EXHIBIT 13.1 FINANCIAL REVIEW INCORPORATING THE COCA-COLA COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS AND SUBSIDIARIES - ------------------------------------------------------------------------ Our mission is to maximize share-owner value over time. To create long-term value, The Coca-Cola Company and its subsidiaries (our Company) execute a comprehensive business strategy driven by four key objectives. We strive to (1) increase volume, (2) expand our share of beverage sales worldwide, (3) maximize our long-term cash flows and (4) improve economic profit and create economic value added. We achieve these goals by strategically investing in the high- return beverages business and by optimizing our cost of capital through appropriate financial policies. INVESTMENTS With a global business system that operates in nearly 200 countries and generates superior cash flows, our Company is uniquely positioned to capitalize on profitable new investment opportunities. Our criterion for investment is simple: New investments must directly enhance our existing operations and must be expected to provide cash returns that exceed our long-term, after-tax, weighted-average cost of capital, currently estimated at approximately 11 percent. Because it consistently generates high returns, our business, beverages, is a particularly attractive investment for us. In emerging and still-developing markets, our Company's main objective is to increase the penetration of our products. In these markets, the bulk of our investments are for infrastructure enhancements such as production facilities, distribution networks, sales equipment and technology. We make these investments by acquiring or forming strategic business alliances with local bottlers and by matching local expertise with our experience, resources and focus. In highly developed markets, our expenditures are primarily for marketing activities. Currently, 50 percent of the world's population live in markets where the average person consumes fewer than 10 servings of our beverages per year. For example, the emerging markets of China, India, Indonesia and Russia represent approximately 44 percent of the world's population, yet, on a combined basis, the average per capita consumption of our products in these markets is less than 2 percent of the United States' level. We continue to invest aggressively in these areas. Our investment strategy focuses on the four fundamental components of our business: bottling operations, capital expenditures, marketing activities and people. BOTTLING OPERATIONS - 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; and (3) bottlers in which we have invested and have a controlling ownership interest. During 1997, independently owned bottling operations produced and distributed approximately 37 percent of our worldwide unit case volume. Bottlers in which we own a noncontrolling ownership interest produced and distributed approximately 50 percent of our 1997 worldwide unit case volume while controlled bottling and fountain operations produced and distributed approximately 13 percent of 1997 worldwide unit case volume. The reason we invest in bottling operations is to maximize the strength and efficiency of our production, distribution and marketing systems around the world. These investments often result in increases in unit case volume, net revenues and profits at the bottler level, which in turn generate increased gallon shipments for our concentrate business. As a result, both our Company and the bottlers benefit from long- term growth in volume, improved cash flows and increased share-owner value. The level of our investment generally depends on the bottler's capital structure and its available resources at the time of our investment. In certain situations, it can be advantageous to acquire a controlling interest in a bottling operation. Although it is not our primary long-term business strategy, owning a controlling interest allows us to compensate for limited local resources and enables us to help focus these bottlers' sales and marketing programs, assist in developing their business and information systems, and establish appropriate capital structures. In 1997, we purchased the bottling assets of three South Korean bottlers. Also in 1997, the Indian government approved our plan to invest in Indian bottling operations, allowing us to set up an integrated bottling system in India. Previously, we acquired controlling interests in certain bottling operations in Italy in 1996 and 1995. By providing capital and marketing expertise to newly acquired bottlers, we strengthen their ability to deliver our Company's brands to customers and consumers. In line with our long-term bottling strategy, we periodically consider options for reducing our ownership interest in a consolidated bottler. One option for reducing our ownership interest is to combine our bottling interests with the bottling interests of others to form strategic business alliances. Another option is to sell our interest in a consolidated bottling operation to one of our equity investee bottlers. In both of these situations, we continue participating in the previously consolidated bottler's earnings through our portion of the equity investee's income. Consistent with our strategy, in early 1998, we announced a proposal for our consolidated bottling operations in northern and central Italy to become part of a new publicly traded European bottler, Coca-Cola Beverages. Coca-Cola Beverages will be formed upon the completion of a proposed spin-off by Coca-Cola Amatil Limited (Coca-Cola Amatil) of its European operations. After the spin-off, these Italian bottling operations will be acquired by Coca-Cola Beverages for both cash and shares of Coca-Cola Beverages stock in a transaction valued at approximately $979 million. Additionally, once the proposed spin-off has been completed, our bottling operations in South Korea will be acquired by Coca-Cola Amatil for shares of stock in Coca-Cola Amatil in a transaction valued at approximately $588 million. The proposed transactions are subject to certain conditions, including approvals by holders of ordinary shares - 33 - FINANCIAL REVIEW INCORPORATING THE COCA-COLA COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS AND SUBSIDIARIES - ------------------------------------------------------------------------ of Coca-Cola Amatil stock and applicable regulatory authorities. In 1996, we sold our consolidated bottling and canning operations in France and Belgium to Coca-Cola Enterprises Inc. (Coca-Cola Enterprises). We also formed a strategic business alliance in Germany, Coca-Cola Erfrischungsgetraenke AG (CCEAG), in 1996 through the merger of our then wholly owned east German bottler with three independent bottlers. In 1997, we merged our consolidated bottling operation in Germany, Coca-Cola Rhein-Ruhr, into CCEAG. Currently, we have a 45 percent interest in CCEAG. Also in 1996, we combined our bottling interests in Venezuela with the Cisneros Group's bottling companies to form a new joint venture, Embotelladora Coca-Cola y Hit de Venezuela, S.A. (Coca-Cola y Hit). In 1997, our Company and the Cisneros Group sold our respective interests in Coca-Cola y Hit to Panamerican Beverages, Inc. (Panamco) in exchange for shares of Panamco stock. At the completion of this transaction, our ownership in Panamco was approximately 23 percent, and we began accounting for our investment by the equity method. As stated earlier, our investments in a bottler can represent either a noncontrolling or a controlling interest. Through noncontrolling investments in bottling companies, we provide expertise and resources to strengthen those businesses. In 1997, we increased our interest in Grupo Continental, S.A., a bottler in Mexico, from 18 percent to 20 percent; our interest in Embotelladoras Polar S.A., a bottler headquartered in Chile, from 17 percent to 19 percent; and our interest in Embotelladora Andina S.A., another bottler headquartered in Chile, from 6 percent to 11 percent. Certain bottling operations in which we have a noncontrolling ownership interest are designated as "anchor bottlers" due to their level of responsibility and performance. Anchor bottlers are strongly committed to their own profitable growth which, in turn, helps us meet our strategic goals and furthers the interests of our worldwide production, distribution and marketing systems. Anchor bottlers tend to be large and geographically diverse with strong financial and management resources. In 1997, our anchor bottlers produced and distributed approximately 38 percent of our total worldwide unit case volume. Anchor bottlers give us strong partners on every major continent. Upon its formation, Coca-Cola Beverages, the Coca-Cola Amatil spin-off which will operate in Europe, will be designated as our tenth anchor bottler. Additionally, we designated Coca-Cola Nordic Beverages (CCNB) as an anchor bottler in 1997. CCNB, a joint venture in which Carlsberg A/S will own a 51 percent interest and we will own a 49 percent interest, has bottling operations in Denmark and Sweden. In 1997, our Company and San Miguel Corporation (San Miguel) sold Coca-Cola Bottlers Philippines, Inc. to Coca-Cola Amatil in exchange for shares of Coca-Cola Amatil stock. Also in 1997, we sold to Coca-Cola Enterprises our 49 percent interest in Coca-Cola & Schweppes Beverages Ltd., a bottler in Great Britain; our 48 percent interest in Coca-Cola Beverages Ltd. of Canada; and our 49 percent interest in The Coca-Cola Bottling Company of New York, Inc. In line with our established investment strategy, our bottling investments have been profitable over time. For bottling investments that are accounted for by the equity method, we measure the profitability of our bottling investments in two ways - equity income and the excess of the fair values over the carrying values of our investments. Equity income, which is included in our consolidated net income, represents our share of the net earnings of our investee companies. In 1997, equity income was $155 million. The following table illustrates the excess of the calculated fair values, based on quoted closing prices of publicly traded shares, over our Company's carrying values for selected equity method investees (in millions): Fair Carrying December 31, Value Value Excess - ------------------------------------------------------------------------- 1997 Coca-Cola Enterprises Inc. $ 6,008 $ 184 $ 5,824 Coca-Cola Amatil Limited 2,122 1,204 918 Panamerican Beverages, Inc. 924 735 189 Coca-Cola FEMSA, S.A. de C.V. 827 87 740 Grupo Continental, S.A. 272 89 183 Coca-Cola Bottling Co. Consolidated 171 71 100 - ------------------------------------------------------------------------- $ 7,954 ========================================================================= The excess of calculated fair values over carrying values for our investments illustrates the significant increase in the value of our investments. Although this excess value for equity method investees is not reflected in our consolidated results of operations or financial position, it represents a true economic benefit to us. CAPITAL EXPENDITURES - Capital expenditures for property, plant and equipment and the percentage distribution by geographic area for 1997, 1996 and 1995 are as follows (in millions): Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------- Capital expenditures $ 1,093 $ 990 $ 937 - --------------------------------------------------------------- North America 24% 27% 31% Africa 2% 3% 2% Greater Europe 30% 38% 41% Latin America 7% 8% 9% Middle & Far East 18% 12% 9% Corporate 19% 12% 8% =============================================================== In 1996, our Company launched Project Infinity, a strategic business initiative utilizing technology to integrate business systems across our global enterprise over the next several years. In 1997, we began testing a limited version of the Project Infinity software technology and anticipate rolling it out to certain divisions in late 1998. Project Infinity will enhance - 34 - FINANCIAL REVIEW INCORPORATING THE COCA-COLA COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS AND SUBSIDIARIES - ------------------------------------------------------------------------ our competitiveness by supplying immediate, detailed information about our financial position and the marketplace to our management, associates and bottlers worldwide. By giving our people real-time data, Project Infinity will increase our ability to recognize opportunities and make better and faster decisions about operations, marketing and finance. Project Infinity will require significant capital expenditures over the next several years. All related costs of business process reengineering activities have been expensed as incurred. In December 1997, our Company signed a letter of intent with beverage company Pernod Ricard to purchase its Orangina brands, three bottling operations and one concentrate plant in France for approximately 5 billion French francs (approximately $850 million based on December 1997 exchange rates). This transaction is subject to approvals from regulatory authorities. MARKETING ACTIVITIES - In addition to investing in our bottling and distribution infrastructure, we make significant expenditures in marketing to support our trademarks. We define marketing as anything we do to create consumer demand for our brands. We focus on continually finding new ways to differentiate our products and build value into all our brands. Marketing spending enhances consumer awareness and increases consumer preference for our brands. This produces growth in volume, per capita consumption and our share of worldwide beverage sales. We heighten consumer awareness and product appeal for our trademarks using integrated marketing programs. Through our bottling investments and strategic alliances with other bottlers of our products, we create and implement these programs worldwide. In developing a global strategy for a Company trademark, we conduct product and packaging research, establish brand positioning, develop precise consumer communications and solicit consumer feedback. Our integrated marketing programs include activities such as advertising, point-of-sale merchandising and product sampling. To maximize the impact of our advertising expenditures, we assign specific brands to individual advertising agencies. This approach enables us to increase accountability and enhance each brand's global positioning. PEOPLE - Our continued success depends on recruiting, training and retaining people who can quickly identify and act on profitable business opportunities. This means maintaining and refining a corporate culture that encourages learning, innovation and value creation on a daily basis. The Coca-Cola Learning Consortium works with the management of our entire system to foster learning as a core capability. This group helps build the culture, systems and processes our people need to develop the knowledge and skills to take advantage of new opportunities. FINANCIAL STRATEGIES We use several strategies to optimize our cost of capital, which is a key component of our ability to maximize share- owner value. DEBT FINANCING - Our Company maintains debt levels considered 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. Our capital structure and financial policies have earned long-term credit ratings of "AA-" from Standard & Poor's and "Aa3" from Moody's, and the highest credit ratings available for our commercial paper programs. 