FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p31
THE COCA-COLA COMPANY AND SUBSIDIARIES
Our mission is to maximize share-owner value over time. In order to achieve
this mission, we must create value for all the constituents we serve, including
our consumers, our customers, our bottlers and our communities. The Coca-Cola
Company and its subsidiaries (our Company) create value by executing a
comprehensive business strategy guided by six key beliefs: (1) consumer demand
drives everything; (2) brand Coca-Cola is the core of our business; (3) we will
serve consumers a broad selection of the nonalcoholic ready-to-drink beverages
they want to drink throughout the day; (4) we will be the best marketers in the
world; (5) we will think and act locally; and (6) we will lead as a model
corporate citizen. The ultimate objectives of our business strategy are to
increase volume, expand our share of worldwide nonalcoholic ready-to-drink
beverage sales, maximize our long-term cash flows and create economic value
added by improving economic profit. We pursue these objectives by strategically
investing in the high-return beverage business and by optimizing our cost of
capital through appropriate financial strategies.
There are nearly 6 billion people in the world who decide every day whether
or not to buy our products. Each of these people represents a potential consumer
of our Company's products. As we increase consumer demand for our portfolio of
brands, we produce growth throughout the Coca-Cola system. This growth typically
comes in the form of increased finished product purchases by our consumers,
increased finished product sales by our customers, increased case sales by our
bottling partners and increased gallon sales by our Company.
The Coca-Cola system has more than 16 million customers around the world
that sell or serve our products directly to consumers. We keenly focus on
enhancing value for these customers and providing solutions to grow their
beverage businesses. Our approach includes understanding each customer's
business and needs, whether that customer is a sophisticated retailer in a
developed market or a kiosk owner in an emerging market.
Ultimately, our success in achieving our Company's mission depends on our
ability to satisfy more of the nonalcoholic ready-to-drink beverage
consumption demands of these 6 billion consumers and our ability to add value
for these customers. This can be achieved when we place the right products in
the right markets at the right time.
INVESTMENTS
With a business system that operates locally in nearly 200 countries and
generates superior cash flows, we consider our Company to be uniquely positioned
to capitalize on profitable investment opportunities. Our criteria for
investment are simple: new investments must directly enhance our existing
operations and must be expected to provide cash returns that exceed our
long-term, after-tax, weighted-average cost of capital, currently estimated at
approximately 11 percent.
Because it consistently generates high returns, the beverage business is a
particularly attractive investment for us. In highly developed markets, our
expenditures focus primarily on marketing our Company's brands. In emerging and
developing markets, our objective is to increase the penetration of our
products. In these markets, we allocate most of our investments to enhancing
infrastructure such as production facilities, distribution networks, sales
equipment and technology. We make these investments by forming strategic
business alliances with local bottlers and by matching local expertise with our
experience, resources and focus. Our investment strategy focuses on three
fundamental components of our business: marketing, brands and our bottling
system.
MARKETING
To meet our long-term growth objectives, we make significant investments in
marketing to support our brands. Marketing investments enhance consumer
awareness and increase consumer preference for our brands. This produces
long-term growth in volume, per capita consumption and our share of worldwide
nonalcoholic ready-to-drink beverage sales.
We heighten consumer awareness and product appeal for our brands using
integrated marketing programs. Through our bottling investments and strategic
alliances with other bottlers of our products, we create and implement these
programs locally. In developing a strategy for a Company brand, we conduct
product and packaging research, establish brand positioning, develop precise
consumer communications and solicit consumer feedback. Our integrated marketing
programs include activities such as advertising, point-of-sale merchandising and
product sampling.
BRANDS
We compete in the nonalcoholic ready-to-drink beverage business. Our
offerings in this category include some of the world's most valuable brands, 232
in all. These include soft drinks and noncarbonated beverages such as sports
drinks, juice and juice drinks, water products, teas and coffees. As discussed
earlier, to meet our long-term growth objectives, we make significant
investments to support our brands. This involves investments to support existing
brands and to acquire new brands, when appropriate.
In July 1999, we completed the acquisition of Cadbury Schweppes plc
beverage brands in 155 countries for approximately $700 million. These brands
included Schweppes, Canada Dry, Dr Pepper, Crush and certain regional brands.
Among the countries excluded from this transaction were the United States, South
Africa, Norway, Switzerland and the European Union member nations (other than
the United Kingdom, Ireland and Greece). In September 1999, we completed the
acquisition of Cadbury Schweppes beverage brands in New Zealand for
approximately $20 million. Also in September 1999, in a separate transaction
valued at approximately $250 million, we acquired the carbonated soft drink
business of Cadbury Schweppes (South Africa) Limited in South Africa, Botswana,
Namibia, Lesotho and Swaziland. Our acquisitions of Cadbury Schweppes beverage
brands are still pending in several countries, subject to certain conditions
including regulatory review.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p32
THE COCA-COLA COMPANY AND SUBSIDIARIES
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. The
transaction was rejected by regulatory authorities of the French government in
November 1999.
BOTTLING SYSTEM
Our Company has business relationships with three types of bottlers: (1)
independently owned bottlers, in which we have no ownership interest; (2)
bottlers in which we have invested and have a noncontrolling ownership interest;
and (3) bottlers in which we have invested and have a controlling ownership
interest.
During 1999, independently owned bottling operations produced and
distributed approximately 27 percent of our worldwide unit case volume. Bottlers
in which we own a noncontrolling ownership interest produced and distributed
approximately 58 percent of our 1999 worldwide unit case volume. Controlled
bottling and fountain operations produced and distributed approximately 15
percent.
We view certain bottling operations in which we have a noncontrolling
ownership interest as key or anchor bottlers due to their level of
responsibility and performance. The strong commitment of both key and anchor
bottlers to their own profitable volume growth helps us meet our strategic goals
and furthers the interests of our worldwide production, distribution and
marketing systems. These bottlers tend to be large and geographically diverse,
with strong financial resources for long-term investment and strong management
resources. These bottlers give us strategic business partners on every major
continent.
Consistent with our strategy, in January 1999, two Japanese bottlers,
Kita Kyushu Coca-Cola Bottling Company Ltd. and Sanyo Coca-Cola Bottling Company
Ltd., announced plans for a merger to become a new, publicly traded bottling
company, Coca-Cola West Japan Company Ltd. The transaction, which was completed
in July 1999 and was valued at approximately $2.2 billion, created our first
anchor bottler in Japan. As of December 31, 1999, we owned approximately 5
percent of this new anchor bottler.
In 1998, Coca-Cola Amatil Ltd. (Coca-Cola Amatil) completed a spin-off of
its European operations into a new publicly traded European anchor bottler,
Coca-Cola Beverages plc (Coca-Cola Beverages). On December 31, 1999, we owned
approximately 50.5 percent of Coca-Cola Beverages. Our expectation is that we
will reduce our ownership position to less than 50 percent in 2000; therefore,
we are accounting for the investment by the equity method of accounting.
Historically, in certain situations, we have viewed it to be advantageous
for our Company to acquire a controlling interest in a bottling operation.
Owning such a controlling interest allowed us to compensate for limited local
resources and enabled us to help focus the bottler's sales and marketing
programs, assist in developing its business and information systems and
establish appropriate capital structures.
