================================================================================
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, 1999
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
------- -------
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 22, 1999
- ------------------------------ -------------------------------
$.25 Par Value 2,469,980,567 Shares
================================================================================
THE COCA-COLA COMPANY AND SUBSIDIARIES
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income
Three and nine months ended September 30, 1999
and 1998 5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 27
Part II. Other Information
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 31
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,
1999 1998
--------------- ---------------
CURRENT
Cash and cash equivalents $ 1,502 $ 1,648
Marketable securities 135 159
--------------- ---------------
1,637 1,807
Trade accounts receivable, less
allowances of $16 at September 30
and $10 at December 31 1,871 1,666
Inventories 882 890
Prepaid expenses and other assets 1,734 2,017
--------------- ---------------
TOTAL CURRENT ASSETS 6,124 6,380
--------------- ---------------
INVESTMENTS AND OTHER ASSETS
Equity method investments
Coca-Cola Enterprises Inc. 764 584
Coca-Cola Amatil Limited 1,107 1,255
Coca-Cola Beverages plc 818 879
Other, principally bottling companies 3,995 3,573
Cost method investments,
principally bottling companies 348 395
Marketable securities and other assets 2,159 1,863
--------------- ---------------
9,191 8,549
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT
Land 214 199
Buildings and improvements 1,648 1,507
Machinery and equipment 4,622 3,855
Containers 207 124
--------------- ---------------
6,691 5,685
Less allowances for depreciation 2,252 2,016
--------------- ---------------
4,439 3,669
--------------- ---------------
GOODWILL AND OTHER INTANGIBLE ASSETS 1,992 547
--------------- ---------------
$ 21,746 $ 19,145
=============== ===============
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,
1999 1998
--------------- ---------------
CURRENT
Accounts payable and accrued expenses $ 3,521 $ 3,141
Loans and notes payable 5,211 4,459
Current maturities of long-term debt 7 3
Accrued income taxes 947 1,037
--------------- ---------------
TOTAL CURRENT LIABILITIES 9,686 8,640
--------------- ---------------
LONG-TERM DEBT 1,108 687
--------------- ---------------
OTHER LIABILITIES 881 991
--------------- ---------------
DEFERRED INCOME TAXES 603 424
--------------- ---------------
SHARE-OWNERS' EQUITY
Common stock, $.25 par value
Authorized: 5,600,000,000 shares
Issued: 3,464,501,579 shares at September 30;
3,460,083,686 shares at December 31 866 865
Capital surplus 2,477 2,195
Reinvested earnings 21,214 19,922
Accumulated other comprehensive income and
unearned compensation on restricted stock (1,935) (1,434)
--------------- ---------------
22,622 21,548
Less treasury stock, at cost
(994,699,052 shares at September 30;
994,566,196 shares at December 31) 13,154 13,145
--------------- ---------------
9,468 8,403
--------------- ---------------
$ 21,746 $ 19,145
=============== ===============
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,
---------------------------------- -------------------------------------
1999 1998 1999 1998
------------ ------------ ------------- -------------
NET OPERATING REVENUES $ 5,195 $ 4,747 $ 15,002 $ 14,355
Cost of goods sold 1,706 1,446 4,673 4,263
------------ ------------ ------------- -------------
GROSS PROFIT 3,489 3,301 10,329 10,092
Selling, administrative and
general expenses 2,390 2,064 6,696 6,062
------------ ------------ ------------- -------------
OPERATING INCOME 1,099 1,237 3,633 4,030
Interest income 62 56 190 171
Interest expense 89 72 244 209
Equity income (loss) 11 51 (72) 103
Other income - net 58 15 82 238
------------ ------------ ------------- -------------
INCOME BEFORE INCOME TAXES 1,141 1,287 3,589 4,333
Income taxes 354 399 1,113 1,397
------------ ------------ ------------- -------------
NET INCOME $ 787 $ 888 $ 2,476 $ 2,936
============ ============ ============= =============
BASIC NET INCOME
PER SHARE $ .32 $ .36 $ 1.00 $ 1.19
============ ============ ============= =============
DILUTED NET INCOME
PER SHARE $ .32 $ .36 $ 1.00 $ 1.18
============ ============ ============= =============
DIVIDENDS PER SHARE $ .16 $ .15 $ .48 $ .45
============ ============ ============= =============
AVERAGE SHARES OUTSTANDING 2,469 2,464 2,468 2,468
============ ============ ============= =============
Dilutive effect of
stock options 16 28 19 30
------------ ------------ ------------- --------------
AVERAGE SHARES OUTSTANDING
