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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 001-02217
The Coca-Cola Company
(Exact name of Registrant as specified in its Charter)
Delaware 58-0628465
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Coca-Cola Plaza 30313
Atlanta, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (404) 676-2121
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the
Registrant's classes of Common Stock as of the latest practicable
date.
Class of Common Stock Outstanding at October 30, 1998
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$.25 Par Value 2,465,104,203 Shares
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THE COCA-COLA COMPANY AND SUBSIDIARIES
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income
Three and nine months ended
September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 23
Part II. Other Information
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 27
2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except share data)
ASSETS
September 30, December 31,
1998 1997
------------- ------------
CURRENT
Cash and cash equivalents $ 1,746 $ 1,737
Marketable securities 83 106
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1,829 1,843
Trade accounts receivable, less
allowances of $12 at September 30
and $23 at December 31 1,594 1,639
Inventories 900 959
Prepaid expenses and other assets 1,673 1,528
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TOTAL CURRENT ASSETS 5,996 5,969
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INVESTMENTS AND OTHER ASSETS
Equity method investments
Coca-Cola Enterprises Inc. 495 184
Coca-Cola Amatil Limited 1,096 1,204
Coca-Cola Beverages plc 918 -
Other, principally bottling companies 3,356 3,049
Cost method investments,
principally bottling companies 319 457
Marketable securities and other assets 1,512 1,607
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7,696 6,501
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PROPERTY, PLANT AND EQUIPMENT
Land 180 183
Buildings and improvements 1,474 1,535
Machinery and equipment 3,845 3,896
Containers 124 157
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5,623 5,771
Less allowances for depreciation 2,057 2,028
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3,566 3,743
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GOODWILL AND OTHER INTANGIBLE ASSETS 613 727
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$ 17,871 $ 16,940
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3
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In millions except share data)
LIABILITIES AND SHARE-OWNERS' EQUITY
September 30, December 31,
1998 1997
------------- ------------
CURRENT
Accounts payable and accrued expenses $ 2,863 $ 3,249
Loans and notes payable 3,933 2,677
Current maturities of long-term debt 2 397
Accrued income taxes 1,042 1,056
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TOTAL CURRENT LIABILITIES 7,840 7,379
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LONG-TERM DEBT 688 801
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OTHER LIABILITIES 942 1,001
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DEFERRED INCOME TAXES 540 448
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SHARE-OWNERS' EQUITY
Common stock, $.25 par value
Authorized: 5,600,000,000 shares
Issued: 3,455,057,379 shares at
September 30; 3,443,441,902
shares at December 31 864 861
Capital surplus 1,932 1,527
Reinvested earnings 19,694 17,869
Unearned compensation related to
outstanding restricted stock (46) (50)
Accumulated other comprehensive income (1,542) (1,314)
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20,902 18,893
Less treasury stock, at cost
(992,814,443 shares at September 30;
972,812,731 shares at December 31) 13,041 11,582
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7,861 7,311
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$ 17,871 $ 16,940
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See Notes to Condensed Consolidated Financial Statements.
4
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In millions except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
NET OPERATING REVENUES $ 4,747 $ 4,954 $ 14,355 $ 14,167
Cost of goods sold 1,446 1,659 4,263 4,563
---------- ---------- ---------- ----------
GROSS PROFIT 3,301 3,295 10,092 9,604
Selling, administrative
and general expenses 2,064 2,052 6,062 5,776
---------- ---------- ---------- ----------
OPERATING INCOME 1,237 1,243 4,030 3,828
Interest income 56 50 171 150
Interest expense 72 58 209 188
Equity income 51 46 103 152
Gains on issuances
of stock by
equity investees 27 - 27 363
Other income (loss) - net (12) 224 211 566
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES 1,287 1,505 4,333 4,871
Income taxes 399 494 1,397 1,559
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NET INCOME $ 888 $ 1,011 $ 2,936 $ 3,312
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BASIC NET INCOME
PER SHARE $ .36 $ .41 $ 1.19 $ 1.34
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DILUTED NET INCOME
PER SHARE $ .36 $ .40 $ 1.18 $ 1.32
========== ========== ========== ==========
DIVIDENDS PER SHARE $ .15 $ .14 $ .45 $ .42
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AVERAGE SHARES
OUTSTANDING 2,464 2,478 2,468 2,479
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Dilutive effect of
stock options 28 37 30 38
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AVERAGE SHARES
OUTSTANDING
ASSUMING DILUTION 2,492 2,515 2,498 2,517
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See Notes to Condensed Consolidated Financial Statements.