In July 1999, our Company acquired from Fraser and Neave Limited its 75
percent ownership interest in F&N Coca-Cola Pte Limited (F&N Coca-Cola). Prior
to the acquisition, our Company held a 25 percent equity interest in F&N
Coca-Cola. Acquisition of Fraser and Neave Limited's 75 percent stake gave our
Company full ownership of F&N Coca-Cola. F&N Coca-Cola holds a majority
ownership in bottling operations in Brunei, Cambodia, Nepal, Pakistan, Sri
Lanka, Singapore and Vietnam.
In line with our long-term bottling strategy, we periodically consider
options for reducing our ownership interest in a bottler. One option is to
combine our bottling interests with the bottling interests of others to form
strategic business alliances. Another option is to sell our interest in a
bottling operation to one of our equity investee bottlers. In both of these
situations, we continue participating in the bottler's earnings through our
portion of the equity investee's income.
As stated earlier, our investments in a bottler can represent either a
noncontrolling or a controlling interest. Through noncontrolling investments in
bottling companies, we provide expertise and resources to strengthen those
businesses.
In 1999, we increased our interest in Embotelladora Arica S.A., a bottler
headquartered in Chile, from approximately 17 percent to approximately 45
percent.
Our bottling investments generally have been profitable over time. Equity
income or loss, included in our consolidated net income, represents our share of
the net earnings or losses of our investee companies. In 1999, our Company's
share of losses from equity method investments totaled $184 million. For a more
complete discussion of these investments, refer to Note 2 in our Consolidated
Financial Statements.
The following table illustrates the difference in calculated fair values,
based on quoted closing prices of publicly traded shares, and our Company's
carrying values for selected equity method investees (in millions):
Fair Carrying
December 31, Value Value Difference {1}
--------------------------------------------------------------------------------
1999
Coca-Cola Enterprises Inc. $ 3,400 $ 728 $2,672
Coca-Cola Beverages plc 1,028 788 240
Coca-Cola Amatil Ltd. 1,019 1,133 (114)
Coca-Cola FEMSA,
S.A. de C.V. 751 124 627
Panamerican
Beverages, Inc. 630 714 (84)
Grupo Continental, S.A. 231 123 108
Embotelladora Arica S.A. 217 255 (38)
Coca-Cola Bottling Co.
Consolidated 118 70 48
Embotelladoras Argos S.A. 63 111 (48)
Embotelladoras Polar S.A. 46 55 (9)
--------------------------------------------------------------------------------
$ 3,402
--------------------------------------------------------------------------------
{1} In instances where carrying value exceeds fair value, this excess is
considered to be temporary.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p33
THE COCA-COLA COMPANY AND SUBSIDIARIES
FINANCIAL STRATEGIES
The following strategies allow us to optimize our cost of capital,
increasing our ability to maximize share-owner value.
DEBT FINANCING
Our Company maintains debt levels we consider prudent based on our cash
flow, interest coverage and percentage of debt to capital. We use debt financing
to lower our overall cost of capital, which increases our return on
share-owners' equity.
Our capital structure and financial policies have earned long-term credit
ratings of "A+" from Standard & Poor's and "Aa3" from Moody's, and a credit
rating of "A-1" and "P-1" for our commercial paper programs from Standard &
Poor's and Moody's, respectively.
Our global presence and strong capital position give us easy
access to key financial markets around the world, enabling us to raise funds
with a low effective cost. This posture, coupled with the active management of
our mix of short-term and long-term debt, results in a lower overall cost of
borrowing. Our debt management policies, in conjunction with our share
repurchase programs and investment activity, typically result in current
liabilities exceeding current assets.
In managing our use of debt capital, we consider the following financial
measurements and ratios:
Year Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
Net debt (in billions) $ 4.5 $ 3.3 $ 2.0
Net debt-to-net capital 32% 28% 22%
Free cash flow to net debt 52% 57% 144%
Interest coverage 14x 19x 22x
Ratio of earnings to
fixed charges 11.6x 17.3x 20.8x
--------------------------------------------------------------------------------
SHARE REPURCHASES
In October 1996, our Board of Directors authorized a plan to repurchase up
to 206 million shares of our Company's common stock through the year 2006. In
1999, we did not repurchase any shares under the 1996 plan due primarily to our
utilization of cash for our recent brand and bottler acquisitions.
We do not anticipate the repurchase of any shares under the 1996 plan
during the first half of the year 2000. This is due to our anticipated
utilization of cash for an organizational realignment and the projected impact
on cash from the planned reduction in concentrate inventory levels at selected
bottlers, as discussed under the heading "Recent Developments." We intend to
reevaluate our cash needs during the second half of the year.
Since the inception of our initial share repurchase program in 1984 through
our current program as of December 31, 1999, we have repurchased more than 1
billion shares. This represents 32 percent of the shares outstanding as of
January 1, 1984, at an average price per share of $12.46.
DIVIDEND POLICY
At its February 2000 meeting, our Board of Directors again increased our
quarterly dividend, raising it to $.17 per share. This is equivalent to a
full-year dividend of $.68 in 2000, our 38th consecutive annual increase. Our
annual common stock dividend was $.64 per share, $.60 per share and $.56 per
share in 1999, 1998 and 1997, respectively.
In 1999, our dividend payout ratio was approximately 65 percent of our net
income, reflecting the impact of the other operating charges recorded in the
fourth quarter. A detailed discussion follows under the heading "Other Operating
Charges." To free up additional cash for reinvestment in our high-return
beverage business, our Board of Directors intends to gradually reduce our
dividend payout ratio to 30 percent over time.
FINANCIAL RISK MANAGEMENT
Our Company uses derivative financial instruments primarily to reduce our
exposure to adverse fluctuations in interest rates and foreign exchange rates
and, to a lesser extent, adverse fluctuations in commodity prices and other
market risks. We do not enter into derivative financial instruments for trading
purposes. As a matter of policy, all our derivative positions are used to reduce
risk by hedging an underlying economic exposure. Because of the high correlation
between the hedging instrument and the underlying exposure, fluctuations in the
value of the instruments are generally offset by reciprocal changes in the value
of the underlying exposure. The derivatives we use are straightforward
instruments with liquid markets.
Our Company monitors our exposure to financial market risks using several
objective measurement systems, including value-at-risk models. For the
value-at-risk calculations discussed below, we used a historical simulation
model to estimate potential future losses our Company could incur as a result of
adverse movements in foreign currency and interest rates. We have not considered
the potential impact of favorable movements in foreign currency and interest
rates on our calculations. We examined historical weekly returns over the
previous 10 years to calculate our value at risk. Our value-at-risk calculations
do not represent actual losses that our Company expects to incur.
FOREIGN CURRENCY
We manage most of our foreign currency exposures on a consolidated basis,
which allows us to net certain exposures and take advantage of any natural
offsets. With approximately 70 percent of 1999 operating income generated
outside the United States, weakness in one particular currency is often offset
by strengths in others over time. We use derivative financial instruments to
further reduce our net exposure to currency fluctuations.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p34
THE COCA-COLA COMPANY AND SUBSIDIARIES
Our Company enters into forward exchange contracts and purchases currency
options (principally European currencies and Japanese yen) to hedge firm sale
commitments denominated in foreign currencies. We also purchase currency options
(principally European currencies and Japanese yen) to hedge certain anticipated
sales. Premiums paid and realized gains and losses, including those on any
terminated contracts, are included in prepaid expenses and other assets. These
are recognized in income, along with unrealized gains and losses, in the same
period we realize the hedged transactions. Gains and losses on derivative
financial instruments that are designated and effective as hedges of net
investments in international operations are included in share-owners' equity as
a foreign currency translation adjustment, a component of other comprehensive
income.
