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Published on June 10, 2005
THE COCA-COLA COMPANY
Coca-Cola
Plaza
Atlanta,
Georgia
|
CONNIE
D. MCDANIEL
VICE
PRESIDENT AND CONTROLLER
|
ADDRESS
REPLY TO
P.O.
BOX 1734
ATLANTA,
GA 30301
-----
404-676-3497
|
June 10,
2005
Mr. Will
Choi
Accounting
Branch Chief
Division
of Corporation Finance
Securities
and Exchange Commission
100 F
Street, N.E.
Washington,
D.C. 20549
|
Re:
|
The
Coca-Cola Company
Form
10-K for the fiscal year ended December 31, 2004
Filed
March 4, 2005
|
Dear Mr.
Choi:
Thank you
for your letter dated April 27, 2005 setting forth comments of the Staff
relating to the periodic report of The Coca-Cola Company (“KO” or the “Company”)
referenced above.
KO’s
responses to the Staff’s comments are set forth below.
To
facilitate the Staff’s review, we have included in this letter the captions and
numbered comments from the Staff’s letter and have provided KO’s responses
immediately following each numbered comment.
Mr. Will
Choi
June 10,
2005
Page
2
General
| 1. |
Where
a comment below requests additional disclosures or other revisions to be
made, please include these disclosures and revisions in your future
filings.
|
Response:
As noted
in the Company’s responses to individual questions below, when appropriate, the
Company will include additional disclosures or other revisions in our future
filings.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations, page 24
Application
of Critical Accounting Policies, page 31
| 2. |
We
note that you recognized an impairment charge of $374 million related to
CCEAG’s franchise rights in the third quarter of 2004 due to volume
declines resulting from a deposit law enacted by the German government on
January 1, 2003. However, it appears that you have not recognized or
expect to recognize an impairment loss related to CCEAG’s goodwill and
tangible assets. Please help us understand your consideration of these
circumstances in evaluating the timing of an impairment test and the need
for recognition of impairment charges related to CCEAG’s goodwill and
tangible assets.
|
Response:
The
Company recognized an impairment charge primarily related to CCEAG’s franchise
rights of $374 million in the third quarter of 2004. Additionally, in the third
quarter of 2004, we considered the impairment indicators related to CCEAG and
performed appropriate analyses as required by the various applicable accounting
standards on all of the related assets as follows:
Goodwill - As
required by Statement of Financial Accounting Standards No. 142, “Goodwill and
Other Intangible Assets” (SFAS No. 142), we performed an impairment test of
goodwill in the third quarter of 2004. The estimated fair value of the Germany
and Nordic reporting unit, which includes CCEAG, exceeded the carrying value of
the reporting unit by a substantial margin. Accordingly, we were not required to
perform Step 2 of the goodwill impairment test described in SFAS No.
142.
Tangible
Assets - We
performed a recoverability analysis of our CCEAG tangible assets under Statement
of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (SFAS No. 144), during the third quarter of 2004.
Based on this analysis, we concluded that the sum of the estimated future
undiscounted cash flows expected to be generated from the use of these assets
exceeded the carrying value of the assets by a substantial amount. Accordingly,
no impairment charge was required to be recognized.
Mr. Will
Choi
June 10,
2005
Page
3
Reconciliation
of Non-GAAP Financial Measures, page 55
| 3. |
Please
disclose, in more detail, why
you believe that presentation of non-GAAP financial measures provides
useful information to investors regarding your financial condition and
results of operations. Please also detail the manner in which you use
non-GAAP financial measures. Your disclosures should be specific to the
non-GAAP financial measure used, the nature of your business and industry,
and the manner in which you assess the non-GAAP financial measures and
apply them to management decisions. See Item 10(e) of Regulation
S-K.
|
Response:
In future
filings, we will disclose in more detail why we believe any non-GAAP financial
measures presented provide useful information to investors regarding the
Company’s financial condition and results of operations. In addition, we will
disclose the purposes for which management uses such non-GAAP financial
measures.
For
example, management uses Return on Average Total Capital as a measure of the
Company’s actual returns compared to the cost of the capital employed to
generate those returns. Further, management uses Return on Average Shareowners’
Equity to determine how well the Company has used reinvested earnings to
generate additional returns or earnings. Additionally, management uses Total
Debt-to-Total Capital and Net Debt-to-Net Capital to evaluate financing
decisions and as a measure of the financial leverage of our Company. Lastly,
management uses Interest Coverage Ratio as a way to evaluate our debt servicing
ability. We believe investors use these measures for the same purposes. We also
believe that Total Debt-to-Total Capital, Net Debt-to-Net Capital and Interest
Coverage Ratio are used by debt rating agencies as an input into determining the
Company’s overall credit rating.