5
THE COCA-COLA COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
Nine Months Ended
September 30,
-------------------------
1998 1997
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OPERATING ACTIVITIES
Net income $ 2,936 $ 3,312
Depreciation and amortization 471 450
Deferred income taxes 25 (57)
Equity income, net of dividends (52) (103)
Gains on issuances of stock by
equity investees (27) (363)
Foreign currency adjustments 57 63
Other items (178) (588)
Net change in operating assets
and liabilities (628) 730
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Net cash provided by operating activities 2,604 3,444
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INVESTING ACTIVITIES
Acquisitions and investments,
principally bottling companies (1,001) (789)
Purchases of investments and other assets (365) (268)
Proceeds from disposals of investments
and other assets 862 1,958
Purchases of property, plant and equipment (612) (776)
Proceeds from disposals of property, plant
and equipment 29 54
Other investing activities (37) 84
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Net cash provided by (used in)
investing activities (1,124) 263
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Net cash provided by operations after
reinvestment 1,480 3,707
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FINANCING ACTIVITIES
Issuances of debt 1,324 101
Payments of debt (409) (1,493)
Issuances of stock 196 109
Purchases of stock for treasury (1,459) (957)
Dividends (1,089) (695)
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Net cash used in financing activities (1,437) (2,935)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (34) (95)
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CASH AND CASH EQUIVALENTS
Net increase during the period 9 677
Balance at beginning of period 1,737 1,433
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Balance at end of period $ 1,746 $ 2,110
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See Notes to Condensed Consolidated Financial Statements.
6
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do
not include all information and notes required by generally accepted
accounting principles for complete financial statements. However,
except as disclosed herein, there has been no material change in the
information disclosed in the notes to consolidated financial
statements included in the Annual Report on Form 10-K of The Coca-Cola
Company (our Company) for the year ended December 31, 1997. In the
opinion of Management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended September
30, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
Certain amounts in our prior period financial statements have been
reclassified to conform to the current period presentation.
NOTE B - SEASONAL NATURE OF BUSINESS
Unit sales of soft drink and noncarbonated beverage products are
generally greater in the second and third quarters due to seasonal
factors.
NOTE C - COMPREHENSIVE INCOME
As of January 1, 1998, we adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). The
adoption of this Statement had no impact on our net income or share-
owners' equity. SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components. SFAS 130 requires
foreign currency translation adjustments and unrealized gains or
losses on our Company's available-for-sale securities to be included
in other comprehensive income. Prior to our adoption of SFAS 130, we
reported such adjustments and unrealized gains or losses separately in
share-owners' equity. Amounts in prior year financial statements have
been reclassified to conform to SFAS 130.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE C - COMPREHENSIVE INCOME (Continued)
The components of comprehensive income, net of related tax, are as
follows (in millions):
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net income $ 888 $ 1,011 $ 2,936 $ 3,312
Net change in
unrealized gain (loss)
on available-for-sale
securities (48) 32 (69) 23
Foreign currency
translation adjustment (81) (179) (159) (375)
---------- ---------- ---------- ----------
Comprehensive income $ 759 $ 864 $ 2,708 $ 2,960
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The components of accumulated other comprehensive income, net of
related tax, are as follows (in millions):
September 30, December 31,
1998 1997
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Unrealized gain (loss) on
available-for-sale securities $ (11) $ 58
Foreign currency translation
adjustment (1,531) (1,372)
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Accumulated other comprehensive income $ (1,542) $ (1,314)
NOTE D - BOTTLING TRANSACTIONS
In August 1998, we exchanged our Korean bottling operations with
Coca-Cola Amatil Limited (CCA) for additional ownership interest in
CCA.
In June 1998, we sold to Coca-Cola Beverages plc (CCB) our wholly
owned Italian bottling operations in northern and central Italy, for
proceeds valued at approximately $1 billion. The proceeds we received
consisted of cash, notes receivable and shares of stock of CCB. As a
result of this sale, we recognized an after-tax gain of approximately
$.03 per share (basic and diluted).
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE D - BOTTLING TRANSACTIONS (Continued)
In August 1997, we sold 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 (CCE) in
exchange for aggregate consideration valued at approximately $456
million in cash. This transaction resulted in an after-tax gain of
approximately $.04 per share (basic and diluted).
In February 1997, we sold our 49 percent interest in Coca-Cola &
Schweppes Beverages Ltd. to CCE. This transaction resulted in cash
proceeds for our Company of approximately $1 billion and an after-tax
gain of approximately $.08 per share (basic and diluted).