ASSUMING DILUTION 2,485 2,492 2,487 2,498
============ ============ ============= ==============
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,
------------------------------------
1999 1998
--------------- ---------------
OPERATING ACTIVITIES
Net income $ 2,476 $ 2,936
Depreciation and amortization 609 471
Deferred income taxes 19 25
Equity (income) loss, net of dividends 157 (52)
Foreign currency adjustments 12 57
Other items 93 (205)
Net change in operating assets and liabilities (470) (628)
--------------- ---------------
Net cash provided by operating activities 2,896 2,604
--------------- ---------------
INVESTING ACTIVITIES
Acquisitions and investments,
principally trademarks and bottling companies (1,774) (1,048)
Purchases of investments and other assets (366) (365)
Proceeds from disposals of investments
and other assets 86 862
Purchases of property, plant and equipment (788) (612)
Proceeds from disposals of property, plant
and equipment 24 29
Other investing activities (123) 10
--------------- ---------------
Net cash used in investing activities (2,941) (1,124)
--------------- ---------------
Net cash provided by (used in) operations after reinvestment (45) 1,480
--------------- ---------------
FINANCING ACTIVITIES
Issuances of debt 1,133 1,324
Payments of debt (44) (409)
Issuances of stock 120 196
Purchases of stock for treasury (9) (1,459)
Dividends (1,140) (1,089)
--------------- ---------------
Net cash provided by (used in)
financing activities 60 (1,437)
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (161) (34)
--------------- ---------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) during the period (146) 9
Balance at beginning of period 1,648 1,737
--------------- ---------------
Balance at end of period $ 1,502 $ 1,746
=============== ===============
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, 1998. 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, 1999, are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
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
Total comprehensive income for the third quarter 1999 was $763 million,
compared to $759 million in the third quarter of 1998. For the first nine months
of 1999, total comprehensive income was $1,969 million, primarily reflecting a
net reduction for foreign currency translation of approximately $525 million.
Total comprehensive income was $2,708 million for the first nine months of 1998.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE D - ISSUANCES OF STOCK BY EQUITY INVESTEES
When one of our equity investees issues additional shares to third parties,
our percentage ownership interest in the investee decreases. In the event the
issuance price per share is more or less than our average carrying amount per
share, we recognize a noncash gain or loss on the issuance. This noncash gain or
loss, net of any deferred taxes, is generally recognized in our net income in
the period the change of ownership interest occurs.
In the third quarter of 1998, Coca-Cola Erfrischungsgetranke AG (CCEAG), a
bottler in Germany, issued new shares valued at approximately $275 million to
effect a merger with Nordwest Getranke 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.
If gains have been previously recognized on issuances of an equity
investee's stock and shares of the equity investee are subsequently repurchased
by the equity investee, gain recognition does not occur on issuances subsequent
to the date of a repurchase until shares have been issued in an amount
equivalent to the number of repurchased shares. This type of transaction is
reflected as an equity transaction and the net effect is reflected in the
accompanying condensed consolidated balance sheets.
In the first quarter of 1999, Coca-Cola Enterprises Inc. (CCE) completed
its acquisition of various bottlers. These transactions were funded primarily
with shares of CCE common stock. The CCE common stock issued was valued in an
amount greater than the book value per share of our investment in CCE. As a
result of these transactions, our equity in the underlying net assets of CCE
increased, and we recorded a $241 million increase to our Company's investment
basis in CCE. Due to CCE's share repurchase programs, 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 $95 million
on this increase to our investment in CCE. The transactions reduced our
ownership in CCE from approximately 42 percent to approximately 40 percent.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE D - ISSUANCES OF STOCK BY EQUITY INVESTEES (Continued)
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. The transaction reduced our ownership
in CCE from approximately 44 percent to approximately 42 percent.