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 the active management of our 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, typically result in current liabilities exceeding current assets. In managing our use of debt capital, we consider the following financial measurements and ratios: Year Ended December 31, 1997 1996 1995 - ---------------------------------------------------------- Net debt (in billions) $ 2.0 $ 2.8 $ 2.6 Net debt-to-net capital 22% 31% 32% Free cash flow to net debt 172% 85% 82% Interest coverage 22x 17x 16x Ratio of earnings to fixed charges 20.8x 14.9x 14.5x =========================================================== Net debt is debt in excess of cash, cash equivalents and marketable securities not required for operations and certain temporary bottling investments. SHARE REPURCHASES - Our Company demonstrates confidence in the long-term growth potential of our business by our continued and consistent use of share repurchase programs. In 1992, our Board of Directors authorized a plan to repurchase up to 200 million shares of our Company's common stock through the year 2000. In 1997, we repurchased approximately 20 million shares under the 1992 plan. Through 1997, we had repurchased 187 million shares under the 1992 plan. In October 1996, our Board of Directors authorized a new program to repurchase 206 million additional shares through the year 2006. Since the inception of our initial share repurchase program in 1984 through our current program as of December 31, 1997, we have repurchased more than 1 billion shares, representing 31 percent of the shares outstanding as of January 1, 1984, at an average price per share of $11.27. - 35 - FINANCIAL REVIEW INCORPORATING THE COCA-COLA COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS AND SUBSIDIARIES - ------------------------------------------------------------------------ DIVIDEND POLICY - At its February 1998 meeting, our Board of Directors again increased our quarterly dividend to $.15 per share, equivalent to a full-year dividend of $.60 in 1998, our 36th consecutive annual increase. Our annual common stock dividend was $.56 per share, $.50 per share and $.44 per share in 1997, 1996 and 1995, respectively. In 1997, our dividend payout ratio was approximately 34 percent of our net income. To free up additional cash for reinvestment in our high-return beverages business, our Board of Directors intends to gradually reduce our dividend payout ratio to 30 percent 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, to reduce our exposure to 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. The derivatives we use are straightforward instruments with liquid markets. Our Company monitors our exposure to financial market risks using several objective measurement systems, including value- at-risk models. For the value-at-risk calculations discussed below, we used a historical simulation model to estimate potential future losses our Company could incur 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. Our value- at-risk calculations do not purport to represent the actual losses that our Company expects to incur. 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 our 1997 operating income generated outside the United States, weakness in one particular currency is often offset by strengths in others. We use derivative financial instruments to further reduce our net exposure to currency fluctuations. Our Company enters into forward exchange contracts and purchases currency options (principally European currencies and Japanese yen) to hedge firm sale commitments denominated in foreign currencies. We also purchase currency options (principally European currencies and Japanese yen) to hedge certain anticipated sales. Premiums paid and realized gains and losses, including those on terminated contracts, if any, are included in prepaid expenses and other assets. These are recognized in income, along with unrealized gains and losses, in the same period the hedged transactions are realized. Gains and losses on derivative financial instruments that are designated and effective as hedges of net investments in international operations are included in share-owners' equity as a foreign currency translation adjustment. Our value-at-risk calculation estimates foreign currency risk on our derivative and other financial instruments. We have not included in our calculation the effects of currency movements on anticipated foreign currency denominated sales and other hedged transactions. According to our calculation, on December 31, 1997, we estimate with 95 percent confidence that the fair value of our derivative and other financial instruments would decline by less than $58 million over a one- week period due to an adverse move in foreign currency exchange rates. However, we would expect that any loss in the fair value of our derivative and other financial instruments would be generally offset by an increase in the fair value of our underlying exposures. INTEREST RATES - Our Company maintains our percentage of fixed and variable rate debt within defined parameters. We enter into interest rate swap agreements that maintain the fixed/variable mix within these parameters. Any differences paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap. Our value-at-risk calculation estimates interest rate risk on our derivative and other financial instruments. According to our calculation, on December 31, 1997, we estimate with 95 percent confidence that any increase in our net interest expense due to an adverse move in interest rates over a one- week period would not have a material impact on our consolidated financial position, results of operations or cash flows. PERFORMANCE TOOLS Economic profit and economic value added provide a framework by which we measure the value of our actions. We define economic profit as income from continuing operations after taxes, excluding interest, in excess of a computed capital charge for average operating capital employed. Economic value added represents the growth in economic profit from year to year. To ensure that our management team stays clearly focused on the key drivers of our business, economic value added and economic profit are used in determining annual incentive awards and long-term incentive awards for most eligible employees. During 1996, we implemented a new tool to help us improve our performance - value-based management (VBM). VBM does not replace the economic value added concept; rather, it is a tool to manage economic profit. It requires us to think about creating value in everything we do, every day. VBM's principles assist us in managing economic profit by clarifying our understanding of what creates value and what destroys it and encouraging us to manage for increased value. - 36 - FINANCIAL REVIEW INCORPORATING THE COCA-COLA COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS AND SUBSIDIARIES - ------------------------------------------------------------------------ With VBM, we determine how best to create value in every area of our business. We believe that using VBM as a planning and execution tool, and economic profit as a performance measurement tool, greatly enhances our ability to build share- owner value over time. TOTAL RETURN TO SHARE OWNERS Our Company has provided share owners with an excellent return on their investment over the past decade. A $100 investment in our Company's common stock on December 31, 1987, together with reinvested dividends, grew in pretax value to approximately $1,643 on December 31, 1997, an average annual compound return of 32 percent. MANAGEMENT'S DISCUSSION AND ANALYSIS OUR BUSINESS We are the largest manufacturer, distributor and marketer of soft-drink beverage concentrates and syrups in the world. Our Company manufactures beverage concentrates and syrups and, in certain instances, finished beverages, which we sell to bottling and canning operations, authorized fountain wholesalers and some fountain retailers. In addition, we have ownership interests in numerous bottling and canning operations. We are also the world's largest distributor and marketer of juice and juice-drink products. We own some of the world's most valuable brands, more than 160 brands in all. These include soft drinks and noncarbonated beverages such as sports drinks, juice drinks, milk products, water products, teas and coffees. VOLUME We measure our sales volume in two ways: (1) gallon shipments of concentrates and syrups and (2) unit cases of finished product. Gallon shipments represent our primary business and measure the volume of concentrates and syrups we sell to our bottling system. Most of our revenues are based on this measure of "wholesale" activity. We also measure volume in unit cases, which represent the amount of finished product our bottling system sells to retail customers. We believe unit case volume more accurately measures the underlying strength of our business system because it measures trends at the retail level. We include fountain syrups sold directly to our customers in both measures. In 1997, our worldwide unit case volume increased 9 percent, on top of an 8 percent increase in 1996. Our business system sold 14.9 billion unit cases in 1997, an increase of 1.2 billion unit cases over 1996. Our 1997 results are the product of years of systematically investing not only in marketing, but also in our worldwide infrastructure that includes bottlers, capital, information systems and people. OPERATIONS NET OPERATING REVENUES AND GROSS MARGIN - On a consolidated basis, our net revenues increased 1 percent and our gross profit grew 8 percent in 1997. The growth in revenues reflects gallon shipment increases and price increases in certain markets, offset by the full-year impact of the sale of previously consolidated bottling and canning operations in France, Belgium and eastern Germany in 1996 as well as the effects of a stronger U.S. dollar. Our gross profit margin increased to 68 percent in 1997 from 64 percent in 1996, primarily due to the sale in 1996 of previously consolidated bottling operations, which shifted proportionately more revenue to our higher margin concentrate business. On a consolidated basis, our net revenues grew 3 percent and our gross profit grew 7 percent in 1996. The increase in revenues was due primarily to an increase in gallon shipments and selective price increases offset by a stronger U.S. dollar and the disposition of our French, Belgian and east German bottling and canning operations. Our gross profit margin increased to 64 percent in 1996 from 62 percent in 1995, primarily due to the sale of our previously consolidated bottling and canning operations as well as favorable results from changes in our product mix. Additionally, gross margins improved in 1996 due to favorable price variances in raw materials, such as packaging, at our consolidated bottlers. SELLING, ADMINISTRATIVE AND GENERAL EXPENSES - Selling expenses were $6,244 million in 1997, $6,018 million in 1996 and $5,508 million in 1995. The increases in 1997 and 1996 were primarily due to higher marketing expenditures in support of our Company's volume growth. Administrative and general expenses totaled $1,608 million in 1997, $2,002 million in 1996 and $1,653 million in 1995. The decrease in 1997 was principally due to certain nonrecurring provisions recorded in 1996, as discussed below, partially offset by a $60 million nonrecurring provision recorded in 1997 related to enhancing manufacturing efficiencies in North America. Administrative and general expenses increased in 1996 due to certain nonrecurring provisions. In the third quarter of 1996, we recorded provisions of approximately $276 million in administrative and general expenses related to our plans for strengthening our worldwide system. Of this $276 million, approximately $130 million related to streamlining our operations, primarily in Greater Europe and Latin America. Our management took actions to consolidate certain manufacturing operations and, as a result, recorded charges to recognize the impairment of certain manufacturing assets and the estimated losses on the disposal of other assets. The remainder of this $276 million provision was for impairment charges to certain production facilities and reserves for losses on the disposal of other production facilities of The Minute Maid Company. Also in the third quarter of 1996, we recorded in administrative - 37 - FINANCIAL REVIEW INCORPORATING THE COCA-COLA COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS AND SUBSIDIARIES - ------------------------------------------------------------------------ and general expenses an $80 million impairment charge to recognize Project Infinity's impact on existing information systems and a $28.5 million charge as a result of our decision to make a contribution to The Coca-Cola Foundation, a not-for-profit charitable organization. Administrative and general expenses, as a percentage of net operating revenues, were approximately 9 percent in 1997, 11 percent in 1996 and 9 percent in 1995. OPERATING INCOME AND OPERATING MARGIN - On a consolidated basis, our operating income increased 28 percent in 1997, following a 3 percent decrease in 1996. The increase in 1997 was due to increased gallon shipments coupled with an increase in gross profit margins, as well as the recording of several nonrecurring provisions in the third quarter of 1996. In addition, the curtailment of concentrate shipments decreased 1996 operating income by an estimated $290 million. Our consolidated operating margin was 27 percent in 1997 and 21 percent in 1996. MARGIN ANALYSIS [bar chart] 1997 1996 1995 - ------------------------------------------------------- Net Operating Revenues $18.9 $18.7 $18.1 (in billions) Gross Margin 68% 64% 62% Operating Margin 27% 21% 22% - ------------------------------------------------------- INTEREST INCOME AND INTEREST EXPENSE - In 1997, our interest income decreased 11 percent due primarily to decreases in international interest rates. Interest expense decreased 10 percent in 1997 due to lower average commercial paper borrowings. In 1996, our interest income decreased 3 percent, due primarily to lower average short-term investments and lower average interest rates in Latin America. Interest expense increased 5 percent in 1996, due to higher average debt balances. EQUITY INCOME - Equity income decreased 27 percent to $155 million in 1997, due primarily to the significant amount of structural change in our global bottling system, which was partially offset by solid results at key equity bottlers. Equity income increased 25 percent to $211 million in 1996, due primarily to stronger operating performances by Coca-Cola Enterprises, Coca-Cola Beverages Ltd. of Canada and The Coca-Cola Bottling Company of New York, Inc. OTHER INCOME-NET - In 1997, other income-net increased $496 million and includes gains totaling $508 million on the sales of our interests in Coca-Cola & Schweppes Beverages Ltd., Coca-Cola Beverages Ltd. of Canada and The Coca-Cola Bottling Company of New York, Inc. Gains on other bottling transactions are also included in other income-net. In 1996, other income-net increased $1 million and included gains recorded on the sale of our bottling and canning operations in France and Belgium, as well as gains on other bottling transactions. GAINS ON ISSUANCES OF STOCK BY EQUITY INVESTEES - In 1997, our Company and San Miguel sold our respective interests in Coca-Cola Bottlers Philippines, Inc. to Coca-Cola Amatil in exchange for approximately 293 million shares of Coca-Cola Amatil stock. In connection with this transaction, Coca-Cola Amatil issued to San Miguel approximately 210 million shares valued at approximately $2.4 billion. The issuance to San Miguel resulted in a one-time noncash pretax gain for our Company of approximately $343 million, and resulted in our 36 percent interest in Coca-Cola Amatil being diluted to approximately 33 percent. Also in 1997, our Company and the Cisneros Group sold our respective interests in Coca-Cola y Hit to Panamco in exchange for approximately 30.6 million shares of Panamco stock. In connection with this transaction, Panamco issued to the Cisneros Group approximately 13.6 million shares valued at approximately $402 million. The issuance to the Cisneros Group resulted in a one-time noncash pretax gain for our Company of approximately $20 million. At the completion of this transaction, our ownership in Panamco was approximately 23 percent. In 1996, Coca-Cola Amatil issued approximately 46 million shares in exchange for approximately $522 million. This issuance reduced our ownership in Coca-Cola Amatil from approximately 39 percent to approximately 36 percent and resulted in a noncash pretax gain for our Company of approximately $130 million. Also in 1996, Coca-Cola Erfrischungsgetraenke G.m.b.H. (CCEG), our wholly owned east German bottler, issued new shares to effect a merger with three independent German bottling operations. The shares were valued at approximately $925 million, based upon the fair values of the assets of the three acquired bottling companies. Approximately 24.4 million shares were issued, resulting in a noncash pretax gain - 38 - FINANCIAL REVIEW INCORPORATING THE COCA-COLA COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS AND SUBSIDIARIES - ------------------------------------------------------------------------ of approximately $283 million for our Company. We own a 45 percent interest in the resulting anchor bottler, CCEAG. In 1996, Coca-Cola FEMSA de Buenos Aires, S.A. (CCFBA) issued approximately 19 million shares to Coca-Cola FEMSA, S.A. de C.V. This issuance reduced our ownership in CCFBA from 49 percent to approximately 32 percent. We recognized a noncash pretax gain of approximately $18 million as a result of this transaction. In subsequent transactions, our Company disposed of its remaining interest in CCFBA. INCOME TAXES - Our effective tax rates were 31.8 percent in 1997, 24.0 percent in 1996 and 31.0 percent in 1995. Our 1997 effective tax rate of 31.8 percent reflects tax benefits derived from significant operations outside the United States, which are taxed at rates lower than the U.S. statutory rate of 35 percent, partially offset by the tax impact of certain gains recognized from previously discussed bottling transactions. These transactions are generally taxed at rates higher than our Company's effective rate on operations. In the third quarter of 1996, our Company reached an agreement in principle with the U.S. Internal Revenue Service (IRS) settling certain U.S.