NOTE E - ISSUANCES OF STOCK BY EQUITY INVESTEES
At the time an equity investee sells its stock to third parties at a
price in excess of its book value, our Company's equity in the
underlying net assets of that investee increases. We generally record
an increase to our investment account and a corresponding gain in
these transactions.
In the third quarter of 1998, Coca-Cola Erfrischungsgetraenke AG
(CCEAG), a bottler in Germany, issued new shares valued at
approximately $275 million to effect a merger with Nordwest Getraenke
GmbH & Co. KG, another German bottler. Approximately 7.5 million
shares were issued, resulting in a one-time noncash pretax gain for
our Company of approximately $27 million. We provided deferred taxes
of approximately $10 million on this gain. This issuance reduced our
ownership in CCEAG from approximately 45 percent to approximately 40
percent.
In June 1997, our Company and San Miguel Corporation (San Miguel)
sold their respective interests in Coca-Cola Bottlers Philippines,
Inc. to Coca-Cola Amatil Limited (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 $2,429
million. 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.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE E - ISSUANCES OF STOCK BY EQUITY INVESTEES (Continued)
In May 1997, our Company and The Cisneros Group of Companies
(Cisneros Group) sold their respective interests in Coca-Cola y Hit de
Venezuela to Panamerican Beverages, Inc. (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.
If gains have been previously recognized on issuances of an equity
investee's stock and shares of the equity investee are subsequently
repurchased by the equity investee, gain recognition would not occur
on issuances subsequent to the date of a repurchase until such time as
shares have been issued in an amount equivalent to the number of
repurchased shares. This type of transaction is reflected as an
equity transaction and the net effect is reflected in the accompanying
condensed consolidated balance sheet.
In June 1998, CCE completed its acquisition of CCBG Corporation and
Texas Bottling Group, Inc. (collectively known as Coke Southwest).
The transaction was valued at approximately $1.1 billion, with
approximately 55 percent of the transaction funded with the issuance
of approximately 17.7 million shares of CCE common stock, and the
remaining portion funded through debt and assumed debt. The CCE
common stock issued in exchange for Coke Southwest was valued in an
amount greater than the book value per share of our investment in CCE.
As a result of this transaction, our equity in the underlying net
assets of CCE increased, and we recorded a $257 million increase to
our Company's investment basis in CCE. Due to CCE's share repurchase
program, the increase in our investment in CCE was recorded as an
equity transaction and no gain was recognized. We recorded a deferred
tax liability of approximately $101 million on this increase to our
investment in CCE. At the completion of this transaction, our
ownership in CCE was approximately 42 percent.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F - ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Essentially, the new
statement requires all derivatives to be recorded on the balance sheet
at fair value and establishes new accounting practices for hedge
instruments. The statement is effective for years beginning after
June 15, 1999. We are currently assessing the impact this statement
will have on our consolidated financial statements.
In March 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use.
Also, in June 1998, the AICPA issued SOP 98-5 "Reporting on the Costs
of Start-Up Activities." SOP 98-5 requires costs of start-up
activities and organizational costs, as defined, to be expensed as
incurred. These statements are effective for fiscal years beginning
after December 15, 1998. We do not expect either of these SOP's to
have a material impact on our Company's consolidated financial
statements.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
BEVERAGE VOLUME
In the third quarter of 1998, our worldwide unit case volume
(excluding volume of The Minute Maid Company) increased 3 percent and
gallon shipments of concentrates and syrups grew 5 percent, on top of
third quarter 1997 growth rates of 11 percent and 14 percent,
respectively. Our unit case volume and gallon shipments have each
increased 9 percent for the first nine months of 1998.
The third quarter 1998 increase in volume is primarily a result of
our Company's investment in marketing activities and continued
development of infrastructure (including bottlers, capital and
information systems), offset by the impacts of difficult economic
conditions in many parts of the world. As previously disclosed, year-
to-date volume results are impacted in the first quarter of 1998 by
additional shipping days as compared to the first quarter of 1997.
This increase in shipping days will be offset by an equal reduction in
shipping days in the fourth quarter of 1998 as compared to the fourth
quarter of 1997.
In the third quarter of 1998, volume increased 3 percent for The
Minute Maid Company compared to an 8 percent decline in the third
quarter of 1997. The 1998 increase is a result of brand building
initiatives and increases in share of sales for Minute Maid Premium
ready-to-drink orange juice products. For the first nine months of
1998, volume for The Minute Maid Company increased 1 percent compared
to the first nine months of 1997.