NOTE E - ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting
for Derivative Instruments and Hedging Activities." The new statement requires
all derivatives to be recorded on the balance sheet at fair value and
establishes new accounting rules for hedging instruments. In June 1999, the FASB
deferred the effective date of SFAS No. 133 for one year until fiscal years
beginning after June 15, 2000. We are assessing the impact SFAS No. 133 will
have on our Consolidated Financial Statements.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE F - OPERATING SEGMENTS
Our Company's operating structure includes the following operating
segments: the North America Group (including The Minute Maid Company); the
Africa Group; the Greater Europe Group; the Latin America Group; the Middle &
Far East Group; and Corporate. The North America Group includes the United
States and Canada.
Information about our Company's operations by operating
segment is as follows (in millions):
As of and for the Three Months Ended September 30,
Middle
North Greater Latin &
America Africa Europe America Far East Corporate Consolidated
----------- ----------- ---------- ----------- ------------ ------------ ---------------
1999
Net operating
revenues $ 1,955 $ 137 $ 1,141 $ 460 $ 1,428 $ 74 $ 5,195
Operating income 339 40 291 149 382 (102) 1,099
Identifiable
operating
assets 4,281 381 2,176 1,902 3,001 2,973 14,714
Investments 142 75 2,063 1,849 2,069 834 7,032
1998
Net operating
revenues $ 1,811 $ 133 $ 1,195 $ 528 $ 1,048 $ 32 $ 4,747
Operating income 340 48 413 234 319 (117) 1,237
Identifiable
operating
assets 4,090 333 2,362 1,662 1,690 1,550 11,687
Investments 143 70 2,032 1,487 1,920 532 6,184
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE F - OPERATING SEGMENTS (Continued)
For the Nine months Ended September 30,
Middle
North Greater Latin &
America Africa Europe America Far East Corporate Consolidated
----------- ----------- ---------- ----------- ------------ ------------ ----------------
1999
Net operating
revenues $ 5,657 $ 415 $ 3,579 $ 1,438 $ 3,776 $ 137 $ 15,002
Operating income 1,114 129 1,144 581 1,033 (368) 3,633
1998
Net operating
revenues $ 5,228 $ 444 $ 3,939 $ 1,657 $ 2,981 $ 106 $ 14,355
Operating income 1,072 159 1,392 779 991 (363) 4,030
Intercompany transfers between operating segments are not material.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE G - OTHER TRANSACTIONS
In September 1999, our Company acquired the carbonated soft drink business
of Cadbury Schweppes (South Africa) Limited in South Africa, Botswana, Namibia,
Lesotho and Swaziland. The transaction is valued at approximately $250 million.
In July 1999, our Company acquired from Fraser and Neave Limited its 75
percent ownership interest in F&N Coca-Cola Pte Limited, in exchange for
approximately 57 million shares of Coca-Cola Amatil Limited and the assumption
of debt. Prior to the acquisition, our Company held a 25 percent equity interest
in F&N Coca-Cola Pte Limited. Acquisition of Fraser and Neave Limited's 75
percent stake gives our Company full ownership of F&N Coca-Cola Pte Limited. F&N
Coca-Cola Pte Limited holds a majority ownership in bottling operations in
Brunei, Cambodia, Nepal, Pakistan, Sri Lanka, Singapore, and Vietnam. The
transaction, valued at approximately $300 million, reduced our ownership in
Coca-Cola Amatil Limited from approximately 43 percent to approximately 37
percent.
In December 1998, our Company signed an agreement with Cadbury Schweppes
plc to purchase beverage brands in countries around the world, (except in the
United States, France and South Africa), and its concentrate plants in Ireland
and Spain. In July 1999, through an amended agreement, we completed the
acquisition of beverage brands in 155 countries for approximately $700 million.
The acquisition, in addition to the United States, France, and South Africa,
excludes Norway, Switzerland and the remaining European Union member nations,
with the exception of the United Kingdom, Ireland and Greece. Also, Poland,
Hungary and the Czech and Slovak Republics will remain with the Cadbury
Schweppes European Beverages division for the foreseeable future. Acquisitions
are still pending in several countries, which are subject to certain conditions,
including regulatory review. The acquisition in July excluded the concentrate
plants in Ireland and Spain. Separately, in September 1999, we acquired the
beverage brands in New Zealand for approximately $20 million.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE G - OTHER TRANSACTIONS (Continued)
In December 1997, our Company announced its intent to acquire from beverage
company Pernod Ricard, its Orangina brands, three bottling operations and one
concentrate plant in France for approximately 5 billion French francs. In May
1999, our Company signed a new letter of intent whereby the distribution of
Orangina in the French on-premise channel for a period of 10 years will be
handled by an independent third party. Our Company would have full rights to
market and distribute the brand outside the French on-premise channel. The
amended transaction is now valued at 4.7 billion French francs (approximately
$758 million) and is subject to approvals from regulatory authorities of the
French government.