-related income tax matters, including issues in litigation related to our operations in Puerto Rico dating back to 1981 and extending through 1995. This settlement resulted in a one-time reduction of $320 million to our 1996 income tax expense as a result of a reversal of previously accrued income tax liabilities and reduced our effective tax rate in 1996. Excluding the favorable impact of the settlement with the IRS, our 1996 effective tax rate would have been 31.0 percent. INCOME PER SHARE - Accelerated by our Company's share repurchase program, our basic net income per share grew 19 percent in 1997, 1996 and 1995, and diluted net income per share grew 19 percent in 1997, 18 percent in 1996 and 19 percent in 1995. LIQUIDITY AND CAPITAL RESOURCES We believe our ability to generate cash from operations in excess of our capital reinvestment and dividend requirements is one of our fundamental financial strengths. We anticipate that our operating activities in 1998 will continue to provide us with sufficient cash flows to meet all our financial commitments and to capitalize on opportunities for business expansion. FREE CASH FLOW - Free cash flow is the cash remaining from operations after we have satisfied our business reinvestment opportunities. We focus on increasing free cash flow to achieve our primary objective, maximizing share-owner value over time. We use free cash flow, along with borrowings, to pay dividends and make share repurchases. The consolidated statements of our cash flows are summarized as follows (in millions): Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------ Cash flows provided by (used in): Operations $ 4,033 $ 3,463 $ 3,328 Investment activities (500) (1,050) (1,226) - ------------------------------------------------------------------------ FREE CASH FLOW 3,533 2,413 2,102 Cash flows used in: Financing Share repurchases (1,262) (1,521) (1,796) Other financing activities (1,833) (581) (482) Exchange (134) (45) (43) - ------------------------------------------------------------------------ Increase (decrease) in cash $ 304 $ 266 $ (219) ======================================================================== Cash provided by operations in 1997 amounted to $4.0 billion, a 16 percent increase from 1996. This increase is primarily due to growth in net income in 1997. In 1996, cash provided by operations amounted to $3.5 billion, a 4 percent increase from 1995. This increase resulted from the continued growth of our business and includes the cash effect of significant items recorded in 1996. These items have been discussed previously in Management's Discussion and Analysis on pages 37 through 39. In 1997, net cash used in investment activities decreased from 1996, primarily due to the increase in proceeds from the disposal of investments and other assets including the dispositions of our interests in Coca-Cola & Schweppes Beverages Ltd., The Coca-Cola Bottling Company of New York, Inc. and Coca-Cola Beverages Ltd. of Canada. The growth in proceeds from disposals was partially offset by increased acquisitions and investments, primarily in bottling operations, including the South Korean bottlers. In 1996, net cash used in investment activities decreased from 1995, also due to the increase in proceeds from the disposal of investments and other assets including the disposition of our bottling and canning operations in France and Belgium. The increase in proceeds from disposals was partially offset by significant acquisitions and investments, including our investment in Coca-Cola y Hit. FINANCING ACTIVITIES - Our financing activities include net borrowings, dividend payments and share repurchases. Net cash used in financing activities totaled $3.1 billion in 1997, $2.1 billion in 1996 and $2.3 billion in 1995. The change between 1997 and 1996 was primarily due to net reductions of debt in 1997 compared to net borrowings of debt in 1996. Cash used to purchase common stock for treasury was $1.3 billion in 1997 versus $1.5 billion in 1996. Commercial paper is our primary source of short-term financing. On December 31, 1997, we had $2.6 billion outstanding in commercial paper borrowings. In addition, we had $.9 billion in lines of credit and other short-term credit facilities available, $.1 billion of which was outstanding. The 1997 reduction in - 39 - FINANCIAL REVIEW INCORPORATING THE COCA-COLA COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS AND SUBSIDIARIES - ------------------------------------------------------------------------ loans and notes payable was funded by proceeds received from the sale of certain bottling interests, as discussed previously. 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 so we can quickly and decisively respond to changing economic and political environments and to fluctuations in foreign currencies and interest rates. We use approximately 50 functional currencies. Due to our global operations, weaknesses in some of these currencies are often offset by strengths in others. In 1997, 1996 and 1995, the weighted-average exchange rates for a basket of selected foreign currencies, and certain individual currencies, strengthened (weakened) against the U.S. dollar as follows: Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------- Basket of currencies (10)% (8)% Even - ------------------------------------------------------------- Australian dollar (7)% 6% 1% British pound 4% Even 3% Canadian dollar (1)% Even Even French franc (12)% (4)% 13% German mark (13)% (6)% 13% Japanese yen (10)% (15)% 9% ============================================================= 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 mitigates over time a portion of our exchange risks. The change in our foreign currency translation adjustment in 1997 and 1996 was primarily due to the revaluation of net assets located in countries where the local currency significantly weakened against the U.S. dollar. Exchange gains (losses)-net amounted to $(56) million in 1997, $3 million in 1996 and $(21) million in 1995, and were recorded in other income-net. Exchange gains (losses)-net includes the remeasurement of certain currencies into functional currencies and the costs of hedging certain of our balance sheet exposures. Additional information concerning our hedging activities is presented on pages 53 through 55. FINANCIAL POSITION The carrying value of our investment in Coca-Cola Enterprises decreased in 1997 as a result of deferred gains related to the sales of our interests in Coca-Cola & Schweppes Beverages Ltd., Coca-Cola Beverages Ltd. of Canada and The Coca-Cola Bottling Company of New York, Inc. to Coca-Cola Enterprises. The deferred gains result from our approximate 44 percent ownership in Coca-Cola Enterprises. The carrying value of our investment in Coca-Cola Amatil increased in 1997 due to Coca-Cola Amatil issuing shares to San Miguel Corporation at a value per share greater than the carrying value per share of our interest in Coca-Cola Amatil. Our equity method investments also increased in 1997 due to our change from the cost method to the equity method in accounting for Panamco and Grupo Continental, S.A., and due to increased investments in other bottling operations. Our cost method investments declined due to the change in accounting for Panamco and Grupo Continental, S.A., partially offset by additional investments in Embotelladoras Polar S.A. and Embotelladora Andina S.A. Unrealized gain on available-for-sale securities, a component of share-owners' equity, is comprised of adjustments to report our marketable cost method investments at fair value. During 1997, unrealized gain on securities decreased $98 million due primarily to the change in accounting for Panamco and Grupo Continental, S.A. The 1996 decrease in our accounts receivable, inventories, property, plant and equipment, goodwill, and accounts payable and accrued expenses was primarily due to the disposition of our previously consolidated bottling and canning operations in France and Belgium and the deconsolidation of our previously consolidated east German bottler. In 1996, our equity method investments increased primarily due to our investments in CCEAG and Coca-Cola y Hit. The 1996 increase in cost method investments included our investment in Embotelladoras Polar S.A., Embotelladora Andina S.A., Panamco and noncash adjustments that increased our investments to fair value. The decrease in accrued income taxes was directly attributable to our 1996 settlement with the IRS, whereby $320 million of previously accrued income tax liabilities was reversed as a reduction of income tax expense. IMPACT OF INFLATION AND CHANGING PRICES Inflation is a factor that affects the way we operate in many markets around the world. In general, we are able to increase prices to counteract the effects of increasing costs and to generate sufficient cash flows to maintain our productive capability. YEAR 2000 In prior years, certain computer programs were written using two digits rather than four to define the applicable year. These programs were written without considering the impact of the upcoming change in the century and may experience problems handling dates beyond the year 1999. This could cause computer applications to fail or to create erroneous results unless corrective measures are taken. Incomplete or untimely resolution of the Year 2000 issue could have a material adverse impact on our Company's business, operations or financial condition in the future. Our Company has been assessing the impact that the Year 2000 issue will have on our computer systems since 1995. In response to these assessments, which are ongoing, our Company has developed a plan to inventory critical systems and develop solutions to those systems that are found to have date-related - 40 - FINANCIAL REVIEW INCORPORATING THE COCA-COLA COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS AND SUBSIDIARIES - ------------------------------------------------------------------------ deficiencies. Project plans call for the completion of the solution implementation phase and testing of those solutions prior to any anticipated impact on our systems. Our Company is also surveying critical suppliers and customers to determine the status of their Year 2000 compliance programs. Based on our work to date, and assuming that our project plans, which continue to evolve, can be implemented as planned, we believe future costs relating to the Year 2000 issue will not have a material impact on our Company's consolidated financial position, results of operations or cash flows. OUTLOOK While we cannot predict future performance, we believe considerable opportunities exist for sustained, profitable growth, not only in the developing population centers of the world but also in our most established markets, including the United States. We firmly believe the strength of our brands, our unparalleled distribution system, our global presence, our strong financial condition and the skills of our people give us the flexibility to capitalize on these growth opportunities as we continue to pursue our goal of increasing share-owner value. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of our Company. Our Company and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in our Company's filings with the Securities and Exchange Commission and in our reports to share owners. 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 or statements expressing general optimism about future operating results, are forward-looking statements within the meaning of the Act. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance. The following are some of the factors that could cause actual results to differ materially from estimates contained in our Company's forward-looking statements: - -- The ability to generate sufficient cash flows to support capital expansion plans, share repurchase programs and general operating activities. - -- Competitive product and pricing pressures and the ability to gain or maintain share of sales in the global market as a result of actions by competitors. While we believe our opportunities for sustained, profitable growth are considerable, unanticipated actions of competitors could impact our earnings, share of sales and volume growth. - -- Changes in laws and regulations, including changes in accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax law interpretations) and environmental laws in domestic or foreign jurisdictions. - -- Fluctuations in the cost and availability of raw materials and the ability to maintain favorable supplier arrangements and relationships. - -- The 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. - -- Interest rate fluctuations and other capital market conditions, including foreign currency rate fluctuations. Most of our exposures to capital markets, including interest and foreign currency, are managed on a consolidated basis, which allows us to net certain exposures and, thus, take 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 foreign currency exposures. - -- Economic and political conditions in international markets, including civil unrest, governmental changes and restrictions on the ability to transfer capital across borders. - -- The 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 effectiveness of our advertising, marketing and promotional programs. - -- 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. - -- Adverse weather conditions, which could reduce demand for Company products. - -- Our Company's ability and our customers' and suppliers' ability to replace, modify or upgrade computer programs in ways that adequately address the Year 2000 issue. 