NET OPERATING REVENUES AND GROSS MARGIN
Although worldwide gallon shipments increased 5 percent in the third
quarter of 1998, net operating revenues declined 4 percent due to the
impact of a stronger U.S. dollar and the sales in 1998 and 1997 of
previously consolidated bottling operations. Net operating revenues
increased 1 percent year to date versus the prior year.
Our gross profit margin increased to 69.5 percent in the third
quarter of 1998 from 66.5 percent in the third quarter of 1997. The
increase in gross margin for the third quarter of 1998 was due
primarily to the sales in 1998 and 1997 of previously consolidated
bottling operations, which shifted proportionately more revenue to our
higher margin concentrate business.
12
RESULTS OF OPERATIONS (Continued)
SELLING, ADMINISTRATIVE AND GENERAL EXPENSES
Selling, administrative and general expenses were $2,064 million in
the third quarter of 1998, compared to $2,052 million in the third
quarter of 1997. The increase was due primarily to higher marketing
investments in support of our Company's volume growth, offset by the
sales in 1998 and 1997 of previously consolidated bottling operations.
For the first nine months of the year, selling, administrative and
general expenses were $6,062 million, compared to $5,776 million for
the same period in 1997.
OPERATING INCOME AND OPERATING MARGIN
Operating income for the third quarter of 1998 totaled $1,237
million, a decrease of $6 million from the third quarter of 1997.
Third quarter 1998 operating income reflects the difficult economic
conditions in many markets throughout the world, the impact of the
stronger U.S. dollar and the sales of previously consolidated bottling
operations in 1998 and 1997. Operating margin for the third quarter
of 1998 was 26.1 percent, compared to 25.1 percent for the comparable
period in 1997. Operating income and operating margin for the nine
months ended September 30, 1998 were $4,030 million and 28.1 percent,
respectively, compared to $3,828 million and 27.0 percent for the nine
months ended September 30, 1997.
INTEREST INCOME AND INTEREST EXPENSE
Interest income increased in the third quarter and the nine month
period ended September 30, 1998 relative to the comparable periods in
1997, due primarily to cash held in locations outside the United
States earning higher interest income in the current year. Interest
expense increased in the third quarter and for the nine months ended
September 30, 1998, relative to the comparable periods in 1997, due to
receipt of proceeds from the 1997 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. These proceeds
decreased the average 1997 commercial paper debt balances and related
interest expense.
EQUITY INCOME
Our equity income for the third quarter of 1998 totaled $51 million,
compared to $46 million in the third quarter of 1997. For the first
nine months of 1998, equity income totaled $103 million, compared to
$152 million for the same period in 1997. In 1998, equity income has
been negatively impacted by difficult economic conditions in many
worldwide markets as well as continued structural changes in the
global bottling system.
13
RESULTS OF OPERATIONS (Continued)
GAINS ON ISSUANCES OF STOCK BY EQUITY INVESTEES
In the third quarter of 1998, Coca-Cola Erfrischungsgetraenke AG
(CCEAG), a bottler in Germany, issued new shares valued at
approximately $275 million to effect a merger with Nordwest Getraenke
GmbH & Co. KG, another German bottler. Approximately 7.5 million
shares were issued, resulting in a one-time noncash pretax gain for
our Company of approximately $27 million. We provided deferred taxes
of approximately $10 million on this gain. This issuance reduced our
ownership in CCEAG from approximately 45 percent to approximately 40
percent.
In June 1997, our Company and San Miguel Corporation (San Miguel)
sold their respective interests in Coca-Cola Bottlers Philippines,
Inc. to Coca-Cola Amatil Limited (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 $2,429 million. 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.
In May 1997, our Company and The Cisneros Group of Companies
(Cisneros Group) sold their respective interests in Coca-Cola y Hit de
Venezuela to Panamerican Beverages, Inc. (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.
OTHER INCOME (LOSS) - NET
Other income (loss) - net was $(12) million for the third quarter of
1998 compared to $224 million for the third quarter of 1997. The
decrease reflects gains recognized in the third quarter of 1997 on the
sales of our bottling interests in Coca-Cola Beverages, Ltd. of
Canada, The Coca-Cola Bottling Company of New York, Inc., Coca-Cola
Rhein-Ruhr and Coca-Cola FEMSA de Buenos Aires, S.A. For the first
nine months of 1998, other income (loss) - net was $211 million,
compared to $566 million in the comparable period of the prior year.