Item
8. Financial Statements and Supplementary Data, page
60
Note
1. Organization and Summary of Significant Accounting Policies, page
66
Variable
Interest Entities, page 66
| 4. |
It
appears that you have concluded that Coca-Cola FEMSA is not a variable
interest entity. Please help us understand the following with respect to
your application of FIN 46R to Coca-Cola
FEMSA:
|
| · |
Please
identify for us your variable interests in Coca-Cola FEMSA. In this
regard, please discuss your evaluation of whether your equity interests,
your $250 million letter of credit, your bottling agreements, and your
marketing and infrastructure support represent variable interests in Coca-Cola
FEMSA. From Coca-Cola FEMSA’s Form 20-F, we note that under your bottling
agreements, you set prices as a percentage of the
|
Mr. Will
Choi
June 10,
2005
Page
4
average
sales price that Coca-Cola FEMSA charges to retailers, which suggests that these
agreements somewhat absorb Coca-Cola FEMSA’s variability and may represent
variable interests. Please advise.
| · |
Please
explain your consideration of paragraph 5 of FIN 46R in determining that
Coca-Cola FEMSA is not a variable interest entity. In this regard, please
also explain:
|
| o |
Your
evaluation of whether the terms of your bottling agreements and marketing
and infrastructure programs indirectly protect investors from expected
losses or guarantee a return, pursuant to paragraph 5(b)(2) of FIN
46R.
|
| o |
Your
evaluation of whether your obligations to absorb expected losses and/or
receive expected residual returns by way of your variable interests are
disproportional to your voting rights, pursuant to paragraph 5(c) of FIN
46R.
|
Response:
Upon
adoption of FIN 46R, the Company performed an analysis with respect to
Coca-Cola
FEMSA (“KOF”) and determined that the Company’s investment in KOF qualified for
the “business scope exception” described in paragraph 4.h. of FIN 46R. The
following summarizes our analysis under paragraph 4.h. of FIN 46R.
Consideration
1: KOF is a
“business” as defined in Appendix C of FIN 46R.
Appendix
C states that a business consists of (a) inputs, (b) processes applied to those
inputs, and (c) resulting outputs that are used to generate revenues. KOF’s set
of activities and assets contain all of these essential components of a
business.
Inputs
The
primary business of KOF is to manufacture and distribute beverages, primarily
Company trademark products but also certain other products that do not bear
Company trademarks. In manufacturing and distributing beverage products, KOF
owns or leases a substantial amount of machinery and equipment, employs a
substantial number of personnel for production, administration and management,
and obtains all the necessary raw materials to produce beverages.
Processes
KOF has
its own organization to conduct its business, including a management structure
comparable to any business where objectives are determined by its own Board of
Directors and day to day business is conducted by a management team. This
structure includes
management routines and separate operational processes such as manufacturing,
sales, logistics and distribution, merchandising, quality, finance, human
resources, etc.
Mr. Will
Choi
June 10,
2005
Page
5
Outputs
KOF,
through the authorization granted under various bottler’s agreements
(collectively, the “Bottler’s Agreement”), is authorized to manufacture and
distribute particular designated Company trademark products, to package the same
in particular authorized containers, and to distribute and sell the same in an
identified territory. In addition, KOF manufactures and distributes certain
other products that do not bear Company trademarks. Therefore, KOF has the
ability to access and has established business relationships with customers in
its identified territories that purchase products manufactured and distributed
by KOF.
The
Company also believes that goodwill is present in KOF’s activities and assets
(i.e., if KOF were acquired, a portion of the purchase price would be allocated
to goodwill). Consequently, pursuant to paragraph C5 of FIN 46R, the Company
notes that the KOF set of activities should be presumed to be a
business.
Conclusion:
KOF
generates revenues, cash flows, profits, and a return to its investors through
inputs, processes and outputs as described above. Based on this analysis, we
concluded that KOF is a “business” as defined in Appendix C of FIN 46R, and the
“business scope exception” of paragraph 4.h. is applicable to KOF.
Consideration
2: None of
the conditions listed in paragraph 4.h., items (1) to (4), which limit the
“business scope exception” provided by paragraph 4.h. of FIN 46R, are applicable
to KOF. The following summarizes our analysis of each of the four
items.
Item
1: The reporting enterprise, its related parties, or both participated
significantly in the design or redesign of the entity. However, this condition
does not apply if the entity is an operating joint venture under joint control
of the reporting enterprise and one or more independent parties or a franchisee
(the term franchisee is defined in paragraph 26 of FASB Statement No. 45,
“Accounting for Franchise Fee Revenue” (SFAS No. 45)).