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 44 through 62 of this report. Additional information concerning our operations in specific geographic areas is presented on page 60. - 41 - 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 1997 1996 1995 1994{2} - ------------------------------------------------------------------------------------------------ SUMMARY OF OPERATIONS Net operating revenues 7.5% 9.4% $ 18,868 $ 18,673 $18,127 $16,264 Cost of goods sold 3.5% 5.2% 6,015 6,738 6,940 6,168 - ----------------------------------------------------------------------------------------------- Gross profit 9.8% 12.3% 12,853 11,935 11,187 10,096 Selling, administrative and general expenses 8.1% 11.3% 7,852 8,020 7,161 6,459 - ----------------------------------------------------------------------------------------------- Operating income 12.7% 14.0% 5,001 3,915 4,026 3,637 Interest income 211 238 245 181 Interest expense 258 286 272 199 Equity income 155 211 169 134 Other income (deductions)-net 583 87 86 (25) Gains on issuances of stock by equity investees 363 431 74 - - ----------------------------------------------------------------------------------------------- Income from continuing operations before income taxes and changes in accounting principles 17.1% 16.1% 6,055 4,596 4,328 3,728 Income taxes 17.4% 14.5% 1,926 1,104 1,342 1,174 - ----------------------------------------------------------------------------------------------- Income from continuing operations before changes in accounting principles 17.0% 16.9% $ 4,129 $ 3,492 $ 2,986 $ 2,554 =============================================================================================== Net income 19.9% 16.3% $ 4,129 $ 3,492 $ 2,986 $ 2,554 Preferred stock dividends - - - - - ----------------------------------------------------------------------------------------------- Net income available to common share owners 19.9% 16.3% $ 4,129 $ 3,492 $ 2,986 $ 2,554 =============================================================================================== Average common shares outstanding 2,477 2,494 2,525 2,580 Average common shares outstanding assuming dilution 2,515 2,523 2,549 2,599 PER COMMON SHARE DATA Income from continuing operations before changes in accounting principles - basic 18.3% 19.1% $ 1.67 $ 1.40 $ 1.18 $ .99 Income from continuing operations before changes in accounting principles - diluted 18.2% 18.9% 1.64 1.38 1.17 .98 Basic net income 21.5% 18.7% 1.67 1.40 1.18 .99 Diluted net income 21.5% 18.5% 1.64 1.38 1.17 .98 Cash dividends 14.9% 14.9% .56 .50 .44 .39 Market price on December 31 26.1% 30.2% 66.69 52.63 37.13 25.75 TOTAL MARKET VALUE OF COMMON STOCK{1} 24.7% 27.8% $164,766 $130,575 $92,983 $65,711 BALANCE SHEET DATA Cash, cash equivalents and current marketable securities $ 1,843 $ 1,658 $ 1,315 $ 1,531 Property, plant and equipment-net 3,743 3,550 4,336 4,080 Depreciation 384 442 421 382 Capital expenditures 1,093 990 937 878 Total assets 16,940 16,161 15,041 13,873 Long-term debt 801 1,116 1,141 1,426 Total debt 3,875 4,513 4,064 3,509 Share-owners' equity 7,311 6,156 5,392 5,235 Total capital{1} 11,186 10,669 9,456 8,744 OTHER KEY FINANCIAL MEASURES{1} Total debt-to-total capital 34.6% 42.3% 43.0% 40.1% Net debt-to-net capital 21.9% 31.4% 32.2% 25.5% Return on common equity 61.3% 60.5% 56.2% 52.0% Return on capital 39.4% 36.7% 34.9% 32.7% Dividend payout ratio 33.6% 35.7% 37.2% 39.4% Free cash flow $ 3,533 $ 2,413 $ 2,102 $ 2,146 Economic profit $ 3,325 $ 2,718 $ 2,291 $ 1,896 =============================================================================================== {1} See Glossary on page 67. {2} In 1994, we adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." {3} In 1993, we adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." {4} In 1992, we adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
- 42 - SELECTED FINANCIAL DATA THE COCA-COLA COMPANY AND SUBSIDIARIES
(In millions except per Year Ended December 31, share data, ratios ---------------------------------------------------------------------------------------- and growth rates) 1993{3} 1992{4,5} 1991{5} 1990{5} 1989{5} 1988 1987 - --------------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net operating revenues $14,030 $13,119 $11,599 $10,261 $ 8,637 $ 8,076 $ 7,667 Cost of goods sold 5,160 5,055 4,649 4,208 3,548 3,429 3,633 - --------------------------------------------------------------------------------------------------------------------- Gross profit 8,870 8,064 6,950 6,053 5,089 4,637 4,034 Selling, administrative and general expenses 5,771 5,317 4,641 4,103 3,342 3,044 2,682 - --------------------------------------------------------------------------------------------------------------------- Operating income 3,099 2,747 2,309 1,950 1,747 1,603 1,352 Interest income 144 164 175 170 205 199 232 Interest expense 168 171 192 231 308 230 297 Equity income 91 65 40 110 75 92 64 Other income (deductions)-net 7 (59) 51 15 45 (38) (28) Gains on issuances of stock by equity investees 12 - - - - - 40 - --------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes and changes in accounting principles 3,185 2,746 2,383 2,014 1,764 1,626 1,363 Income taxes 997 863 765 632 553 537 496 - --------------------------------------------------------------------------------------------------------------------- Income from continuing operations before changes in accounting principles $ 2,188 $ 1,883 $ 1,618 $ 1,382 $ 1,211 $ 1,089 $ 867 ===================================================================================================================== Net income $ 2,176 $ 1,664 $ 1,618 $ 1,382 $ 1,537 $ 1,045 $ 916 Preferred stock dividends - - 1 18 21 7 - - --------------------------------------------------------------------------------------------------------------------- Net income available to common share owners $ 2,176 $ 1,664 $ 1,617 $ 1,364 $ 1,516{6} $ 1,038 $ 916 ===================================================================================================================== Average common shares outstanding 2,603 2,634 2,666 2,674 2,768 2,917 3,019 Average common shares outstanding assuming dilution 2,626 2,668 2,695 2,706 2,789 2,929 3,037 PER COMMON SHARE DATA Income from continuing operations before changes in accounting principles - basic $ .84 $ .72 $ .61 $ .51 $ .43 $ .37 $ .29 Income from continuing operations before changes in accounting principles - diluted .83 .71 .60 .50 .43 .37 .29 Basic net income .84 .63 .61 .51 .55{6} .36 .30 Diluted net income .83 .62 .60 .50 .54 .35 .30 Cash dividends .34 .28 .24 .20 .17 .15 .14 Market price on December 31 22.31 20.94 20.06 11.63 9.66 5.58 4.77 TOTAL MARKET VALUE OF COMMON STOCK{1} $57,905 $54,728 $53,325 $31,073 $26,034 $15,834 $14,198 BALANCE SHEET DATA Cash, cash equivalents and current marketable securities $ 1,078 $ 1,063 $ 1,117 $ 1,492 $ 1,182 $ 1,231 $ 1,489 Property, plant and equipment-net 3,729 3,526 2,890 2,386 2,021 1,759 1,602 Depreciation 333 310 254 236 181 167 152 Capital expenditures 800 1,083 792 593 462 387 304 Total assets 12,021 11,052 10,189 9,245 8,249 7,451 8,606 Long-term debt 1,428 1,120 985 536 549 761 909 Total debt 3,100 3,207 2,288 2,537 1,980 2,124 2,995 Share-owners' equity 4,584 3,888 4,239 3,662 3,299 3,345 3,187 Total capital{1} 7,684 7,095 6,527 6,199 5,279 5,469 6,182 OTHER KEY FINANCIAL MEASURES{1} Total debt-to-total capital 40.3% 45.2% 35.1% 40.9% 37.5% 38.8% 48.4% Net debt-to-net capital 29.0% 33.1% 24.1% 24.6% 15.6% 21.1% 21.1% Return on common equity 51.7% 46.4% 41.3% 41.4% 39.4% 34.7% 26.0% Return on capital 31.2% 29.4% 27.5% 26.8% 26.5% 21.3% 18.3% Dividend payout ratio 40.6% 44.3% 39.5% 39.2% 31.0%{6} 42.1% 46.0% Free cash flow $ 1,623 $ 873 $ 960 $ 844 $ 1,664 $ 1,517 $ 1,023 Economic profit $ 1,549 $ 1,300 $ 1,073 $ 920 $ 859 $ 717 $ 530 ===================================================================================================================== {5} In 1992, we adopted SFAS No. 109, "Accounting for Income Taxes," by restating financial statements beginning in 1989. {6} Net income available to common share owners in 1989 included after-tax gains of $604 million ($.22 per common share, basic and diluted) from the sales of our equity interest in Columbia Pictures Entertainment, Inc. and our bottled water business, and the transition effect of $265 million related to the change in accounting for income taxes. Excluding these nonrecurring items, our dividend payout ratio in 1989 was 39.9 percent.
- 43 - CONSOLIDATED BALANCE SHEETS THE COCA-COLA COMPANY AND SUBSIDIARIES
December 31, 1997 1996 - ------------------------------------------------------------------------------------ (In millions except share data) ASSETS CURRENT Cash and cash equivalents $ 1,737 $ 1,433 Marketable securities 106 225 - ------------------------------------------------------------------------------------ 1,843 1,658 Trade accounts receivable, less allowances of $23 in 1997 and $30 in 1996 1,639 1,641 Inventories 959 952 Prepaid expenses and other assets 1,528 1,659 - ------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 5,969 5,910 - ------------------------------------------------------------------------------------ INVESTMENTS AND OTHER ASSETS Equity method investments Coca-Cola Enterprises Inc. 184 547 Coca-Cola Amatil Limited 1,204 881 Other, principally bottling companies 3,049 2,004 Cost method investments, principally bottling companies 457 737 Marketable securities and other assets 1,607 1,779 - ------------------------------------------------------------------------------------ 6,501 5,948 - ------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT Land 183 204 Buildings and improvements 1,535 1,528 Machinery and equipment 3,896 3,649 Containers 157 200 - ------------------------------------------------------------------------------------ 5,771 5,581 Less allowances for depreciation 2,028 2,031 - ------------------------------------------------------------------------------------ 3,743 3,550 - ------------------------------------------------------------------------------------ GOODWILL AND OTHER INTANGIBLE ASSETS 727 753 - ------------------------------------------------------------------------------------ $ 16,940 $ 16,161 ==================================================================================== See Notes to Consolidated Financial Statements.
- 44 - CONSOLIDATED BALANCE SHEETS THE COCA-COLA COMPANY AND SUBSIDIARIES
December 31, 1997 1996 - ------------------------------------------------------------------------------------ (In millions except share data) LIABILITIES AND SHARE-OWNERS' EQUITY CURRENT Accounts payable and accrued expenses $ 3,249 $ 2,972 Loans and notes payable 2,677 3,388 Current maturities of long-term debt 397 9 Accrued income taxes 1,056 1,037 - ------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 7,379 7,406 - ------------------------------------------------------------------------------------ LONG-TERM DEBT 801 1,116 - ------------------------------------------------------------------------------------ OTHER LIABILITIES 1,001 1,182 - ------------------------------------------------------------------------------------ DEFERRED INCOME TAXES 448 301 - ------------------------------------------------------------------------------------ SHARE-OWNERS' EQUITY Common stock, $.25 par value Authorized: 5,600,000,000 shares Issued: 3,443,441,902 shares in 1997; 3,432,956,518 shares in 1996 861 858 Capital surplus 1,527 1,058 Reinvested earnings 17,869 15,127 Unearned compensation related to outstanding restricted stock (50) (61) Foreign currency translation adjustment (1,372) (662) Unrealized gain on securities available for sale 58 156 - ------------------------------------------------------------------------------------ 18,893 16,476 Less treasury stock, at cost (972,812,731 shares in 1997; 951,963,574 shares in 1996) 11,582 10,320 - ------------------------------------------------------------------------------------ 7,311 6,156 - ------------------------------------------------------------------------------------ $ 16,940 $ 16,161 ==================================================================================== See Notes to Consolidated Financial Statements.
- 45 - CONSOLIDATED STATEMENTS OF INCOME THE COCA-COLA COMPANY AND SUBSIDIARIES
Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------ (In millions except per share data) NET OPERATING REVENUES $ 18,868 $ 18,673 $ 18,127 Cost of goods sold 6,015 6,738 6,940 - ------------------------------------------------------------------------------------ GROSS PROFIT 12,853 11,935 11,187 Selling, administrative and general expenses 7,852 8,020 7,161 - ------------------------------------------------------------------------------------ OPERATING INCOME 5,001 3,915 4,026 Interest income 211 238 245 Interest expense 258 286 272 Equity income 155 211 169 Other income-net 583 87 86 Gains on issuances of stock by equity investees 363 431 74 - ------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 6,055 4,596 4,328 Income taxes 1,926 1,104 1,342 - ------------------------------------------------------------------------------------ NET INCOME $ 4,129 $ 3,492 $ 2,986 ==================================================================================== BASIC NET INCOME PER SHARE $ 1.67 $ 1.40 $ 1.18 DILUTED NET INCOME PER SHARE $ 1.64 $ 1.38 $ 1.17 ==================================================================================== AVERAGE SHARES OUTSTANDING 2,477 2,494 2,525 Dilutive effect of stock options 38 29 24 - ------------------------------------------------------------------------------------ AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,515 2,523 2,549 ==================================================================================== See Notes to Consolidated Financial Statements.
- 46 -
CONSOLIDATED STATEMENTS OF CASH FLOWS THE COCA-COLA COMPANY AND SUBSIDIARIES Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------ (In millions) OPERATING ACTIVITIES Net income $ 4,129 $ 3,492 $ 2,986 Depreciation and amortization 626 633 562 Deferred income taxes 380 (145) 157 Equity income, net of dividends (108) (89) (25) Foreign currency adjustments 37 (60) (23) Gains on issuances of stock by equity investees (363) (431) (74) Gains on sales of assets, including bottling interests (639) (135) (16) Other items 18 316 60 Net change in operating assets and liabilities (47) (118) (299) - ------------------------------------------------------------------------------------ Net cash provided by operating activities 4,033 3,463 3,328 - ------------------------------------------------------------------------------------ INVESTING ACTIVITIES Acquisitions and investments, principally bottling companies (1,100) (645) (338) Purchases of investments and other assets (459) (623) (403) Proceeds from disposals of investments and other assets 1,999 1,302 580 Purchases of property, plant and equipment (1,093) (990) (937) Proceeds from disposals of property, plant and equipment 71 81 44 Other investing activities 82 (175) (172) - ------------------------------------------------------------------------------------ Net cash used in investing activities (500) (1,050) (1,226) - ------------------------------------------------------------------------------------ Net cash provided by operations after reinvestment 3,533 2,413 2,102 - ------------------------------------------------------------------------------------ FINANCING ACTIVITIES Issuances of debt 155 1,122 754 Payments of debt (751) (580) (212) Issuances of stock 150 124 86 Purchases of stock for treasury (1,262) (1,521) (1,796) Dividends (1,387) (1,247) (1,110) - ------------------------------------------------------------------------------------ Net cash used in financing activities (3,095) (2,102) (2,278) - ------------------------------------------------------------------------------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (134) (45) (43) - ------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS Net increase (decrease) during the year 304 266 (219) Balance at beginning of year 1,433 1,167 1,386 - ------------------------------------------------------------------------------------ Balance at end of year $ 1,737 $ 1,433 $ 1,167 ==================================================================================== See Notes to Consolidated Financial Statements.