The decrease in the first nine months of 1998 as compared to the first
nine months of 1997 reflects the impacts of the first quarter 1997
gain from the sale of our interest in Coca-Cola & Schweppes Beverages
Ltd. and the third quarter 1997 gains from the sales of certain
bottling interests, partially offset by the second quarter 1998 gain
on the sale of our northern and central Italy bottling operations to
Coca-Cola Beverages plc.
14
RESULTS OF OPERATIONS (Continued)
INCOME TAXES
Our effective tax rate was 31.0 percent for the third quarter of
1998 compared to 32.8 percent for the third quarter of 1997. The
effective tax rate was 32.2 percent for the first nine months of 1998
compared to 32.0 percent for the first nine months of 1997. Our
effective tax rate 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.
15
FINANCIAL CONDITION
NET CASH FLOW PROVIDED BY OPERATIONS AFTER REINVESTMENT
In the first nine months of 1998, net cash flow after reinvestment
totaled $1,480 million, a decrease of $2,227 million over the
comparable period in 1997.
Cash provided by operating activities in the first nine months of
1998 amounted to $2,604 million, an $840 million decrease compared to
the first nine months of 1997. The decrease was primarily due to the
timing of payments of accounts payable and accrued expenses and
accrued income taxes (net change in operating assets and liabilities).
Net cash used in investing activities totaled $1,124 million for the
first nine months of 1998 compared to $263 million in cash provided by
investing activities for the first nine months of 1997. As previously
discussed, we sold our interests in Coca-Cola & Schweppes Beverages
Ltd., Coca-Cola Beverages, Ltd. of Canada and The Coca-Cola Bottling
Company of New York, Inc. in 1997 resulting in higher proceeds from
disposals of investments and other assets in 1997.
FINANCING
Our financing activities primarily consist of net borrowings,
dividend payments and share repurchases. Net cash used in financing
activities totaled $1,437 million and $2,935 million for the first
nine months of 1998 and 1997, respectively. For the first nine months
of 1998, our Company had net borrowings of $915 million, versus net
repayments of $1,392 million for the comparable period of 1997. This
difference in net borrowings was due primarily to proceeds received
from the 1997 sale of Company bottling interests, as previously
discussed, and to higher commercial paper borrowings in 1998.
Cash used for share repurchases was $1,459 million for the first
nine months of 1998, compared to $957 million for the first nine
months of 1997.
Cash used for dividend payments was $1,089 million for the first
nine months of 1998, compared to $695 million for the first nine
months of 1997. The increase was due primarily to the timing of
dividend payments, as 1998 included three quarterly dividend payments
while 1997 included two quarterly dividend payments.
16
FINANCIAL CONDITION (Continued)
FINANCIAL POSITION
The change in our investment in Coca-Cola Enterprises (CCE) in the
first nine months of 1998 is primarily a result of CCE's issuance of
stock in an acquisition as discussed in Note E of the accompanying
condensed consolidated financial statements. Our investment in CCA
decreased due to the spin-off of Coca-Cola Beverages plc (CCB) to its
share owners, partially offset by the receipt of additional ownership
interest in CCA in exchange for our wholly owned Korean bottling
operations. CCB is a separate entity created to manage the operations
of CCA's former eastern European business.
EURO CONVERSION
The existing currencies of certain member countries of the European
Union are being phased out and will be replaced with the European
Union's common currency (Euro). The transition period for this
process begins January 1, 1999, when a permanent fixed conversion
rate between the existing currencies of the countries and the Euro
will be established. Our Company has been preparing for the
introduction of the Euro for several years. We believe we are ready
for the establishment of permanent fixed conversion rates on
January 1, 1999. The mandatory elimination of the other currencies is
scheduled to phase in over a period ending January 1, 2002 (with the
existing currency being completely removed from circulation on July 1,
2002). The timing of our phasing out all uses of the existing
currencies will comply with the legal requirements and also be
scheduled to facilitate optimal coordination with the plans of our
vendors, distributors and customers. Our work in preparing for the
introduction of the Euro and the phasing out of the other currencies
includes converting information technology systems, recalculating
currency risk, recalibrating derivatives and other financial
instruments, evaluating and taking action if needed regarding
continuity of contracts and modifying our processes for preparing tax,
accounting, payroll and customer records. Based on our work to date,
we believe the introduction of the Euro and the phasing out of the
other currencies will not have a material impact on our Company's
consolidated financial position, results of operations or cash flows.
EXCHANGE
Our international operations are subject to certain opportunities
and risks, including currency fluctuations and governmental actions.
