable interest entity's assets and liabilities. Variable
interests may arise from financial instruments, service contracts, nonvoting
ownership interests and other arrangements. If an enterprise holds a majority of
the variable interests of an entity, it would be considered the primary
beneficiary. The primary beneficiary would be required to include assets,
liabilities and the results of operations of the variable interest entity in its
financial statements. This interpretation applies immediately to variable
interest entities that are created after or for which control is obtained after
January 31, 2003. For variable interest entities created prior to February 1,
2003, the provisions would be applied effective July 1, 2003.
Our Company has equity ownership interests in bottlers that we currently
account for under the equity method of accounting. For certain bottlers, our
Company holds variable interests such as providing financing and guarantees, in
addition to our equity investments. As a result, these bottlers may be
considered variable interest entities, and it is reasonably possible that the
Company may be required to consolidate such variable interest entities when FASB
Interpretation No. 46 becomes effective on July 1, 2003. The difference between
consolidation and the equity method impacts certain financial ratios because of
the presentation of the detailed line items reported in the financial
statements. However, consolidated net income for the period and our
share-owners' equity at the end of the period are the same whether the
investment in the company is accounted for under the equity method or the
company is consolidated. We do not expect this interpretation to have a material
impact on our financial statements.
2002 ANNUAL REPORT - 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
NOTE 2: BOTTLING INVESTMENTS
Coca-Cola Enterprises Inc.
- --------------------------
Coca-Cola Enterprises Inc. (Coca-Cola Enterprises) is the largest marketer,
distributor and producer of bottle and can liquid nonalcoholic refreshment in
the world, operating in eight countries. On December 31, 2002, our Company owned
approximately 38 percent of the outstanding common stock of Coca-Cola
Enterprises, and accordingly, we account for our investment by the equity method
of accounting. As of December 31, 2002, our proportionate share of the net
assets of Coca-Cola Enterprises exceeded our investment by approximately $285
million.
A summary of financial information for Coca-Cola Enterprises is as follows
(in millions):
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
- ----------------------------------------------------------------------------
Current assets $ 2,844 $ 2,876
Noncurrent assets 21,531 20,843
- ----------------------------------------------------------------------------
Total assets $ 24,375 $ 23,719
============================================================================
Current liabilities $ 3,455 $ 4,522
Noncurrent liabilities 17,573 16,377
- ----------------------------------------------------------------------------
Total liabilities $ 21,028 $ 20,899
============================================================================
Share-owners' equity $ 3,347 $ 2,820
============================================================================
Company equity investment $ 972 $ 788
============================================================================
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Net operating revenues (1) $ 16,889 $ 15,605 $ 14,659
Cost of goods sold 10,417 9,740 9,083
- ----------------------------------------------------------------------------
Gross profit (1) $ 6,472 $ 5,865 $ 5,576
- ----------------------------------------------------------------------------
Operating income $ 1,364 $ 601 $ 1,126
- ----------------------------------------------------------------------------
Cumulative effect of
accounting change (2) $ - $ (302) $ -
- ----------------------------------------------------------------------------
Net income (loss) $ 494 $ (321) $ 236
- ----------------------------------------------------------------------------
Net income (loss)
available to common
share owners $ 491 $ (324) $ 233
============================================================================
(1) 2001 and 2000 Net Operating Revenues and Gross Profit have been reduced for
the impact of adopting EITF Issue No. 01-9.
(2) Accounting change for its method of accounting for infrastructure payments.
- --------------------------------------------------------------------------------
Our net concentrate and syrup sales to Coca-Cola Enterprises were $4.3
billion in 2002, $3.9 billion in 2001 and $3.5 billion in 2000. Coca-Cola
Enterprises purchases sweeteners through our Company; however, related
collections from Coca-Cola Enterprises and payments to suppliers are not
included in our statements of income. These transactions amounted to $325
million in 2002, $295 million in 2001 and $298 million in 2000. We also provide
certain administrative and other services to Coca-Cola Enterprises under
negotiated fee arrangements.
Cash payments made by us directly to Coca-Cola Enterprises for support of
certain marketing activities and our participation with them in cooperative
advertising and other marketing programs amounted to approximately $837 million,
$606 million and $533 million in 2002, 2001 and 2000, respectively. Cash
payments made by us directly to Coca-Cola Enterprises' customers for support of
certain marketing activities and programs amounted to approximately $204
million, $282 million and $221 million in 2002, 2001 and 2000, respectively.
Pursuant to cooperative advertising and trade agreements with Coca-Cola
Enterprises, we received approximately $264 million, $252 million and $195
million in 2002, 2001 and 2000, respectively, from Coca-Cola Enterprises for
local media and marketing program expense reimbursements.
In early 2002, our Company entered into a multi-year Sales Growth
Initiative (SGI) agreement with Coca-Cola Enterprises to support profitable
growth of our brands in their territories. Total cash support paid by our
Company under the SGI agreement in 2002 was $150 million. This amount is
included in the total support of certain marketing activities and our
participation with them in cooperative marketing and other marketing programs
noted above.
The entire SGI agreement may be terminated by either party by providing six
months written notice to the other party; provided, however, that once an annual
plan has been agreed upon by both companies, such termination shall not be
effective until the end of the applicable plan year. In addition, during the
first three quarters of any year, either party may cancel for ensuing quarters
the sales volume growth targets and cash support funding provisions of the
agreement for that year by providing 10 days' notice prior to the end of such
quarter. Upon such quarterly cancellation, all other provisions of the agreement
will remain in full force and effect. Volume growth funding is paid to Coca-Cola
Enterprises equally over the four quarters of the program year within 30 days
after the beginning of each quarter. Our Company recognizes a charge as sales
volume growth is attained by Coca-Cola Enterprises. Such amounts are included as
allowance deductions in Net Operating Revenues.
The agreement provides for refunds of funding advances should Coca-Cola
Enterprises fail to attain specified minimum sales volume growth targets.
Accordingly,
82 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
should Coca-Cola Enterprises not attain specified minimum cumulative sales
volume growth targets in the ensuing quarters of a given year, amounts
recognized to date for that year would be subject to refund.
Our Company recently agreed with Coca-Cola Enterprises to modify the terms
of the SGI agreement relating to 2003 and beyond. Under the amended agreement,
funding for 2003, anticipated to be $250 million under the original agreement,
will decrease to $200 million. The new amendment, however, requires an
additional $275 million in funding to Coca-Cola Enterprises over the next nine
years (2003-2011) and significantly reduces the annual reductions in funding
that were a part of the original agreement. In addition, the amendment provides
for each company to retain all cost savings it generates from future system
efficiency initiatives. The previous agreement called for an equal sharing
between our Company and Coca-Cola Enterprises of combined proceeds above set
targets.
Our Company previously entered into programs with Coca-Cola Enterprises
designed to help it develop cold-drink infrastructure. Under these programs, our
Company paid Coca-Cola Enterprises for a portion of the cost of developing the
infrastructure necessary to support accelerated placements of cold-drink
equipment. These payments support a common objective of increased sales of
Coca-Cola beverages from increased availability and consumption in the
cold-drink channel. In connection with these programs, Coca-Cola Enterprises
agrees to:
(1) purchase and place specified numbers of venders/coolers or cold-drink
equipment each year through 2008;
(2) maintain the equipment in service, with certain exceptions, for a period of
at least 12 years after placement;
(3) maintain and stock the equipment in accordance with specified standards;
and
(4) report to our Company minimum average annual unit case sales volume
throughout the economic life of the equipment.
Coca-Cola Enterprises must achieve minimum average unit case sales volume
for a 12-year period following the placement of equipment. These minimum average
unit case sales volume levels ensure adequate gross profit from sales of
concentrate to fully recover the capitalized costs plus a return on the
Company's investment. Should Coca-Cola Enterprises fail to purchase the
specified numbers of venders/coolers or cold-drink equipment for any calendar
year through 2008, the parties agree to mutually develop a reasonable solution.
Should no mutually agreeable solution be developed, or in the event that
Coca-Cola Enterprises otherwise breaches any material obligation under the
contracts and such breach is not remedied within a stated period, then Coca-Cola
Enterprises would be required to repay a portion of the support funding as
determined by our Company. No repayments by Coca-Cola Enterprises have ever been
made under these programs. Our Company paid or committed to pay approximately $3
million in 2002, $159 million in 2001 and $223 million in 2000 to Coca-Cola
Enterprises in connection with these infrastructure programs. These payments are
recorded in Prepaid Expenses and Other Assets and noncurrent Other Assets and
amortized as deductions in Net Operating Revenues over the 10-year period
following the placement of the equipment. Our carrying values for these
infrastructure programs with Coca-Cola Enterprises were approximately $879
million as of December 31, 2002 and $931 million as of December 31, 2001.
Effective 2002 and thereafter, the Company has no further commitments under
these programs.
As of January 1, 2001, Coca-Cola Enterprises changed its method of
accounting for infrastructure development payments received from the Company.
Prior to this change, Coca-Cola Enterprises recognized these payments as offsets
to incremental expenses of the programs in the periods in which they were
incurred. Coca-Cola Enterprises now recognizes the infrastructure development
payments received from the Company as income when obligations under the
contracts are performed. Because the Company eliminates the financial effect of
significant intercompany transactions (including transactions with equity method
investees), this change in accounting method had no impact on the financial
statements of our Company.
If valued at the December 31, 2002 quoted closing price of Coca-Cola
Enterprises shares, the value of our investment in Coca-Cola Enterprises
exceeded our carrying value by approximately $2.7 billion.
2002 ANNUAL REPORT - 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
Other Equity Investments
- ------------------------
Operating results include our proportionate share of income (loss) from our
equity investments. A summary of financial information for our equity
investments in the aggregate, other than Coca-Cola Enterprises, is as follows
(in millions):
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
- -----------------------------------------------------------------------------
Current assets $ 5,649 $ 6,013
Noncurrent assets 14,453 17,879
- -----------------------------------------------------------------------------
Total assets $ 20,102 $ 23,892
=============================================================================
Current liabilities $ 4,816 $ 5,085
Noncurrent liabilities 6,010 7,806
- -----------------------------------------------------------------------------
Total liabilities $ 10,826 $ 12,891
=============================================================================
Share-owners' equity $ 9,276 $ 11,001
- -----------------------------------------------------------------------------
Company equity investment $ 3,765 $ 4,340
=============================================================================
YEAR ENDED DECEMBER 31, 2002 2001 2000
- -----------------------------------------------------------------------------
Net operating revenues (1) $ 17,915 $ 19,827 $ 21,275
Cost of goods sold 10,218 11,413 13,014
- -----------------------------------------------------------------------------
Gross profit (1) $ 7,697 $ 8,414 $ 8,261
- -----------------------------------------------------------------------------
Operating income (loss) $ 1,744 $ 1,770 $ (24)
- -----------------------------------------------------------------------------
Cumulative effect of
accounting change (2) $ (1,428) $ - $ -
- -----------------------------------------------------------------------------
Net income (loss) $ (630) $ 735 $ (894)
=============================================================================
Equity investments include nonbottling investees.
(1) 2001 and 2000 Net Operating Revenues and Gross Profit have been reduced for
the impact of adopting EITF Issue No. 01-9.
(2) Accounting change is the adoption of SFAS No. 142.
- --------------------------------------------------------------------------------
Net sales to equity investees other than Coca-Cola Enterprises were $3.2
billion in 2002, $3.7 billion in 2001 and $3.5 billion in 2000. Total support
payments, primarily marketing, made to equity investees other than Coca-Cola
Enterprises, the majority of which are located outside the United States, were
approximately $488 million, $636 million and $663 million for 2002, 2001 and
2000, respectively.
Effective February 2002, our Company acquired control of Coca-Cola
Erfrischungsgetraenke AG (CCEAG), the largest bottler in Germany. Prior to
acquiring control, our Company accounted for CCEAG under the equity method of
accounting. Refer to Note 18.
In the first quarter of 2002, our Company sold our bottling operations in
the Baltics to Coca-Cola Hellenic Bottling Company S.A. (CCHBC). The proceeds
from the sale of the Baltics bottlers were approximately equal to the carrying
value of the investment.
In February 2001, the Company reached an agreement with Carlsberg A/S
(Carlsberg) for the dissolution of Coca-Cola Nordic Beverages A/S (CCNB), a
joint venture bottler in which our Company had a 49 percent ownership. In July
2001, our Company and San Miguel Corporation (San Miguel) acquired Coca-Cola
Bottlers Philippines, Inc. (CCBPI) from Coca-Cola Amatil Limited (Coca-Cola
Amatil). Refer to Note 18.
In November 2001, our Company sold nearly all of its ownership interests in
various Russian bottling operations to CCHBC for approximately $170 million in
cash and notes receivable, of which $146 million in notes receivable remained
outstanding as of December 31, 2001. Such amount was subsequently collected in
2002. These interests consisted of the Company's 40 percent ownership interest
in a joint venture with CCHBC that operates bottling territories in Siberia and
parts of western Russia, together with our Company's nearly 100 percent
interests in bottling operations with territories covering the remainder of
Russia.
In July 2000, a merger of Coca-Cola Beverages plc (Coca-Cola Beverages) and
Hellenic Bottling Company S.A. was completed to create CCHBC. This merger
resulted in a decrease in our Company's equity ownership interest from
approximately 51 percent of Coca-Cola Beverages to approximately 24 percent of
the combined entity, CCHBC.
If valued at the December 31, 2002 quoted closing prices of shares actively
traded on stock markets, the value of our investments in publicly traded
bottlers other than Coca-Cola Enterprises exceeded our carrying value by
approximately $810 million.
NOTE 3: ISSUANCES OF STOCK BY EQUITY INVESTEE
In July 2001, Coca-Cola Enterprises completed its acquisition of Hondo
Incorporated and Herbco Enterprises, Inc., collectively known as Herb Coca-Cola.
The transaction was valued at approximately $1.4 billion, with approximately 30
percent of the transaction funded with the issuance of approximately 25 million
shares of Coca-Cola Enterprises common stock and the remaining portion funded
through debt and assumed debt. The Coca-Cola Enterprises common stock issued was
valued in an amount greater than the book value per share of our investment in
Coca-Cola Enterprises. The shares issued, combined with other share issuances,
exceeded the amount of repurchased shares under Coca-Cola Enterprises' share
repurchase plan. As a result, the issuance of these shares resulted in a noncash
pretax gain for our Company of
84 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
approximately $91 million. We provided deferred taxes of approximately $36
million on this gain. This transaction reduced our ownership in Coca-Cola
Enterprises from approximately 40 percent to approximately 38 percent. No gains
or losses on issuances of stock by equity investees were recorded during 2002
and 2000.