Our value-at-risk calculation estimates foreign currency risk on our
derivatives and other financial instruments. The average value at risk
represents the simple average of quarterly amounts for the past year. We have
not included in our calculation the effects of currency movements on anticipated
foreign currency denominated sales and other hedged transactions. We performed
calculations to estimate the impact to the fair values of our derivatives and
other financial instruments over a one-week period resulting from an adverse
movement in foreign currency exchange rates. As a result of our calculations, we
estimate with 95 percent confidence that the fair values would decline by less
than $71 million using 1999 average fair values and by less than $56 million
using December 31, 1999, fair values. On December 31, 1998, we estimated the
fair value would decline by less than $60 million. However, we would expect that
any loss in the fair value of our derivatives and other financial instruments
would generally be offset by an increase in the fair value of our underlying
exposures.
INTEREST RATES
Our Company maintains our percentage of fixed and variable rate debt within
defined parameters. We enter into interest rate swap agreements that maintain
the fixed-to-variable mix within these parameters. We recognize any differences
paid or received on interest rate swap agreements as adjustments to interest
expense over the life of each swap.
Our value-at-risk calculation estimates interest rate risk on our
derivatives and other financial instruments. The average value at risk
represents the simple average of quarterly amounts for the past year. According
to our calculations, we estimate with 95 percent confidence that any increase in
our average and in our December 31, 1999, net interest expense due to an adverse
move in interest rates over a one-week period would not have a material impact
on our Consolidated Financial Statements. Our December 31, 1998, estimate also
was not material to our Consolidated Financial Statements.
PERFORMANCE TOOLS
Economic profit provides a framework by which we measure the value of our
actions. We define economic profit as income from continuing operations, after
giving effect to taxes and excluding the effects of interest, in excess of a
computed capital charge for average operating capital employed.
We use value-based management (VBM) as a tool to help improve our
performance in planning and execution. VBM principles assist us in managing
economic profit by clarifying our understanding of what creates value and what
destroys it and encouraging us to manage for increased value. With VBM, we
determine how best to create value in every area of our business. We believe
that by using VBM as a planning and execution tool, and economic profit as a
performance measurement tool, we greatly enhance our ability to build
share-owner value over time.
We seek to maximize economic profit by strategically investing in the
high-return beverage business and by optimizing our cost of capital through
appropriate financial policies.
TOTAL RETURN TO SHARE OWNERS
Our Company has provided share owners with an excellent return on their
investments over the past decade. A $100 investment in our Company's common
stock on December 31, 1989, together with reinvested dividends, grew in pretax
value to approximately $681 on December 31, 1999, an average annual compound
return of 21 percent.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p35
THE COCA-COLA COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OUR BUSINESS
We are the world's leading manufacturer, marketer and distributor of
nonalcoholic beverage concentrates and syrups. Our Company manufactures beverage
concentrates and syrups and, in certain instances, finished beverages, which we
sell to bottling and canning operations, authorized fountain wholesalers and
some fountain retailers. We also market and distribute juice and juice-drink
products. In addition, we have ownership interests in numerous bottling and
canning operations.
VOLUME
We measure our sales volume in two ways: (1) gallon sales and (2) unit
cases of finished products. Gallon sales represent our primary business and
measure the volume of concentrates and syrups we sell to our bottling partners
or customers, plus the gallon sales equivalent of the juice and juice-drink
products sold by The Minute Maid Company. Most of our revenues are based on this
measure of "wholesale" activity. We also measure volume in unit cases, which
represent the amount of finished products we and our bottling system sell to
customers. We believe unit case volume more accurately measures the underlying
strength of our business system because it measures trends at the retail level.
We include in both measures fountain syrups sold by the Company to customers
directly or through wholesalers or distributors. The Company now includes
products sold by The Minute Maid Company in its calculations of unit case volume
and gallon sales. Accordingly, all historical unit case volume data in this
report reflect the inclusion of these products. In all years presented, the
impact on our unit case volume and gallon sales was not material.
Against a challenging economic environment in many of our key markets, our
worldwide unit case volume increased nearly 2 percent in 1999, on top of a 6
percent increase in 1998. Approximately 1 percentage point of the increase in
unit case volume in 1999 was attributable to the Cadbury Schweppes brands
acquired during the second half of 1999, as discussed under the heading
"Brands." Our business system sold 16.5 billion unit cases in 1999.
OPERATIONS
NET OPERATING REVENUES AND GROSS MARGIN
In 1999, on a consolidated basis, our net revenues and our gross profit
grew 5 percent and 4 percent, respectively. The growth in net revenues was
primarily due to price increases in certain markets, the consolidation in 1999
of our recently acquired bottling operations in India and our vending operations
in Japan, partially offset by the impact of a stronger U.S. dollar and the sale
of our previously consolidated bottling and canning operations in Italy in June
1998.
Our gross profit margin decreased slightly to 69.7 percent in 1999,
primarily due to the consolidation in 1999 of our recently acquired bottling
operations in India and our vending operations in Japan. Generally, the
consolidation of bottling and vending operations shifts a greater portion of our
net revenues to the higher revenue, but lower margin, bottling and vending
operations.
In 1998, on a consolidated basis, our net revenues remained even with 1997,
and our gross profit grew 3 percent. Net revenues remained even with 1997,
primarily due to an increase in gallon sales and price increases in certain
markets, offset by the impact of a stronger U.S. dollar and the sale of our
previously consolidated bottling and canning operations in Italy in June 1998.
Our gross profit margin increased to 70.4 percent in 1998 from 68.1 percent in
1997, primarily as a result of the sale in 1997 of previously consolidated
bottling and canning operations.
SELLING, ADMINISTRATIVE AND GENERAL EXPENSES
Selling expenses totaled $7,266 million in 1999, $6,552 million in 1998 and
$6,283 million in 1997. The increase in 1999 was primarily due to the temporary
product withdrawal in Belgium and France and marketing expenditures associated
with brand building activities. The increase in 1998 was primarily due to higher
marketing expenditures in support of our Company's volume growth.
Administrative and general expenses totaled $1,735 million in 1999, $1,659
million in 1998 and $1,509 million in 1997. The increase in 1999 was primarily
related to the consolidation in 1999 of our recently acquired bottling
operations in India and our vending operations in Japan. The increase in 1998
was mainly due to the expansion of our business into emerging markets.
Offsetting this increase was the impact of the sale of our bottling and canning
operations in Italy in June 1998.
Administrative and general expenses, as a percentage of net operating
revenues, totaled approximately 9 percent in 1999, 9 percent in 1998 and 8
percent in 1997.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p36
THE COCA-COLA COMPANY AND SUBSIDIARIES
OTHER OPERATING CHARGES
In the fourth quarter of 1999, we recorded charges of approximately $813
million. Of this $813 million, approximately $543 million related to the
impairment of certain bottling, manufacturing and intangible assets, primarily
within our Russian and Caribbean bottlers and in the Middle and Far East and
North America. These impairment charges were recorded to reduce the carrying
value of the identified assets to fair value. Fair values were derived using a
variety of methodologies, including cash flow analysis, estimates of sales
proceeds and independent appraisals. Where cash flow analyses were used to
estimate fair values, key assumptions employed, consistent with those used in
our internal planning process, included our estimates of future growth in unit
case sales, estimates of gross margins and estimates of the impact of inflation
and foreign currency fluctuations. The charges were primarily the result of our
revised outlook in certain markets due to the prolonged severe economic
downturns. The remaining carrying value of long-lived assets within these
operations as of December 31, 1999, was approximately $140 million.