- 47 - CONSOLIDATED STATEMENTS OF SHARE-OWNERS' EQUITY THE COCA-COLA COMPANY AND SUBSIDIARIES
Number of Common Outstanding Foreign Unrealized Three Years Ended Shares Common Capital Reinvested Restricted Currency Gain on Treasury December 31, 1997 Outstanding Stock Surplus Earnings Stock Translation Securities Stock - ------------------------------------------------------------------------------------------------------------------------ (In millions except per share data) | | BALANCE DECEMBER 31, 1994 2,552 | $854 $ 746 $11,006 $(74) $ (272) $48 $(7,073) Stock issued to employees | exercising stock options 8 | 2 84 -- -- -- -- -- Tax benefit from employees' | stock option and | restricted stock plans -- | -- 26 -- -- -- -- -- Stock issued under | restricted stock plans, | less amortization of $12 -- | -- 7 -- 6 -- -- -- Translation adjustments -- | -- -- -- -- (152) -- -- Net change in unrealized | gain on securities, | net of deferred taxes -- | -- -- -- -- -- 34 -- Purchases of stock for | treasury (58){1}| -- -- -- -- -- -- (1,796) Treasury stock issued | in connection with | an acquisition 3 | -- -- -- -- -- -- 70 Net income -- | -- -- 2,986 -- -- -- -- Dividends (per share-$.44) -- | -- -- (1,110) -- -- -- -- - ---------------------------------------|------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1995 2,505 | 856 863 12,882 (68) (424) 82 (8,799) Stock issued to employees | exercising stock options 9 | 2 122 -- -- -- -- -- Tax benefit from employees' | stock option and | restricted stock plans -- | -- 63 -- -- -- -- -- Stock issued under | restricted stock plans, | less amortization of $15 -- | -- 10 -- 7 -- -- -- Translation adjustments -- | -- -- -- -- (238) -- -- Net change in unrealized | gain on securities, | net of deferred taxes -- | -- -- -- -- -- 74 -- Purchases of stock for | treasury (33){1}| -- -- -- -- -- -- (1,521) Net income -- | -- -- 3,492 -- -- -- -- Dividends (per share-$.50) -- | -- -- (1,247) -- -- -- -- - ---------------------------------------|------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1996 2,481 | 858 1,058 15,127 (61) (662) 156 (10,320) Stock issued to employees | exercising stock options 10 | 3 147 -- -- -- -- -- Tax benefit from employees' | stock option and | restricted stock plans -- | -- 312 -- -- -- -- -- Stock issued under | restricted stock plans, | less amortization of $10 -- | -- 10 -- 11 -- -- -- Translation adjustments -- | -- -- -- -- (710) -- -- Net change in unrealized | gain on securities, | net of deferred taxes -- | -- -- -- -- -- (98) -- Purchases of stock for | treasury (20){1}| -- -- -- -- -- -- (1,262) Net income -- | -- -- 4,129 -- -- -- -- Dividends (per share-$.56) -- | -- -- (1,387) -- -- -- -- - ---------------------------------------|------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1997 2,471 | $861 $1,527 $17,869 $(50) $(1,372) $ 58 $(11,582) ======================================================================================================================= {1} Common stock purchased from employees exercising stock options numbered 1.1 million, .9 million and.6 million shares for the years ending December 31, 1997, 1996 and 1995, respectively. See Notes to Consolidated Financial Statements.
- 48 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - -------------------------------------------------------------------- NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - The Coca-Cola Company and subsidiaries (our Company) is predominantly a manufacturer, marketer and distributor of soft-drink and noncarbonated beverage concentrates and syrups. Operating in nearly 200 countries worldwide, we primarily sell our concentrates and syrups to bottling and canning operations, fountain wholesalers and fountain retailers. We have significant markets for our products in all of the world's geographic regions. We record revenue when title passes to our customers. BASIS OF PRESENTATION - Certain amounts in the prior years' financial statements have been reclassified to conform to the current year presentation. CONSOLIDATION - Our consolidated financial statements include the accounts of The Coca-Cola Company and all subsidiaries except where control is temporary or does not rest with our Company. Our investments in companies in which we have the ability to exercise significant influence over operating and financial policies, including certain investments where there is a temporary majority interest, are accounted for by the equity method. Accordingly, our Company's share of the net earnings of these companies is included in consolidated net income. Our investments in other companies are carried at cost or fair value, as appropriate. All significant intercompany accounts and transactions are eliminated upon consolidation. 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 recognized in our net income in the period the change of ownership interest occurs. ADVERTISING COSTS - Our Company expenses production costs of print, radio and television advertisements as of the first date the advertisements take place. Advertising expenses included in selling, administrative and general expenses were $1,576 million in 1997, $1,441 million in 1996 and $1,292 million in 1995. As of December 31, 1997 and 1996, advertising costs of approximately $358 million and $247 million, respectively, were recorded primarily in prepaid expenses and other assets in our accompanying balance sheets. NET INCOME PER SHARE Basic net income per share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted net income per share includes the dilutive effect of stock options. CASH EQUIVALENTS - Marketable securities that are highly liquid and have maturities of three months or less at the date of purchase are classified as cash equivalents. INVENTORIES - Inventories consist primarily of raw materials and supplies and are valued at the lower of cost or market. In general, cost is determined on the basis of average cost or first-in, first-out methods. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost and are depreciated principally by the straight-line method over the estimated useful lives of the assets. GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill and other intangible assets are stated on the basis of cost and are amortized, principally on a straight-line basis, over the estimated future periods to be benefited (not exceeding 40 years). Goodwill and other intangible assets are periodically reviewed for impairment based on an assessment of future operations to ensure they are appropriately valued. Accumulated amortization was approximately $105 million and $86 million on December 31, 1997 and 1996, respectively. 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 amounts reported 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 - In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements, which are effective for fiscal years beginning after December 15, 1997, expand or modify disclosures and will have no impact on our consolidated financial position, results of operations or cash flows. We adopted SFAS No. 128, "Earnings per Share," in 1997. In accordance with SFAS No. 128, we have presented both basic net income per share and diluted net income per share in our financial statements. - 49 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - -------------------------------------------------------------------- NOTE 2: BOTTLING INVESTMENTS COCA-COLA ENTERPRISES INC. - Coca-Cola Enterprises is the largest soft-drink bottler in the world. Our Company owns approximately 44 percent of the outstanding common stock of Coca-Cola Enterprises, and accordingly, we account for our investment by the equity method of accounting. The excess of our equity in the underlying net assets of Coca-Cola Enterprises over our investment is primarily being amortized on a straight-line basis over 40 years. The balance of this excess, net of amortization, was approximately $595 million at December 31, 1997. A summary of financial information for Coca-Cola Enterprises is as follows (in millions): December 31, 1997 1996 - -------------------------------------------------------------------- Current assets $ 1,813 $ 1,319 Noncurrent assets 15,674 9,915 - -------------------------------------------------------------------- Total assets $ 17,487 $ 11,234 ==================================================================== Current liabilities $ 3,032 $ 1,690 Noncurrent liabilities 12,673 7,994 - -------------------------------------------------------------------- Total liabilities $ 15,705 $ 9,684 ==================================================================== Share-owners' equity $ 1,782 $ 1,550 ==================================================================== Company equity investment $ 184 $ 547 ==================================================================== Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------- Net operating revenues $ 11,278 $ 7,921 $ 6,773 Cost of goods sold 7,096 4,896 4,267 - -------------------------------------------------------------------- Gross profit $ 4,182 $ 3,025 $ 2,506 ==================================================================== Operating income $ 720 $ 545 $ 468 ==================================================================== Cash operating profit{1} $ 1,666 $ 1,172 $ 997 ==================================================================== Net income $ 171 $ 114 $ 82 ==================================================================== Net income available to common share owners $ 169 $ 106 $ 80 ==================================================================== Company equity income $ 59 $ 53 $ 35 ==================================================================== {1} Cash operating profit is defined as operating income plus depreciation expense, amortization expense and other noncash operating expenses. Our net concentrate/syrup sales to Coca-Cola Enterprises were $2.5 billion in 1997, $1.6 billion in 1996 and $1.3 billion in 1995, comprising approximately 13 percent, 9 percent and 7 percent of our 1997, 1996 and 1995 net operating revenues. Coca-Cola Enterprises purchases sweeteners through our Company; however, related collections from Coca-Cola Enterprises and payments to suppliers are not included in our consolidated statements of income. These transactions amounted to $223 million in 1997, $247 million in 1996 and $242 million in 1995. We also provide certain administrative and other services to Coca-Cola Enterprises under negotiated fee arrangements. Our direct support for certain marketing activities of Coca-Cola Enterprises and participation with them in cooperative advertising and other marketing programs amounted to approximately $604 million in 1997, $448 million in 1996 and $343 million in 1995. Additionally, in 1997 and 1996, we committed approximately $190 million and $120 million, respectively, to Coca-Cola Enterprises under a Company program that encourages bottlers to invest in building and supporting beverage infrastructure. If valued at the December 31, 1997, quoted closing price of publicly traded Coca-Cola Enterprises shares, the calculated value of our investment in Coca-Cola Enterprises would have exceeded its carrying value by approximately $5.8 billion. COCA-COLA AMATIL LIMITED - We own approximately 33 percent of Coca-Cola Amatil, an Australian-based bottler of our products that operates in 18 countries. Accordingly, we account for our investment in Coca-Cola Amatil by the equity method. The excess of our investment over our equity in the underlying net assets of Coca-Cola Amatil is being amortized on a straight-line basis over 40 years. The balance of this excess, net of amortization, was approximately $64 million at December 31, 1997. A summary of financial information for Coca-Cola Amatil is as follows (in millions): December 31, 1997 1996 - -------------------------------------------------------------------- Current assets $ 1,470 $ 1,847 Noncurrent assets 4,590 2,913 - -------------------------------------------------------------------- Total assets $ 6,060 $ 4,760 ==================================================================== Current liabilities $ 1,053 $ 1,247 Noncurrent liabilities 1,552 1,445 - -------------------------------------------------------------------- Total liabilities $ 2,605 $ 2,692 ==================================================================== Share-owners' equity $ 3,455 $ 2,068 ==================================================================== Company equity investment $ 1,204 $ 881 ==================================================================== Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------- Net operating revenues $ 3,290 $ 2,905 $ 2,193 Cost of goods sold 1,856 1,737 1,311 - -------------------------------------------------------------------- Gross profit $ 1,434 $ 1,168 $ 882 ==================================================================== Operating income $ 276 $ 215 $ 214 ==================================================================== Cash operating profit{1} $ 505 $ 384 $ 329 ==================================================================== Net income $ 89 $ 80 $ 75 ==================================================================== Company equity income $ 27 $ 27 $ 28 ==================================================================== {1} Cash operating profit is defined as operating income plus depreciation expense, amortization expense and other noncash operating expenses. Our net concentrate sales to Coca-Cola Amatil were approximately $588 million in 1997, $450 million in 1996 and $340 million in 1995. We also participate in various marketing, promotional and other activities with Coca-Cola Amatil. If valued at the December 31, 1997, quoted closing price of publicly traded Coca-Cola Amatil shares, the calculated value of our investment in Coca-Cola Amatil would have exceeded its carrying value by approximately $918 million. - 50 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - -------------------------------------------------------------------- OTHER EQUITY INVESTMENTS - Operating results include our proportionate share of income from our equity investments since the respective dates of those investments. A summary of financial information for our equity investments in the aggregate, other than Coca-Cola Enterprises and Coca-Cola Amatil, is as follows (in millions): December 31, 1997 1996 - ------------------------------------------------------------------- Current assets $ 2,946 $ 2,792 Noncurrent assets 11,371 8,783 - ------------------------------------------------------------------- Total assets $ 14,317 $ 11,575 =================================================================== Current liabilities $ 3,545 $ 2,758 Noncurrent liabilities 4,636 4,849 - ------------------------------------------------------------------- Total liabilities $ 8,181 $ 7,607 =================================================================== Share-owners' equity $ 6,136 $ 3,968 =================================================================== Company equity investment $ 3,049 $ 2,004 =================================================================== Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------- Net operating revenues $ 13,688 $ 11,640 $ 9,370 Cost of goods sold 8,645 8,028 6,335 - ------------------------------------------------------------------- Gross profit $ 5,043 $ 3,612 $ 3,035 =================================================================== Operating income $ 869 $ 835 $ 632 =================================================================== Cash operating profit{1} $ 1,794 $ 1,268 $ 1,079 =================================================================== Net income $ 405 $ 366 $ 280 =================================================================== Company equity income $ 69 $ 131 $ 106 =================================================================== Equity investments include certain non-bottling investees. {1} Cash operating profit is defined as operating income plus depreciation expense, amortization expense and other noncash operating expenses. Net sales to equity investees other than Coca-Cola Enterprises and Coca-Cola Amatil were $1.5 billion in 1997, $1.5 billion in 1996 and $1.2 billion in 1995. Our Company also participates in various marketing, promotional and other activities with these investees, the majority of which are located outside the United States. In February 1997, we sold our 49 percent interest in Coca-Cola & Schweppes Beverages Ltd. to Coca-Cola Enterprises. This transaction resulted in proceeds for our Company of approximately $1 billion and an after-tax gain of approximately $.08 per share (basic and diluted). In August 1997, we sold our 48 percent interest in Coca-Cola