NOTE 4: GOODWILL, TRADEMARKS AND OTHER INTANGIBLE ASSETS
In accordance with SFAS No. 142, goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed annually for impairment. Our Company is
the owner of some of the world's most valuable trademarks. As a result, certain
trademarks and franchise rights to bottle and distribute such trademarked
products are expected to generate positive cash flows for as long as the Company
owns such trademarks and franchise rights for a particular territory. Given the
Company's more than 100-year history, certain trademarks and the franchise
rights to bottle and distribute products under our trademarks have been assigned
indefinite lives. Intangible assets that are deemed to have definite lives are
amortized over their useful lives. The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company began applying the new accounting rules effective January 1, 2002.
The adoption of SFAS No. 142 required the Company to perform an initial
impairment assessment on all goodwill and indefinite lived intangible assets as
of January 1, 2002. The Company compared the fair value of trademarks and other
intangible assets to the current carrying value. Fair values were derived using
discounted cash flow analyses. The assumptions used in these discounted cash
flow analyses were consistent with our internal planning. Valuations were
completed for intangible assets for both the Company and our equity method
investees. For the Company's intangible assets, the cumulative effect of this
change in accounting principle was an after-tax decrease to net income of
approximately $367 million. For the Company's proportionate share of its equity
method investees, the cumulative effect of this change in accounting principle
was an after-tax decrease to net income of approximately $559 million. The
deferred income tax benefit related to the cumulative effect of this change for
the Company's intangible assets was approximately $94 million and for the
Company's proportionate share of its equity method investees was approximately
$123 million.
The impairment charges resulting in the after-tax decrease to net income
for the cumulative effect of this change by applicable operating segment as of
January 1, 2002 are as follows (in millions):
- --------------------------------------------------------------------------------
The Company:
Europe, Eurasia & Middle East $ 33
Latin America 226
Asia 108
- --------------------------------------------------------------------------------
Total $ 367
================================================================================
The Company's proportionate
share of its equity method investees:
Africa $ 63
Europe, Eurasia & Middle East 400
Latin America 96
- --------------------------------------------------------------------------------
Total $ 559
================================================================================
- --------------------------------------------------------------------------------
Of the Company's $226 million impairment for Latin America, approximately
$113 million relates to Company-owned Brazilian bottlers' franchise rights. The
Brazilian macroeconomic conditions, the devaluation of the currency and lower
pricing impacted the valuation of these bottlers' franchise rights. The
remainder of the $226 million primarily relates to a $109 million impairment for
certain trademarks in Latin America. In early 1999, our Company formed a
strategic partnership to market and distribute such trademark brands. The
macroeconomic conditions and lower pricing depressed operating margins for these
trademarks.
Of the $108 million impairment for the Company in Asia, $99 million relates
to bottlers' franchise rights in our consolidated bottlers in our Southeast and
West Asia Division. Difficult economic conditions impacted our business in
Singapore, Sri Lanka, Nepal and Vietnam. As a result, bottlers in these
countries experienced lower than expected volume and operating margins.
For Europe, Eurasia and Middle East equity method investees, a $400 million
impairment was recorded for the Company's proportionate share related to
bottlers' franchise rights. Of this amount, approximately $301 million related
to CCEAG. This impairment was due to a prolonged difficult economic environment
in Germany, resulting in continuing losses for CCEAG in eastern Germany. The
market for nonalcoholic beverages is currently undergoing a transformation. A
changing competitive landscape, continuing price pressure,
2002 ANNUAL REPORT - 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
and growing demand for new products and packaging were elements impacting CCEAG.
The $400 million impairment also included a $50 million charge for Middle East
bottlers' franchise rights. In our Africa operating segment, a $63 million
charge was recorded for the Company's proportionate share of impairments related
to equity method investee bottlers' franchise rights. These Middle East and
Africa bottlers have challenges as a result of political instability and the
resulting economic instability, in their respective regions, which has adversely
impacted financial performance.
A $96 million impairment was recorded for the Company's proportionate share
related to bottlers' franchise rights of Latin America equity method investees.
In southern Latin America, the macroeconomic conditions and devaluation of the
Argentine peso significantly impacted the valuation of bottlers' franchise
rights.
As discussed in Note 18, the Company acquired certain intangible assets in
connection with the business combinations of CCEAG, Cosmos Bottling Company
(CBC) and CCDA Waters L.L.C. (CCDA). Because such assets were assigned
indefinite lives, no amortization will be recorded.
The following table sets forth the information for intangible assets
subject to amortization and for intangible assets not subject to amortization
(in millions):
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
- -----------------------------------------------------------------------------
Amortized intangible assets
(various, principally trademarks):
Gross carrying amount $ 181 $ 160
=============================================================================
Accumulated amortization $ 81 $ 67
=============================================================================
Unamortized intangible assets:
Trademarks $ 1,724 $ 1,697
Bottlers' franchise rights 846 639
Goodwill 726 108
Other 157 42
- -----------------------------------------------------------------------------
$ 3,453 $ 2,486
=============================================================================
YEAR ENDED DECEMBER 31, 2002 2001
- -----------------------------------------------------------------------------
Aggregate amortization expense $ 11 $ 72
=============================================================================
Estimated amortization expense:
For the year ending:
December 31, 2003 $ 12
December 31, 2004 $ 11
December 31, 2005 $ 9
December 31, 2006 $ 6
December 31, 2007 $ 6
- --------------------------------------------------------------------------------
The following table summarizes and reconciles Net Income Before Cumulative
Effect of Accounting Change for the three years ended December 31, 2002, 2001
and 2000, adjusted to exclude amortization expense recognized in such periods
related to trademarks, bottlers' franchise rights, goodwill, other indefinite
lived intangible assets that are no longer amortized and our proportionate share
of equity method investees' intangibles (in millions, except per share amounts):
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Reported net income
before cumulative effect
of accounting change $ 3,976 $ 3,979 $ 2,177
Add back after-tax amounts:
Trademark amortization - 30 29
Bottlers' franchise
rights amortization - 7 3
Goodwill amortization - 3 2
Other indefinite lived
intangible amortization - 4 4
Equity method investees'
intangibles amortization - 110 120
- ----------------------------------------------------------------------------
Adjusted net income
before cumulative effect
of accounting change $ 3,976 $ 4,133 $ 2,335
============================================================================
Basic net income per share
before accounting change:
Reported net income $ 1.60 $ 1.60 $ .88
Trademark amortization - .01 .01
Bottlers' franchise
rights amortization - - -
Goodwill amortization - - -
Other indefinite lived
intangible amortization - - -
Equity method investees'
intangibles amortization - .05 .05
- --------------------------------------------------------------------------------
Adjusted basic net
income per share before
accounting change $ 1.60 $ 1.66 $ .94
================================================================================
(Continued on next page)
86 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Diluted net income per share
before accounting change:
Reported net income $ 1.60 $ 1.60 $ .88
Trademark amortization - .01 .01
Bottlers' franchise
rights amortization - - -
Goodwill amortization - - -
Other indefinite lived
intangible amortization - - -
Equity method investees'
intangibles amortization - .05 .05
- ----------------------------------------------------------------------------
Adjusted diluted net
income per share before
accounting change $ 1.60 $ 1.66 $ .94
============================================================================
- --------------------------------------------------------------------------------
NOTE 5: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts Payable and Accrued Expenses consist of the following (in millions):
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
- ----------------------------------------------------------------------------
Accrued marketing $ 1,046 $ 1,160
Container deposits 178 84
Accrued compensation 284 202
Sales, payroll and other taxes 182 148
Accrued realignment expenses - 59
Trade accounts payable and
other accrued expenses 2,002 2,026
- ----------------------------------------------------------------------------
$ 3,692 $ 3,679
============================================================================
- --------------------------------------------------------------------------------
NOTE 6: SHORT-TERM BORROWINGS AND
CREDIT ARRANGEMENTS
Loans and Notes Payable consist primarily of commercial paper issued in the
United States. On December 31, 2002 and 2001, we had approximately $2,122
million and $3,361 million, respectively, outstanding in commercial paper
borrowings. Our weighted-average interest rates for commercial paper outstanding
were approximately 1.4 percent and 1.9 percent at December 31, 2002 and 2001,
respectively. In addition, we had $2,331 million in lines of credit and other
short-term credit facilities available as of December 31, 2002, of which
approximately $353 million was outstanding. All of this $353 million amount
relates to our international subsidiaries. Included in the available facilities
discussed above, the Company had $1,900 million in lines of credit for general
corporate purposes, including commercial paper back-up, which had no borrowings
during 2002.
These facilities are subject to normal banking terms and conditions. Some
of the financial arrangements require compensating balances, none of which is
presently significant to our Company.
NOTE 7: LONG-TERM DEBT
Long-Term Debt consists of the following (in millions):
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
- ----------------------------------------------------------------------------
6 5/8% U.S. dollar notes due 2002 $ - $ 150
6% U.S. dollar notes due 2003 150 150
Variable euro notes due 2004 (1) 248 -
5 7/8% euro notes due 2005 496 -
4% U.S. dollar notes due 2005 748 -
5 3/4% U.S. dollar notes due 2009 399 399
5 3/4% U.S. dollar notes due 2011 498 498
7 3/8% U.S. dollar notes due 2093 116 116
Other, due through 2013 (2) 226 62
- ----------------------------------------------------------------------------
2,881 1,375
Less current portion 180 156
- ----------------------------------------------------------------------------
$ 2,701 $ 1,219
============================================================================
(1) 3.3% at December 31, 2002.
(2) Includes $44 million fair value adjustment related to interest rate swap
agreements (refer to Note 10).
- --------------------------------------------------------------------------------
The above notes include various restrictions, none of which is presently
significant to our Company.
After giving effect to interest rate management instruments, the principal
amount of our long-term debt that had fixed and variable interest rates,
respectively, was $1,764 million and $1,117 million on December 31, 2002, and
$1,262 million and $113 million on December 31, 2001. The weighted-average
interest rate on our Company's long-term debt was 4.2 percent and 5.8 percent
for the years ended December 31, 2002 and 2001, respectively. Total interest
paid was approximately $197 million, $304 million and $458 million in 2002, 2001
and 2000, respectively. For a more complete discussion of interest rate
management, refer to Note 10.
Maturities of long-term debt for the five years succeeding December 31,
2002 are as follows (in millions):
- --------------------------------------------------------------------------------
2003 2004 2005 200 2007
---------------------------------------------------------------------
$ 180 $ 291 $ 1,320 $ 16 $ 8
- --------------------------------------------------------------------------------
2002 ANNUAL REPORT - 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
NOTE 8: COMPREHENSIVE INCOME
Accumulated other comprehensive income (AOCI), including our proportionate share
of equity method investees' AOCI, consists of the following (in millions):
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
- -----------------------------------------------------------------------------
Foreign currency
translation adjustment $ (2,777) $ (2,682)
Accumulated derivative
net gains (losses) (44) 142
Unrealized gain (loss) on
available-for-sale securities 12 (55)
Minimum pension liability (238) (43)
- -----------------------------------------------------------------------------
$ (3,047) $ (2,638)
=============================================================================
- --------------------------------------------------------------------------------
A summary of the components of other comprehensive income, including our
proportionate share of equity method investees' other comprehensive income, for
the years ended December 31, 2002, 2001 and 2000 is as follows (in millions):
- --------------------------------------------------------------------------------
Before-Tax Income After-Tax
Amount Tax Amount
- -----------------------------------------------------------------------------
2002
- ----
Net foreign currency
translation $ (51) $ (44) $ (95)
Net gain (loss) on derivatives (284) 98 (186)
Net change in unrealized gain
(loss) on available-for-
sale securities 104 (37) 67
Net change in minimum
pension liability (299) 104 (195)
- -----------------------------------------------------------------------------
Other comprehensive
income (loss) $ (530) $ 121 $ (409)
=============================================================================
- --------------------------------------------------------------------------------
Before-Tax Income After-Tax
Amount Tax Amount
- -----------------------------------------------------------------------------
2001
- ----
Net foreign currency
translation $ (285) $ 78 $ (207)
Cumulative effect of adopting
SFAS No. 133, net 83 (33) 50
Net gain (loss) on derivatives 151 (59) 92
Net change in unrealized gain
(loss) on available-for-
sale securities (39) 10 (29)
Net change in minimum
pension liability (27) 10 (17)
- -----------------------------------------------------------------------------
Other comprehensive
income (loss) $ (117) $ 6 $ (111)
=============================================================================
- --------------------------------------------------------------------------------
Before-Tax Income After-Tax
Amount Tax Amount
- -----------------------------------------------------------------------------
2000
- ----
Net foreign currency
translation $ (1,074) $ 109 $ (965)
Net change in unrealized gain
(loss) on available-for-
sale securities (90) 30 (60)
Net change in minimum
pension liability (17) 7 (10)
- -----------------------------------------------------------------------------
Other comprehensive
income (loss) $ (1,181) $ 146 $ (1,035)
=============================================================================
NOTE 9: FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts reflected in our balance sheets for cash, cash equivalents,
marketable equity securities, cost method investments, receivables, loans and
notes payable and long-term debt approximate their respective fair values. Fair
values are based primarily on quoted prices for those or similar instruments.
Fair values for our derivative financial instruments are included in Note 10.
Credit Risk
- -----------
With respect to our Cash and Cash Equivalents balances, we manage our exposure
to counterparty credit risk through specific minimum credit standards,
diversification of counterparties and procedures to monitor concentration of
credit risk. Based on these factors, we consider the risk of counterparty
default to be minimal.
88 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
Certain Debt and Marketable Equity Securities
- ---------------------------------------------
Investments in debt and marketable equity securities, other than investments
accounted for by the equity method, are required to be categorized as either
trading, available-for-sale or held-to-maturity. On December 31, 2002 and 2001,
we had no trading securities. Securities categorized as available-for-sale are
stated at fair value, with unrealized gains and losses, net of deferred income
taxes, reported as a component of AOCI. Debt securities categorized as
held-to-maturity are stated at amortized cost.