The
condition stated in this item is not applicable because KOF is a franchisee
under SFAS No. 45. The business agreement between the Company and KOF meets the
requirements of paragraph 26 of SFAS No. 45 and, therefore, constitutes a
franchise agreement:
| · |
Paragraph
26(a): The relationship between the Company and KOF is contractual; the
Bottler’s Agreement confirms the rights and responsibilities of each
party, and is in force for a specified period.
|
| · |
Paragraph
26(b): The primary purpose of the Bottler’s Agreement is to authorize KOF
to manufacture and distribute Company trademark products within a
particular market area authorized by the
Company.
|
| · |
Paragraph
26(c): The Company owns trademarks while KOF owns production and
distribution assets. KOF also has an independent management team which is
|
Mr. Will
Choi
June 10,
2005
Page
6
accountable
to its investors. Both parties contribute resources for establishing and
maintaining the franchise.
| · |
Paragraph
26(d): The Bottler’s Agreement outlines and describes the specific
marketing practices to be followed, specifies the contribution of each
party to the operation of the business, and sets forth certain operating
procedures with which both parties agree to
comply.
|
| · |
Paragraph
26(e): The establishment of KOF created a business entity that requires
and supports the full-time business activity of the franchisee.
|
| · |
Paragraph
26(f): Both the Company and KOF are identified with the Company’s
trademarks. This identity is frequently reinforced through advertising
programs designed to promote the sale of Company trademark products in
KOF’s territories.
|
Based on
this analysis, the condition stated in item 1 of paragraph 4.h. is not
applicable because KOF is a franchisee.
Item
2: The entity is designed so that substantially all of its activities either
involve or are conducted on behalf of the reporting enterprise and its related
parties.
KOF’s
activities are conducted for the benefit of all of its investors, including the
Company, which has a minority interest in KOF. It is important to note that KOF
generates substantial revenues, cash flows, and profits and pays dividends to
its equity owners. The Company receives its proportionate share of such
dividends.
We
considered the following factors to conclude that substantially all of KOF’s
activities are not conducted on behalf of the Company and its related parties:
| · |
The
Company’s operations are not substantially similar to those of KOF, as the
Company owns the trademarks and produces concentrate and KOF produces and
distributes finished beverages for consumers.
|
| · |
Substantially
all of KOF’s assets were not acquired from the
Company.
|
| · |
Employees
of the Company are not actively involved in managing the operations of
KOF, with the exception of minority representation on KOF’s Board of
Directors commensurate with the level of equity ownership.
|
| · |
The
Company is not obligated to fund operating losses of KOF, if they occur.
|
| · |
The
Company has not outsourced activities to KOF. The Company has entered into
a formal franchise arrangement as outlined in the Bottler’s Agreement.
|
| · |
KOF
has not leased a significant portion of its assets from the Company.
|
Item
3: The reporting enterprise and its related parties provide more than half of
the total of the equity, subordinated debt, and other forms of subordinated
financial support to the entity based on an analysis of the fair values of the
interests in the entity.
Mr. Will
Choi
June 10,
2005
Page
7
Consideration
of equity
The
Company and its subsidiaries hold approximately 39.6% of KOF's share capital and
46.4% of KOF's voting share capital. The capital structure of KOF as of March
31, 2004 (the date of our assessment for FIN 46R purposes) was as follows:
|
Shareholder
|
Outstanding
Capital Stock
|
%
Ownership of Outstanding Capital Stock
|
%
of Voting Rights
|
|
Compana
Internacional de Bebidas, S.A. de C.V. (Series A)
|
844,078,519
|
45.7
|
53.6
|
|
KO
(Series D)
|
731,545,678
|
39.6
|
46.4
|
|
Public
(Series L)
|
270,750,000
|
14.7
|
*
|
|
Total
|
1,846,374,197
|
100.0
|
100.0
|
* Holders
of Series L are only entitled to vote in limited circumstances.
The
relative ownership of the voting rights among the various shareholders differs
from the relative economic rights because holders of Series L shares have
limited voting rights. However, the differences do not result in the Company
holding the majority of either the economic or voting rights of KOF's
outstanding share capital.
Consideration
of subordinated debt
In
December 2003, the Company granted KOF a stand-by line of credit for $250
million in order to support continuous investment that KOF may require for the
subsequent three years of operation. No amounts have been drawn against this
line of credit since its inception. The Company’s variable interest consists of
the potential that amounts may be drawn down by KOF and not repaid. The Company
believes the line of credit does not have significant expected losses. However,
the Company has included the total amount of the line of credit (instead of the
fair value of the commitment) as subordinated financial support in the
calculation described in paragraph 4.h. item 3 of FIN 46R to be conservative in
our analysis.
Consideration
of other possible forms of subordinated financial support
As
discussed below, we determined that our other business relationships with KOF do
not constitute subordinated financial support.
Marketing
and infrastructure support payments are not subordinated financial
support.
The
Company and KOF engage in a variety of marketing programs, local media
advertising, and other similar arrangements to promote the sale of Company
trademark products. The amounts to be paid under the programs are determined
annually.