In August 1998, we exchanged our Korean bottling operations with Coca-Cola
Amatil Limited (CCA) for additional ownership interest in CCA.
In June 1998, our Company sold to Coca-Cola Beverages plc (CCB) our wholly
owned Italian bottling operations in northern and central Italy, in exchange for
proceeds valued at approximately $1 billion. The proceeds our Company received
consisted of cash, notes receivable and shares of stock of CCB. As a result of
this sale our Company recognized an after-tax gain of approximately $.03 per
share (basic and diluted).
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
BEVERAGE VOLUME
In the third quarter of 1999, our worldwide unit case volume (excluding
volume of The Minute Maid Company) increased 3.5 percent and gallon sales of
concentrates and syrups were even, on top of third quarter 1998 growth rates of
3 percent and 5 percent, respectively. Approximately 1 point of growth in unit
case volume was attributable to recent brand acquisitions during the third
quarter of 1999, as discussed in Note G of the accompanying condensed
consolidated financial statements. Our unit case volume was even and gallon
sales decreased 3 percent for the first nine months of 1999, compared to an
increase in both unit case volume and gallon sales of 9 percent for the first
nine months of 1998. The decrease in gallon sales is primarily a result of the
impacts of difficult economic conditions in many key markets throughout the
world. The recent temporary product withdrawal in Belgium and France had a
negative impact on unit case volume in several countries.
In the third quarter of 1999, volume increased 4 percent for The Minute
Maid Company compared to a 3 percent increase in the third quarter of 1998. For
the first nine months of 1999, volume for The Minute Maid Company increased 5
percent compared to a 1 percent increase in the first nine months of 1998. The
1999 increase is a result of brand building initiatives and increases in share
of sales for Minute Maid Premium ready-to-drink orange juice products and Minute
Maid and Hi-C brand products in drink boxes.
NET OPERATING REVENUES AND GROSS MARGIN
Net operating revenues increased 9 percent in the third quarter of 1999 and
5 percent year to date versus comparable periods in the prior year. The increase
in the third quarter of 1999 reflects selective price increases, the
consolidation in 1999 of our recently acquired bottling operations in India and
our vending operations in Japan and the impact of the stronger U.S. dollar.
Comparatively, the first nine months of 1999 were also impacted by a decline in
year to date gallon sales and the sale of our previously consolidated bottling
operations in northern and central Italy to CCB in June 1998.
Our gross profit margin decreased to 67.2 percent in the third quarter of
1999 from 69.5 percent in the third quarter of 1998. The decrease in gross
profit margin for the third quarter of 1999 was due primarily to the
consolidation in 1999 of our recently acquired bottling operations in India and
our vending operations in Japan.
14
RESULTS OF OPERATIONS (Continued)
SELLING, ADMINISTRATIVE AND GENERAL EXPENSES
Selling, administrative and general expenses were $2,390 million in the
third quarter of 1999, compared to $2,064 million in the third quarter of 1998.
For the first nine months of the year, selling, administrative and general
expenses were $6,696 million, compared to $6,062 million for the same period in
1998. The increase in the third quarter of 1999 was due primarily to the recent
product withdrawal in Belgium and France, the consolidation in 1999 of our
recently acquired bottling operations in India and our vending operations in
Japan and marketing expenditures associated with brand building activities. The
increase in the first nine months of 1999 was also impacted by a nonrecurring
provision of $73 million, related primarily to the impairment of certain assets
in our global manufacturing system, recorded in the second quarter of 1998.
This effect was partially offset by the sale of our previously consolidated
bottling operations in northern and central Italy to CCB in June 1998.