We closely monitor our operations in each country and adopt
appropriate strategies responsive to each environment. On a weighted
average basis, the U.S. dollar was approximately 9 percent stronger
during the third quarter of 1998 versus a weighted average basket of
foreign currencies for the comparable period of the prior year. This
percentage does not include the effects of our hedging activities and,
therefore, does not reflect the actual impact of fluctuations in
exchange rates on operating results. Our foreign currency management
program mitigates over time a portion of the impact of exchange on net
income and earnings per share.
17
FINANCIAL CONDITION (Continued)
YEAR 2000
Certain computer programs written with two digits rather than four
to define the applicable year may experience problems handling dates
near the end of and beyond the year 1999 (Y2K failure dates). This
may cause computer applications to fail or to create erroneous results
unless corrective measures are taken. The Year 2000 (Y2K) problem can
arise at any point in the Company's supply, manufacturing, processing,
distribution, and financial chains.
Aided by third party service providers, we are implementing a plan
to address the anticipated impacts of the Y2K problem on our
information technology (IT) systems and on non-IT systems involving
embedded chip technologies (non-IT systems). We are also surveying
selected third parties to determine the status of their Y2K compliance
programs. In addition, we are developing contingency plans specifying
what the Company will do if it or important third parties experience
disruptions as a result of the Y2K problem.
With respect to IT systems, our Y2K plan includes programs relating
to (i) computer applications, including those for mainframes, client
server systems, minicomputers and personal computers (the Applications
Program) and (ii) IT infrastructure, including hardware, software,
network technology, and voice and data communications (the
Infrastructure Program). In the case of non-IT systems, our Y2K plan
includes programs relating to (i) equipment and processes required to
produce and distribute beverage concentrates and syrups, finished
beverages, juices and juice-drink products (the Manufacturing Program)
and (ii) equipment and systems in buildings that our Company occupies
or leases to third parties (the Facilities Program).
Each of the foregoing IT and non-IT programs is being conducted in
phases, described as follows:
INVENTORY PHASE -- Identify hardware, software, processes or devices
that use or process date information.
ASSESSMENT PHASE -- Identify Y2K date processing deficiencies and
related implications.
PLANNING PHASE -- Determine for each deficiency an appropriate
solution and budget. Schedule resources and develop testing plans.
IMPLEMENTATION PHASE -- Implement designed solutions. Conduct
systems testing.
18
FINANCIAL CONDITION (Continued)
YEAR 2000 (Continued)
The plan also includes a control element intended to ensure that
changes to IT and non-IT systems do not introduce Y2K issues.
Our Y2K plan is subject to modification and is revised periodically
as additional information is developed. The Company currently
believes that its Y2K plan will be completed in all material respects
prior to the anticipated Y2K failure dates. As of the respective
dates indicated below, status reports regarding the Applications,
Infrastructure, Manufacturing and Facilities Programs are as follows:
APPLICATIONS PROGRAM (AS OF SEPTEMBER 26, 1998): The inventory,
assessment and planning phases have been completed for all 40
applications considered to be mission-critical, and implementation
phase progress is as follows: 19 are complete; 15 more are expected to
be complete by December 1998; and the remaining six are expected to be
complete by June 1999. Of approximately 2,100 other applications we
have identified, approximately 1,900 have been assessed and 970 of
these have been determined to have Y2K issues. Remaining assessment
phase work is expected to be complete by January 1999. We have
completed the planning and implementation phases for approximately
31 percent of the 970 applications and we expect to complete the
remainder by year-end 1999.
INFRASTRUCTURE PROGRAM (AS OF OCTOBER 24, 1998): The inventory
phase is estimated to be approximately 82 percent complete and is
expected to be fully completed by March 1999. Approximately 2,000
"components" have been identified to date. (We define a component
as a particular type (of which there may be numerous individual
iterations) of software package, computer or telecommunications
hardware, or lab or research equipment, including any supporting
software and utilities.) The assessment, planning and implementation
phases are estimated to be approximately 68 percent, 44 percent and
24 percent complete, respectively, and are expected to be fully
completed by April, July and October 1999, respectively.
MANUFACTURING PROGRAM (AS OF OCTOBER 28, 1998): We have identified
74 separate manufacturing operations in which our Company's ownership
interest is 50 percent or greater. Of these, 69 operations have now
completed the inventory phase and all are expected to have done so by
January 1999. The assessment phase is complete in 39 operations and
is expected to be fully completed by February 1999. Planning phase
work is in progress in 34 operations, has been completed in 12
operations, and is expected to be fully completed by April 1999.