On December 31, 2002 and 2001, available-for-sale and held-to-maturity
securities consisted of the following (in millions):
- --------------------------------------------------------------------------------
Gross Unrealized Estimated
------------------ Fair
DECEMBER 31, Cost Gains Losses Value
- ----------------------------------------------------------------------------
2002
- ----
Available-for-sale
securities:
Equity securities $ 245 $ 25 $ (2)(1) $ 268
Collateralized
mortgage
obligations 5 - - 5
Other debt securities 57 - - 57
- ----------------------------------------------------------------------------
$ 307 $ 25 $ (2) $ 330
============================================================================
Held-to-maturity
securities:
Bank and
corporate debt $ 1,083 $ - $ - $ 1,083
Other debt securities 1 - - 1
- ----------------------------------------------------------------------------
$ 1,084 $ - $ - $ 1,084
============================================================================
Gross Unrealized Estimated
------------------ Fair
DECEMBER 31, Cost Gains Losses Value
- ----------------------------------------------------------------------------
2001
- ----
Available-for-sale
securities:
Equity securities $ 251 $ 43 $ (116)(1) $ 178
Collateralized
mortgage
obligations 13 - (1) 12
Other debt securities 19 - - 19
- ----------------------------------------------------------------------------
$ 283 $ 43 $ (117) $ 209
============================================================================
Held-to-maturity
securities:
Bank and
corporate debt $ 978 $ - $ - $ 978
Other debt securities 8 - - 8
- ----------------------------------------------------------------------------
$ 986 $ - $ - $ 986
============================================================================
(1) Refer to Note 16 for the discussion of the write-down of investments
primarily in Latin America.
On December 31, 2002 and 2001, these investments were included in the
following captions (in millions):
- --------------------------------------------------------------------------------
Available- Held-to-
for-Sale Maturity
DECEMBER 31, Securities Securities
- -----------------------------------------------------------------------------
2002
- ----
Cash and cash equivalents $ - $ 1,081
Current marketable securities 217 2
Cost method investments,
principally bottling companies 104 -
Other assets 9 1
- -----------------------------------------------------------------------------
$ 330 $ 1,084
=============================================================================
Available- Held-to-
for-Sale Maturity
DECEMBER 31, Securities Securities
- -----------------------------------------------------------------------------
2001
- ----
Cash and cash equivalents $ - $ 976
Current marketable securities 66 2
Cost method investments,
principally bottling companies 127 -
Other assets 16 8
- -----------------------------------------------------------------------------
$ 209 $ 986
=============================================================================
- --------------------------------------------------------------------------------
The contractual maturities of these investments as of December 31, 2002
were as follows (in millions):
- --------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
Securities Securities
------------------ ---------------------
Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------------
2003 $ 53 $ 53 $ 1,083 $ 1,083
2004-2007 - - 1 1
After 2007 4 4 - -
Collateralized
mortgage
obligations 5 5 - -
Equity securities 245 268 - -
- ---------------------------------------------------------------------------
$ 307 $ 330 $ 1,084 $ 1,084
===========================================================================
- --------------------------------------------------------------------------------
For the years ended December 31, 2002 and 2001, gross realized gains and
losses on sales of available-for-sale securities were not material. The cost of
securities sold is based on the specific identification method.
2002 ANNUAL REPORT - 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
NOTE 10: HEDGING TRANSACTIONS AND DERIVATIVE
FINANCIAL INSTRUMENTS
Our Company uses derivative financial instruments primarily to reduce our
exposure to adverse fluctuations in interest rates and foreign exchange rates
and, to a lesser extent, in commodity prices and other market risks. When
entered into, the Company formally designates and documents the financial
instrument as a hedge of a specific underlying exposure, as well as the risk
management objectives and strategies for undertaking the hedge transactions. The
Company formally assesses, both at the inception and at least quarterly
thereafter, whether the financial instruments that are used in hedging
transactions are effective at offsetting changes in either the fair value or
cash flows of the related underlying exposure. Because of the high degree of
effectiveness between the hedging instrument and the underlying exposure being
hedged, fluctuations in the value of the derivative instruments are generally
offset by changes in the fair value or cash flows of the underlying exposures
being hedged. Any ineffective portion of a financial instrument's change in fair
value is immediately recognized in earnings. Virtually all of our derivatives
are straightforward over-the-counter instruments with liquid markets. Our
Company does not enter into derivative financial instruments for trading
purposes.
The fair values of derivatives used to hedge or modify our risks fluctuate
over time. We do not view these fair value amounts in isolation, but rather in
relation to the fair values or cash flows of the underlying hedged transactions
or other exposures. The notional amounts of the derivative financial instruments
do not necessarily represent amounts exchanged by the parties and, therefore,
are not a direct measure of our exposure to the financial risks described above.
The amounts exchanged are calculated by reference to the notional amounts and by
other terms of the derivatives, such as interest rates, exchange rates or other
financial indices.
As discussed in Note 1, the Company adopted SFAS No. 133, as amended by
SFAS No. 137 and SFAS No. 138, on January 1, 2001. These statements require the
Company to recognize all derivative instruments as either assets or liabilities
in our balance sheets at fair value. The accounting for changes in the fair
value of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, further, on the type of hedging
relationship. At the inception of the hedge relationship, the Company must
designate the derivative instrument as either a fair value hedge, a cash flow
hedge or a hedge of a net investment in a foreign operation. This designation is
based upon the exposure being hedged.
The adoption of SFAS No. 133 resulted in the Company recording transition
adjustments to recognize its derivative instruments at fair value and to
recognize the ineffective portion of the change in fair value of its
derivatives. The cumulative effect of these transition adjustments was an
after-tax reduction to Net Income of approximately $10 million and an after-tax
net increase to AOCI of approximately $50 million. The reduction to Net Income
was primarily related to the change in the time value and fair value of foreign
currency options and interest rate swap agreements, respectively. The increase
in AOCI was primarily related to net gains on foreign currency cash flow hedges.
The Company reclassified into earnings during the year ended December 31, 2001
approximately $54 million of net gains relating to the transition adjustment
recorded in AOCI as of January 1, 2001.
We have established strict counterparty credit guidelines and enter into
transactions only with financial institutions of investment grade or better. We
monitor counterparty exposures daily and review any downgrade in credit rating
immediately. If a downgrade in the credit rating of a counterparty were to
occur, we have provisions requiring collateral in the form of U.S. government
securities for substantially all of our transactions. To mitigate presettlement
risk, minimum credit standards become more stringent as the duration of the
derivative financial instrument increases. To minimize the concentration of
credit risk, we enter into derivative transactions with a portfolio of financial
institutions. The Company has master netting agreements with most of the
financial institutions that are counterparties to the derivative instruments.
These agreements allow for the net settlement of assets and liabilities arising
from different transactions with the same counterparty. Based on these factors,
we consider the risk of counterparty default to be minimal.
Interest Rate Management
- ------------------------
Our Company monitors our percentage mix of fixed-rate and variable-rate debt, as
well as our percentage mix of term debt versus nonterm debt. This monitoring
includes a review of business and other financial risks. We also enter into
interest rate swap agreements to manage these risks. These contracts had
maturities ranging from one to three
90 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
years on December 31, 2002. Interest rate swap agreements that meet certain
conditions required under SFAS No. 133 for fair value hedges are accounted for
as such with the offset recorded to adjust the fair value of the underlying
exposure being hedged. Any ineffective portion (which was not significant in
2002 or 2001) of the changes in the fair value of these agreements is recorded
in earnings immediately. The fair values of our Company's interest rate swap
agreements were approximately $44 million and $5 million at December 31, 2002
and 2001, respectively. The Company estimates the fair value of its interest
rate management derivatives based on quoted market prices.
Prior to January 1, 2001, our Company also used interest rate swaps and
interest rate caps for hedging purposes. For interest rate swaps, any
differences paid or received were recognized as adjustments to interest expense
over the life of each swap, thereby adjusting the effective interest rate on the
underlying obligation. Additionally, prior to January 1, 2001, our Company had
entered into an interest rate cap agreement that entitled us to receive from a
financial institution the amount, if any, by which our interest payments on our
variable rate debt exceeded prespecified interest rates through 2004. This cap
agreement was terminated during 2001, and the impact on the statements of income
was immaterial.
Foreign Currency Management
- ---------------------------
The purpose of our foreign currency hedging activities is to reduce the risk
that our eventual U.S. dollar net cash inflows resulting from sales outside the
United States will be adversely affected by changes in exchange rates.
We enter into forward exchange contracts and collars and purchase currency
options (principally euro and Japanese yen) to hedge certain portions of
forecasted cash flows denominated in foreign currencies. The effective portion
of the changes in fair value for these contracts, which have been designated as
cash flow hedges, are reported in AOCI and reclassified into earnings in the
same financial statement line item and in the same period or periods during
which the hedged transaction affects earnings. Any ineffective portion (which
was not significant in 2002 or 2001) of the change in fair value of these
instruments is immediately recognized in earnings. These contracts had
maturities ranging from one to two years on December 31, 2002, which is also the
period in which all amounts included in AOCI will be reclassified into earnings.
Additionally, the Company enters into forward exchange contracts that are
not designated as hedging instruments under SFAS No. 133. These instruments are
used to offset the earnings impact relating to the variability in exchange rates
on certain monetary assets and liabilities denominated in non-functional
currencies. Changes in the fair value of these instruments are recognized in
earnings in the Other Income (Loss)-Net line item of our statements of income
immediately to offset the effect of remeasurement of the monetary assets and
liabilities.
The Company also enters into forward exchange contracts to hedge its net
investment position in certain major currencies. Under SFAS No. 133, changes in
the fair value of these instruments are recognized in foreign currency
translation adjustment, a component of AOCI, to offset the change in the value
of the net investment being hedged. For the years ended December 31, 2002 and
2001, approximately $26 million and $43 million, respectively, of losses
relating to derivative financial instruments were recorded in foreign currency
translation adjustment.
Prior to January 1, 2001, gains and losses on derivative financial
instruments that were designated and effective as hedges of net investments in
international operations were included in foreign currency translation
adjustment, a component of AOCI.
For the years ended December 31, 2002 and 2001, we recorded an increase
(decrease) to AOCI of approximately $(151) million and $92 million,
respectively, net of both income taxes and reclassifications to earnings,
primarily related to net gains (losses) on foreign currency cash flow hedges,
which will generally offset cash flow gains and losses relating to the
underlying exposures being hedged in future periods. The Company estimates that
it will reclassify into earnings during the next 12 months losses of
approximately $8 million from the net amount recorded in AOCI as of December 31,
2002 as the anticipated foreign currency cash flows occur. For the year ended
December 31, 2001, the Company recorded approximately $12 million in earnings,
classified within Net Operating Revenues in our statements of income, primarily
related to the change in the time value of foreign currency options. During
2001, the FASB issued an interpretation to SFAS No. 133 allowing the entire
change in fair value, including the time value, of certain purchased options to
be recorded in AOCI until the related underlying exposure is recorded in
earnings. The Company adopted this interpretation prospectively.
91 - 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
The Company did not discontinue any cash flow hedge relationships during
the years ended December 31, 2002 and 2001.
The following table summarizes activity in AOCI related to derivatives
designated as cash flow hedges held by the Company during the applicable periods
(in millions):
- --------------------------------------------------------------------------------
Before-Tax Income After-Tax
YEAR ENDED DECEMBER 31, Amount Tax Amount
- -----------------------------------------------------------------------------
2002
- ----
Accumulated derivative net gains
as of January 1, 2002 $ 234 $ (92) $ 142
Net changes in fair value
of derivatives (129) 51 (78)
Net gains reclassified from
AOCI into earnings (120) 47 (73)
- -----------------------------------------------------------------------------
Accumulated derivative
net losses as of
December 31, 2002 $ (15) $ 6 $ (9)
=============================================================================
Before-Tax Income After-Tax
YEAR ENDED DECEMBER 31, Amount Tax Amount
- -----------------------------------------------------------------------------
2001
- ----
Cumulative effect of adopting
SFAS No. 133, net $ 83 $ (33) $ 50
Net changes in fair value
of derivatives 311 (122) 189
Net gains reclassified from
AOCI into earnings (160) 63 (97)
- ----------------------------------------------------------------------------
Accumulated derivative
net gains as of
December 31, 2001 $ 234 $ (92) $ 142
============================================================================
- --------------------------------------------------------------------------------
The following table presents the fair values, carrying values and
maturities of the Company's foreign currency derivative instruments outstanding
(in millions):
- --------------------------------------------------------------------------------
Carrying Fair
DECEMBER 31, Values Values Maturity
- --------------------------------------------------------------------------
2002
- ----
Forward contracts $ 5 $ 5 2003
Options and collars 60 60 2003-2004
- --------------------------------------------------------------------------
$ 65 $ 65
==========================================================================
Carrying Fair
DECEMBER 31, Values Values Maturity
- --------------------------------------------------------------------------
2001
- ----
Forward contracts $ 37 $ 37 2002
Currency swap agreements 10 10 2002
Options and collars 219 219 2002-2003
- --------------------------------------------------------------------------
$ 266 $ 266
==========================================================================
- --------------------------------------------------------------------------------
The Company estimates the fair value of its foreign currency derivatives
based on quoted market prices or pricing models using current market rates. This
amount is primarily reflected in Prepaid Expenses and Other Assets within our
balance sheets.
Prior to January 1, 2001, our Company also used foreign exchange contracts
and purchased currency options for hedging purposes. Premiums paid and realized
gains and losses, including those on any terminated contracts, were included in
Prepaid Expenses and Other Assets. These were recognized in income, along with
unrealized gains and losses, in the same period the hedging transactions were
realized.
NOTE 11: COMMITMENTS AND CONTINGENCIES
On December 31, 2002, we were contingently liable for guarantees of indebtedness
owed by third parties in the amount of $494 million. We do not consider it
probable that we will be required to satisfy these guarantees.
We believe our exposure to concentrations of credit risk is limited due to
the diverse geographic areas covered by our operations.
We have committed to make future marketing and other expenditures of
approximately $2,550 million, of which the majority is payable over the next 12
years.
In June 2002, our Company announced long-term agreements with the National
Collegiate Athletic Association (NCAA) and CBS, and with the Houston Astros
Baseball Club for a combined value of approximately $650 million to $800
million. These commitments are included in the future marketing and other
expenditures amount referred to in the preceding paragraph.