Beverages Ltd. of Canada and our 49 percent ownership interest in The Coca-Cola Bottling Company of New York, Inc. to Coca-Cola Enterprises in exchange for aggregate consideration valued at approximately $456 million. This sale resulted in an after- tax gain of approximately $.04 per share (basic and diluted). In July 1996, we sold our interests in our French and Belgian bottling and canning operations to Coca-Cola Enterprises in return for cash consideration of approximately $936 million. Also in 1996, we contributed cash and our Venezuelan bottling interests to a new joint venture, Embotelladora Coca-Cola y Hit de Venezuela, S.A. (Coca-Cola y Hit), in exchange for a 50 percent ownership interest. In 1997, we sold our interest in Coca-Cola y Hit to Panamerican Beverages, Inc. (Panamco) in exchange for shares in Panamco. (See Note 3.) If valued at the December 31, 1997, quoted closing prices of shares actively traded on stock markets, the calculated value of our equity investments in publicly traded bottlers other than Coca-Cola Enterprises and Coca-Cola Amatil would have exceeded our carrying value by approximately $1.2 billion. NOTE 3: ISSUANCES OF STOCK BY EQUITY INVESTEES In the second quarter of 1997, our Company and San Miguel Corporation (San Miguel) sold our respective interests in Coca-Cola Bottlers Philippines, Inc. to Coca-Cola Amatil in exchange for approximately 293 million shares of Coca-Cola Amatil stock. In connection with this transaction, Coca-Cola Amatil issued approximately 210 million shares to San Miguel valued at approximately $2.4 billion. The issuance to San Miguel resulted in a one-time noncash pretax gain for our Company of approximately $343 million. We provided deferred taxes of approximately $141.5 million on this gain. This transaction resulted in our Company's 36 percent interest in Coca-Cola Amatil being diluted to 33 percent. Also in the second quarter of 1997, our Company and the Cisneros Group sold our respective interests in Coca-Cola y Hit to Panamco in exchange for approximately 30.6 million shares of Panamco stock. In connection with this transaction, Panamco issued approximately 13.6 million shares to the Cisneros Group valued at approximately $402 million. The issuance to the Cisneros Group resulted in a one-time noncash pretax gain for our Company of approximately $20 million. We provided deferred taxes of approximately $7.2 million on this gain. At the completion of this transaction, our ownership in Panamco was approximately 23 percent. In the third quarter of 1996, our previously wholly owned subsidiary, Coca-Cola Erfrischungsgetraenke G.m.b.H. (CCEG), issued approximately 24.4 million shares of common stock as part of a merger with three independent German bottlers of our products. The shares were valued at approximately $925 million, based upon the fair values of the assets of the three acquired bottling companies. In connection with CCEG's issuance of shares, a new corporation was established, Coca-Cola Erfrischungsgetraenke AG (CCEAG), and our ownership was reduced to 45 percent of the resulting corporation. As a result, we began accounting for our related investment by the equity method of accounting prospectively from the transaction date. This transaction resulted in a noncash pretax gain of $283 million for our Company. We provided deferred taxes of approximately $171 million related to this gain. Also in the third quarter of 1996, Coca-Cola Amatil issued approximately 46 million shares in exchange for approximately $522 million. This issuance reduced our Company's ownership percentage in Coca-Cola Amatil from approximately 39 percent to approximately 36 percent. This transaction resulted in a noncash - 51 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - -------------------------------------------------------------------- pretax gain of $130 million for our Company. We have provided deferred taxes of approximately $47 million on this gain. In 1996, Coca-Cola FEMSA de Buenos Aires, S.A. (CCFBA) issued approximately 19 million shares to Coca-Cola FEMSA, S.A. de C.V. This issuance reduced our ownership in CCFBA from 49 percent to approximately 32 percent. We recognized a noncash pretax gain of approximately $18 million as a result of this transaction. In subsequent transactions, we disposed of our remaining interest in CCFBA. In the third quarter of 1995, Coca-Cola Amatil completed a public offering in Australia of approximately 97 million shares of common stock. In connection with the offering, our ownership interest in Coca-Cola Amatil was diluted to approximately 40 percent. This transaction resulted in a noncash pretax gain of $74 million. We provided deferred taxes of approximately $27 million on this gain. NOTE 4: ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following (in millions): December 31, 1997 1996 - ------------------------------------------------------------- Accrued marketing $ 615 $ 510 Container deposits 30 64 Accrued compensation 152 169 Sales, payroll and other taxes 173 174 Accounts payable and other accrued expenses 2,279 2,055 - ------------------------------------------------------------- $ 3,249 $ 2,972 ============================================================= NOTE 5: SHORT-TERM BORROWINGS AND CREDIT ARRANGEMENTS Loans and notes payable consist primarily of commercial paper issued in the United States. On December 31, 1997, we had $2.6 billion outstanding in commercial paper borrowings. In addition, we had $.9 billion in lines of credit and other short-term credit facilities available, under which $.1 billion was outstanding. Our weighted-average interest rates for commercial paper were approximately 5.8 and 5.6 percent on December 31, 1997 and 1996, respectively. These facilities are subject to normal banking terms and conditions. Some of the financial arrangements require compensating balances, none of which are presently significant to our Company. NOTE 6: LONG-TERM DEBT Long-term debt consists of the following (in millions): December 31, 1997 1996 - ----------------------------------------------------------------- 5-3/4% German mark notes due 1998{1} $ 141 $ 161 7-7/8% U.S. dollar notes due 1998 250 250 6% U.S. dollar notes due 2000 251 251 6-5/8% U.S. dollar notes due 2002 150 150 6% U.S. dollar notes due 2003 150 150 7-3/8% U.S. dollar notes due 2093 116 116 Other, due 1998 to 2013 140 47 - ----------------------------------------------------------------- 1,198 1,125 Less current portion 397 9 - ----------------------------------------------------------------- $ 801 $ 1,116 ================================================================= {1} Portions of these notes have been swapped for liabilities denominated in other currencies. After giving effect to interest rate management instruments (see Note 8), the principal amount of our long-term debt that had fixed and variable interest rates, respectively, was $480 million and $718 million on December 31, 1997, and $261 million and $864 million on December 31, 1996. The weighted- average interest rate on our Company's long-term debt was 6.2 and 5.9 percent on December 31, 1997 and 1996, respectively. Interest paid was approximately $264 million, $315 million and $275 million in 1997, 1996 and 1995, respectively. Maturities of long-term debt for the five years succeeding December 31, 1997, are as follows (in millions): 1998 1999 2000 2001 2002 - ------------------------------------------------------------ $ 397 $ 13 $ 309 $ 61 $ 151 ============================================================ The above notes include various restrictions, none of which is presently significant to our Company. NOTE 7: FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts reflected in our consolidated balance sheets for cash, cash equivalents, marketable equity securities, marketable 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. A comparison of the carrying value and fair value of our hedging instruments is included in Note 8. CERTAIN DEBT AND MARKETABLE EQUITY SECURITIES - Investments in debt and marketable equity securities, other than investments accounted for by the equity method, are categorized as either trading, available-for-sale or held-to-maturity. On December 31, 1997 and 1996, 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 in share- - 52 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - -------------------------------------------------------------------- owners' equity. Debt securities categorized as held-to-maturity are stated at amortized cost. On December 31, 1997 and 1996, available-for-sale and held-to-maturity securities consisted of the following (in millions): Gross Gross Estimated Unrealized Unrealized Fair December 31, Cost Gains Losses Value - -------------------------------------------------------------------------- 1997 Available-for-sale securities Equity securities $ 293 $ 93 $ (3) $ 383 Collateralized mortgage obligations 132 - (2) 130 Other debt securities 23 - - 23 - ------------------------------------------------------------------------- $ 448 $ 93 $ (5) $ 536 ========================================================================= Held-to-maturity securities Bank and corporate debt $ 1,569 $ - $ - $ 1,569 Other debt securities 22 - - 22 - ------------------------------------------------------------------------- $ 1,591 $ - $ - $ 1,591 ========================================================================= Gross Gross Estimated Unrealized Unrealized Fair December 31, Cost Gains Losses Value - -------------------------------------------------------------------------- 1996 Available-for-sale securities Equity securities $ 377 $ 259 $ (2) $ 634 Collateralized mortgage obligations 145 - (5) 140 Other debt securities 24 - (1) 23 - ------------------------------------------------------------------------- $ 546 $ 259 $ (8) $ 797 ========================================================================= Held-to-maturity securities Bank and corporate debt $ 1,550 $ - $ (9) $ 1,541 Other debt securities 58 - - 58 - ------------------------------------------------------------------------- $ 1,608 $ - $ (9) $ 1,599 ========================================================================= On December 31, 1997 and 1996, these investments were included in the following captions on our consolidated balance sheets (in millions): Available-for-Sale Held-to-Maturity December 31, Securities Securities - ------------------------------------------------------------------------- 1997 Cash and cash equivalents $ - $ 1,346 Current marketable securities 64 42 Cost method investments, principally bottling companies 336 - Marketable securities and other assets 136 203 - ------------------------------------------------------------------------- $ 536 $ 1,591 ========================================================================= Available-for-Sale Held-to-Maturity Securities Securities - ------------------------------------------------------------------------- 1996 Cash and cash equivalents $ - $ 1,208 Current marketable securities 68 157 Cost method investments, principally bottling companies 584 - Marketable securities and other assets 145 243 - ------------------------------------------------------------------------- $ 797 $ 1,608 ========================================================================= The contractual maturities of these investments as of December 31, 1997, were as follows (in millions): Available-for-Sale Held-to-Maturity Securities Securities - ---------------------------------------------------------------------------- Fair Amortized Fair Cost Value Cost Value - ---------------------------------------------------------------------------- 1998 $ 20 $ 20 $ 1,388 $ 1,388 1999-2002 3 3 203 203 Collateralized mortgage obligations 132 130 - - Equity securities 293 383 - - - ---------------------------------------------------------------------------- $ 448 $ 536 $ 1,591 $ 1,591 ============================================================================ For the years ended December 31, 1997 and 1996, 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. NOTE 8: 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, to reduce our exposure to adverse fluctuations in commodity prices and other market risks. When entered into, these financial instruments are designated as hedges of underlying exposures. Because of the high correlation between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the instruments are generally offset by changes in the value of the - 53 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - -------------------------------------------------------------------- underlying exposures. Virtually all of our derivatives are "over-the-counter" instruments. Our Company does not enter into derivative financial instruments for trading purposes. The estimated fair values of derivatives used to hedge or modify our risks fluctuate over time. These fair value amounts should not be viewed in isolation but rather in relation to the fair values of the underlying hedged transactions and investments and to the overall reduction in our exposure to adverse fluctuations in interest rates, foreign exchange rates, commodity prices and other market risks. 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 through our use of derivatives. 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. We have established strict counterparty credit guidelines and only enter into transactions with financial institutions of investment grade or better. We monitor counterparty exposures daily and any downgrade in credit rating receives immediate review. 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 pre- settlement 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. As a result, we consider the risk of counterparty default to be minimal. INTEREST RATE MANAGEMENT - Our Company maintains our percentage of fixed and variable rate debt within defined parameters. We enter into interest rate swap agreements that maintain the fixed/variable mix within these parameters. These contracts had maturities ranging from one to six years on December 31, 1997. Variable rates are predominantly linked to LIBOR (London Interbank Offered Rate). Any differences paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the underlying obligation. FOREIGN CURRENCY MANAGEMENT - The purpose of our foreign currency hedging activities is to reduce the risk that our eventual 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 purchase currency options (principally European currencies and Japanese yen) to hedge firm sale commitments denominated in foreign currencies. We also purchase currency options (principally European currencies and Japanese yen) to hedge certain anticipated sales. Premiums paid and realized gains and losses, including those on terminated contracts, if any, are included in prepaid expenses and other assets. These are recognized in income along with unrealized gains and losses, in the same period the hedged transactions are realized. Approximately $52 million of realized gains and $17 million of realized losses on settled contracts entered into as hedges of firmly committed transactions that have not yet occurred were deferred on December 31, 1997 and 1996, respectively. Deferred gains/losses from hedging anticipated transactions were not material on December 31, 1997 or 1996. In the unlikely event that the underlying transaction terminates or becomes improbable, the deferred gains or losses on the associated derivative will be recorded in our income statement. Gains and losses on derivative financial instruments that are designated and effective as hedges of net investments in international operations are included in share-owners' equity as a foreign currency translation adjustment. The following table presents the aggregate notional principal amounts, carrying values, fair values and maturities of our derivative financial instruments outstanding on December 31, 1997 and 1996 (in millions): Notional Principal Carrying Fair December 31, Amounts Values Values Maturity - -------------------------------------------------------------------------- 1997 Interest rate management Swap agreements Assets $ 597 $ 4 $ 15 1998-2003 Liabilities 175 (1) (12) 2000-2003 Foreign currency management Forward contracts Assets 1,286 27 93 1998-1999 Liabilities 465 (6) 18 1998-1999 Swap agreements Assets 178 1 3 1998 Liabilities 1,026 (4) (28) 1998-2002 Purchased options Assets 1,051 34 109 1998 Other Assets 470 2 53 1998 Liabilities 68 (2) _ 1998 - -------------------------------------------------------------------------- $ 5,316 $ 55 $ 251 ========================================================================== - 54 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - ----------------------------------------------------------------------- Notional