Mr. Will
Choi
June 10,
2005
Page
8
Payments
made under these programs are received or made within the year they are due or
shortly thereafter. The Company is under no obligation to participate in the
programs or continue past levels of funding into the future.
The
Company’s payments to KOF under these annual marketing programs do not create an
ownership, contractual, or pecuniary interest that changes with the change in
the fair value of KOF’s net assets. The Company is obligated to make payments to
KOF based solely on marketing programs agreed to by the Company, at its sole
discretion, on an annual basis. Generally, the Company’s participation in and
the types of marketing programs are dependent on sales volume and competitive
factors. Additionally, the Company participates in similar programs with other
bottlers. The Company’s participation is neither dependent upon nor changes with
the change in the fair value of the net assets of KOF. Payments for these
programs are designed to be reimbursements for marketing costs incurred by KOF
and are not paid to finance KOF’s operations. Therefore, the Company’s
discretionary participation in marketing programs with KOF is not a variable
interest that absorbs some or all of an entity's expected losses if they occur.
The
Company engages in these marketing programs with many bottlers (including KOF),
regardless of the Company’s ownership interest in the bottler. The amounts are
negotiated annually by the Company and the bottlers. These negotiations are
strictly based on the commercial interests of the Company and the bottlers, and
the Company’s ownership in a particular bottler is not considered in, and is not
relevant to, the negotiations. These marketing programs are designed to benefit
the Company through increased concentrate sales and to benefit the bottlers
through increased sales to consumers.
Infrastructure
development payments are not subordinated financial support. As described in our
response to the Staff’s comment 6 below, the Company makes upfront payments to
certain bottlers. In return for these payments, the bottlers agree to purchase
and place specified numbers of Company approved cold-drink equipment, maintain
and service the equipment for a specified period of time, maintain and stock the
equipment and sell at least contractually agreed minimum annual sales volume
through the cold-drink equipment. Payments under these programs do not vary
based on KOF’s results or changes in the fair value of KOF’s net assets.
Therefore, participation in this program does not create an ownership,
contractual, or pecuniary interest that changes with the change in the fair
value of KOF’s net assets.
The
supply of concentrate by the Company to KOF, including the pricing terms based
on a percentage of net sales price to KOF’s retailers, is not subordinated
financial support.
Pursuant
to the Bottler’s Agreement, the Company supplies to KOF all the concentrate
required for production of the Company’s trademark beverages by KOF. Concentrate
is an essential ingredient to produce the bottler’s finished product, and is
subject to variations in price just as any other ingredient. The specific method
of pricing is not defined in the standard Bottler’s Agreement with the
presumption that pricing will be
Mr. Will
Choi
June 10,
2005
Page
9
established
at fair value for the local market. The Company and KOF agreed upon a pricing
mechanism whereby the concentrate price is set as a percentage of KOF’s
net sales price; as this agreement was negotiated and entered into by a
willing buyer and a willing seller, the pricing method is believed to be at fair
value. The equity ownership interest that the Company had in KOF was not a
consideration during negotiation of the pricing mechanism. Additionally, the
Company’s pricing terms with KOF are similar to the pricing terms the Company
has with other bottlers in Latin America (including those bottlers in which the
Company has no equity interest). Sales of concentrate to KOF under the Bottler’s
Agreement do not create an ownership, contractual, or pecuniary interest that
changes with the change in the fair value of KOF’s net assets, nor is the
sales price dependent upon the value of the equity interest that the Company
holds in KOF. The concentrate price is neither dependent upon nor changes with
the change in the fair value of the net assets of KOF.
The total
subordinated financial support provided by the Company to KOF, including the
standby line of credit, was approximately 27% of the total of KOF’s equity,
subordinated debt and other forms of subordinated financial support as of March
31, 2004 (the date of our assessment for FIN 46R purposes). Based on this
analysis, we concluded that the condition of item 3 of paragraph 4.h. does not
exist because the Company did not provide to KOF more than half of the total of
the equity, debt and other forms of subordinated financial support.
Item 4: The activities of the entity are primarily related to securitizations or other forms of asset-backed financings or single-lessee leasing arrangements.
As noted
under Consideration 1, the primary activities of KOF are to manufacture and
distribute beverages, including Company trademark products.
Conclusion:
As
discussed above, KOF is a “business” and none of the conditions set forth in
paragraph 4.h. of FIN 46R exists. Therefore, FIN 46R is not applicable for
evaluating whether the Company is required to consolidate KOF. Because the
“business scope exception” under FIN 46R applies, the detailed implementation
guidance of paragraph 5 is not applicable to the Company’s investment in KOF.