Of the remainder, approximately $196 million related to charges associated
with the impairment of the distribution and bottling assets of our vending
operations in Japan and our bottling operations in the Baltics. The charges
reduced the carrying value of these assets to their fair value less the cost to
sell. Consistent with our long-term bottling investment strategy, management has
committed to a plan to sell our ownership interest in these operations to one of
our strategic business partners. It is management's intention that this plan
will be completed within approximately the next 12 months. The remaining
carrying value of long-lived assets within these operations and the loss from
operations on an after-tax basis as of and for the 12-month period ending
December 31, 1999, were approximately $152 million and $5 million, respectively.
The remainder of the $813 million charges, approximately $74 million,
primarily related to the change in senior management and charges related to
organizational changes within the Greater Europe, Latin America and Corporate
segments. These charges were incurred during the fourth quarter of 1999.
In the second quarter of 1998, we recorded nonrecurring provisions
primarily related to the impairment of certain assets in North America of $25
million and Corporate of $48 million.
In the second quarter of 1997, we recorded certain nonrecurring provisions
of approximately $60 million related to enhancing manufacturing efficiencies in
North America. Substantially all of the charges required as a result of these
provisions have been realized as of December 31, 1999.
OPERATING INCOME AND OPERATING MARGIN
On a consolidated basis, our operating income declined 20 percent in 1999
to $3,982 million. This follows a decline of less than 1 percent in 1998 to
$4,967 million. The 1999 results reflect the recording of nonrecurring
provisions, as previously discussed under the heading "Other Operating Charges,"
the difficult economic conditions in many markets throughout the world, the
temporary product withdrawal in Belgium and France, the impact of the stronger
U.S. dollar and the consolidation in 1999 of our recently acquired bottling
operations in India and vending operations in Japan.
The 1998 results reflect an increase in gallon sales coupled with an
increase in gross profit margins, offset by the impact of the stronger U.S.
dollar and the sales of previously consolidated bottling operations. Our
consolidated operating margin was 20.1 percent in 1999, 26.4 percent in 1998 and
26.5 percent in 1997.
MARGIN ANALYSIS
--------------------------------------------------------------------------------
1999 1998 1997
Net Operating Revenues
(in billions) $ 19.8 $ 18.8 $ 18.9
Gross Margin 69.7% 70.4% 68.1%
Operating Margin 20.1% 26.4% 26.5%
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FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p37
THE COCA-COLA COMPANY AND SUBSIDIARIES
INTEREST INCOME AND INTEREST EXPENSE
Our interest income increased 19 percent in 1999 and 4 percent in 1998,
primarily due to cash held in locations outside the United States earning higher
interest rates, on a comparative basis.
Interest expense increased 22 percent in 1999 due to higher total
borrowings throughout the period. Average 1999 debt balances increased from 1998
primarily due to brand and bottler acquisitions during the period. Interest
expense increased 7 percent in 1998 due to higher average commercial paper
borrowings. Average 1998 debt balances increased from 1997 primarily due to
additional investments in bottling operations.
EQUITY INCOME (LOSS)
In 1999, our Company's share of losses from equity method investments
totaled $184 million, reflecting the negative impact of difficult economic
conditions in many worldwide markets, continued structural change in the
bottling system, the impact of the temporary product withdrawal in Belgium and
France, and one-time charges taken by certain equity investees. Our Company's
share of the one-time charges taken by certain equity investees in countries
such as Venezuela and the Philippines was approximately $22 million. Our
Company's share of Coca-Cola Enterprises Inc.'s (Coca-Cola Enterprises)
nonrecurring product recall costs resulting from the product withdrawal was
approximately $28 million.
Equity income decreased approximately 79 percent to $32 million in 1998,
principally due to the weak economic environments around the world, the impact
of a stronger U.S. dollar, continued structural changes and losses in start-up
bottling operations.
OTHER INCOME-NET
In 1999, other income-net decreased 57 percent to $98 million, primarily
reflecting the impact of the gains recorded on the sales of our bottling and
canning operations in Italy in June 1998, partially offset by an increase in
exchange gains in 1999.
In 1998, other income-net decreased 61 percent to $230 million, primarily
reflecting the impact of gains on the sales of our interests in Coca-Cola &
Schweppes Beverages Ltd., Coca-Cola Beverages Ltd. of Canada and The Coca-Cola
Bottling Company of New York, Inc., in 1997, partially offset by gains recorded
on the sales of our bottling and canning operations in Italy in June 1998.
GAINS ON ISSUANCES OF STOCK BY EQUITY INVESTEES
At the time an equity investee sells its stock to third parties at a price
in excess of our book value, our Company's equity in the underlying net assets
of that investee increases. We generally record an increase to our investment
account and a corresponding gain in these transactions. No gains on issuances of
stock by equity investees were recorded during 1999.
As a result of sales of stock by certain equity investees, we recorded
pretax gains of approximately $27 million in 1998 and approximately $363 million
in 1997. These gains represent the increase in our Company's equity in the
underlying net assets of the related investee. For a more complete description
of these transactions, refer to Note 3 in our Consolidated Financial Statements.
INCOME TAXES
Our effective tax rates were 36.3 percent in 1999, 32.0 percent in 1998 and
31.8 percent in 1997. The change in our effective tax rate in 1999 was primarily
the result of our inability to realize a tax benefit associated with a majority
of the charge taken in the fourth quarter of 1999, as previously discussed under
the heading "Other Operating Charges." Our effective tax rates reflect 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 tax rate on operations. For a more complete
description of our income taxes, refer to Note 14 in our Consolidated Financial
Statements.
INCOME PER SHARE
Our basic net income per share declined by 31 percent in 1999, compared to
a 14 percent decline in 1998 and a 19 percent increase in 1997. Diluted net
income per share declined 31 percent in 1999, compared to a 13 percent decline
in 1998 and a 19 percent increase in 1997.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p38
THE COCA-COLA COMPANY AND SUBSIDIARIES
RECENT DEVELOPMENTS
In the second half of 1999, we undertook a detailed review of each of our
business functions. The purpose of this review was to determine the optimal
organizational structure to serve the needs of our customers and consumers at
the local level.
As a result of this review, in January 2000 we announced a major
organizational realignment (the Realignment). The Realignment will reduce our
workforce around the world while transferring responsibilities from our
corporate headquarters to revenue-generating operating units. The intent of the
Realignment is to effectively align our corporate resources, support systems and
business culture to fully leverage the local capabilities of our system. Under
the Realignment, approximately 6,000 positions worldwide, including employees of
the Company, open positions and contract labor, will be eliminated. Of these
identified positions, approximately 3,300 are based within the United States and
approximately 2,700 are based outside of the United States. The entire reduction
will take place during calendar year 2000.
Employees separating from our Company as a result of the Realignment will
be offered severance packages which include both financial and nonfinancial
components. We estimate that as a result of the Realignment, our Company will
take a pretax charge of approximately $800 million during calendar year 2000.
Also, we estimate that the Realignment will yield an annual expense reduction of
approximately $300 million following full implementation of the new
organizational structure.