Principal Carrying Fair December 31, Amounts Values Values Maturity - -------------------------------------------------------------------------- 1996 Interest rate management Swap agreements Assets $ 893 $ 5 $ 13 1997-2003 Liabilities 25 - 1 2002 Interest rate caps Assets 400 1 - 1997 Foreign currency management Forward contracts Assets 5 1 (2) 1997 Liabilities 2,541 (53) (42) 1997-1998 Swap agreements Assets 398 18 12 1997-1998 Liabilities 1,086 (12) (114) 1997-2002 Purchased options Assets 1,873 42 89 1997 Other Assets 537 67 33 1997 - -------------------------------------------------------------------------- $ 7,758 $ 69 $ (10) ========================================================================== Maturities of derivative financial instruments held on December 31, 1997, are as follows (in millions): 1998 1999 2000 2001-2003 - -------------------------------------------------------------------- $ 4,218 $ 257 $ 426 $ 415 ==================================================================== NOTE 9: COMMITMENTS AND CONTINGENCIES On December 31, 1997, we were contingently liable for guarantees of indebtedness owed by third parties in the amount of $409 million, of which $26 million related to independent bottling licensees. We do not consider it probable that we will be required to satisfy these guarantees. The fair value of these contingent liabilities is immaterial to our consolidated financial statements. We believe our exposure to concentrations of credit risk is limited, due to the diverse geographic areas covered by our operations. Additionally, under certain circumstances, we have committed to make future investments in bottling companies. However, we do not consider any of these commitments to be individually significant. NOTE 10: NET CHANGE IN OPERATING ASSETS AND LIABILITIES The changes in operating assets and liabilities, net of effects of acquisitions and divestitures of businesses and unrealized exchange gains/losses, are as follows (in millions): 1997 1996 1995 - -------------------------------------------------------------------------- Increase in trade accounts receivable $ (164) $ (230) $ (255) Increase in inventories (43) (33) (80) Increase in prepaid expenses and other assets (145) (219) (267) Increase in accounts payable and accrued expenses 299 361 214 Increase (decrease) in accrued taxes 393 (208) 26 Increase (decrease) in other liabilities (387) 211 63 - -------------------------------------------------------------------------- $ (47) $ (118) $ (299) ========================================================================== NOTE 11: RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS Our Company sponsors restricted stock award plans, stock option plans, Incentive Unit Agreements and Performance Unit Agreements. Our Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for our plans. Accordingly, for our stock option plans, no compensation cost has been recognized. The compensation cost that has been charged against income for our restricted stock award plans was $56 million in 1997, $63 million in 1996 and $45 million in 1995. For our Incentive Unit Agreements and Performance Unit Agreements, the charge against income was $31 million in 1997, $90 million in 1996 and $64 million in 1995. Had compensation cost for the stock option plans been determined based on the fair value at the grant dates for awards under the plans, consistent with the alternative method set forth under SFAS No. 123, "Accounting for Stock- Based Compensation," our Company's net income, basic net income per share and diluted net income per share would have been reduced. The pro forma amounts are indicated below (in millions, except per share amounts): Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------- Net income As reported $ 4,129 $ 3,492 $ 2,986 Pro forma $ 4,026 $ 3,412 $ 2,933 Basic net income per share As reported $ 1.67 $ 1.40 $ 1.18 Pro forma $ 1.63 $ 1.37 $ 1.16 Diluted net income per share As reported $ 1.64 $ 1.38 $ 1.17 Pro forma $ 1.60 $ 1.35 $ 1.15 ========================================================================== - 55 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - ---------------------------------------------------------------------- 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, 1997, 33 million shares were available for grant under the Restricted Stock Award Plans. In 1997, 1996 and 1995, 162,000, 210,000 and 190,000 shares of restricted stock were granted at $59.75, $48.88 and $35.63, respectively. 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. Under our 1991 Stock Option Plan (the 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 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 Option Plan have been granted to Company employees at fair market value at the date of grant. Generally, stock options become exercisable over a three-year vesting period and expire 10 years from the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yields of 1.0, 1.0 and 1.3 percent; expected volatility of 20.1, 18.3 and 20.1 percent; risk-free interest rates of 6.0, 6.2 and 5.9 percent; and expected lives of four years for all years. The weighted-average fair value of options granted was $13.92, $11.43 and $8.13 for the years ended December 31, 1997, 1996 and 1995, respectively. A summary of stock option activity under all plans is as follows (shares in millions):
1997 1996 1995 --------------------------- --------------------------- --------------------------- Weighted-Average Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------------ Outstanding on January 1, 78 $ 26.50 74 $ 20.74 65 $ 15.53 Granted 13 59.79 14 48.86 18 34.88 Exercised (10) 14.46 (9) 13.72 (8) 10.63 Forfeited/Expired (1) 44.85 (1) 31.62 (1) 24.84 - ------------------------------------------------------------------------------------------------------------ Outstanding on December 31, 80 $ 33.22 78 $ 26.50 74 $ 20.74 ============================================================================================================ Exercisable on December 31, 55 $ 24.62 51 $ 18.69 45 $ 14.22 ============================================================================================================ Shares Available on December 31, for options that may be granted 34 46 59 ============================================================================================================
The following table summarizes information about stock options at December 31, 1997 (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 - ------------------------------------------------------------------------------------------------------------- $ 4.00 to $ 10.00 11 1.5 years $ 7.33 11 $ 7.33 $ 10.01 to $ 20.00 4 3.5 years $ 14.50 4 $ 14.50 $ 20.01 to $ 30.00 24 6.1 years $ 23.71 24 $ 23.71 $ 30.01 to $ 40.00 15 7.8 years $ 35.63 11 $ 35.63 $ 40.01 to $ 50.00 13 8.8 years $ 48.86 5 $ 48.86 $ 50.01 to $ 71.00 13 9.8 years $ 59.78 _ $ _ ============================================================================================================= $ 4.00 to $ 71.00 80 6.7 years $ 33.22 55 $ 24.62 =============================================================================================================
- 56 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - -------------------------------------------------------------------- In 1988, our Company entered into Incentive Unit Agreements whereby, subject to certain conditions, certain officers were given the right to receive cash awards based on the market value of 2.4 million shares of our common stock at the measurement dates. Under the Incentive Unit Agreements, the employee is reimbursed by our Company for income taxes imposed when the value of the units is paid, but not for taxes generated by the reimbursement payment. At December 31, 1996 and 1995, approximately 1.6 million units were outstanding. In 1997, all outstanding units were paid at a price of $58.50 per unit. In 1985, we entered into Performance Unit Agreements, whereby certain officers were given the right to receive cash awards based on the difference in the market value of approximately 4.4 million shares of our common stock at the measurement dates and the base price of $2.58, the market value as of January 2, 1985. At December 31, 1996 and 1995, approximately 2.9 million units were outstanding. In 1997, all outstanding units were paid based on a market price of $58.50 per unit. NOTE 12: PENSION AND OTHER POSTRETIREMENT BENEFITS Our Company sponsors and/or contributes to pension plans covering substantially all U.S. employees and certain employees in international locations. The benefits are primarily based on years of service and the employees' compensation for certain periods during the last years of employment. We generally fund pension costs currently, subject to regulatory funding limitations. We also sponsor nonqualified, unfunded defined benefit plans for certain officers and other employees. In addition, our Company and its subsidiaries have various pension plans and other forms of postretirement arrangements outside the United States. Total pension expense for all benefit plans, including defined benefit plans, amounted to approximately $77 million in 1997, $85 million in 1996 and $81 million in 1995. Net periodic pension cost for our defined benefit plans consists of the following (in millions): Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------- Service cost-benefits earned during the period $ 49 $ 48 $ 43 Interest cost on projected benefit obligation 93 91 89 Actual return on plan assets (172) (169) (211) Net amortization and deferral 98 103 145 - ------------------------------------------------------------------- Net periodic pension cost $ 68 $ 73 $ 66 ==================================================================== The funded status of our defined benefit plans is as follows (in millions): Assets Exceed Accumulated Accumulated Benefits Benefits Exceed Assets -------------------- ---------------------- December 31, 1997 1996 1997 1996 - --------------------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefit obligation $ 804 $ 704 $ 328 $ 343 =========================================================================== Accumulated benefit obligation $ 872 $ 768 $ 370 $ 384 =========================================================================== Projected benefit obligation $ 1,016 $ 890 $ 472 $ 485 Plan assets at fair value{1} 1,280 1,126 128 156 - --------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation 264 236 (344) (329) Unrecognized net (asset) liability at transition (30) (39) 28 36 Unrecognized prior service cost 29 33 12 16 Unrecognized net (gain) loss (211) (191) 113 104 Adjustment required to recognize minimum liability - - (76) (66) - --------------------------------------------------------------------------- Accrued pension asset (liability) included in the consolidated balance sheet $ 52 $ 39 $ (267) $ (239) =========================================================================== {1} Primarily listed stocks, bonds and government securities. The assumptions used in computing the preceding information are as follows: Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------- Discount rates 7% 7-1/4% 7% Rates of increase in compensation levels 4-3/4% 4-3/4% 4-3/4% Expected long-term rates of return on assets 9% 8-1/2% 8-1/2% =================================================================== Our Company has plans providing postretirement health care and life insurance benefits to substantially all U.S. employees and certain employees in international locations who retire with a minimum of five years of service. Net periodic cost for our postretirement health care and life insurance benefits consists of the following (in millions): Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------- Service cost $ 11 $ 12 $ 12 Interest cost 23 20 23 Other (2) (3) (2) - ------------------------------------------------------------------- $ 32 $ 29 $ 33 =================================================================== - 57 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - ----------------------------------------------------------------------- In addition, we contribute to a Voluntary Employees' Beneficiary Association trust that will be used to partially fund health care benefits for future retirees. Generally, we fund benefits to the extent contributions are tax-deductible, which under current legislation is limited. In general, retiree health benefits are paid as covered expenses are incurred. The funded status of our postretirement health care and life insurance plans is as follows (in millions): December 31, 1997 1996 - ----------------------------------------------------------------------- Accumulated postretirement benefit obligations: Retirees $ 154 $ 114 Fully eligible active plan participants 41 35 Other active plan participants 132 130 - ----------------------------------------------------------------------- Total benefit obligation 327 279 Plan assets at fair value{1} 40 41 - ----------------------------------------------------------------------- Plan assets less than benefit obligation (287) (238) Unrecognized prior service cost 5 5 Unrecognized net gain (27) (57) - ----------------------------------------------------------------------- Accrued postretirement benefit liability included in the consolidated balance sheet $(309) $(290) ======================================================================= {1} Consists of corporate bonds, government securities and short-term investments. The assumptions used in computing the preceding information are as follows: Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------- Discount rate 7-1/4% 7-3/4% 7-1/4% Rates of increase in compensation levels 4-3/4% 5% 4-3/4% =================================================================== The rate of increase in the per capita costs of covered health care benefits is assumed to be 7-1/4 percent in 1998, decreasing gradually to 5 percent by the year 2002. Increasing the assumed health care cost trend rate by one percentage point would increase the accumulated postretirement benefit obligation as of December 31, 1997, by approximately $39 million and increase the net periodic postretirement benefit cost by approximately $5 million in 1997. NOTE 13: INCOME TAXES Income before income taxes consists of the following (in millions): Year Ended December 31, 1997 1996 1995 - --------------------------------------------------------------- United States $ 1,515 $ 1,168 $ 1,270 International 4,540 3,428 3,058 - --------------------------------------------------------------- $ 6,055 $ 4,596 $ 4,328 =============================================================== Income tax expense (benefit) consists of the following (in millions): Year Ended United State & December 31, States Local International Total - ----------------------------------------------------------------------- 1997 Current $ 240 $ 45 $ 1,261 $ 1,546 Deferred 180 21 179 380 1996 Current $ 256 $ 79 $ 914 $ 1,249 Deferred (264) (29) 148 (145) 1995 Current $ 204 $ 41 $ 940 $ 1,185 Deferred 80 10 67 157 ======================================================================= We made income tax payments of approximately $982 million, $1,242 million and $1,000 million in 1997, 1996 and 1995, respectively. A reconciliation of the statutory U.S. federal rate and effective rates is as follows: Year Ended December 31, 1997 1996 1995 - ----------------------------------------------------------------------- Statutory U.S. federal rate 35.0% 35.0% 35.0% State income taxes-net of federal benefit 1.0 1.0 1.0 Earnings in jurisdictions taxed at rates different from the statutory U.S. federal rate (2.6) (3.3) (3.9) Equity income (.6) (1.7) (1.7) Tax settlement - (7.0) - Other-net (1.0) - .6 - ----------------------------------------------------------------------- 31.8% 24.0% 31.0% ======================================================================= Our 31.8 percent 1997 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, partially offset by the tax impact of certain gains recognized from previously discussed bottling transactions. These transactions are generally taxed at rates higher than our Company's effective rate on operations. In 1996, we reached an agreement in principle with the U.S. Internal Revenue Service (IRS) settling certain U.S.