Revenue
Recognition, page 68
| 5. |
Your
disclosures on page 5 indicate that you provided $3.6 billion to bottlers,
resellers, vendors and customers of your products for participation in
sales promotion programs in 2004. You also state that you provide
promotional and marketing services, repair services, and dispensing
equipment to fountain and bottle/can retailers. Please tell us, citing
relevant accounting literature, and disclose how you account for and
classify the funds, services, and equipment you provide. In this regard,
please explain your consideration of EITF
01-9.
|
Mr. Will
Choi
June 10,
2005
Page
10
Response:
The
Company provides customers with a variety of sales incentives which include, but
are not limited to, cash discounts, marketing and promotional activities, repair
services, and fountain dispensing equipment. The aggregate amount of funds
provided by the Company to bottlers, resellers, vendors or customers of Company
products during 2004 was approximately $3.6 billion which was classified as
Deductions from Revenue, a component of the Net Operating Revenues caption
within the consolidated income statement. This amount is primarily comprised of
consideration relating to volume-based promotional and marketing services. In
determining the income statement classification for these costs, the Company
considered EITF 01-09 which states that the “Task Force reached a consensus that
cash consideration (including a sales incentive) given by a vendor to a customer
is presumed to be a reduction of the selling prices of the vendor’s products or
services and therefore, should be characterized as a reduction of
revenue.”
In
addition to the above mentioned $3.6 billion, the Company also provided fountain
equipment and fountain equipment repair services to customers. For the year
ended December 31, 2004, the Company recorded approximately $140 million in
Selling, General and Administrative expenses related to these programs. This
amount represented approximately 1.7% of consolidated Selling, General and
Administrative expense and approximately 0.6% of consolidated Net Operating
Revenues for the year ended December 31, 2004. After reconsidering EITF 01-09,
the Company has determined that the costs related to these programs should also
be classified as Deductions from Revenue, a component of Net Operating Revenues,
or Cost of Goods Sold, as appropriate. This reclassification, from Selling,
General and Administrative expenses to either Deductions from Revenue or Cost of
Goods Sold will be made in all future filings.
Additionally,
the Company will include additional discussion in Note 1, Organization and
Summary of Significant Accounting Policies, regarding the classification of
payments to bottlers, resellers, vendors or customers in future
filings.
Other
Assets, page 69
| 6. |
We
note that you invest in infrastructure programs with your bottlers, make
advance payments to fund future marketing activities, and make advance
payments to certain customers for distribution rights. For each of these
three types of programs:
|
| · |
Please
tell us and disclose where you classify the amortization of these other
assets. We understand from your disclosures in note 2 that you classify a
portion of the amortization expense related to your infrastructure
programs in net operating revenue. Please clarify whether you classify
amortization for all programs in net operating
revenues.
|
Mr. Will
Choi
June 10,
2005
Page
11
| · |
Please
tell us and disclose, similar to your disclosure of the amount of
amortization expense for infrastructure programs, the amount of
amortization expense related to the other two types of
programs.
|
Response:
We
confirm that the amortization expense related to all our infrastructure programs
with our bottlers is classified as a component of Net Operating Revenues. The
$136 million amortization expense for the year ended December 31, 2004
referenced in Note 1 in the paragraph titled Other Assets is included in the
total $3.6 billion amount noted in the Staff’s comment 5 above. We will clarify
the applicable disclosure in Note 1 in future filings.
Amortization
expense related to advance payments to fund future marketing activities and
advanced payments for distribution rights made to bottlers, resellers, vendors
and customers is also classified as a component of Net Operating Revenues. We do
not specifically track the amortization of these programs at the consolidated
level. Based on an analysis of the largest transactions recorded in Other Assets
related to these programs, we have determined that such amounts are not material
and that the amortization related to payments made to bottlers, resellers,
vendors and customers is included in the aforementioned $3.6 billion noted in
the Staff’s comment 5 above. We have not separately disclosed the total
consolidated amortization expense related to advance payments to fund future
marketing activities and for distribution rights in our Form 10-K for the year
ended December 31, 2004 because, as stated above, such amounts are not
material.
| · |
Please
explain and disclose the period over which you amortize these assets and
how you determine the applicable
period.
|
Response:
In
addressing the Staff’s specific comment, we must first describe our basis for
capitalizing costs associated with these programs.
Capitalized
costs for infrastructure programs, advance payments for future marketing
activities and advance payments for distribution rights are supported by legally
binding agreements which obligate the other party to perform certain future
activities that will contribute
to probable profitable sales volume and cash inflows for the Company as
discussed further below.
Infrastructure
programs:
The
Company makes upfront payments to certain bottlers. In return for these
payments, the bottlers agree to purchase and place specified numbers of Company
approved cold-drink equipment, maintain and service the equipment for a
specified period of time,
Mr. Will
Choi
June 10,
2005
Page
12
maintain
and stock the equipment and report to the Company that the bottler achieved the
minimum average annual unit case volume set forth in the contractual agreement.