Effective January 1, 2000, two of our Company's operating segments were
renamed and geographically reconfigured. The Middle and Far East Group was
renamed the Asia Pacific Group, while the Africa Group became known as the
Africa and Middle East Group. At the same time, the Middle East and North Africa
Division ceased to be part of the Asia Pacific Group and became part of the
expanded Africa and Middle East Group.
In January 2000, we announced the intention of the Coca-Cola system to
reduce concentrate inventory levels at selected bottlers. This was based on a
review performed in conjunction with bottlers around the world in order to
determine the optimum level of bottler concentrate inventories. Management of
the Coca-Cola system determined that opportunities exist to reduce the level of
concentrate inventory carried by bottlers in selected regions of the world, such
as Eastern Europe, Japan and Germany. As such, bottlers in these regions have
indicated that they intend to reduce their inventory levels during the first
half of the year 2000. This move is intended to take the average bottler
inventories to the optimal worldwide level of 34 days. This reduction in bottler
inventory levels will result in our Company shipping less concentrate and is
therefore expected to reduce our Company's diluted earnings per share by
approximately $.11-$.13 after tax during the first half of the year 2000.
Also in January 2000, we announced our plans to perform a comprehensive
review of our India bottling franchise investments during the first quarter of
the year 2000 with the intent of streamlining the business. Based on this
review, as well as the current excise tax levels in India, which are presently
under review by the Indian government, we will be evaluating the carrying value
of these assets.
LIQUIDITY AND CAPITAL RESOURCES
We believe our ability to generate cash from operations to reinvest in our
business is one of our fundamental financial strengths. We anticipate that our
operating activities in 2000 will continue to provide us with cash flows to
assist in our business expansion and to meet our financial commitments.
FREE CASH FLOW
Free cash flow is the cash remaining from operations after we have
satisfied our business reinvestment opportunities. We focus on increasing free
cash flow to achieve our primary objective: maximizing share-owner value over
time. We use free cash flow, along with borrowings to pay dividends, make share
repurchases and make acquisitions. The consolidated statements of our cash flows
are summarized as follows (in millions):
Year Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
Cash flows provided by
(used in):
Operations $ 3,883 $ 3,433 $ 4,033
Business reinvestment (1,551) (1,557) (1,082)
--------------------------------------------------------------------------------
Free Cash Flow {1} 2,332 1,876 2,951
Cash flows (used in)
provided by:
Acquisitions,
net of disposals (1,870) (604) 582
Share repurchases (15) (1,563) (1,262)
Other financing activities (456) 230 (1,833)
Exchange (28) (28) (134)
--------------------------------------------------------------------------------
Increase (decrease) in cash $ (37) $ (89) $ 304
--------------------------------------------------------------------------------
{1} All years presented have been restated to exclude net cash flows related to
acquisitions.
Cash provided by operations in 1999 amounted to $3.9 billion, a 13 percent
increase from 1998. In 1998, cash provided by operations amounted to $3.4
billion, a 15 percent decrease from 1997. This change was primarily due to an
increased use of cash for operating assets and liabilities in 1998.
In 1999, net cash used in investing activities increased by $1.3 billion
compared to 1998. The increase was primarily the result of brand and bottler
acquisitions during 1999. For a more complete description of these transactions,
refer to Note 17 in our Consolidated Financial Statements.
In 1998, net cash used in investing activities increased compared to 1997.
During 1998, investing activities included additional investments in
territories, such as India and Latin American countries. Investing activities in
1997 included incremental proceeds of approximately $1 billion from the disposal
of investments and other assets, which included the dispositions of
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p39
THE COCA-COLA COMPANY AND SUBSIDIARIES
our interests in Coca-Cola & Schweppes Beverages Ltd., The Coca-Cola
Bottling Company of New York Inc. and Coca-Cola Beverages Ltd. of Canada,
partially offset by acquisitions and investments, primarily in bottling
operations, including three South Korean bottlers.
Total capital expenditures for property, plant and equipment (including our
investments in information technology) and the percentage distribution by
operating segment for 1999, 1998 and 1997 are as follows (in millions):
Year Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
Capital expenditures $ 1,069 $ 863 $ 1,093
--------------------------------------------------------------------------------
North America {1} 25% 32% 24%
Africa 2% 2% 2%
Greater Europe 20% 25% 30%
Latin America 6% 8% 7%
Middle & Far East 30% 13% 18%
Corporate 17% 20% 19%
--------------------------------------------------------------------------------
{1} Includes The Minute Maid Company
FINANCING ACTIVITIES
Our financing activities include net borrowings, dividend payments and
share issuances and repurchases. Net cash used in financing activities totaled
$.5 billion in 1999, $1.3 billion in 1998 and $3.1 billion in 1997. The change
between 1999 and 1998 was primarily due to a decrease in treasury stock
repurchases due to our utilization of cash for our brand and bottler
acquisitions during 1999. The decrease between 1998 and 1997 was due to our net
repayments of debt in 1997 from proceeds of disposals of investments and other
assets.
Cash used to purchase common stock for treasury totaled $15 million in
1999, $1.6 billion in 1998 and $1.3 billion in 1997.
Commercial paper is our primary source of short-term financing. On December
31, 1999, we had $4.9 billion outstanding in commercial paper borrowings
compared to $4.3 billion outstanding at the end of 1998, a $.6 billion increase
in borrowings. The 1999 increase in loans and notes payable was due to
additional commercial paper borrowings used for our brand acquisitions during
1999 and additional investments in bottling operations. The Company's commercial
paper borrowings normally mature less than three months from the date of
issuance. In 1999, as part of our Year 2000 plan, we increased the amount of
commercial paper borrowings with maturity dates greater than three months. The
gross payments and receipts of borrowings greater than three months from the
date of issuance have been included in the consolidated statements of cash
flows. In addition, on December 31, 1999, we had $3.1 billion in lines of credit
and other short-term credit facilities available, of which approximately $167
million was outstanding.
On December 31, 1999, we had $854 million outstanding in long-term debt,
compared to $687 million outstanding at the end of 1998, a $167 million increase
in borrowings. The 1999 increase in long-term debt was primarily due to the
issuance of long-term notes in the European marketplace.
EXCHANGE
Our international operations are subject to certain opportunities and
risks, including currency fluctuations and government actions. We closely
monitor our operations in each country and seek to adopt appropriate strategies
that are responsive to changing economic and political environments and to
fluctuations in foreign currencies.
We use approximately 60 functional currencies. Due to our global
operations, weaknesses in some of these currencies are often offset by strengths
in others. In 1999, 1998 and 1997, the weighted-average exchange rates for
foreign currencies, and for certain individual currencies, strengthened
(weakened) against the U.S. dollar as follows:
Year Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
All currencies Even (9)% (10)%
--------------------------------------------------------------------------------
Australian dollar 3% (16)% (6)%
British pound (2)% 2% 4%
Canadian dollar Even (7)% (1)%
French franc (2)% (3)% (12)%
German mark (2)% (3)% (13)%
Japanese yen 15% (6)% (10)%
--------------------------------------------------------------------------------
These percentages do not include the effects of our hedging activities and,
therefore, do not reflect the actual impact of fluctuations in exchange on our
operating results. Our foreign currency management program mitigates over time a
portion of the impact of exchange on net income and earnings per share. The
impact of a stronger U.S. dollar reduced our operating income by approximately 4
percent in 1999 and by approximately 9 percent in 1998.
Exchange gains (losses)-net amounted to $87 million in 1999, $(34) million
in 1998 and $(56) million in 1997, and were recorded in other income-net.