The Company is also involved in various legal proceedings. Management
believes that any liability to the Company that may arise as a result of
currently pending legal proceedings, including those discussed below, will not
have a material adverse effect on the financial condition of the Company taken
as a whole.
During the period from 1970 to 1981, our Company owned Aqua-Chem, Inc.
(Aqua-Chem). A division of Aqua-Chem manufactured certain boilers that contained
gaskets that Aqua-Chem purchased from outside suppliers. Several years after our
Company sold this entity, Aqua-Chem received its first lawsuit relating to
asbestos, a component of some of the gaskets. Aqua-Chem has notified our Company
that it believes we are obligated to them for certain costs and expenses
92 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
associated with the litigation. Aqua-Chem has demanded that our Company
reimburse it for approximately $10 million for out-of-pocket litigation-related
expenses incurred over the last 18 years. Aqua-Chem has also demanded that the
Company acknowledge a continuing obligation to Aqua-Chem for any future
liabilities and expenses that are excluded from coverage under the applicable
insurance or for which there is no insurance. Our Company disputes Aqua-Chem's
claims, and we believe we have no obligation to Aqua-Chem for any of its past,
present or future liabilities, costs or expenses. Furthermore, we believe we
have substantial legal and factual defenses to Aqua-Chem's claims. The parties
have entered into litigation to resolve this dispute. The Company believes
Aqua-Chem has substantial insurance coverage to pay Aqua-Chem's asbestos
claimants. An estimate of possible losses over time, if any, cannot be made at
this time.
The Competition Authority of the European Commission made unannounced
visits to the offices of the Company and our bottling partners in Austria,
Belgium, Denmark, Germany and Great Britain several years ago. Similarly, the
Spanish competition authorities made unannounced visits to our own offices and
those of certain bottlers in Spain in 2000. The European Commission and the
Spanish competition authorities continue their investigations into unspecified
market practices in their respective jurisdictions. The Company believes we have
substantial legal and factual defenses in these matters.
Additionally, at the time of divesting our interest in a consolidated
entity, we sometimes agree to indemnify the buyer for specific liabilities
related to the period we owned the entity. Management believes that any
liability to the Company that may arise as a result of any such indemnification
agreements will not have a material adverse effect on the financial condition of
the Company taken as a whole.
NOTE 12: NET CHANGE IN OPERATING ASSETS
AND LIABILITIES
Net cash provided by operating activities attributable to the net change in
operating assets and liabilities is composed of the following (in millions):
- --------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------
Increase in trade
accounts receivable $ (83) $ (73) $ (39)
Increase in inventories (49) (17) (2)
Decrease (increase) in prepaid
expenses and other assets 74 (349) (618)
Decrease in accounts payable
and accrued expenses (442) (179) (84)
Increase (decrease) in
accrued taxes 20 247 (96)
Increase (decrease) in
other liabilities 73 (91) (13)
- ----------------------------------------------------------------------------
$ (407) $ (462) $ (852)
============================================================================
- --------------------------------------------------------------------------------
NOTE 13: RESTRICTED STOCK, STOCK OPTIONS AND
OTHER STOCK PLANS
Prior to 2002, our Company accounted for our stock option plans and restricted
stock plans under the recognition and measurement provisions of APB No. 25 and
related interpretations. Effective January 1, 2002, our Company adopted the
preferable fair value recognition provisions of SFAS No. 123. Our Company
selected the modified prospective method of adoption described in SFAS No. 148.
Compensation cost recognized in 2002 is the same as that which would have been
recognized had the fair value method of SFAS No. 123 been applied from its
original effective date. Refer to Note 1.
In accordance with the provisions of SFAS No. 123 and SFAS No. 148, $365
million was recorded for total stock-based compensation expense in 2002. In
accordance with APB No. 25, total stock-based compensation expense was $41
million and $43 million, respectively, for the years ended December 31, 2001 and
2000.
2002 ANNUAL REPORT - 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
Stock Option Plans
- ------------------
Under our 1991 Stock Option Plan (the 1991 Option Plan), a maximum of 120
million shares of our common stock was approved to be issued or transferred to
certain officers and employees pursuant to stock options and stock appreciation
rights granted under the 1991 Option Plan. The stock appreciation rights permit
the holder, upon surrendering all or part of the related stock option, to
receive cash, common stock or a combination thereof, in an amount up to 100
percent of the difference between the market price and the option price. Options
to purchase common stock under the 1991 Option Plan have been granted to Company
employees at fair market value at the date of grant.
The 1999 Stock Option Plan (the 1999 Option Plan) was approved by share owners
in April of 1999. Following the approval of the 1999 Option Plan, no grants were
made from the 1991 Option Plan, and shares available under the 1991 Option Plan
were no longer available to be granted. Under the 1999 Option Plan, a maximum of
120 million shares of our common stock was approved to be issued or transferred
to certain officers and employees pursuant to stock options granted under the
1999 Option Plan. Options to purchase common stock under the 1999 Option Plan
have been granted to Company employees at fair market value at the date of
grant.
The 2002 Stock Option Plan (the 2002 Option Plan) was approved by share
owners in April of 2002. Under the 2002 Option Plan, a maximum of 120 million
shares of our common stock was approved to be issued or transferred to certain
officers and employees pursuant to stock options granted under the 2002 Option
Plan. Options to purchase common stock under the 2002 Option Plan have been
granted to Company employees at fair market value at the date of grant.
Generally, stock options become exercisable over a four-year graded vesting
period and expire 15 years from the date of grant. Prior to 1999, stock options
generally became exercisable over a three-year vesting period and expired 10
years from the date of grant.
To ensure the best market-based assumptions were used to determine the
estimated fair value of stock options granted in 2002, we obtained two
independent market quotes. Our Black-Scholes value was not materially different
from the independent quotes.
The following table sets forth information about the fair value of each
option grant on the date of grant using the Black-Scholes option-pricing model
and the weighted-average assumptions used for such grants:
- --------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------
Weighted-average fair value
of options granted $ 13.10 $ 15.09 $ 19.85
Dividend yields 1.7% 1.6% 1.2%
Expected volatility 30.2% 31.9% 31.7%
Risk-free interest rates 3.4% 5.1% 5.8%
Expected lives 6 years 5 years 5 years
- --------------------------------------------------------------------------------
A summary of stock option activity under all plans is as follows (shares in
millions):
- -----------------------------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ----------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------
Outstanding on January 1, 141 $ 51.16 112 $ 51.23 101 $ 46.66
Granted (1) 29 44.69 45 48.11 32 57.35
Exercised (3) 31.09 (7) 24.30 (12) 26.00
Forfeited/Expired (2) (8) 54.21 (9) 56.74 (9) 57.51
- -------------------------------------------------------------------------------------------------------------------
Outstanding on December 31, 159 $ 50.24 141 $ 51.16 112 $ 51.23
===================================================================================================================
Exercisable on December 31, 80 $ 51.72 65 $ 50.83 60 $ 46.57
===================================================================================================================
Shares available on December 31,
for options that may be granted 122 25 65
===================================================================================================================
(1) No grants were made from the 1991 Option Plan during 2000, 2001 or 2002.
(2) Shares Forfeited/Expired relate to the 1991 and 1999 Option Plans.
- -------------------------------------------------------------------------------------------------------------------
94 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
The following table summarizes information about stock options at December 31,
2002 (shares in millions):
- --------------------------------------------------------------------------------------------------------------------
Outstanding Stock Options Exercisable Stock Options
-------------------------------------------------- ----------------------------
Weighted-Average
Remaining Weighted-Average Weighted-Average
RANGE OF EXERCISE PRICES Shares Contractual Life Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------
$ 20.00 to $ 30.00 5 1.4 years $ 23.93 5 $ 23.93
$ 30.01 to $ 40.00 8 2.8 years $ 35.63 8 $ 35.63
$ 40.01 to $ 50.00 79 13.0 years $ 46.91 19 $ 48.41
$ 50.01 to $ 60.00 55 11.2 years $ 56.30 36 $ 56.37
$ 60.01 to $ 86.75 12 5.8 years $ 65.88 12 $ 65.89
- -----------------------------------------------------------------------------------------------------------------
$ 20.00 to $ 86.75 159 10.9 years $ 50.24 80 $ 51.72
=================================================================================================================
- --------------------------------------------------------------------------------------------------------------------
Restricted Stock Award Plans
- ----------------------------
Under the amended 1989 Restricted Stock Award Plan and the amended 1983
Restricted Stock Award Plan (the Restricted Stock Award Plans), 40 million and
24 million shares of restricted common stock, respectively, may be granted to
certain officers and key employees of our Company.
On December 31, 2002, 29 million shares were available for grant under the
Restricted Stock Award Plans. In 2002, there were 30,000 shares of restricted
stock granted at an average fair value of $50.99 per share. In 2001, there were
116,300 shares of restricted stock granted at an average fair value of $48.95
per share. In 2000, there were 546,585 shares of restricted stock granted at an
average fair value of $58.20 per share. In 2002, 2,500 shares of restricted
stock were cancelled at an average fair value of $67.50 per share. In 2001,
78,700 shares of restricted stock were cancelled at an average fair value of
$48.49 per share. In 2000, 80,500 shares of restricted stock were cancelled at
an average fair value of $28.41 per share. Participants are entitled to vote and
receive dividends on the shares and, under the 1983 Restricted Stock Award Plan,
participants are reimbursed by our Company for income taxes imposed on the
award, but not for taxes generated by the reimbursement payment. The shares are
subject to certain transfer restrictions and may be forfeited if a participant
leaves our Company for reasons other than retirement, disability or death,
absent a change in control of our Company.
In addition, 270,000 shares of three-year performance-based and 2,025,000
shares of five-year performance-based restricted stock were granted in 2000. The
release of these shares was contingent upon the Company achieving certain
predefined performance targets over the three-year and five-year measurement
periods, respectively. Participants were entitled to vote and receive dividends
on these shares during the measurement period. The Company also promised to
grant 180,000 shares of stock at the end of three years and 200,000 shares at
the end of five years to certain employees if the Company achieved predefined
performance targets over the respective measurement periods.
In May 2001, all performance-based restricted stock awards and promises
made to grant shares in the future were cancelled, with the exception of 150,000
shares of five-year performance-based restricted stock. New awards for the same
number of cancelled shares, with the exception of the promises made in 2000 to
grant 200,000 shares at the end of five years, were granted at an average fair
value of $47.88 per share. The release of the shares is subject to the Company's
achievement of a minimum of 11 percent annual growth in earnings per share over
the respective measurement periods, as adjusted for certain items approved by
the Board of Directors. In 2001, an additional 10,000 shares of three-year
performance-based restricted stock and 50,000 shares of five-year
performance-based restricted stock were granted at an average fair value of
$46.22 per share and $45.70 per share, respectively, with predefined performance
targets to be achieved over the respective measurement periods. In 2001, an
additional 250,000 shares of five-year performance-based restricted stock were
granted at an average fair value of $46.80 per share.
In 2002, an additional 50,000 shares of four-year performance-based
restricted stock were granted at an average fair value of $46.88 per share. The
release of the shares is subject to the Company's achievement of a minimum of 11
percent annual growth in earnings per share over the four-year measurement
period, as adjusted for certain items approved by the Board of Directors. In
2002, the Company also promised to grant 50,000 shares at the end of three years
and 75,000 shares
2002 ANNUAL REPORT - 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
at the end of four years if the Company achieved predefined performance targets
over the respective measurement periods.
NOTE 14: PENSION AND OTHER POSTRETIREMENT
BENEFIT PLANS
Our Company sponsors and/or contributes to pension and postretirement health
care and life insurance benefit plans covering substantially all U.S. employees.
We also sponsor nonqualified, unfunded defined benefit pension plans for certain
members of management. In addition, our Company and its subsidiaries have
various pension plans and other forms of postretirement arrangements outside the
United States.
Total expense for all benefit plans, including defined benefit pension
plans, defined contribution pension plans, and postretirement health care and
life insurance benefit plans, amounted to approximately $168 million in 2002,
$142 million in 2001 and $116 million in 2000. In addition, in 2000 the Company
recorded a charge of $124 million for special retirement benefits as part of the
organizational realignment discussed in Note 17. Net periodic cost for our
pension and other postretirement benefit plans consists of the following (in
millions):
- --------------------------------------------------------------------------------
Pension Benefits
------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Service cost $ 63 $ 53 $ 54
Interest cost 132 123 119
Expected return on plan assets (137) (125) (132)
Amortization of prior service cost 6 8 4
Recognized net actuarial (gain) loss 8 3 (7)
Settlements and curtailments - - 1
- ----------------------------------------------------------------------------
Net periodic pension cost $ 72 $ 62 $ 39
============================================================================
Other Benefits
------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Service cost $ 18 $ 13 $ 12
Interest cost 38 34 29
Expected return on plan assets - (1) (1)
Amortization of prior service cost 2 2 1
Recognized net actuarial gain - - (1)
- ----------------------------------------------------------------------------
Net periodic cost $ 58 $ 48 $ 40
============================================================================
- --------------------------------------------------------------------------------
The following table sets forth the change in benefit obligation for our
benefit plans (in millions):
- --------------------------------------------------------------------------------
Pension Benefits Other Benefits
-------------------- ------------------
DECEMBER 31, 2002 2001 2002 2001
- -----------------------------------------------------------------------------
Benefit obligation at
beginning of year $ 1,906 $ 1,819 $ 530 $ 407
Service cost 63 53 18 13
Interest cost 132 123 38 34
Foreign currency
exchange rate changes 11 (23) - -
Amendments 6 - - 3
Actuarial loss 138 62 86 96
Benefits paid (121) (126) (23) (23)
Business combinations 46 10 - -
Divestitures - (12) - -
Other 1 - 2 -
- -----------------------------------------------------------------------------
Benefit obligation at
end of year $ 2,182 $ 1,906 $ 651 $ 530
=============================================================================
- --------------------------------------------------------------------------------
The following table sets forth the change in the fair value of plan assets
for our benefit plans (in millions):
- --------------------------------------------------------------------------------
Pension Benefits Other Benefits
-------------------- ------------------
DECEMBER 31, 2002 2001 2002 2001
- ----------------------------------------------------------------------------
Fair value of plan
assets at beginning
of year (1) $ 1,492 $ 1,555 $ - $ 17
Actual return on
plan assets (121) (96) - -
Employer contributions 151 130 - -
Foreign currency
exchange rate changes 23 (14) - -
Benefits paid (95) (91) - (17)
Business combinations - 9 - -
Divestitures - (4) - -
Other 2 3 - -
- ----------------------------------------------------------------------------
Fair value of plan
assets at end of year(1) $ 1,452 $ 1,492 $ - $ -
============================================================================
(1) Pension benefit plan assets primarily consist of listed stocks including
1.62 million shares of common stock of our Company with a fair value of $71
million and $76 million as of December 31, 2002 and 2001, respectively.