OPERATING INCOME AND OPERATING MARGIN
Operating income for the third quarter of 1999 totaled $1,099 million, a
decrease of $138 million from the third quarter of 1998. Third quarter 1999
operating income reflects the difficult economic conditions in many markets
throughout the world, the recent temporary product withdrawal in Belgium and
France, the impact of the stronger U.S. dollar, the consolidation in 1999 of our
recently acquired bottling operations in India and our vending operations in
Japan and marketing expenditures associated with brand building activities.
Operating margin for the third quarter of 1999 was 21.2 percent, compared to
26.1 percent for the comparable period in 1998. Operating income and operating
margin for the nine months ended September 30, 1999 were $3,633 million and
24.2 percent, respectively, compared to $4,030 million and 28.1 percent for the
nine months ended September 30, 1998. The decrease in the first nine months of
1999 as compared to the first nine months of 1998 also reflects the impact of
the sale of our previously consolidated bottling operations in northern and
central Italy to CCB in June 1998.
INTEREST INCOME AND INTEREST EXPENSE
Interest income increased in the third quarter and the nine month period
ended September 30, 1999 relative to the comparable period in 1998, due
primarily to cash held in locations outside the United States earning higher
interest income in the current year. Interest expense increased for the third
quarter and for the nine months ended September 30, 1999, relative to the
comparable periods in 1998, due to interest expense associated with higher total
borrowings throughout the period.
15
RESULTS OF OPERATIONS (Continued)
EQUITY INCOME (LOSS)
Our Company's share of income from equity method investments for the third
quarter of 1999 totaled $11 million, compared to $51 million in the third
quarter of 1998. For the first nine months of 1999, our Company's share of
losses from equity method investments totaled $72 million, compared to income of
$103 million for the same period in 1998. The decreases were due primarily to
the negative impact of difficult economic conditions in many worldwide markets,
continued structural change in the bottling system, as well as the impact of the
recent temporary product withdrawal in Belgium and France. Our Company's share
of Coca-Cola Enterprises' nonrecurring product recall costs resulting from the
product withdrawal was approximately $28 million in the second quarter of 1999.
OTHER INCOME - NET
Other income - net increased to $58 million income for the third quarter of
1999 from $15 million income for the third quarter of 1998. Third quarter 1999
other income - net is impacted by a foreign currency gain reflecting the
economic benefit received by hedging our resources in Brazil. Other income - net
was $82 million income for the first nine months of 1999 compared to $238
million income for the comparable period during 1998. The decrease in the first
nine months of 1999 as compared to the first nine months of 1998 reflects the
impact of the second quarter 1998 gain from the sale of our previously
consolidated bottling operations in northern and central Italy to CCB and the
third quarter 1998 gain on the issuance of stock by CCEAG, as discussed in Note
D of the accompanying condensed consolidated financial statements.
INCOME TAXES
Our effective tax rate was 31.0 percent for both the third quarter of 1999
and 1998. The effective tax rate was 31.0 percent for the first nine months of
1999 compared to 32.2 percent for the first nine months of 1998. 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. The year to date 1998 effective tax rate reflects 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.
16
RESULTS OF OPERATIONS (Continued)
NET CASH FLOW PROVIDED BY OPERATIONS AFTER REINVESTMENT
In the first nine months of 1999, net cash used in operations after
reinvestment was $45 million compared to $1,480 million in net cash provided by
operations after reinvestment for the comparable period in 1998. Net cash
provided by operating activities in the first nine months of 1999 amounted to
$2,896 million, a $292 million increase compared to the first nine months of
1998.
Net cash used in investing activities totaled $2,941 million for the first
nine months of 1999 compared to $1,124 million in net cash used in investing
activities for the first nine months of 1998. The increase was primarily the
result of the recent brand acquisitions during the third quarter of 1999, as
discussed in Note G of the accompanying condensed consolidated financial
statements. Additionally, net cash used in investing activities in 1998 included
$862 million in proceeds primarily from the disposals of bottling investments
as compared to $86 million in such proceeds received during the first nine
months of 1999.