Implementation phase work is under way in 34 operations, has been
completed in one operation and is expected to be fully completed by
July 1999.
19
FINANCIAL CONDITION (Continued)
YEAR 2000 (Continued)
FACILITIES PROGRAM (AS OF SEPTEMBER 26, 1998): Preliminary
inventories are estimated to be approximately 92 percent complete and
are expected to be fully completed by February 1999, subject to post-
completion verification. The assessment, planning and implementation
phases are estimated to be approximately 81 percent, 61 percent and 34
percent complete, respectively, and are expected to be fully completed
by March, April and July 1999, respectively. Owners of properties
leased by our Company are being contacted in order to assess the Y2K
readiness of their facilities.
THIRD PARTY Y2K READINESS. The Company has material relationships
with third parties whose failure to be Y2K compliant could have
materially adverse impacts on our Company's business, operations or
financial condition in the future. Third parties that we consider to
be in this category for Y2K purposes (Key Business Partners) include
critically important customers, suppliers, vendors and public entities
such as government regulatory agencies, utilities, financial entities
and others.
CUSTOMERS: We derive most of our net operating revenues from sales
of concentrates, syrups and finished products to authorized third
parties, including bottling and canning operations (Bottlers) that
produce, package and distribute beverages bearing the Company's
trademarks. Our Company has made Y2K awareness information available
to all Bottlers and has asked each Bottler to advise the Company of
the Bottler's plans for reaching Y2K readiness with respect to non-IT
systems. As of October 30, 1998, unconsolidated Bottlers representing
approximately 91 percent of our 1997 worldwide unit case volume from
unconsolidated Bottlers have made their plans available to us,
including all ten of our anchor bottlers. We have also contacted the
Bottlers to inquire about their state of Y2K readiness with respect to
IT systems, as well as the actions being taken by Bottlers with
respect to third parties. Further action may be taken by the Company
as it deems appropriate in particular cases.
In addition, we have met and exchanged information with a limited
number of key non-Bottler customers regarding Y2K readiness issues.
We are now formalizing these contacts into a program designed to help
us assess the Y2K readiness of key non-Bottler customers.
20
FINANCIAL CONDITION (Continued)
YEAR 2000 (Continued)
SUPPLIERS AND VENDORS: The Company classifies as "critical" those
suppliers of products or services consumed on an ongoing basis that,
if interrupted, would materially disrupt the Company's ability to
deliver products or conduct operations. We are conducting on site
reviews of suppliers identified as critical on a worldwide basis, for
purposes of assessing their Y2K plans and their progress toward
implementation. We expect all of these reviews to be completed by
April 1999. In addition, each Company field location is working to
assess the likelihood of supply issues with suppliers classified as
critical on a regional basis.
Suppliers of less critical importance to our business, and vendors
from whom we buy goods expected to be in service beyond 1999, have
been sent a questionnaire from us asking about the status of their Y2K
plans. Although response rates to date have been low, responses will
be evaluated, certain selected goods are being tested, and follow-up
action will be taken by the Company as it deems appropriate.
PUBLIC ENTITIES: In August 1998, we began the planning and
implementation of a Y2K program involving interaction with and
assessment of public entities such as government regulatory agencies,
utilities, financial entities and others.
CONTINGENCY PLANS. The Company is preparing contingency plans
relating specifically to identified Y2K risks, and cost estimates
relating to these plans are being developed. We began training
designated employees in Y2K contingency planning matters during the
third quarter of 1998. We anticipate completion of the Y2K
contingency plans during the first half of 1999. Contingency plans
may include stockpiling raw and packaging materials, increasing
inventory levels, securing alternate sources of supply and other
appropriate measures. Once developed, Y2K contingency plans and
related cost estimates will be continually refined as additional
information becomes available.
Y2K RISKS. While the Company currently believes that it will be
able to modify or replace its affected systems in time to minimize any
significant detrimental effects on its operations, failure to do so, or
the failure of Key Business Partners or other third parties to modify
or replace their affected systems, could have materially adverse
impacts on the Company's business, operations or financial condition
in the future. There can be no guarantee that such impacts will not
occur. In particular, because of the interdependent nature of business
systems, the Company could be materially adversely affected if private
businesses, utilities and governmental entities with which it does
business or that provide essential products or services are not Y2K
ready. The Company currently believes that the
21
FINANCIAL CONDITION (Continued)
YEAR 2000 (Continued)
greatest risk of disruption in its businesses exists in certain
international markets. Reasonably likely consequences of failure
by the Company or third parties to resolve the Y2K problem include,
among other things, temporary slowdowns or cessations of manufacturing
operations at one or more Company or Bottler facilities, delays in the
delivery or distribution of products, delays in the receipt of supplies,
invoice and collection errors, and inventory and supply obsolescence.