96 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
The total projected benefit obligation and fair value of plan assets for
the pension plans with projected benefit obligations in excess of plan assets
were $2,016 million and $1,262 million, respectively, as of December 31, 2002
and $687 million and $232 million, respectively, as of December 31, 2001. The
total accumulated benefit obligation and fair value of plan assets for the
pension plans with accumulated benefit obligations in excess of plan assets were
$1,733 million and $1,243 million, respectively, as of December 31, 2002 and
$583 million and $202 million, respectively, as of December 31, 2001.
The accrued pension and other benefit costs recognized in our balance
sheets are computed as follows (in millions):
- ---------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------------- --------------------
DECEMBER 31, 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------
Funded status $ (730) $ (414) $ (651) $ (530)
Unrecognized net asset at transition (1) (5) - -
Unrecognized prior service cost 66 73 19 21
Unrecognized net actuarial loss 584 195 130 45
- -------------------------------------------------------------------------------------------------
Net liability recognized $ (81) $ (151) $ (502) $ (464)
=================================================================================================
Prepaid benefit cost $ 271 $ 146 $ - $ -
Accrued benefit liability (747) (387) (502) (464)
Accumulated other comprehensive income 335 70 - -
Intangible asset 60 20 - -
- -------------------------------------------------------------------------------------------------
Net liability recognized $ (81) $ (151) $ (502) $ (464)
=================================================================================================
- ----------------------------------------------------------------------------------------------------
The weighted-average assumptions used in computing the preceding
information are as follows:
- --------------------------------------------------------------------------------
Pension Benefits
------------------------------------
DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Discount rate 6 1/4% 6 1/2% 7%
Rate of increase in
compensation levels 4 1/4% 4 1/4% 4 1/2%
Expected long-term rate of
return on plan assets 8 1/4% 8 1/2% 8 1/2%
Other Benefits
------------------------------------
DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Discount rate 6 3/4% 7 1/4% 7 1/2%
Rate of increase in
compensation levels 4 1/2% 4 1/2% 4 3/4%
Expected long-term rate of
return on plan assets - - 3%
- --------------------------------------------------------------------------------
The rate of increase in per capita costs of covered health care benefits is
assumed to be 10 percent in 2003, decreasing gradually to 5 1/4 percent by the
year 2008.
A one percentage point change in the assumed health care cost trend rate
would have the following effects (in millions):
- --------------------------------------------------------------------------------
One Percentage One Percentage
Point Increase Point Decrease
- --------------------------------------------------------------------------------
Effect on accumulated
postretirement benefit obligation
as of December 31, 2002 $ 68 $ (57)
Effect on net periodic
postretirement benefit cost in 2002 $ 9 $ (8)
- --------------------------------------------------------------------------------
2002 ANNUAL REPORT - 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
NOTE 15: INCOME TAXES
Income Before Income Taxes and Cumulative Effect of Accounting Change consists
of the following (in millions):
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
United States $ 2,062 $ 2,430 $ 1,497
International 3,437 3,240 1,902
- ----------------------------------------------------------------------------
$ 5,499 $ 5,670 $ 3,399
============================================================================
- --------------------------------------------------------------------------------
Income tax expense (benefit) consists of the following (in millions):
- --------------------------------------------------------------------------------
YEAR ENDED United State & Inter-
DECEMBER 31, States Local national Total
- ---------------------------------------------------------------------------
2002
- ----
Current $ 455 $ 55 $ 973 $ 1,483
Deferred 2 23 15 40
2001
- ----
Current $ 552 $ 102 $ 981 $ 1,635
Deferred 70 (15) 1 56
2000
- ----
Current $ 48 $ 16 $ 1,155 $ 1,219
Deferred (9) 46 (34) 3
- --------------------------------------------------------------------------------
We made income tax payments of approximately $1,508 million, $1,496 million
and $1,425 million in 2002, 2001 and 2000, respectively. During the first
quarter of 2000, the U.S. and Japan taxing authorities entered into an Advance
Pricing Agreement (APA) whereby the level of royalties paid by Coca-Cola (Japan)
Company, Ltd. (our Subsidiary) to our Company was established for the years 1993
through 2001. Pursuant to the terms of the APA, our Subsidiary filed amended
returns for the applicable periods reflecting the negotiated royalty rate. These
amended returns resulted in the payment during the first and second quarters of
2000 of additional Japanese taxes. The effect on our financial performance and
our effective tax rate was not material, due primarily to offsetting tax credits
utilized on our U.S. income tax return.
A reconciliation of the statutory U.S. federal rate and effective rates is
as follows:
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 2001 2000
- ----------------------------------------------------------------------------
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income taxes-net of
federal benefit 0.9 1.0 0.8
Earnings in jurisdictions taxed
at rates different from the
statutory U.S. federal rate (6.0) (4.9) (4.0)
Equity income or loss (1) (2.0) (0.9) 2.9
Other operating charges (2) - - 1.9
Write-down/sale of certain
bottling investments (3) 0.7 - -
Other-net (0.9) (0.4) (0.6)
- ----------------------------------------------------------------------------
Effective rates 27.7% 29.8% 36.0%
============================================================================
(1) Includes charges by equity investees in 2002 and 2000. Refer to Note 16.
(2) Includes charges related to certain bottling, manufacturing and intangible
assets for 2000. Refer to Note 16.
(3) Includes gains on the sale of Cervejarias Kaiser Brazil, Ltda and the
write-down of certain bottling investments, primarily in Latin America.
Refer to Note 16.
- --------------------------------------------------------------------------------
Our effective tax rate reflects the tax benefit derived from having
significant operations outside the United States that are taxed at rates lower
than the U.S. statutory rate of 35 percent.
In 2002 and 2000, management concluded that it was more likely than not
that tax benefits would not be realized with respect to principally all of the
items discussed in Note 16, with the exception of approximately $188 million of
charges in 2000 related to the settlement terms of a class action discrimination
lawsuit. Accordingly, valuation allowances were recorded to offset the future
tax benefit of these items resulting in an increase in our effective tax rate.
Excluding the impact of these items, the effective tax rate on operations for
2002 was 27 percent and for 2000 was slightly more than 30 percent.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $6.1 billion at December 31, 2002. Those earnings are considered
to be indefinitely reinvested and, accordingly, no U.S. federal and
98 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
state income taxes have been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation;
however, unrecognized foreign tax credits would be available to reduce a portion
of the U.S. liability.
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities consist of the following (in millions):
- --------------------------------------------------------------------------------
DECEMBER 31, 2002 2001
- ---------------------------------------------------------------------------
Deferred tax assets:
Property, plant and equipment $ 227 $ 241
Trademarks and other
intangible assets 75 4
Equity method investments
(including translation adjustment) 468 343
Other liabilities 123 263
Benefit plans 541 377
Net operating/capital loss
carryforwards 663 442
Other 307 275
- --------------------------------------------------------------------------------
Gross deferred tax assets 2,404 1,945
Valuation allowance (738) (563)
- --------------------------------------------------------------------------------
Total deferred tax assets (1) $ 1,666 $ 1,382
================================================================================
Deferred tax liabilities:
Property, plant and equipment $ (757) $ (556)
Trademarks and other
intangible assets (208) (118)
Equity method investments
(including translation adjustment) (465) (539)
Other liabilities (55) (14)
Other (222) (185)
- ---------------------------------------------------------------------------
Total deferred tax liabilities $ (1,707) $ (1,412)
===========================================================================
Net deferred tax liabilities $ (41) $ (30)
===========================================================================
(1) Deferred tax assets of $358 million and $412 million have been included in
the caption Other Assets at December 31, 2002 and 2001, respectively.
- --------------------------------------------------------------------------------
On December 31, 2002 and 2001, we had approximately $34 million and $240
million, respectively, of net deferred tax assets located in countries outside
the United States.
On December 31, 2002, we had $1,387 million of tax operating loss
carryforwards available to reduce future taxable income of certain international
subsidiaries. Loss carryforwards of $614 million must be utilized within the
next five years; $483 million can be utilized over an indefinite period. A
valuation allowance has been provided for a portion of the deferred tax assets
related to these loss carryforwards.
NOTE 16: SIGNIFICANT OPERATING AND
NONOPERATING ITEMS
In the third quarter of 2002, our Company recorded a noncash pretax charge of
approximately $33 million related to our share of impairment and restructuring
charges taken by certain investees in Latin America. This charge was recorded in
the caption Equity Income (Loss).
Our Company had direct and indirect ownership interests totaling
approximately 18 percent in Cervejarias Kaiser S.A. (Kaiser S.A.). In March
2002, Kaiser S.A. sold its investment in Cervejarias Kaiser Brazil, Ltda to
Molson Inc. (Molson) for cash of approximately $485 million and shares of Molson
valued at approximately $150 million. Our Company's pretax share of the gain
related to this sale was approximately $43 million, of which approximately $21
million was recorded in the caption Equity Income (Loss), and approximately $22
million was recorded in the caption Other Income (Loss)-Net.
In the first quarter of 2002, our Company recorded a noncash pretax charge
of approximately $157 million (recorded in the caption Other Income (Loss)-Net),
primarily related to the write-down of certain investments in Latin America.
This write-down reduced the carrying value of the investments in Latin America
to fair value. The charge was primarily the result of the economic developments
in Argentina during the first quarter of 2002, including the devaluation of the
Argentine peso and the severity of the unfavorable economic outlook.
In the first quarter of 2000, we recorded charges of approximately $405
million related to the impairment of certain bottling, manufacturing and
intangible assets, primarily within our Indian bottling operations. These
impairment charges were recorded to reduce the carrying value of the identified
assets to fair value. Fair value was derived using cash flow analysis. The
assumptions used in the cash flow analysis were consistent with those used in
2002 ANNUAL REPORT - 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
our internal planning. The assumptions included estimates of future growth in
unit cases, estimates of gross margins, estimates of the impact of exchange
rates and estimates of tax rates and incentives. The charge was primarily the
result of our revised outlook for the Indian beverage market including the
future expected tax environment. The remaining carrying value of long-lived
assets within our Indian bottling operations, immediately after recording the
impairment charge, was approximately $300 million.
In July 2000, we recorded a tax-free noncash gain of approximately $118
million related to the merger of Coca-Cola Beverages and Hellenic Bottling
Company S.A. Refer to Note 2.
In the fourth quarter of 2000, we recorded charges of approximately $188
million related to the settlement terms of, and direct costs related to, a class
action discrimination lawsuit. The monetary settlement included cash payments to
fund back pay, compensatory damages, a promotional achievement fund and
attorneys' fees. In addition, the Company introduced a wide range of training,
monitoring and mentoring programs. Of the $188 million, $50 million was donated
to The Coca-Cola Foundation to continue its broad range of community support
programs. In 2001, our Company paid out substantially all of this settlement.
In 2000, the Company also recorded a charge of approximately $306 million,
which represents the Company's portion of a charge recorded by Coca-Cola Amatil
to reduce the carrying value of its investment in the Philippines. In addition,
Panamerican Beverages, Inc. wrote down selected assets, including the impairment
of the value of its Venezuelan operating unit. The Company's portion of this
charge was approximately $124 million. Also contributing to the equity losses
were charges recorded by investees in Eurasia and the Middle East. These charges
were partially offset by the impact of lower tax rates related to current and
deferred taxes at CCEAG.
NOTE 17: REALIGNMENT COSTS
In January 2000, our Company initiated a major organizational realignment (the
Realignment) intended to put more responsibility, accountability and resources
in the hands of local business units of the Company so as to fully leverage the
local capabilities of our system.
Under the Realignment, employees were separated from almost all functional
areas of the Company's operations, and certain activities were outsourced to
third parties. The total number of employees separated as of December 31, 2000
was approximately 5,200. Employees separated from the Company as a result of the
Realignment were offered severance or early retirement packages, as appropriate,
that included both financial and nonfinancial components. The Realignment
expenses included costs associated with involuntary terminations, voluntary
retirements and other direct costs associated with implementing the Realignment.
Other direct costs included repatriating and relocating employees to local
markets; asset write-downs; lease cancellation costs; and costs associated with
the development, communication and administration of the Realignment. We
recorded total Realignment charges in 2000 of $850 million, which was included
in the caption Other Operating Charges.
100 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
The table below summarizes the balance of accrued Realignment expenses and
the movement in that accrual as of and for the years ended December 31, 2001 and
2000 (in millions):
2000 Accrued 2001 Accrued
Noncash Balance Noncash Balance
2000 2000 and December 31, 2001 and December 31,
REALIGNMENT SUMMARY Expenses Payments Exchange 2000 Payments Exchange 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Employees involuntarily separated
Severance pay and benefits $ 216 $ (123) $ (2) $ 91 $ (66) $ (8) $ 17
Outside services--legal,
outplacement, consulting 33 (25) - 8 (8) - -
Other--including asset
write-downs 81 (37) (7) 37 (33) (4) -
- ------------------------------------------------------------------------------------------------------------------------------------
$ 330 $ (185) $ (9) $ 136 $ (107) $ (12) $ 17
- ------------------------------------------------------------------------------------------------------------------------------------
Employees voluntarily separated
Special retirement pay
and benefits $ 353 $ (174) $ - $ 179 $ (26) $ (12) $ 141
Outside services--legal,
outplacement, consulting 6 (3) - 3 (3) - -
- ------------------------------------------------------------------------------------------------------------------------------------
$ 359 $ (177) $ - $ 182 $ (29) $ (12) $ 141
====================================================================================================================================
Other direct costs $ 161 $ (92) $ (9) $ 60 $ (26) $ (11) $ 23
====================================================================================================================================
TOTAL REALIGNMENT $ 850 $ (454) $ (18) $ 378 $ (162) $ (35) $ 181 (1)
====================================================================================================================================
(1) As of December 31, 2001, $59 million was included in the caption Accounts
Payable and Accrued Expenses. As of December 31, 2001, $122 million was
included in the caption Other Liabilities.