17
FINANCIAL CONDITION
FINANCING
Our financing activities primarily consist of net borrowings, dividend
payments and share repurchases. Net cash provided by financing activities
totaled $60 million for the first nine months of 1999, compared with net cash
used in financing activities of $1,437 million during the first nine months of
1998. Our Company had net borrowings of $1,089 million and $915 million for the
first nine months of 1999 and 1998, respectively. Cash used for share
repurchases was $9 million for the first nine months of 1999, compared to $1,459
million for the first nine months of 1998. This decrease in treasury stock
repurchases was due primarily to our Company's utilization of cash for our
transactions with Cadbury Schweppes plc for approximately $720 million, Cadbury
Schweppes (South Africa) Limited for approximately $250 million and our pending
transaction with Pernod Ricard for approximately $758 million, as previously
discussed. The transaction with Pernod Ricard is subject to certain conditions
including approvals from regulatory authorities of the French government.
FINANCIAL POSITION
The increase in our long-term debt during the nine months ended
September 30, 1999 was primarily due to the issuance of long-term notes in the
European marketplace. The increase in our loans and notes payable in the first
nine months of 1999 is primarily due to additional commercial paper borrowings
used for brand acquisitions and additional investments in bottling operations.
The change in the carrying value of our investment in CCE in the first nine
months of 1999 is primarily a result of CCE's issuances of stock in acquisitions
as discussed in Note D of the accompanying condensed consolidated financial
statements. The increase in our property, plant and equipment is primarily due
to the consolidation in 1999 of our recently acquired bottling operations in
India and our vending operations in Japan. The increase in our goodwill and
other intangible assets is primarily due to the recent brand acquisitions
during the third quarter of 1999, as discussed in Note G of the accompanying
condensed consolidated financial statements.
18
FINANCIAL CONDITION (Continued)
EURO CONVERSION
In January 1999, certain member countries of the European Union established
permanent, fixed conversion rates between their existing currencies and the
European Union's common currency (the Euro).
The transition period for the introduction of the Euro 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. Our Company has been
preparing for the introduction of the Euro for several years. 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 related to 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 Euro replacing the other
currencies will not have a material impact on our operations or our Consolidated
Financial Statements.
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 1 percent stronger versus all of our functional currencies during
the third quarter of 1999 versus the comparable period of the prior year. This
does not include the effects of our hedging activities and, therefore, does not
reflect the actual impact of fluctuations on our operating results. Our foreign
currency management program mitigates over time a portion of the impact of
exchange on net income and earnings per share.
19
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 (Year 2000 failure dates). This may cause computer
applications to fail or to create erroneous results unless corrective measures
are taken. The Year 2000 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 Year 2000 problem on our information
technology (IT) systems and on non-IT systems involving embedded chip
technologies (non-IT systems). We have surveyed selected third parties to
determine the status of their Year 2000 compliance programs. In addition, we
have developed and are refining contingency plans specifying what the Company
will do if we or important third parties experience disruptions as a result of
the Year 2000 problem.
With respect to IT systems, our Year 2000 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 Year 2000 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 not encompassed by the
Manufacturing Program that our Company occupies or leases to third parties (the
Facilities Program).
Each of these 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 Year 2000 date processing deficiencies and
related implications.
20
FINANCIAL CONDITION (Continued)
YEAR 2000 (Continued)
PLANNING PHASE -- Determine for each deficiency an appropriate solution and
budget. Schedule resources and develop testing plans.
IMPLEMENTATION PHASE -- Implement designed solutions. Conduct appropriate
systems testing.
Following completion of the implementation phase, certain additional
testing may be conducted. As and when additional Year 2000 issues are identified
by such testing or other means, they are addressed. Our Year 2000 plan also
includes a control element intended to ensure that changes to IT and non-IT
systems do not introduce additional Year 2000 issues.
Our Year 2000 plan is subject to modification and is revised periodically
as additional information is developed. The Company currently believes that its
Year 2000 plan will be completed in all material respects prior to the
anticipated Year 2000 failure dates. For the Company and its consolidated
subsidiaries, status reports regarding the Applications, Infrastructure,
Manufacturing and Facilities Programs as of September 30, 1999 (except as
otherwise indicated) are as follows:
APPLICATIONS PROGRAM -- We have completed the inventory, assessment,
planning and implementation phases for all 51 applications considered to be
mission-critical. Of 2,622 other applications we have identified, all have been
assessed and 1,851 of these have been determined to require Year 2000 planning
and implementation phase work. As of October 31, 1999, we have completed the
planning and implementation phases for all of the 1,851 applications.
INFRASTRUCTURE PROGRAM -- The inventory phase is complete and approximately
4,500 "components" have been identified. (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 and planning
phases are complete. The implementation phase is estimated to be approximately
99 percent complete, and is expected to be fully completed by November 1999.