These minimum average annual unit case volume levels ensure adequate gross
profit from sales of concentrate to fully recover the capitalized costs plus a
return on the Company’s investment. The contracts also provide for the bottlers
to repay the unearned portion of the infrastructure payments in the event the
bottlers’ fail to achieve their obligations under the agreements and their
failure cannot be remedied. A description of the infrastructure program with
Coca-Cola Enterprises (“CCE”) is included in Note 2 of our annual report on Form
10-K for the year ended December 31, 2004. The description of our agreement with
CCE is representative of our agreements with other bottlers. Additionally, the
Company disclosed in Note 2 that the amortization expense related to CCE’s
infrastructure program is recorded as a component of Net Operating
Revenues.
The
carrying value of infrastructure programs with other bottlers is not material.
Accordingly, we have not separately disclosed the amortization period for these
infrastructure programs.
In each
case, the Company has determined the amortization period for the infrastructure
programs based on the performance criteria described in the infrastructure
program contractual agreements.
Advance
payments to fund future marketing activities and to customers for distribution
rights:
The
Company makes advance payments to fund future marketing activities and for
distribution rights (sometimes referred to as “pouring rights”) in connection
with a variety of contractual agreements with specific customers. Such
contractual agreements include:
| · |
Advance
payments are made for future stadium, venue, league, event or team
advertising and promotional rights. Under these agreements, the Company
generally receives the right to:
|
| A. |
promote
and advertise our products over the life of the agreement using various
forms of media in the stadiums, venues, or at the events involving such
leagues or teams; or
|
| B. |
promote
and advertise our products under a license to use the trademarks or other
intellectual property of the stadium, venue, league, event or team for a
specified number of years.
|
These
contractual agreements also generally provide for the exclusive sale of our
trademark products in the associated stadium or venue or at events involving
such leagues or teams.
| · |
Advance
payments to restaurants that agree contractually to purchase our products
for a specified number of years or until a cumulative purchase commitment
is met and conduct specified promotional activities during the term of the
agreement.
|
Mr. Will
Choi
June 10,
2005
Page
13
The terms
of these agreements necessarily vary. However, the contractual agreements
generally incorporate the Company’s exclusive right to promote or jointly
promote its trademark products for a specified period of time. The agreements
generally require the counterparties to perform specified activities for a
specified period of time, including, as appropriate, purchasing our products,
promoting our trademark products and providing exclusive access for a specified
period of time to the counterparty’s intellectual property.
The
Company enters into such arrangements because of their probable future economic
benefits to the Company. All such arrangements are designed to increase the
future cash inflows associated with the sale of the Company’s trademark
products. Additionally, the exclusivity provisions of these arrangements ensure
that the Company has the exclusive access to the rights afforded in each unique
arrangement. In the event of non-performance or breach of an agreement by the
counterparty, the Company would be entitled to a remedy under the terms of each
arrangement, including the return of an appropriate portion of the Company’s
advanced funds.
The
Company capitalizes each payment and amortizes the associated cost over the
period benefited by the arrangement (i.e., the contractually defined period).
The Company only defers the cost of rights that provide the Company with
specific benefits over multiple years.
Additionally, the Company’s treatment is consistent with AICPA Statement of Position 93-7, “Reporting on Advertising Costs” (SoP 93-7), paragraph 44 which states that the “[c]osts of communicating advertising are not incurred until the item or service has been received and should not be reported as an expense before the item or service has been received…” and paragraph 45 which states that “[s]ome activities, such as product endorsements and sponsorship of events, may be performed pursuant to executory contracts. Costs incurred under executory contracts generally are recognized as performance under the contracts is received.”
The
amortization periods for advance payments to fund future marketing activities
and to certain customers for distribution rights range from 2 to 15 years. In
future filings, we will describe in Note 1 in the paragraph titled Other Assets
that the costs of these programs
are amortized over the periods directly benefited which range from 2 to 15
years.
| · |
Please
tell us and disclose in more detail how you determine whether these assets
are recoverable.
|
Mr. Will
Choi
June 10,
2005
Page
14
Response:
We
determine whether these assets are recoverable based on SFAS No.
144.
As
indicated on page 34 in our annual report on Form 10-K for the year ended
December 31, 2004, we periodically evaluate the recoverability of these assets
by preparing estimates of sales volume, gross profit, cash flows and other
factors specifically related to the use of these assets.