However, the Company believes that its Y2K readiness program, including
related contingency planning, should significantly reduce the
possibility of significant interruptions of normal operations.
COSTS. As of October 30, 1998, the Company's total incremental
costs (historical plus estimated future costs) of addressing Y2K
issues are estimated to be in the range of $130 million to $160
million, of which approximately $60 million has been incurred. These
costs are being funded through operating cash flow. These amounts do
not include: (i) any costs associated with the implementation of
contingency plans, which are in the process of being developed, or
(ii) costs associated with replacements of computerized systems or
equipment in cases where replacement was not accelerated due to Y2K
issues.
Implementation of our Company's Y2K plan is an ongoing process.
Consequently, the above described estimates of costs and completion
dates for the various components of the plan are subject to change.
For further information regarding Y2K matters, see the disclosures
under Forward-Looking Statements on page 24.
22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
We have no material changes to the disclosure made in our report on
Form 10-K for the year ended December 31, 1997 on this matter.
23
Part II. Other Information
Item 5. Other Information
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 this report and other 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, statements expressing general optimism
about future operating results, and non-historical Year 2000
information, 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.
FACTORS THAT MAY IMPACT FORWARD-LOOKING STATEMENTS OR FINANCIAL
PERFORMANCE
The following are some of the factors that could affect our
financial performance or could cause actual results to differ
materially from estimates contained in or underlying our Company's
forward-looking statements.
-- Our ability to generate sufficient cash flows to support
capital expansion plans, share repurchase programs and general
operating activities.
-- Competitive product and pricing pressures and our ability to
gain or maintain share of sales in the global market as a
result of actions by competitors. 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.
-- Our ability to achieve earnings forecasts, which are generated
based on projected volumes and sales of many product types,
some of which are more profitable than others. There can be
no assurance that we will achieve the projected level or mix
of product sales.
24
FORWARD-LOOKING STATEMENTS (Continued)
-- 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.
-- Our ability to penetrate developing and emerging markets, which
also depends on economic and political conditions and how well
we are able to acquire or form strategic business alliances
with local bottlers and make necessary infrastructure
enhancements to production facilities, distribution networks,
sales equipment and technology. Moreover, the supply of
products in developing markets must match the customers'
demand for those products, and due to product price and
cultural differences, there can be no assurance of product
acceptance in any particular market.
-- The 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.
25
FORWARD-LOOKING STATEMENTS (Continued)
-- Our ability and the ability of our Key Business Partners and
other third parties to replace, modify or upgrade computer
systems in ways that adequately address the Y2K problem. Given
the numerous and significant uncertainties involved, there can
be no assurance that Y2K-related estimates and anticipated
results will be achieved, and actual results could differ
materially. Specific factors that might cause such material
differences include, but are not limited to, the ability to
identify and correct all relevant computer codes and embedded
chips, unanticipated difficulties or delays in the
implementation of Y2K project plans and the ability of third
parties to adequately address their own Y2K issues.
-- Our ability to timely resolve issues relating to introduction
of the European Union's common currency (Euro).
The foregoing list of important factors is not exclusive.
26
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 - The Coca-Cola Company 1987 Stock Option Plan,
as amended through October 15, 1998
10.2 - The Coca-Cola Company 1991 Stock Option Plan,
as amended through October 15, 1998
12 - Computation of Ratios of Earnings to Fixed Charges
27 - Financial Data Schedule for the nine months ended
September 30, 1998, submitted to the Securities and
Exchange Commission in electronic format
(b) Reports on Form 8-K:
No report on Form 8-K has been filed during the quarter for
which this report is filed.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE COCA-COLA COMPANY
(REGISTRANT)
Date: November 12, 1998 By: /s/ Gary P. Fayard
------------------------------
Gary P. Fayard
Vice President and Controller
(On behalf of the Registrant and
as Chief Accounting Officer)
28
EXHIBIT INDEX
Exhibit Number and Description
10.1 - The Coca-Cola Company 1987 Stock Option Plan,
as amended through October 15, 1998
10.2 - The Coca-Cola Company 1991 Stock Option Plan,
as amended through October 15, 1998
12 - Computation of Ratios of Earnings to Fixed Charges
27 - Financial Data Schedule for the nine months ended
September 30, 1998, submitted to the Securities and
Exchange Commission in electronic format