Exchange gains (losses)-net includes the remeasurement of certain currencies
into functional currencies and the costs of hedging certain exposures of our
balance sheet.
Additional information concerning our hedging activities is presented in
Note 9 in our Consolidated Financial Statements.
FINANCIAL POSITION
The carrying value of our investment in Coca-Cola Enterprises increased in
1999, primarily as a result of Coca-Cola Enterprises' issuance of stock in its
acquisitions of various bottling operations. The carrying value of our
investment in Coca-Cola Amatil decreased, primarily due to the transfer of
approximately 57 million shares of Coca-Cola Amatil to Fraser and Neave Limited
in conjunction with our acquisition of its 75 percent interest in F&N Coca-Cola.
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 our brand and bottler acquisitions during
1999.
The carrying value of our investment in Coca-Cola Enterprises increased in
1998 as a result of Coca-Cola Enterprises' issuance of stock in its acquisitions
of various bottling operations. The carrying value of our investment in
Coca-Cola Amatil increased due to
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p40
THE COCA-COLA COMPANY AND SUBSIDIARIES
its acquisition of our bottling operations in South Korea, offset by the
spin-off of Coca-Cola Beverages to its share owners. The increase for Coca-Cola
Beverages in 1998 is primarily a result of our equity participation in its
formation in 1998, as previously discussed under the heading "Bottling System,"
and the sale to Coca-Cola Beverages of our bottling and canning operations in
Italy in June 1998. The increase in prepaid expenses and other assets is
primarily due to increases in receivables from equity method investees,
marketing prepaid expenses and miscellaneous receivables.
YEAR 2000
As previously reported, over the past several years our Company developed
and implemented a plan to address the anticipated impacts of the so-called Year
2000 problem on our information technology (IT) systems and on non-IT systems
involving embedded chip technologies. We also surveyed selected third parties to
determine the status of their Year 2000 compliance programs. In addition, we
developed contingency plans specifying what the Company would do if we or
important third parties experienced disruptions to critical business activities
as a result of the Year 2000 problem.
Our Company's Year 2000 plan was completed in all material respects prior
to the anticipated Year 2000 failure dates. As of February 15, 2000, the Company
has not experienced any materially important business disruptions or system
failures as a result of Year 2000 issues, nor is it aware of any Year 2000
issues that have impacted its bottlers, customers, suppliers or other
significant third parties to an extent significant to the Company. However, Year
2000 compliance has many elements and potential consequences, some of which may
not be foreseeable or may be realized in future periods. Consequently, there can
be no assurance that unforeseen circumstances may not arise, or that the Company
will not in the future identify equipment or systems which are not Year 2000
compliant.
As of December 31, 1999, the Company's total incremental costs (historical
plus estimated future costs) of addressing Year 2000 issues are estimated to be
approximately $131 million, of which approximately $129 million has been
incurred. These costs are being funded through operating cash flow. These
amounts do not include: (i) approximately $4 million in costs associated with
the implementation of contingency plans, or (ii) costs associated with
replacements of computerized systems or equipment in cases where replacement was
not accelerated due to Year 2000 issues.
For further information regarding Year 2000 matters, refer to disclosures
under Forward-Looking Statements on page 41.
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 the 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.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation affects the way we operate in many markets around the world. In
general, we are able to increase prices to counteract the inflationary effects
of increasing costs and to generate sufficient cash flows to maintain our
productive capability.
NEW ACCOUNTING STANDARDS
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 that SFAS No. 133
will have on our Consolidated Financial Statements.
OUTLOOK
While we cannot predict future performance, we believe considerable
opportunities exist for sustained, profitable growth, not only in the developing
population centers of the world, but also in our most established markets,
including the United States and Mexico.
We firmly believe that the strength of our brands, our unparalleled
distribution system, our global presence, our strong financial condition and
the skills of our people give us the flexibility to capitalize on growth
opportunities as we continue to pursue our goal of increasing share-owner
value over time.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p41
THE COCA-COLA COMPANY AND SUBSIDIARIES
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 Company filings with the Securities and Exchange Commission and in our
reports to share owners. Generally, the words "believe," "expect," "intend,"
"estimate," "anticipate," "will" and similar expressions identify
forward-looking statements. 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, and speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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.
-- 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.
-- 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.
-- 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. 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 and the
ability of third parties to adequately address their own Year 2000 issues.
-- Our ability to resolve issues relating to introduction of the European
Union's common currency (the Euro) in a timely fashion.
The foregoing list of important factors is not exclusive.
ADDITIONAL INFORMATION
For additional information about our operations, cash flows, liquidity and
capital resources, please refer to the information on pages 44 through 64 of
this report. Additional information concerning our operating segments is
presented on pages 60 through 62.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p49
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Coca-Cola Company and subsidiaries (our Company) is predominantly
a manufacturer, marketer and distributor of nonalcoholic beverage concentrates
and syrups. Operating in nearly 200 countries worldwide, we primarily sell our
concentrates and syrups to bottling and canning operations, fountain
wholesalers and fountain retailers. We also market and distribute juice and
juice-drink products. We have significant markets for our products in all the
world's geographic regions. We record revenue when title passes to our
customers or our bottling partners.
BASIS OF PRESENTATION
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
CONSOLIDATION
Our Consolidated Financial Statements include the accounts of The
Coca-Cola Company and all subsidiaries except where control is temporary or
does not rest with our Company. Our investments in companies in which we have
the ability to exercise significant influence over operating and financial
policies, including certain investments where there is a temporary majority
interest, are accounted for by the equity method. Accordingly, our Company's
share of the net earnings of these companies is included in consolidated net
income. Our investments in other companies are carried at cost or fair value,
as appropriate. All significant intercompany accounts and transactions are
eliminated upon consolidation.
ISSUANCES OF STOCK BY EQUITY INVESTEES
When one of our equity investees issues additional shares to third
parties, our percentage ownership interest in the investee decreases. In the
event the issuance price per share is more or less than our average carrying
amount per share, we recognize a noncash gain or loss on the issuance. This
noncash gain or loss, net of any deferred taxes, is generally recognized in
our net income in the period the change of ownership interest occurs.
If gains have been previously recognized on issuances of an equity
investee's stock and shares of the equity investee are subsequently
repurchased by the equity investee, gain recognition does not occur on
issuances subsequent to the date of a repurchase until shares have been issued
in an amount equivalent to the number of repurchased shares. This type of
transaction is reflected as an equity transaction and the net effect is
reflected in the accompanying consolidated balance sheets. For specific
transaction details, refer to Note 3.
ADVERTISING COSTS
Our Company expenses production costs of print, radio and television
advertisements as of the first date the advertisements take place. Advertising
expenses included in selling, administrative and general expenses were $1,699
million in 1999, $1,597 million in 1998 and $1,576 million in 1997. As of
December 31, 1999 and 1998, advertising costs of approximately $523 million and
$365 million, respectively, were recorded primarily in pre-paid expenses and
other assets in the accompanying consolidated balance sheets.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted-average number of shares outstanding. Diluted net income per share
includes the dilutive effect of stock options.
CASH EQUIVALENTS
Marketable securities that are highly liquid and have maturities of three
months or less at the date of purchase are classified as cash equivalents.
INVENTORIES
Inventories consist primarily of raw materials and supplies and are valued
at the lower of cost or market. In general, cost is determined on the basis of
average cost or first-in, first-out methods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated
principally by the straight-line method over the estimated useful lives of the
assets.