-related income tax matters. The agreement included issues in litigation involving our operations in Puerto Rico, dating back to the 1981 tax year and extending through 1995. This agreement resulted in a one-time reduction of $320 million to our 1996 income tax expense as a result of reversing previously accrued contingent income tax liabilities. Our 1996 effective tax rate would have been 31 percent, excluding the favorable impact of the settlement with the IRS. - 58 - NOTES TO CONSOLIDATED THE COCA-COLA COMPANY FINANCIAL STATEMENTS AND SUBSIDIARIES - -------------------------------------------------------------------- Appropriate U.S. and international taxes have been provided for earnings of subsidiary companies that are expected to be remitted to the parent company. Exclusive of amounts that would result in little or no tax if remitted, the cumulative amount of unremitted earnings from our international subsidiaries that is expected to be indefinitely reinvested was approximately $1,917 million on December 31, 1997. The taxes that would be paid upon remittance of these indefinitely reinvested earnings are approximately $671 million, based on current tax laws. 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, 1997 1996 - ------------------------------------------------------------------- Deferred tax assets: Benefit plans $ 246 $ 414 Liabilities and reserves 172 164 Net operating loss carryforwards 72 130 Other 89 88 - ------------------------------------------------------------------- Gross deferred tax assets 579 796 Valuation allowance (21) (18) - ------------------------------------------------------------------- $ 558 $ 778 =================================================================== Deferred tax liabilities: Property, plant and equipment $ 203 $ 200 Equity investments 107 369 Intangible assets 164 74 Other 288 33 - ------------------------------------------------------------------- $ 762 $ 676 =================================================================== Net deferred tax asset (liability){1} $(204) $ 102 =================================================================== {1} Deferred tax assets of $244 million and $403 million have been included in the consolidated balance sheet caption "marketable securities and other assets" at December 31, 1997 and 1996, respectively. On December 31, 1997, we had $180 million of operating loss carryforwards available to reduce future taxable income of certain international subsidiaries. Loss carryforwards of $11 million must be utilized within the next five years; $169 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 14: NONRECURRING ITEMS In the second quarter of 1997, we recorded a nonrecurring charge of $60 million in selling, administrative and general expenses related to enhancing manufacturing efficiencies in North America. In the third quarter of 1996, we recorded provisions of approximately $276 million in selling, administrative and general expenses related to our plans for strengthening our worldwide system. Of this $276 million, approximately $130 million related to streamlining our operations, primarily in Greater Europe and Latin America. Our management took actions to consolidate certain manufacturing operations and, as a result, recorded charges to recognize the impairment of certain manufacturing assets and estimated losses on the disposal of other assets. The remainder of this $276 million provision related to actions taken by The Minute Maid Company. During the third quarter of 1996, The Minute Maid Company entered into two significant agreements with independent parties: (1) a strategic supply alliance with Sucocitrico Cutrale Ltda., the world's largest grower and processor of oranges, and (2) a joint venture agreement with Groupe Danone to produce, distribute and sell premium refrigerated juices outside the United States and Canada. With these agreements, we intend to increase The Minute Maid Company's focus on managing its brands while seeking arrangements to lower its overall manufacturing costs. In connection with these actions, we recorded $146 million in third quarter provisions, composed primarily of impairment charges to certain production facilities and reserves for losses on the disposal of other production facilities. Also in the third quarter of 1996, we launched a strategic initiative, Project Infinity, to redesign and enhance our information systems and communications capabilities. In connection with this initiative, we recorded an $80 million impairment charge in administrative and general expenses to recognize Project Infinity's impact on existing information systems. Based on management's commitment to certain strategic actions during the third quarter of 1996, these impairment charges were recorded to reduce the carrying value of identified assets to fair value. Fair values were derived using a variety of methodologies, including cash flow analysis, estimates of sales proceeds and independent appraisals. Also in the third quarter of 1996, we recorded a $28.5 million charge in administrative and general expenses as a result of our decision to make a contribution to The Coca-Cola Foundation, a not-for-profit charitable organization. During 1995, selling, administrative and general expenses included provisions of $86 million to increase efficiencies in our operations in North America and Europe. - 59 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE COCA-COLA COMPANY AND SUBSIDIARIES - -------------------------------------------------------------------------------------------------------- 15. OPERATIONS IN GEOGRAPHIC AREAS Information about the Company's operations by geographic area is as follows (in millions):
North Greater Latin Middle & America Africa Europe America Far East Corporate Consolidated - ---------------------------------------------------------------------------------------------------------------------- 1997 Net operating revenues $6,443 $582 $5,395 $2,124 $4,256 $ 68 $18,868 Operating income 1,311{2} 165 1,479 957 1,508 (419) 5,001 Identifiable operating assets 4,429 418 2,410 1,593 1,624 1,572{1} 12,046 Equity income 155 155 Investments (principally bottling companies) 4,894 4,894 Capital expenditures 261 17 327 78 196 214 1,093 Depreciation and amortization 195 22 123 99 106 81 626 ====================================================================================================================== 1996 Net operating revenues $6,050 $482 $5,959 $2,040 $4,095 $ 47 $18,673 Operating income 949{3} 118{3} 1,277{3} 815{3} 1,358{3} (602){3} 3,915 Identifiable operating assets 3,814 326 2,896 1,405 1,463 2,088{1} 11,992 Equity income 211 211 Investments (principally bottling companies) 4,169 4,169 Capital expenditures 261 32 379 79 121 118 990 Depreciation and amortization 188 12 190 83 84 76 633 ====================================================================================================================== 1995 Net operating revenues $5,513 $603 $6,007 $1,955 $3,994 $ 55 $18,127 Operating income 856{4} 205 1,256{4} 798 1,394 (483) 4,026 Identifiable operating assets 3,478 348 4,301 1,294 1,445 1,461{1} 12,327 Equity income 169 169 Investments (principally bottling companies) 2,714 2,714 Capital expenditures 286 19 383 87 85 77 937 Depreciation and amortization 156 13 192 64 71 66 562 ====================================================================================================================== Intercompany transfers between geographic areas are not material. North America includes only the United States and Canada. Certain prior year amounts have been reclassified to conform to the current year presentation. {1} Corporate identifiable operating assets are composed principally of marketable securities, finance subsidiary receivables and fixed assets. {2} Operating income for North America was reduced by $60 million for provisions related to enhancing manufacturing efficiencies. {3} Operating income for North America, Africa, Greater Europe, Latin America and the Middle & Far East was reduced by $153 million, $7 million, $66 million, $32 million and $18 million, respectively, for provisions related to management's strategic plans to strengthen our worldwide system. Corporate operating income was reduced by $80 million for Project Infinity's impairment impact to existing systems and by $28.5 million for our decision to contribute to The Coca-Cola Foundation. {4} Operating income for North America and Greater Europe was reduced by $61 million and $25 million, respectively, for provisions to increase efficiencies.
Compound Growth Rates North Greater Latin Middle & Ending 1997 America Africa Europe America Far East Consolidated - ---------------------------------------------------------------------------------------------------------------------- Net operating revenues 5 years 7% 19% 4% 9% 13% 8% 10 years 6% 17% 13% 14% 9% 9% ======================================================================================================================= Operating income 5 years 13% 5% 8% 14% 12% 13% 10 years 12% 13% 13% 20% 13% 14% =======================================================================================================================
- 60 - THE COCA-COLA COMPANY AND SUBSIDIARIES NET OPERATING REVENUES BY GEOGRAPHIC AREA{1} [bar chart] Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------- Middle & Far East 23% 22% 22% Latin America 11% 11% 11% Greater Europe 29% 32% 33% Africa 3% 3% 3% North America 34% 32% 31% OPERATING INCOME BY GEOGRAPHIC AREA{1} [bar chart] Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------- Middle & Far East 28% 30% 31% Latin America 18% 18% 18% Greater Europe 27% 28% 28% Africa 3% 3% 4% North America 24% 21% 19% {1} Charts and percentages are calculated exclusive of corporate operations. 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, 1997 and 1996, 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, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Atlanta, Georgia January 23, 1998 - 61 - 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 - --------------------------------------------------------------------------------- 1997 Net operating revenues $4,138 $5,075 $4,954 $4,701 $18,868 Gross profit 2,843 3,466 3,295 3,249 12,853 Net income 987 1,314 1,011 817 4,129 Basic net income per share .40 .53 .41 .33 1.67 Diluted net income per share .39 .52 .40 .33 1.64 ================================================================================= 1996 Net operating revenues $4,224 $5,286 $4,687 $4,476 $18,673 Gross profit 2,694 3,380 2,873 2,988 11,935 Net income 713 1,050 967 762 3,492 Basic net income per share .28 .42 .39 .31 1.40 Diluted net income per share .28 .42 .38 .30 1.38 =================================================================================
The first quarter of 1997 includes a gain of approximately $352 million ($.08 per share after income taxes, basic and diluted) on the sale of our 49 percent interest in Coca-Cola & Schweppes Beverages Ltd. to Coca-Cola Enterprises. The second quarter of 1997 includes noncash gains on the issuance of stock by Coca-Cola Amatil of approximately $343 million ($.08 per share after income taxes, basic and diluted). The second quarter of 1997 also includes provisions related to enhancing manufacturing efficiencies in North America of $60 million ($.02 per share after income taxes, basic and diluted). The third quarter of 1997 includes a gain of approximately $156 million ($.04 per share after income taxes, basic and diluted) on the sale of our 48 percent interest in Coca-Cola Beverages Ltd. of Canada and our 49 percent interest in The Coca-Cola Bottling Company of New York, Inc. to Coca-Cola Enterprises. The third quarter of 1996 includes a noncash gain from a tax settlement with the IRS for $320 million ($.13 per share after income taxes, basic and diluted), an impairment charge of $80 million ($.02 per share after income taxes, basic and diluted) to recognize Project Infinity's impact on existing information systems, a $28.5 million ($.01 per share after income taxes, basic and diluted) charge for our decision to make a contribution to The Coca-Cola Foundation, a not-for- profit charitable organization and provisions related to management's strategic plans to strengthen our worldwide system of $276 million ($.07 per share after income taxes, basic and diluted). In addition, the third quarter of 1996 includes noncash gains on the issuance of stock by Coca-Cola Amatil of $130 million ($.03 per share after income taxes, basic and diluted) and CCEAG of $283 million ($.04 per share after income taxes, basic and diluted). STOCK PRICES Below are the New York Stock Exchange high, low and closing prices of The Coca-Cola Company's stock for each quarter of 1997 and 1996.
First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------- 1997 High $ 63.25 $72.63 $71.94 $67.19 Low 51.13 52.75 55.06 51.94 Close 55.75 68.00 61.00 66.69 ==================================================================== 1996 High $ 42.69 $49.50 $53.88 $54.25 Low 36.06 39.13 44.25 46.88 Close 41.38 49.00 50.88 52.63 ====================================================================
- 63 - 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: 366,279 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, Cincinnati, Chicago, 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 1998 meeting, our Board increased our quarterly dividend to 15 cents per share, equivalent to an annual dividend of 60 cents per share. The Company has increased dividends each of the last 36 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 307 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. All brokerage commissions associated with purchases made through the Plan are paid by the Company. The Plan's administrator, First Chicago Trust Company of New York, purchases stock for voluntary cash investments beginning the first business day of each month, except in December when purchases begin on the 15th; dividend reinvestment purchases begin on April 1, July 1, October 1 and December 15. 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 to First Chicago Trust Company of New York electronically through the Direct Registration System. At year end, 69 percent of the Company's share owners of record were participants in the Plan. In 1997, share owners invested $39 million in dividends and $124 million in cash in the Plan. ANNUAL MEETING OF SHARE OWNERS April 15, 1998, 9 a.m. local time The Playhouse Theatre Du Pont Building 10th and Market Streets Wilmington, Delaware CORPORATE OFFICES The Coca-Cola Company One Coca-Cola Plaza Atlanta, Georgia 30313 INSTITUTIONAL INVESTOR INQUIRIES (404) 676-5766 SHARE-OWNER ACCOUNT ASSISTANCE For address changes, dividend checks, direct deposit of dividends, account consolidation, registration changes, lost stock certificates, stock holdings and the Dividend and Cash Investment Plan, please contact: Registrar and Transfer Agent First Chicago Trust Company of New York P.O. Box 2500 Jersey City, NJ 07303-2500 Toll-free: (888) COKESHR (265-3747) For hearing impaired: (201) 222-4955 E-mail: fctc@em.fcnbd.com Internet: http://www.fctc.com INFORMATION RESOURCES PUBLICATIONS THE COMPANY'S ANNUAL AND INTERIM REPORTS, PROXY STATEMENT, FORM 10-K AND FORM 10-Q REPORTS ARE AVAILABLE FREE OF CHARGE FROM OUR INDUSTRY & CONSUMER AFFAIRS DEPARTMENT AT THE COMPANY'S CORPORATE ADDRESS, LISTED ABOVE. Also available is "The Chronicle of Coca-Cola Since 1886." INTERNET SITE Our site at http://www.coca-cola.com offers information about our Company, as well as periodic marketing features. 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 recent 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 publications, please contact the First Chicago Trust Company of New York at one of the numbers listed above. - 66 - GLOSSARY [Following are certain definitions extracted from page 67:] DIVIDEND PAYOUT RATIO: Calculated by dividing cash dividends on common stock by net income available to common share owners. ECONOMIC PROFIT: Income from continuing operations, after taxes, excluding interest, in excess of a computed capital charge for average operating capital employed. FREE CASH FLOW: Cash provided by operations less cash used in investing activities. The Company uses free cash flow along with borrowings to pay dividends and make share repurchases. NET DEBT AND NET CAPITAL: Debt and capital in excess of cash, cash equivalents and marketable securities not required for operations and certain temporary bottling investments. RETURN ON CAPITAL: Calculated by dividing income from continuing operations - before changes in accounting principles, adjusted for interest expense - by average total capital. RETURN ON COMMON EQUITY: Calculated by dividing income from continuing operations - before changes in accounting principles, less preferred stock dividends - by average common share-owners' equity. TOTAL CAPITAL: Equals share-owners' equity plus interest- bearing debt. TOTAL MARKET VALUE OF COMMON STOCK: Stock price at year end multiplied by the number of shares outstanding at year end. - 67 -