We review
these assets for possible impairment whenever events or changes in circumstances
(e.g., lower than anticipated sales volume or lower than expected gross profit
related to a specific agreement) indicate that the carrying amount of an asset
or group of related assets may not be recoverable. Once an "impairment
indicator" suggests assets may not be recoverable, we perform an impairment
test. Generally, the form of this impairment test is a cash flow model. We
compare the sum of the expected future cash flows (undiscounted and without
interest charges) related to the use of an asset or group of related assets to
the carrying amount, based on reasonable and supportable assumptions and
projections. If the sum of the expected undiscounted cash flows is less than
carrying value, then the asset or group of related assets is impaired and a
write-down to fair value is recorded.
| · |
Please
explain your basis for capitalizing costs associated with each of these
three programs. In addition, please tell us whether any of the costs
relate to advertising, as defined by paragraphs .22 - .24 of SoP 93-7;
start-up activities, as discussed in paragraph .05 of SoP 98-5; or
internally developed intangible assets, as discussed in paragraph 10 of
SFAS No. 142. If so, please tell us your consideration of those
statements.
|
Response:
The
Company’s basis for capitalizing costs associated with each of these programs is
addressed in the response to Staff comment 6 above regarding the period over
which the assets are amortized.
In
determining the proper accounting for these agreements, the Company analyzed SoP
93-7, SoP 98-5 and SFAS No. 142. The following summarizes our analysis of each
of these standards.
(1)
Whether any of the costs relate to advertising, as defined by paragraphs .22 -
..24 of SoP 93-7:
Paragraphs
..22-.24 of SoP 93-7 define advertising as follows:
Mr. Will
Choi
June 10,
2005
Page
15
| 22. |
Advertising
is the promotion of an industry, an entity, a brand, a product name, or
specific products or services so as to create or stimulate a positive
entity image or to create or stimulate a desire to buy the entity’s
products or services.
|
| 23. |
Advertising
is one kind of customer acquisition activity. Financial reporting of other
kinds of customer acquisition activities is outside the scope of this
SoP.
|
| 24. |
Advertising
generally uses a form of media-such as mail, television, radio, telephone,
facsimile machine, newspaper, magazine, coupon, or billboard-to
communicate with potential customers.
|
The costs
of our infrastructure programs and the advance payments for future marketing
activities and for distribution rights to certain customers do not meet the
definition of advertising as discussed above. The payments in each of these
programs represent payments to our bottlers and other customers who in turn are
required to perform certain activities or provide the Company with certain
rights, the nature of which is described above. In certain cases, where our
customers provide the Company with the exclusive rights to use specified media
(e.g., the right to use a sign or billboard in a stadium, the right to place
promotional materials in a facility, etc.) for future advertising and promotion
of our products, the Company expenses the cost of the media in accordance with
paragraph 44 of SoP 93-7, which states the following:
Costs of
communicating advertising are not incurred until the item or service has been
received and should not be reported as an expense before the item or service has
been received, except as discussed in paragraph 27. For example:
| · |
The
costs of television airtime should not be reported as advertising expense
before the airtime is used. Once it is used, the costs should be expensed,
unless the airtime was used for direct-response advertising that meet the
criteria for capitalization under this SoP.
|
| · |
The
costs of magazine, directory, or other print media advertising space
should not be reported as advertising expense before the space is used.
Once it is used, the costs should be expensed, unless the space was used
for direct-response advertising activities that meet the criteria for
capitalization under this SoP.
|
The
Company has determined that these costs are “costs of communicating
advertising.” The Company expenses in accordance with SoP 93-7 the costs
associated with communicating advertising, including advertising costs
associated with utilizing the exclusive rights available under the agreements
described above (e.g., producing a television advertisement that makes use of a
particular team name), when the advertising takes place. Refer to Note 1 in the
paragraph titled Advertising Costs for a description of our accounting policy
for advertising costs.
| (2) |
Whether
any of the costs relate to start-up activities, as discussed in paragraph
05 of SoP 98-5:
|
Mr. Will
Choi
June 10,
2005
Page
16
The costs
capitalized in our programs do not relate to start-up activities, as discussed
in paragraph 05 of SoP 98-5, which
states:
Start-up
activities are defined broadly as those one-time activities related to opening a
new facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, or commencing some new
operation. Start-up activities include activities related to organizing a new
entity (commonly referred to as organization costs). This SOP provides guidance
on accounting for the costs of start-up activities.
The
capitalized costs associated with these programs are generally related to the
distribution of existing products. In addition, we do not enter into agreements
with an entirely new class of customers. Accordingly, we have not capitalized
any costs associated with start-up activities.
| (3) |
Whether
any of the costs relate to internally developed intangible assets, as
discussed in Paragraph 10 of SFAS No.
142:
|
The
capitalized costs associated with these programs do not relate to internally
developed intangible assets, as discussed in paragraph 10 of SFAS No. 142, which
states:
Costs of
internally developing, maintaining, or restoring intangible assets (including
goodwill) that are not specifically identifiable, that have indeterminate lives,
or that are inherent in a continuing business and related to an entity as a
whole, shall be recognized as an expense when incurred.
The
advance payments made pursuant to each of the three programs are payments made
to third parties. These third parties must satisfy specific contractual
conditions related to the amounts that have been advanced to them. The amounts
advanced do not reflect costs related to internally developed intangible
assets.