21
FINANCIAL CONDITION (Continued)
YEAR 2000 (Continued)
MANUFACTURING PROGRAM -- We have identified 100 separate manufacturing
operations, all of which have completed the inventory, assessment, planning and
implementation phases. Certain post-implementation validation testing also has
been completed.
FACILITIES PROGRAM -- Of the 53 non-manufacturing buildings we have
identified, all have completed the inventory and assessment phases. Seventeen
buildings were found to have no Year 2000 issues. The remaining 36 buildings
which had Year 2000 issues have completed the planning and implementation
phases.
Owners of properties leased by our Company have been contacted by us for
purposes of assessing the Year 2000 readiness of their facilities. Responses and
non-responses are being taken into account in connection with the Company's
contingency plans.
NEWLY ACQUIRED ASSETS AND PENDING ACQUISITIONS. Businesses and assets
acquired by our Company after June 30 but prior to the end of 1999 may not be
included in and fully evaluated and remediated pursuant to the four plan
Programs described above. In most cases, however, potential acquisitions are
subjected by our Company to a Year 2000 assessment process and, where feasible,
representations, warranties or covenants as to Year 2000 readiness are obtained
from the seller. Post-closing, each significant acquisition will be tracked as
a separate Year 2000 project while the Company takes such actions regarding
inventory, assessment, planning and implementation as it considers necessary or
appropriate. These steps are intended to mitigate, but cannot eliminate, the
risks that Year 2000-related disruptions and expenses may be experienced in
connection with such assets.
THIRD PARTY YEAR 2000 READINESS. The Company has material relationships
with third parties whose failure to be Year 2000 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 Year 2000
purposes (Key Business Partners) include critically important bottlers,
customers, suppliers, vendors and public entities such as government regulatory
agencies, utilities, financial entities and others.
22
FINANCIAL CONDITION (Continued)
YEAR 2000 (Continued)
BOTTLERS. 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 brands. We have made Year 2000
awareness information available to all Bottlers and have asked each Bottler to
advise us of the Bottler's plans for reaching Year 2000 readiness with respect
to non-IT systems. All of our Bottlers have made their plans available to us. We
have also contacted the Bottlers to inquire about their state of Year 2000
readiness with respect to IT systems as well as the actions being taken by
Bottlers with respect to third parties. We may take further action as we deem it
appropriate in particular cases.
CUSTOMERS. We have met and exchanged information with a limited number of
key non-Bottler customers regarding Year 2000 readiness and business continuity
issues.
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 our Company's ability to deliver products or conduct
operations. We have completed reviews of suppliers identified as critical on a
worldwide basis, for purposes of assessing their Year 2000 plans and their
progress toward implementation. Going forward, as part of our contingency
planning process, we will make efforts to monitor the Year 2000 readiness of
these suppliers throughout the remainder of 1999. In addition, each Company
field location has completed assessments regarding 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 Year 2000 plans.
Responses have been evaluated and are periodically reassessed, certain selected
goods are being tested, and follow-up action is being taken by the Company as it
deems appropriate.
PUBLIC ENTITIES. We also have a Year 2000 program that involves interaction
with and assessment of public entities such as government regulatory agencies,
utilities, financial entities and others.
23
FINANCIAL CONDITION (Continued)
YEAR 2000 (Continued)
CONTINGENCY PLANS. The Company has prepared contingency plans relating
specifically to identified Year 2000 risks and has developed cost estimates
relating to the implementation of these plans. Key elements of our contingency
plans include stockpiling raw and packaging materials, increasing inventory
levels, securing alternate sources of supply, adopting workaround procedures,
and other measures designed to avoid or address potential business
interruptions. Each Company division has conducted a test of its plan, and
integrated tests within Company Groups and among Company Groups, Bottlers and
key customers have been conducted. Throughout the remainder of 1999, our Year
2000 contingency plans and related cost estimates will be further tested in
certain respects and continually refined as additional information becomes
available.
During the transition period in the early part of the Year 2000, the
Company will maintain a global communications center to function as a point of
coordination and information about significant Year 2000 events, whether
internal or external, that may impact normal business processes. In addition,
regional and functional event management teams will be in place at the Division
level.