The Realignment has been completed, and all material payments associated
with the Realignment have been made except for retirement pay and benefits for
employees who voluntarily accepted early retirement packages, which will be paid
out in accordance with the Company's defined benefit pension plans over a number
of years.
NOTE 18: ACQUISITIONS AND INVESTMENTS
During 2002, our Company's acquisition and investment activity totaled
approximately $1,144 million. Of this $1,144 million, our Company paid $544
million in cash.
Effective February 2002, our Company acquired control of CCEAG. CCEAG is
included in our Europe, Eurasia and Middle East operating segment. As a result
of acquiring control of CCEAG, our Company expects to help focus its sales and
marketing programs and assist in developing the business. This transaction was
accounted for as a business combination, and the results of CCEAG's operations
have been included in the Company's financial statements since February 2002.
Prior to February 2002, our Company accounted for CCEAG under the equity method
of accounting. As of December 31, 2002, our Company had an approximate 41
percent ownership interest in the outstanding shares of CCEAG. In accordance
with the terms of a Control and Profit and Loss Transfer Agreement (CPL) with
CCEAG, our Company obtained control of CCEAG for a period of up to five years.
In return for control of CCEAG, the Company guaranteed annual payments, in lieu
of dividends by CCEAG, to all other CCEAG share owners. These guaranteed annual
payments equal .76 euro for each CCEAG share outstanding. Additionally, all
other CCEAG share owners entered into either a put or put/call option agreement
with the Company, exercisable at the end of the term of the CPL at agreed
prices. Our Company entered into either put or put/call agreements for shares
representing an approximate 59 percent interest in CCEAG. The spread in the
strike prices of the put and call options is approximately 3 percent.
As of the date of the transaction, the Company concluded that the exercise
of the put and/or call agreements was a virtual certainty based on the minimal
differences in the strike prices. We concluded that either the holder of the put
option would require the Company to purchase the shares at the agreed-upon put
strike price, or the Company would exercise its call option and require the
share owner to tender its shares at the agreed-upon call strike price. The
holders of the puts or calls may exercise their rights at any time up to
2002 ANNUAL REPORT - 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
the expiration date, which in this case is in five years. If these rights are
exercised, the actual transfer of shares would not occur until the end of the
term of the CPL. Coupled with the guaranteed payments in lieu of dividends for
the term of the CPL, these instruments represented the financing vehicle for the
transaction. As such, the Company determined that the economic substance of the
transaction resulted in the acquisition of the remaining outstanding shares of
CCEAG and required the Company to account for the transaction as a business
combination. Furthermore, the terms of the CPL transfer control and all of the
economic risks and rewards of CCEAG to the Company immediately.
The present value of the total amount likely to be paid by our Company to
all other CCEAG share owners, including the put or put/call payments and the
guaranteed annual payments in lieu of dividends, is approximately $741 million
at December 31, 2002. This amount has increased from the initial liability of
approximately $600 million due to the accretion of the discounted value to the
ultimate maturity of the liability described below, as well as approximately $95
million of translation adjustment related to this liability. This liability is
included in the caption Other Liabilities. The accretion of the discounted value
to its ultimate maturity value was recorded in the caption Other Income
(Loss)-Net, and this amount was approximately $38 million for the year ended
December 31, 2002. As of December 31, 2002, the Company's balance sheet included
property, plant and equipment with a fair value of approximately $961 million,
bottler franchise rights with a fair value of approximately $576 million and
goodwill with a fair value of approximately $419 million. These amounts are
composed of approximately 41 percent of our historic book value of CCEAG's
property, plant and equipment, franchise rights and goodwill, and approximately
59 percent of the fair value of CCEAG's property, plant and equipment, franchise
rights and goodwill computed at the acquisition date. The bottler franchise
rights, which authorize the bottler to manufacture and distribute designated
Company trademark beverages within identified territories, were assigned an
indefinite life. The goodwill, which is not currently expected to be deductible
for tax purposes, is reported in the Europe, Eurasia and Middle East operating
segment. As of December 31, 2002, CCEAG had outstanding debt of $843 million.
The purchase price allocation is subject to refinement.
In July 2002, our Company and Danone Waters of North America, Inc. (DWNA)
formed the new company, CCDA, for the production, marketing and distribution of
DWNA's bottled spring and source water business in the United States. In forming
CCDA, DWNA contributed assets of its retail bottled spring and source water
business in the United States. These assets include five production facilities,
a license for the use of the Dannon and Sparkletts brands, as well as ownership
of several value brands. Our Company made a cash payment to acquire a
controlling 51 percent equity interest in CCDA and is also providing marketing,
distribution and management expertise. This transaction was accounted for as a
business combination, and the results of CCDA's operations have been included in
our financial statements since July 2002. This business combination expanded our
water brands to include a national offering in all sectors of the water category
with purified, spring and source waters.
In January 2002, our Company and CCBPI finalized the purchase of RFM
Corp.'s (RFM) approximate 83 percent interest in CBC, a publicly traded
Philippine beverage company. The original sale and purchase agreement with RFM
was entered into in November 2001. As of the date of this sale and purchase
agreement, the Company began supplying concentrate for this operation. In March
2002, a tender offer was completed with our Company and CCBPI acquiring all
shares of the remaining minority share owners except for shares representing a 1
percent interest in CBC. As of December 31, 2002, our Company's direct ownership
interest in CBC was approximately 61 percent, and our indirect ownership
interest in CBC was approximately 13 percent. This transaction was accounted for
as a business combination, and the results of CBC's operations have been
included in our financial statements since January 2002. CBC is an established
carbonated soft-drink business in the Philippines. Our Company's goal is to
leverage our partnership with San Miguel in the Philippines, as well as leverage
our sales, marketing and system resources, to expand CBC volume and profit over
time. The Company and CCBPI have agreed to restructure the operations of CBC,
and this restructuring will result in the Company owning all acquired trademarks
and CCBPI owning all acquired bottling assets.
Our Company acquired controlling interests in CCDA and CBC for total
combined consideration of approximately
102 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
$328 million. CCDA is included in our North America operating segment, and CBC
is included in our Asia operating segment. The Company has currently allocated
approximately $91 million of the purchase price for these acquisitions to
goodwill and $186 million to other indefinite lived intangible assets, primarily
trademarks, brands and licenses. Of the $91 million for this goodwill, $63
million is allocated to our North America operating segment and $28 million is
allocated to our Asia segment. As of December 31, 2002, the Company recorded
minority ownership accruals of approximately $228 million related to these
acquisitions in the caption Other Liabilities. The purchase price allocation for
CBC was completed in 2002. The purchase price allocation for the CCDA
acquisition is subject to refinement based on completion of asset valuations.
The combined 2002 Net Operating Revenues of CCEAG, CBC and CCDA were
approximately $1.3 billion.
During 2001, our Company's acquisition and investment activity totaled
approximately $651 million. In February 2001, our Company reached an agreement
with Carlsberg for the dissolution of CCNB, a joint venture bottler in which our
Company had a 49 percent ownership interest. At that time, CCNB had bottling
operations in Sweden, Norway, Denmark, Finland and Iceland. Under this agreement
with Carlsberg, our Company acquired CCNB's Sweden and Norway bottling
operations in June 2001, increasing our Company's ownership in those bottlers to
100 percent. Carlsberg acquired CCNB's Denmark and Finland bottling operations,
increasing Carlsberg's ownership in those bottlers to 100 percent. Pursuant to
the agreement, CCNB sold its Iceland bottling operations to a third-party group
of investors in May 2001.
In March 2001, our Company signed a definitive agreement with La Tondena
Distillers, Inc. (La Tondena) and San Miguel to acquire carbonated soft-drink,
water and juice brands for $84 million. CCBPI acquired the related manufacturing
and distribution assets from La Tondena for $63 million.
In July 2001, our Company and San Miguel acquired CCBPI from Coca-Cola
Amatil. Upon the completion of this transaction, our Company owned 35 percent of
the common shares and 100 percent of the Preferred B shares, and San Miguel
owned 65 percent of the common shares of CCBPI. Additionally, as a result of
this transaction, our Company's interest in Coca-Cola Amatil was reduced from
approximately 38 percent to approximately 35 percent.
In December 2001, our Company completed a cash tender offer for all
outstanding shares of the common stock of Odwalla, Inc. This acquisition was
valued at approximately $190 million with our Company receiving an ownership
interest of 100 percent.
During the first half of 2001, in separate transactions, our Company
purchased two bottlers in Brazil: Refrescos Guararapes Ltda. and Sucovalle Sucos
e Concentrados do Vale S.A. In separate transactions during the first half of
2000, our Company purchased two other bottlers in Brazil: Companhia Mineira de
Refrescos, S.A. and Refrigerantes Minas Gerais Ltda. In October 2000, the
Company purchased a 58 percent interest in Paraguay Refrescos S.A. (Paresa), a
bottler in Paraguay. In December 2000, the Company made a tender offer for the
remaining 42 percent of the shares in Paresa. In January 2001, following the
completion of the tender offer, we owned approximately 95 percent of Paresa.
The acquisitions and investments have been accounted for by either the
purchase or equity method of accounting, as appropriate. Their results have been
included in our financial statements from their respective dates of acquisition
using the appropriate method of accounting. Had the results of these businesses
been included in operations commencing with 2000, the reported results would not
have been materially affected.
NOTE 19: SUBSEQUENT EVENTS
During the first quarter of 2003, the Company initiated steps to streamline and
simplify its operations, primarily in North America and Germany.
In North America, the Company is integrating the operations of our three
separate North American business units- Coca-Cola North America (including our
interest in CCDA), The Minute Maid Company (including our Odwalla business) and
Fountain. The integration is expected to result in a headcount reduction of
approximately 1,000 people, with the identification of the individuals expected
to be completed by the end of the first quarter of 2003.
In Germany, CCEAG has taken steps to improve efficiency in sales and
distribution, including the closure of three
2002 ANNUAL REPORT - 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
bottling plants in 2003. The streamlining initiative is expected to affect
approximately 900 employees in Germany.
NOTE 20: OPERATING SEGMENTS
Our Company's operating structure includes the following operating segments:
North America (including The Minute Maid Company); Africa; Europe, Eurasia and
Middle East; Latin America; Asia; and Corporate. North America includes the
United States, Canada and Puerto Rico. During the first quarter of 2002, the
Egypt Region was reclassified from Europe, Eurasia and Middle East to Africa.
Prior period amounts have been reclassified to conform to the current period
presentation.
Effective January 1, 2001, our Company's operating segments were
geographically reconfigured and renamed. Puerto Rico was added to North America
from Latin America. The Middle East Division was added to Europe and Eurasia,
which changed its name to Europe, Eurasia and Middle East. At the same time,
Africa and Middle East, less the reclassified Middle East Division, changed its
name to Africa. During the first quarter of 2001, Asia Pacific was renamed Asia.
Prior period amounts have been reclassified to conform to the current period
presentation.
Segment Products and Services
- -----------------------------
The business of our Company is nonalcoholic beverages. Our operating segments
derive substantially all of their revenues from the manufacture and sale of
beverage concentrates and syrups, and in some cases, the sale of finished
beverages. The Net Operating Revenues from operations excluding bottling were
$17,157 million, $16,402 million and $16,448 million, respectively, for the
years ended December 31, 2002, 2001 and 2000. Our consolidated bottling
operations accounted for Net Operating Revenues of $2,407 million, $1,143
million and $906 million, respectively, for the years ended December 31, 2002,
2001 and 2000.
Method of Determining Segment Profit or Loss
- --------------------------------------------
Management evaluates the performance of its operating segments separately to
individually monitor the different factors affecting financial performance.
Segment profit or loss includes substantially all the segment's costs of
production, distribution and administration. Our Company typically manages and
evaluates equity investments and related income on a segment level. However, we
manage certain significant investments, such as our equity interests in
Coca-Cola Enterprises, at the Corporate segment. Our Company manages income
taxes on a global basis. We manage financial costs, such as exchange gains and
losses and interest income and expense, on a global basis at the Corporate
segment. Thus, we evaluate segment performance based on profit or loss before
income taxes and cumulative effect of accounting change.
104 - THE COCA-COLA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
Information about our Company's operations by operating segment is as follows
(in millions):
- --------------------------------------------------------------------------------
Europe,
North Eurasia & Latin
America Africa Middle East America Asia Corporate Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
2002
- ----
Net operating revenues $ 6,264 $ 684 $ 5,262 (1) $ 2,089 (2) $ 5,054 (3) $ 211 $ 19,564
Operating income (4) 1,494 224 1,612 1,033 (2) 1,820 (725) 5,458
Interest income 209 209
Interest expense 199 199
Depreciation and amortization 266 37 193 57 133 120 806
Equity income (loss) 15 (25) (18) 131 60 221 384
Income before income taxes and
cumulative effect of accounting
change 1,515 187 1,540 1,081 (2) 1,848 (672) 5,499
Identifiable operating assets 4,999 565 4,576 (1) 1,205 2,370 5,795 (5) 19,510
Investments (6) 142 115 1,211 (1) 1,352 1,150 1,021 4,991
Capital expenditures 334 18 162 37 209 91 851
====================================================================================================================================
2001
- ----
Net operating revenues $ 5,729 $ 633 $ 3,961 $ 2,181 $ 4,861 (3) $ 180 $ 17,545
Operating income 1,480 276 1,461 1,094 1,763 (722) 5,352
Interest income 325 325
Interest expense 289 289
Depreciation and amortization 249 43 118 90 144 159 803
Equity income (loss) 2 (9) (52) 118 68 25 152
Income before income taxes and
cumulative effect of accounting
change 1,472 262 1,413 1,279 1,808 (564)(7) 5,670
Identifiable operating assets 4,738 517 2,292 1,681 2,121 5,646 (5) 16,995
Investments (6) 140 184 1,626 1,572 1,053 847 5,422
Capital expenditures 339 11 105 37 107 170 769
====================================================================================================================================
2000
- ----
Net operating revenues $ 5,679 $ 624 $ 3,929 $ 2,024 $ 4,949 (3) $ 149 $ 17,354
Operating income (8) 1,409 164 1,310 (9) 908 956 (1,056)(10) 3,691
Interest income 345 345
Interest expense 447 447
Depreciation and amortization 244 52 66 96 211 104 773
Equity income (loss) (11) 3 (17) (21) (75) (290) 111 (289)
Income before income taxes 1,413 134 1,406 (12) 859 651 (1,064) 3,399
Identifiable operating assets 4,271 549 1,481 1,545 1,953 5,270 (5) 15,069
Investments (6) 141 191 1,904 1,767 993 769 5,765
Capital expenditures 259 8 197 16 132 121 733
====================================================================================================================================
Intercompany transfers between operating segments are not material. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
(1) Net operating revenues, identifiable operating assets and investments for
Europe, Eurasia and Middle East were significantly impacted by the
acquisition of CCEAG.