OTHER ASSETS
Our Company invests in infrastructure programs with our bottlers which are
directed at strengthening our bottling system and increasing unit case sales.
The costs of these programs are recorded in other assets and are subsequently
amortized over the periods to be directly benefited.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are stated on the basis of cost and
are amortized, principally on a straight-line basis, over the estimated future
periods to be benefited (not exceeding 40 years). Goodwill and other intangible
assets are periodically reviewed for impairment to ensure they are appropriately
valued. Conditions which may indicate an impairment issue exists include a
negative economic downturn in a worldwide market or a change in the assessment
of future operations. In the event that a condition is identified which may
indicate an impairment issue exists, an assessment is performed using a variety
of methodologies, including cash flow analysis, estimates of sales proceeds and
independent appraisals. Where applicable, an appropriate interest rate is
utilized, based on location specific economic factors. Accumulated amortization
was approximately $154 million and $119 million on December 31, 1999 and 1998,
respectively.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, the
preparation of our financial statements requires our management to make
estimates and assumptions that affect the amounts reported in our financial
statements and accompanying notes including our assessment of the carrying
value of our investments in bottling operations. Although these estimates are
based on our knowledge of current events and actions we may undertake in the
future, actual results may ultimately differ from estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p50
THE COCA-COLA COMPANY AND SUBSIDIARIES
NEW ACCOUNTING STANDARDS
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 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.
We adopted the American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" and SOP 98-5, "Reporting on
the Costs of Start-Up Activities," on January 1, 1999. There was no material
impact on our Consolidated Financial Statements as a result.
NOTE 2: BOTTLING INVESTMENTS
COCA-COLA ENTERPRISES INC.
Coca-Cola Enterprises is the largest soft-drink bottler in the world,
operating in eight countries, and is one of our anchor bottlers. On December 31,
1999, our Company owned approximately 40 percent of the outstanding common stock
of Coca-Cola Enterprises, and accordingly, we account for our investment by
the equity method of accounting. The excess of our equity in the underlying net
assets of Coca-Cola Enterprises over our investment is primarily amortized on a
straight-line basis over 40 years. The balance of this excess, net of
amortization, was approximately $445 million on December 31, 1999. A summary of
financial information for Coca-Cola Enterprises is as follows (in millions):
December 31, 1999 1998
------------------------------------------------------------------
Current assets $ 2,557 $ 2,285
Noncurrent assets 20,149 18,847
------------------------------------------------------------------
Total assets $ 22,706 $ 21,132
==================================================================
Current liabilities $ 3,590 $ 3,397
Noncurrent liabilities 16,192 15,297
------------------------------------------------------------------
Total liabilities $ 19,782 $ 18,694
==================================================================
Share-owners' equity $ 2,924 $ 2,438
==================================================================
Company equity investment $ 728 $ 584
==================================================================
Year Ended December 31, 1999 1998 1997
------------------------------------------------------------------
Net operating revenues $ 14,406 $ 13,414 $ 11,278
Cost of goods sold 9,015 8,391 7,096
------------------------------------------------------------------
Gross profit $ 5,391 $ 5,023 $ 4,182
==================================================================
Operating income $ 839 $ 869 $ 720
==================================================================
Cash operating profit{1} $ 2,187 $ 1,989 $ 1,666
==================================================================
Net income $ 59 $ 142 $ 171
==================================================================
Net income available
to common share owners $ 56 $ 141 $ 169
==================================================================
{1} Cash operating profit is defined as operating income plus
depreciation expense, amortization expense and other noncash
operating expenses.
Our net concentrate/syrup sales to Coca-Cola Enterprises were $3.3 billion
in 1999, $3.1 billion in 1998 and $2.5 billion in 1997, or approximately 17
percent, 16 percent and 13 percent of our 1999, 1998 and 1997 net operating
revenues, respectively. Coca-Cola Enterprises purchases sweeteners through our
Company; however, related collections from Coca-Cola Enterprises and payments
to suppliers are not included in our Consolidated Statements of Income. These
transactions amounted to $308 million in 1999, $252 million in 1998 and $223
million in 1997. We also provide certain administrative and other services to
Coca-Cola Enterprises under negotiated fee arrangements.
Our direct support for certain marketing activities of Coca-Cola
Enterprises and participation with them in cooperative advertising and other
marketing programs amounted to approximately $767 million in 1999, $899 million
in 1998 and $604 million in 1997. Pursuant to cooperative advertising and
trade arrangements with Coca-Cola Enterprises, we received $243 million, $173
million and $144 million in 1999, 1998 and 1997, respectively, from Coca-Cola
Enterprises for local media and marketing program expense reimbursements.
Additionally, in 1999 and 1998, we committed approximately $338 million and
$324 million, respectively, to Coca-Cola Enterprises under a Company
program that encourages bottlers to invest in building and supporting beverage
infrastructure.
If valued at the December 31, 1999, quoted closing price of publicly
traded Coca-Cola Enterprises shares, the calculated value of our investment
in Coca-Cola Enterprises would have exceeded its carrying value by
approximately $2.7 billion.
COCA-COLA AMATIL LTD.
We own approximately 37 percent of Coca-Cola Amatil, an Australian-based
anchor bottler that operates in seven countries. Accordingly, we account for
our investment in Coca-Cola Amatil by the equity method. The excess of our
investment over our equity in the underlying net assets of Coca-Cola Amatil
is being amortized on a straight-line basis over 40 years. The balance of this
excess, net of amortization, was approximately $261 million at December 31,
1999. A summary of financial information for Coca-Cola Amatil is as follows
(in millions):
December 31, 1999 1998{1}
-------------------------------------------------------------------
Current assets $ 1,259 $ 1,057
Noncurrent assets 3,912 4,002
-------------------------------------------------------------------
Total assets $ 5,171 $ 5,059
===================================================================
Current liabilities $ 1,723 $ 1,065
Noncurrent liabilities 1,129 1,552
-------------------------------------------------------------------
Total liabilities $ 2,852 $ 2,617
===================================================================
Share-owners' equity $ 2,319 $ 2,442
===================================================================
Company equity investment $ 1,133 $ 1,255
===================================================================
Year Ended December 31, 1999 1998{1} 1997
===================================================================
Net operating revenues $ 2,427 $ 2,731 $ 3,290
Cost of goods sold 1,426 1,567 1,856
-------------------------------------------------------------------
Gross profit $ 1,001 $ 1,164 $ 1,434
===================================================================
Operating income $ 162 $ 237 $ 276
===================================================================
Cash operating profit {2} $ 387 $ 435 $ 505
===================================================================
Net income $ 29 $ 65 $ 89
===================================================================
{1} 1998 reflects the spin-off of Coca-Cola Amatil's European operations.
{2} Cash operating profit is defined as operating income plus
depreciation expense, amortization expense and other noncash operating
expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p51
THE COCA-COLA COMPANY AND SUBSIDIARIES
Our net concentrate sales to Coca-Cola Amatil were approximately $431
million in 1999, $546 million in 1998 and $588 million in 1997. We also
participate in various marketing, promotional and other activities with
Coca-Cola Amatil.
In July 1999, we acquired from Fraser and Neave Limited its 75 percent
ownership interest in F&N Coca-Cola in exchange for approximately 57 million
shares of Coca-Cola Amatil and the assumption of debt. The transaction reduced
our ownership in Coca-Cola Amatil from approximately 43 percent to
approximately 37 percent. In August 1998, we exchanged our Korean bottling
operations with Coca-Cola Amatil for an additional ownership interest in
Coca-Cola Amatil.