Property,
Plant and Equipment, page 69
| 7. |
We
note your property, plant and equipment represents approximately 32% of
your total assets. Please disclose the useful lives of your property,
plant and equipment by component. In a separate note, please disclose in
tabular form as of each balance sheet date a breakout of the components
included in the property, plant and equipment line item, including the
related amounts. Further, given the materiality of your property, plant
and equipment and the judgment involved in estimating useful lives, please
tell us why you do not believe this area to represent a critical
accounting policy.
|
Mr. Will
Choi
June 10,
2005
Page
17
Response:
In future
annual reports on Form 10-K, we will disclose the useful lives of our property,
plant and equipment by component. Further, we will disclose in a separate note
the components of property, plant and equipment and the related
amounts.
The
Company does not consider its accounting policies regarding property, plant and
equipment to be critical. As contemplated in SEC Financial Reporting Release No.
60, critical accounting policy disclosures are reserved for the accounting
policies management believes are the most important for the portrayal of the
company’s financial statements and require management’s most difficult,
subjective or complex judgments. While we agree disclosures regarding property,
plant and equipment are important, we do not believe a critical accounting
policy disclosure regarding property, plant and equipment is one of the
Company’s most critical policies that requires disclosure. The judgments related
to estimating the useful lives of our property, plant and equipment are not as
difficult, subjective or complex as those judgments related to matters that we
disclosed as our critical accounting policies. Our property, plant and equipment
is generally not “high technology” oriented items and includes such items as
buildings, plant bottling lines, dispensers, coolers, trucks and other machinery
and equipment. Based on our experience in purchasing and using these fixed
assets, we do not believe significant judgment is required in assigning
estimated useful lives.
Note
18. Acquisitions and Investments, page 110
| 8. |
We
understand that you have recognized a liability equal to the present value
of the total amount likely to be paid to CCEAG shareholders related to the
put or put/call agreements. Please tell us whether the agreements meet the
definition of a derivative, based on paragraphs 6 to 9 of SFAS No. 133. If
so, please tell us your consideration of paragraphs 17 and 18 of SFAS No.
133 in accounting for these
agreements.
|
Response:
Paragraph
6 of SFAS No. 133 defines a derivative instrument as a financial instrument or
contract with all three of the following characteristics:
| (a) |
It
has (1) one or more underlyings and (2) one or more notional amounts or
payment provisions or both. Those terms determine the amount of the
settlement or settlements, and, in some cases, whether or not a settlement
is required.
|
| (b) |
It
requires no initial net investment or an initial net investment that is
smaller than would be required for other types of contracts that would be
expected to have a similar response to changes in market
factors.
|
| (c) |
Its
terms require or permit net settlement, it can readily be settled net by a
means outside the contract, or it provides for delivery of an asset that
puts the recipient in a position not substantially different from net
settlement.
|
Mr. Will
Choi
June 10,
2005
Page
18
Additionally,
paragraph 9 states a contract fits the description in paragraph 6(c) if its
settlement provisions meet one of the following criteria:
| (a) |
Neither
party is required to deliver an asset that is associated with the
underlying or that has a principal amount, stated amount, face value,
number of shares, or other denomination that is equal to the notional
amount….
|
| (b) |
One
of the parties is required to deliver an asset of the type described in
paragraph 9(a), but there is a market mechanism that facilitates net
settlement….
|
| (c) |
One
of the parties is required to deliver an asset of the type described in
paragraph 9(a), but that asset is readily convertible to cash or is itself
a derivative instrument.
|
The put
or put/call agreements require delivery of the shares of CCEAG to the Company in
exchange for cash to be paid to the shareholders. We have concluded that the put
and put/call agreements do not meet the definition of a derivative because, with
respect to each such agreement, (1) the agreement’s terms do not provide or
permit net settlement of the contract, (2) there exists no market mechanism to
facilitate net settlement of the agreement, and (3) the shares of CCEAG are not
publicly traded and therefore could not be readily converted to cash upon our
Company taking delivery of the shares at the time the options are exercised.
Mr. Will
Choi
June 10,
2005
Page
19
In
connection with responding to your comments, the Company acknowledges the
following:
| · |
The
Company is responsible for the adequacy and accuracy of the disclosure in
our filings;
|
| · |
Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the
filing; and
|
| · |
The
Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
|
Please
direct any comments or questions regarding this letter to me at 404-676-3497 or
via fax at 404-515-2554.
Sincerely,
/s/
Connie D. McDaniel
Connie D.
McDaniel
|
c:
|
E.
Neville Isdell, Chairman, Board of Directors, and Chief Executive
Officer
Gary
P. Fayard, Executive Vice President and Chief Financial
Officer
Peter
V. Ueberroth, Chairman of the Audit Committee of the Board of
Directors
|