(2) Net operating revenues, operating income and income before income taxes and
cumulative effect of accounting change for Latin America were negatively
impacted by exchange and challenging economic conditions, primarily in
Argentina, Venezuela and Brazil.
(3) Revenues in Japan represented approximately 69 percent of total Asia
operating segment net operating revenues in 2002, 74 percent in 2001 and 75
percent in 2000.
(4) Operating income was reduced by $119 million for North America, $24 million
for Africa, $51 million for Europe, Eurasia and Middle East, $22 million
for Latin America, $51 million for Asia and $106 million for Corporate to
include the impact of adopting the fair value method of accounting for
stock-based compensation under SFAS No. 123.
(5) Principally marketable securities, finance subsidiary receivables,
goodwill, trademarks and other intangible assets and property, plant and
equipment.
(6) Principally equity investments in bottling companies.
(7) Income before income taxes and cumulative effect of accounting change was
increased by $91 million for Corporate due to a noncash gain that was
recognized on the issuance of stock by Coca-Cola Enterprises, one of our
equity investees.
(8) Operating income was reduced by $3 million for North America, $397 million
for Asia and $5 million for Corporate related to the other operating
charges recorded for asset impairments in the first quarter of 2000.
Operating income was also reduced by $132 million for North America, $40
million for Africa, $198 million for Europe, Eurasia and Middle East, $59
million for Latin America, $127 million for Asia and $294 million for
Corporate as a result of other operating charges associated with the
Realignment.
(9) Operating income was reduced by $30 million for Europe, Eurasia and Middle
East due to incremental marketing expenses in Central Europe.
(10) Operating income was reduced by $188 million for Corporate related to the
settlement terms of a discrimination lawsuit, including a donation to The
Coca-Cola Foundation.
(11) Equity income (loss) was reduced by $9 million for Africa, $26 million for
Europe, Eurasia and Middle East, $124 million for Latin America and $306
million for Asia as a result of our Company's portion of charges recorded
by equity investees.
(12) Income before income taxes was increased by $118 million for Europe,
Eurasia and Middle East as a result of a gain related to the merger of
Coca-Cola Beverages plc and Hellenic Bottling Company S.A.
- --------------------------------------------------------------------------------
2002 ANNUAL REPORT - 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coca-Cola Company and Subsidiaries
Europe,
Compound Growth Rates North Eurasia & Latin
Ending 2002 America Africa Middle East America Asia Corporate Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net operating revenues
5 years 5.4% 0.9% 0.8% 0.4% 5.8% (0.5)% 3.3%
10 years 5.6% 9.9% 2.0% 4.3% 8.7% 19.7 % 5.2%
====================================================================================================================================
Operating income
5 years 2.8% 1.9% 0.0% 0.3% 4.7% * 1.8%
10 years 7.8% 4.3% 4.2% 6.8% 7.9% * 7.1%
====================================================================================================================================
*Calculation is not meaningful.
- ------------------------------------------------------------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHARE OWNERS
THE COCA-COLA COMPANY
We have audited the accompanying consolidated balance sheets of The Coca-Cola
Company and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, share-owners' equity, and cash flows for each
of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Coca-Cola
Company and subsidiaries at December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
As discussed in Notes 1, 4 and 13 to the Consolidated Financial Statements,
in 2002 the Company changed its method of accounting for goodwill and other
intangible assets and changed its method of accounting for stock-based
compensation. As discussed in Notes 1 and 10 to the Consolidated Financial
Statements, in 2001 the Company changed its method of accounting for derivative
instruments and hedging activities.
/s/ Ernst & Young LLP
Atlanta, Georgia
January 31, 2003
106 - THE COCA-COLA COMPANY
The Coca-Cola Company and Subsidiaries
QUARTERLY DATA (UNAUDITED)
- ---------------------------------------------------------------------------------------------------
(In millions, except per
share data) First Second Third Fourth Full
YEAR ENDED DECEMBER 31, Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------
2002
- ----
Net operating revenues $ 4,079 $ 5,368 $ 5,322 $ 4,795 $ 19,564
Gross profit 2,685 3,441 3,239 3,094 12,459
Net income before cumulative effect of
accounting change 732 1,223 1,091 930 3,976
Net income (loss) $ (194) $ 1,223 $ 1,091 $ 930 $ 3,050
===================================================================================================
Basic net income (loss) per share:
Before accounting change $ .29 $ .49 $ .44 $ .38 $ 1.60
Cumulative effect of accounting change (.37) - - - (.37)
- ---------------------------------------------------------------------------------------------------
Total $ (.08) $ .49 $ .44 $ .38 $ 1.23
===================================================================================================
Diluted net income (loss) per share:
Before accounting change $ .29 $ .49 $ .44 $ .38 $ 1.60
Cumulative effect of accounting change (.37) - - - (.37)
- ---------------------------------------------------------------------------------------------------
Total $ (.08) $ .49 $ .44 $ .38 $ 1.23
===================================================================================================
2001
- ----
Net operating revenues $ 3,959 $ 4,653 $ 4,695 $ 4,238 $ 17,545
Gross profit 2,614 3,074 3,003 2,810 11,501
Net income 863 1,118 1,074 914 3,969
Basic net income per share .35 .45 .43 .37 1.60
Diluted net income per share .35 .45 .43 .37 1.60
- ---------------------------------------------------------------------------------------------------
Effective January 1, 2002, our Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." For the
Company's intangible assets, the cumulative effect of this change in accounting
principle was a decrease to net income after taxes in the first quarter of 2002
of approximately $367 million ($.15 per share after income taxes, basic and
diluted). For the Company's proportionate share of its equity method investees,
the cumulative effect of this change in accounting principle was a decrease to
net income after taxes in the first quarter of 2002 of approximately $559
million ($.22 per share after income taxes, basic and diluted). Refer to Note 4.
Effective January 1, 2002, our Company adopted the preferable fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Our Company selected the modified prospective method of adoption
as described in SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." Since SFAS No. 148 was issued in
December 2002, results for the quarters previously reported in our 2002
Quarterly Reports on Form 10-Q were restated to the amounts noted above for the
modified prospective method of adoption. The pretax impact of adopting the
provisions under the modified prospective method for the three months ended
March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002 was $95
million, $92 million, $95 million and $91 million, respectively. The 2002 full
year impact of adopting the provisions under the modified prospective method was
$.11 per share after income taxes, basic and diluted. Results for prior years
have not been restated. Refer to Note 1.
Effective January 1, 2002, our Company adopted the provisions of Emerging
Issues Task Force (EITF) Issue No. 01-9, "Accounting for Consideration Given by
a Vendor to a Customer or a Reseller of the Vendor's Products." Refer to Note 1.
The adoption of the remaining items included in EITF Issue No. 01-9 resulted in
the Company reducing Net Operating Revenues by $520 million, $641 million, $701
million and $685 million, respectively, for the three months ended March 31,
2001, June 30, 2001, September 30, 2001 and December 31, 2001. This
reclassification had no impact on Operating Income.
The first quarter of 2002 includes a noncash pretax charge of approximately
$157 million ($.06 per share after income taxes, basic and diluted) primarily
related to the write-down of our investments in Latin America.
In the first quarter of 2002, Cervejarias Kaiser S.A. sold its investment
in Cervejarias Kaiser Brazil, Ltda to Molson Inc. (Molson) for cash of
approximately $485 million and shares of Molson valued at approximately $150
million. Our Company's pretax share of the gain related to this sale was
approximately $43 million ($.01 per share after income taxes, basic and
diluted).
The third quarter of 2002 includes a noncash pretax charge of approximately
$33 million ($.01 per share after income taxes, basic and diluted) related to
our proportionate share of impairment and restructuring charges taken by certain
investees in Latin America.
The third quarter of 2001 includes a noncash gain on the issuance of stock
by one of our equity investees, Coca-Cola Enterprises, of approximately $91
million ($.02 per share after income taxes, basic and diluted).
108 - THE COCA-COLA COMPANY
The Coca-Cola Company and Subsidiaries
STOCK PRICES
Below is a summary of the New York Stock Exchange Composite high, low and
closing prices of The Coca-Cola Company's stock for each quarter of 2002 and
2001.
- --------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------
2002
- ----
High $ 52.68 $ 57.91 $ 57.50 $ 53.10
Low 43.50 51.50 43.60 42.90
Close 52.26 56.00 47.96 43.84
=============================================================================
2001
- ----
High $ 62.19 $ 49.35 $ 50.70 $ 50.45
Low 43.76 42.37 43.50 44.01
Close 45.16 45.00 46.85 47.15
=============================================================================
- --------------------------------------------------------------------------------
2002 ANNUAL REPORT - 109
SELECTED FINANCIAL DATA
The Coca-Cola Company and Subsidiaries
COMPOUND
(In millions except per GROWTH RATES YEAR ENDED DECEMBER 31,
share data, ratios and ------------------- -----------------------------------------------------------------------------
growth rates) 5 Years 10 Years 2002(2)(3)(4) 2001(4)(5) 2000(4) 1999(4) 1998(4)(6) 1997(4)(6)
- ----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ---------------------
Net operating revenues 3.3 % 5.2 % $ 19,564 $ 17,545 $ 17,354 $ 16,767 $ 16,301 $ 16,611
Cost of goods sold 3.4 % 3.5 % 7,105 6,044 6,204 6,009 5,562 6,015
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 3.3 % 6.3 % 12,459 11,501 11,150 10,758 10,739 10,596
Selling, general and
administrative expenses 4.8 % 5.7 % 7,001 6,149 6,016 5,963 5,699 5,535
Other operating charges - - 1,443 813 73 60
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 1.8 % 7.1 % 5,458 5,352 3,691 3,982 4,967 5,001
Interest income 209 325 345 260 219 211
Interest expense 199 289 447 337 277 258
Equity income (loss) 384 152 (289) (184) 32 155
Other income (loss)--net (353) 39 99 98 230 583
Gains on issuances of stock
by equity investees - 91 - - 27 363
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes
and changes in accounting
principles (1.9)% 7.2 % 5,499 5,670 3,399 3,819 5,198 6,055
Income taxes (4.6)% 5.8 % 1,523 1,691 1,222 1,388 1,665 1,926
- ----------------------------------------------------------------------------------------------------------------------------------
Net income before changes
in accounting principles (0.8)% 7.8 % $ 3,976 $ 3,979 $ 2,177 $ 2,431 $ 3,533 $ 4,129
==================================================================================================================================
Net income (5.9)% 6.2 % $ 3,050 $ 3,969 $ 2,177 $ 2,431 $ 3,533 $ 4,129
==================================================================================================================================
Average shares outstanding 2,478 2,487 2,477 2,469 2,467 2,477
Average shares outstanding
assuming dilution 2,483 2,487 2,487 2,487 2,496 2,515
PER SHARE DATA
- --------------
Income before changes in
accounting principles-
basic (0.8)% 8.3 % $ 1.60 $ 1.60 $ .88 $ .98 $ 1.43 $ 1.67
Income before changes in
accounting principles-
diluted (0.5)% 8.5 % 1.60 1.60 .88 .98 1.42 1.64
Basic net income (5.9)% 6.9 % 1.23 1.60 .88 .98 1.43 1.67
Diluted net income (5.6)% 7.1 % 1.23 1.60 .88 .98 1.42 1.64
Cash dividends 7.4 % 11.1 % .80 .72 .68 .64 .60 .56
Market price on December 31, (8.0)% 7.7 % 43.84 47.15 60.94 58.25 67.00 66.69
TOTAL MARKET VALUE OF
COMMON STOCK (1) (8.0)% 7.1 % $108,328 $117,226 $151,421 $143,969 $165,190 $164,766
- ---------------------
BALANCE SHEET AND OTHER DATA
- ----------------------------
Cash, cash equivalents and
current marketable
securities $ 2,345 $ 1,934 $ 1,892 $ 1,812 $ 1,807 $ 1,843
Property, plant and
equipment--net 5,911 4,453 4,168 4,267 3,669 3,743
Depreciation 614 502 465 438 381 384
Capital expenditures 851 769 733 1,069 863 1,093
Total assets 24,501 22,417 20,834 21,623 19,145 16,881
Long-term debt 2,701 1,219 835 854 687 801
Total debt 5,356 5,118 5,651 6,227 5,149 3,875
Share-owners' equity 11,800 11,366 9,316 9,513 8,403 7,274
Total capital (1) 17,156 16,484 14,967 15,740 13,552 11,149
OTHER KEY FINANCIAL MEASURES (1)
- --------------------------------
Total debt-to-total capital 31.2% 31.0% 37.8% 39.6% 38.0% 34.8%
Net debt-to-net capital 21.1% 22.6% 29.4% 32.2% 28.1% 22.0%
Return on common equity 34.3% 38.5% 23.1% 27.1% 45.1% 61.6%
Return on capital 24.5% 26.6% 16.2% 18.2% 30.2% 39.5%
Dividend payout ratio 65.1% 45.1% 77.4% 65.0% 41.9% 33.6%
Net cash provided by operations $ 4,742 $ 4,110 $ 3,585 $ 3,883 $ 3,433 $ 4,033
Economic profit $ 2,375 $ 2,466 $ 861 $ 1,128 $ 2,480 $ 3,325
==================================================================================================================================
(1) See Glossary on inside back cover.
(2) In 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets."
Refer to Note 4 in our Consolidated Financial Statements.
(3) In 2002, we adopted the fair value method provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and we adopted SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure."
(4) In 2002, we adopted EITF Issue No. 01-9, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products." In
2001, we adopted EITF Issue No. 00-14, "Accounting for Certain Sales
Incentives" and EITF Issue No. 00-22, "Accounting for 'Points' and Certain
Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for
Free Products or Services to be Delivered in the Future." All prior years
were reclassified to conform to the current year presentation.
(5) In 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities."
(6) In 1998, we adopted SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits."