With regard to manufacturing operations, the Company has contracted with
third party service providers for worldwide consulting and troubleshooting
services to the extent needed during the transition period in the early part of
the Year 2000.
24
FINANCIAL CONDITION (Continued)
YEAR 2000 (Continued)
YEAR 2000 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 Year 2000 ready.
The Company currently believes that the 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 Year 2000
problem include, among other things, temporary slowdowns or cessations of
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 Year 2000 readiness program, including related contingency
planning, should significantly reduce the possibility of significant
interruptions of normal operations.
25
FINANCIAL CONDITION (Continued)
YEAR 2000 (Continued)
COSTS. As of September 30, 1999, the Company's total incremental costs
(historical plus estimated future costs) of addressing Year 2000 issues are
estimated to be in the range of $130 million to $140 million, of which
approximately $121 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, currently estimated to
be approximately $7 million or (ii) any costs associated with replacements of
computerized systems or equipment in cases where replacement was not accelerated
due to Year 2000 issues. Except for carrying costs, estimated contingency plan
implementation costs do not include the incremental costs of stockpiling extra
concentrate and other inventories, currently estimated at approximately $25
million, because the Company expects that it will be able to utilize these
inventories over time.
Implementation of our Company's Year 2000 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 Year 2000 matters, see the disclosures
under Forward-Looking Statements on page 28.
26
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
We have no material changes to the disclosure on this matter made in our
report on Form 10-K for the year ended December 31, 1998.
27
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 The
Coca-Cola Company and its subsidiaries. We and our representatives may from time
to time make written or verbal forward-looking statements, including statements
contained in this report and other filings made by The Coca-Cola Company with
the Securities and Exchange Commission and in reports to share owners of The
Coca-Cola Company. 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 forward-looking statements made by or on behalf of
The Coca-Cola Company:
o Our ability to generate sufficient cash flows to support capital
expansion plans, share repurchase programs and general operating
activities.
o 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.
o 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.
o Fluctuations in the cost and availability of raw materials and the
ability to maintain favorable supplier arrangements and
relationships.
28
FORWARD-LOOKING STATEMENTS (Continued)
o 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.
o 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 advantage of any natural
offsets. We use derivative financial instruments to reduce our net
exposure to financial risks. There can be no assurance, however,
that our financial risk management program will be successful in
reducing foreign currency exposures.
o Economic and political conditions in international markets,
including civil unrest, governmental changes and restrictions on
the ability to transfer capital across borders.
o 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.
o The effectiveness of our advertising, marketing and promotional
programs.
o The uncertainties of litigation, as well as other risks and
uncertainties detailed from time to time in filings made by The
Coca-Cola Company with the Securities and Exchange Commission.
o Adverse weather conditions, which could reduce demand for Company
products.
29
FORWARD-LOOKING STATEMENTS (Continued)
o 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 Year 2000 problem. Given the
numerous and significant uncertainties involved, there can be no
assurance that Year 2000-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 Year
2000 project plans and the ability of third parties to adequately
address their own Year 2000 issues.
o Our ability to timely resolve issues relating to introduction of
the European Union's common currency (the Euro).
The foregoing list of important factors is not exclusive.
OTHER EVENTS
On October 29, 1999, the Company issued a press release announcing a realignment
of its operating and functional organizational structures. The press release is
filed as Exhibit 99 hereto and is incorporated herein by reference.
30
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12 - Computation of Ratios of Earnings to Fixed Charges
27 - Financial Data Schedule for the nine months ended
September 30, 1999, submitted to the Securities
and Exchange Commission in electronic format
99 - Press release of The Coca-Cola Company, dated
October 29, 1999
(b) Reports on Form 8-K:
No report on Form 8-K has been filed by the Registrant during
the quarter for which this report is filed.
31
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 3 , 1999 By: /s/ Gary P. Fayard
---------------------------------
Gary P. Fayard
Vice President and Controller
(On behalf of the Registrant and
as Chief Accounting Officer)
32
EXHIBIT INDEX
Exhibit Number and Description
12 - Computation of Ratios of Earnings to Fixed Charges
27 - Financial Data Schedule for the nine months ended
September 30, 1999, submitted to the Securities and
Exchange Commission in electronic format
99 - Press release of The Coca-Cola Company, dated October 29,
1999