110-111 - THE COCA-COLA COMPANY
SELECTED FINANCIAL DATA
The Coca-Cola Company and Subsidiaries
(In millions except per YEAR ENDED DECEMBER 31,
share data, ratios and ---------------------------------------------------------------------------------------
growth rates) 1996(4)(6) 1995(4)(6) 1994(4)(6)(7) 1993(4)(6)(8) 1992(4)(6)(9)(10)
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ---------------------
Net operating revenues $ 16,635 $ 16,283 $ 14,570 $ 12,527 $ 11,820
Cost of goods sold 6,738 6,940 6,168 5,160 5,055
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 9,897 9,343 8,402 7,367 6,765
Selling, general and
administrative expenses 5,597 5,231 4,765 4,218 4,018
Other operating charges 385 86 - 50 -
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 3,915 4,026 3,637 3,099 2,747
Interest income 238 245 181 144 164
Interest expense 286 272 199 168 171
Equity income (loss) 211 169 134 91 65
Other income (loss)--net 87 86 (25) 7 (59)
Gains on issuances of stock
by equity investees 431 74 - 12 -
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
changes in accounting
principles 4,596 4,328 3,728 3,185 2,746
Income taxes 1,104 1,342 1,174 997 863
- ------------------------------------------------------------------------------------------------------------------------------------
Net income before changes
in accounting principles $ 3,492 $ 2,986 $ 2,554 $ 2,188 $ 1,883
====================================================================================================================================
Net income $ 3,492 $ 2,986 $ 2,554 $ 2,176 $ 1,664
====================================================================================================================================
Average shares outstanding 2,494 2,525 2,580 2,603 2,634
Average shares outstanding
assuming dilution 2,523 2,549 2,599 2,626 2,668
PER SHARE DATA
- --------------
Income before changes in
accounting principles-
basic $ 1.40 $ 1.18 $ .99 $ .84 $ .72
Income before changes in
accounting principles-
diluted 1.38 1.17 .98 .83 .71
Basic net income 1.40 1.18 .99 .84 .63
Diluted net income 1.38 1.17 .98 .83 .62
Cash dividends .50 .44 .39 .34 .28
Market price on December 31, 52.63 37.13 25.75 22.31 20.94
TOTAL MARKET VALUE OF
COMMON STOCK (1) $ 130,575 $ 92,983 $ 65,711 $ 57,905 $ 54,728
- ---------------------
BALANCE SHEET AND OTHER DATA
- ----------------------------
Cash, cash equivalents and
current marketable
securities $ 1,658 $ 1,315 $ 1,531 $ 1,078 $ 1,063
Property, plant and
equipment--net 3,550 4,336 4,080 3,729 3,526
Depreciation 442 421 382 333 310
Capital expenditures 990 937 878 800 1,083
Total assets 16,112 15,004 13,863 11,998 11,040
Long-term debt 1,116 1,141 1,426 1,428 1,120
Total debt 4,513 4,064 3,509 3,100 3,207
Share-owners' equity 6,125 5,369 5,228 4,570 3,881
Total capital (1) 10,638 9,433 8,737 7,670 7,088
OTHER KEY FINANCIAL MEASURES (1)
- ----------------------------
Total debt-to-total capital 42.4% 43.1% 40.2% 40.4% 45.2%
Net debt-to-net capital 31.6% 32.3% 25.5% 29.0% 33.1%
Return on common equity 60.8% 56.4% 52.1% 51.8% 46.4%
Return on capital 36.8% 34.9% 32.8% 31.2% 29.4%
Dividend payout ratio 35.7% 37.2% 39.4% 40.6% 44.3%
Net cash provided by operations $ 3,463 $ 3,328 $ 3,361 $ 2,508 $ 2,232
Economic profit $ 2,718 $ 2,291 $ 1,896 $ 1,549 $ 1,300
====================================================================================================================================
(7) In 1994, we adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
(8) In 1993, we adopted SFAS No. 112, "Employers' Accounting for Postemployment
Benefits."
(9) In 1992, we adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions."
(10) In 1992, we adopted SFAS No. 109, "Accounting for Income Taxes."
2002 ANNUAL REPORT - 110-111
SHARE-OWNER INFORMATION
COMMON STOCK
Ticker symbol: KO
The Coca-Cola Company is one of 30 companies in the Dow Jones Industrial
Average.
Share owners of record at year end: 365,189
Shares outstanding at year end: 2.47 billion
STOCK EXCHANGES
Inside the United States:
- ------------------------
Common stock listed and traded: New York Stock Exchange, the principal market
for our common stock.
Common stock traded: Boston, Chicago, Cincinnati, Pacific and Philadelphia stock
exchanges.
Outside the United States:
- -------------------------
Common stock listed and traded: the German exchange in Frankfurt and the Swiss
exchange in Zurich.
DIVIDENDS
At its February 2003 meeting, our Board increased our quarterly dividend to 22
cents per share, equivalent to an annual dividend of 88 cents per share. The
Company has increased dividends in each of the last 41 years.
The Coca-Cola Company normally pays dividends four times a year, usually on
April 1, July 1, October 1 and December 15. The Company has paid 327 consecutive
quarterly dividends, beginning in 1920.
DIVIDEND AND CASH INVESTMENT PLAN
The Dividend and Cash Investment Plan permits share owners of record to reinvest
dividends from Company stock in shares of The Coca-Cola Company. The Plan
provides a convenient, economical and systematic method of acquiring additional
shares of our common stock. All share owners of record are eligible to
participate. Share owners also may purchase Company stock through voluntary cash
investments of up to $125,000 per year.
At year end, 76 percent of the Company's share owners of record were
participants in the Plan. In 2002, share owners invested $36.7 million in
dividends and $25.7 million in cash in the Plan.
If your shares are held in street name by your broker and you are
interested in participating in the Dividend and Cash Investment Plan, you may
have your broker transfer the shares electronically to EquiServe Trust Company,
N.A., through the Direct Registration System.
For more details on the Dividend and Cash Investment Plan, please contact
the Plan Administrator, EquiServe, or visit the investor section of our
Company's Web site, www.coca-cola.com, for more information.
SHARE-OWNER ACCOUNT ASSISTANCE
For address changes, dividend checks, direct deposit of dividends, account
consolidation, registration changes, lost stock certificates, stock holdings and
information about the Dividend and Cash Investment Plan, please contact:
Registrar and Transfer Agent
EquiServe Trust Company, N.A.
P.O. Box 43069
Providence, RI 02940-3070
U.S. toll-free: (888) COKESHR (265-3747) or (781) 575-2725
For hearing impaired: (800) 490-1493 or (781) 575-2692
E-mail: cocacola@equiserve.com
Internet: www.equiserve.com
SHARE-OWNER INTERNET ACCOUNT ACCESS
Share owners of record may access their accounts via the Internet to obtain
their share balance, conduct secure transactions, request printable forms and
view the current market value of their investment as well as historical stock
prices.
To log on to this secure site and request your initial password, go to
www.equiserve.com and click on "Account Access."
ANNUAL MEETING OF SHARE OWNERS
April 16, 2003, 10:00 a.m., local time
Four Seasons Hotel
1300 Lamar Street
Houston, Texas
CORPORATE OFFICES
The Coca-Cola Company
One Coca-Cola Plaza
Atlanta, Georgia 30313
INSTITUTIONAL INVESTOR INQUIRIES
(404) 676-5766
INFORMATION RESOURCES
Internet
- --------
Our Web site, www.coca-cola.com, offers information about our financial
performance, news about the Company and brand experiences.
Publications
- ------------
The Company's Annual Report, Proxy Statement, Form 10-K and Form 10-Q reports
are available free of charge upon request from our Industry and Consumer Affairs
Department at the Company's corporate address, listed above.
Hotline
- -------
The Company's hotline, (800) INVSTKO (468-7856), offers taped highlights from
the most recent quarter and may be used to request the most up-to-date quarterly
results news release.
Audio Annual Report
- -------------------
An audiocassette version of this report is available without charge as a service
to the visually impaired. To receive a copy, please contact our Industry &
Consumer Affairs Department at (800) 571-2653.
Duplicate Mailings
- ------------------
If you are receiving duplicate or unwanted copies of our Annual Report, please
contact EquiServe at (888) COKESHR (265-3747).
- ---------------------
Harry Potter characters, names and all related indicia are trademarks of and
[copyright symbol] Warner Bros. All rights reserved.
[copyright symbol] 2003 Warner Home Video. Harry Potter Publishing Rights
[copyright symbol] J.K.R.
Winnie the Pooh [copyright symbol] Disney. Based on the "Winnie the Pooh" works
by A.A. Milne and E.H. Shepard.
American Idol Search For A Superstar [trademark symbol] 2002 FremantleMedia
Operations, B.V. and 19 Television Ltd. All rights reserved.
[copyright symbol] 2002 FremantleMedia North America, Inc. and 19 Television
Ltd. All rights reserved.
[copyright symbol] 2003 The Coca-Cola Company
[recycle symbol] This report is printed on recycled paper.
114 - THE COCA-COLA COMPANY
GLOSSARY
BOTTLING PARTNER OR BOTTLER: businesses that buy concentrates, beverage bases or
syrups from the Company, convert them into finished packaged products and sell
them to customers.
CARBONATED SOFT DRINK: nonalcoholic carbonated beverage containing flavorings
and sweeteners. Excludes, among others, waters and flavored waters, juices and
juice drinks, sports drinks, and teas and coffees.
THE COCA-COLA SYSTEM: the Company and its bottling partners.
COMPANY: The Coca-Cola Company together with its subsidiaries.
CONCENTRATE OR BEVERAGE BASE: material manufactured from Company-defined
ingredients and sold to bottlers to prepare finished beverages through the
addition of sweeteners and/or water and marketed under trademarks of the
Company.
CONSUMER: person who drinks Company products.
COST OF CAPITAL: after-tax blended cost of equity and borrowed funds used to
invest in operating capital required for our business.
CUSTOMER: retail outlet, restaurant or other operation that sells or serves
Company products directly to consumers.
DERIVATIVES: contracts or agreements, the value of which may change based on
changes in interest rates, exchange rates, prices of securities, or financial or
commodity indices. The Company uses derivatives to reduce its exposure to
adverse fluctuations in interest and exchange rates and other market risks.
DIVIDEND PAYOUT RATIO: calculated by dividing cash dividends on common stock by
net income.
ECONOMIC PROFIT: income before changes in accounting principles after giving
effect to taxes and excluding the effects of interest, in excess of a computed
capital charge for average operating capital employed. Economic value added
respresents growth in economic profit from year to year.
FOUNTAIN: system used by retail outlets to dispense product into cups or glasses
for immediate consumption.
GALLONS: unit of measurement for concentrates, syrups, beverage bases, finished
beverages and powders (in all cases, expressed in equivalent gallons of syrup)
for all beverage products which are reportable as unit case volume.
GROSS MARGIN: calculated by dividing gross profit by net operating revenues.
KO: the ticker symbol for common stock of The Coca-Cola Company.
MARKET: when used in reference to geographic areas, territory in which the
Company and its bottling partners do business, often defined by national
boundaries.
NET CAPITAL: calculated by adding share-owners' equity to net debt.
NET DEBT: calculated by subtracting from debt the sum of cash, cash equivalents,
and marketable securities, less the amount of cash determined to be necessary
for operations.
NONCARBONATED BEVERAGES: nonalcoholic noncarbonated beverages including, but not
limited to, waters and flavored waters, juices and juice drinks, sports drinks,
and teas and coffees.
OPERATING MARGIN: calculated by dividing operating income by net operating
revenues.
PER CAPITA CONSUMPTION: average number of servings consumed per person, per year
in a specific market. Per capita consumption of Company products is calculated
by multiplying our unit case volume by 24, and dividing by the population.
RETURN ON CAPITAL: calculated by dividing income before changes in accounting
principles (adding back interest expense, net of related taxes) by average total
capital.
RETURN ON COMMON EQUITY: calculated by dividing income before changes in
accounting principles by average common share-owners' equity.
SERVING: eight U.S. fluid ounces of a finished beverage.
SYRUP: concentrate mixed with sweetener and water, sold to bottlers and
customers who add carbonated water to produce finished carbonated soft drinks.
TOTAL CAPITAL: equals share-owners' equity plus interest-bearing debt.
TOTAL MARKET VALUE OF COMMON STOCK: stock price as of a date multiplied by the
number of shares outstanding as of the same date.
UNIT CASE: unit of measurement equal to 192 U.S. fluid ounces of finished
beverage (24 servings).
UNIT CASE VOLUME, OR VOLUME: the number of unit cases (or unit case equivalents)
of Company trademark or licensed beverage products directly or indirectly sold
by the Coca-Cola system to customers. Volume primarily consists of beverage
products bearing Company trademarks. Also included in volume are certain
products licensed to our Company or owned by our bottling partners, for which
our Company provides marketing support and derives profit from the sales. Such
products licensed to our Company or owned by our bottling partners account for a
minimal portion of total unit case volume.
ENVIRONMENTAL STATEMENT: Our Company's commitment to environmental issues is
guided by a simple principle: We will conduct our business in ways that protect
and preserve the environment. Throughout our organization, our employees at all
levels are proactively integrating our Company's environmental management system
(eKOsystem) throughout all business units worldwide. We use the results of
research and new technology to minimize the environmental footprint of our
operations, products and packages. We seek to cooperate with public, private and
governmental organizations in pursuing solutions to environmental challenges. We
direct our Company's skills, energies and resources to activities and issues
where we can make a positive and effective contribution.
EQUAL OPPORTUNITY POLICY: The Coca-Cola Company and its subsidiaries maintain a
long-standing commitment to equal opportunity, affirmative action and valuing
the diversity of our employees, share owners, customers and consumers. The
Company strives to create a working environment free of discrimination and
harassment with respect to race, sex, color, national origin, religion, age,
sexual orientation, disability, status as a special disabled veteran, a veteran
of the Vietnam era, or other covered veteran. The Company also makes reasonable
accommodations in the employment of qualified individuals with disabilities. The
Company maintains ongoing contact with labor and employee associations to
develop relationships that foster responsive and mutually beneficial discussions
pertaining to labor issues. These associations have provided a mechanism for
positive industrial relations. In addition, we provide fair marketing
opportunities to all suppliers and maintain programs to increase transactions
with firms that are owned and operated by minorities and women.