If valued at the December 31, 1999, quoted closing price of publicly traded
Coca-Cola Amatil shares, the calculated value of our investment in Coca-Cola
Amatil would have been below its carrying value by approximately $114 million.
OTHER EQUITY INVESTMENTS
Operating results include our proportionate share of income (loss) from our
equity investments. A summary of financial information for our equity
investments in the aggregate, other than Coca-Cola Enterprises and Coca-Cola
Amatil, is as follows (in millions):
December 31, 1999 1998
-------------------------------------------------------------------
Current assets $ 5,393 $ 4,453
Noncurrent assets 17,394 16,825
-------------------------------------------------------------------
Total assets $ 22,787 $ 21,278
===================================================================
Current liabilities $ 4,827 $ 4,968
Noncurrent liabilities 7,007 6,731
-------------------------------------------------------------------
Total liabilities $ 11,834 $ 11,699
===================================================================
Share-owners' equity $ 10,953 $ 9,579
===================================================================
Company equity investment $ 4,581 $ 4,452
===================================================================
Year Ended December 31, 1999 1998 1997
-------------------------------------------------------------------
Net operating revenues $ 17,358 $ 15,244 $ 13,688
Cost of goods sold 10,659 9,555 8,645
-------------------------------------------------------------------
Gross profit $ 6,699 $ 5,689 $ 5,043
===================================================================
Operating income $ 647 $ 668 $ 869
===================================================================
Cash operating profit{1} $ 2,087 $ 1,563 $ 1,794
==================================================================
Net income (loss) $ (163) $ 152 $ 405
===================================================================
Equity investments include certain nonbottling investees.
{1} Cash operating profit is defined as operating income plus
depreciation expense, amortization expense and other noncash
operating expenses.
Net sales to equity investees other than Coca-Cola Enterprises and
Coca-Cola Amatil were $2.8 billion in 1999, $2.1 billion in 1998 and $1.5
billion in 1997. Our direct support for certain marketing activities with
equity investees other than Coca-Cola Enterprises, the majority of which are
located outside the United States, was approximately $685 million, $640
million and $528 million for 1999, 1998 and 1997, respectively.
In June 1998, we sold our previously consolidated Italian bottling
and canning operations to Coca-Cola Beverages plc (Coca-Cola Beverages).
This transaction resulted in proceeds valued at approximately $1 billion
and an after-tax gain of approximately $.03 per share (basic and diluted).
If valued at the December 31, 1999, quoted closing prices of shares
actively traded on stock markets, the calculated value of our equity investments
in publicly traded bottlers other than Coca-Cola Enterprises and Coca-Cola
Amatil would have exceeded our carrying value by approximately $844 million.
NOTE 3: ISSUANCES OF STOCK BY EQUITY INVESTEES
In the first quarter of 1999, Coca-Cola Enterprises completed its
acquisition of various bottlers. These transactions were funded primarily with
shares of Coca-Cola Enterprises common stock. The Coca-Cola Enterprises common
stock issued was valued in an amount greater than the book value per share of
our investment in Coca-Cola Enterprises. As a result of these transactions, our
equity in the underlying net assets of Coca-Cola Enterprises increased, and we
recorded a $241 million increase to our Company's investment basis in Coca-Cola
Enterprises. Due to Coca-Cola Enterprises' share repurchase programs, the
increase in our investment in Coca-Cola Enterprises 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 Coca-Cola
Enterprises. The transactions reduced our ownership in Coca-Cola Enterprises
from approximately 42 percent to approximately 40 percent.
In December 1998, Coca-Cola Enterprises completed its acquisition of
certain independent bottling operations operating in parts of Texas, New Mexico
and Arizona (collectively known as the Wolslager Group). The transactions were
funded primarily with the issuance of shares of Coca-Cola Enterprises common
stock. The Coca-Cola Enterprises common stock issued in exchange for these
bottlers was valued at an amount greater than the book value per share of our
investment in Coca-Cola Enterprises. As a result of this transaction, our equity
in the underlying net assets of Coca-Cola Enterprises increased, and we recorded
a $116 million increase to our Company's investment basis in Coca-Cola
Enterprises. Due to Coca-Cola Enterprises' share repurchase program, the
increase in our investment in Coca-Cola Enterprises was recorded as an equity
transaction, and no gain was recognized. We recorded a deferred tax liability of
approximately $46 million on this increase to our investment in Coca-Cola
Enterprises. At the completion of this transaction, our ownership in Coca-Cola
Enterprises was approximately 42 percent.
In September 1998, Coca-Cola Erfrischungsgetranke AG (CCEAG), our anchor
bottler in Germany, issued new shares valued at approximately $275 million to
affect 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.
In June 1998, Coca-Cola Enterprises 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.
Approximately 55 percent of the transaction was funded with the issuance of
approximately 17.7 million shares
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p52
THE COCA-COLA COMPANY AND SUBSIDIARIES
of Coca-Cola Enterprises common stock, and the remaining portion was funded
through debt and assumed debt. The Coca-Cola Enterprises common stock issued in
exchange for Coke Southwest was valued at an amount greater than the book
value per share of our investment in Coca-Cola Enterprises. As a result of
this transaction, our equity in the underlying net assets of Coca-Cola
Enterprises increased and we recorded a $257 million increase to our Company's
investment basis in Coca-Cola Enterprises. Due to Coca-Cola Enterprises' share
repurchase program, the increase in our investment in Coca-Cola Enterprises 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 Coca-Cola Enterprises. At the completion of this transaction, our
ownership in Coca-Cola Enterprises was approximately 42 percent.
In the second quarter of 1997, our Company and San Miguel Corporation sold
our respective interests in Coca-Cola Bottlers Philippines, Inc., to Coca-Cola
Amatil in exchange for approximately 293 million shares of Coca-Cola Amatil
stock. In connection with this transaction, Coca-Cola Amatil issued
approximately 210 million shares to San Miguel valued at approximately $2.4
billion. The issuance to San Miguel resulted in a one-time noncash pretax gain
for our Company of approximately $343 million. We provided deferred taxes of
approximately $141.5 million on this gain. This transaction resulted in a
dilution of our Company's approximately 36 percent interest in Coca-Cola Amatil
to approximately 33 percent.
Also in the second quarter of 1997, our Company and the Cisneros Group
sold our respective interests in Coca-Cola y Hit de Venezuela, S.A., 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.
NOTE 4: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
millions):
December 31, 1999 1998
------------------------------------------------------------------
Accrued marketing $ 1,056 $ 967
Container deposits 53 14
Accrued compensation 164 166
Sales, payroll and other taxes 297 183
Accounts payable and
other accrued expenses 2,144 1,811
-----------------------------------------------------------------
$ 3,714 $ 3,141
=================================================================
NOTE 5: SHORT-TERM BORROWINGS AND CREDIT ARRANGEMENTS
Loans and notes payable consist primarily of commercial paper issued in the
United States. On December 31, 1999, we had $4.9 billion outstanding in
commercial paper borrowings. In addition, we had $3.1 billion in lines of credit
and other short-term credit facilities available, of which approximately $167
million was outstanding. Our weighted-average interest rates for commercial
paper outstanding were approximately 6.0 and 5.2 percent at December 31, 1999
and 1998, respectively.
These facilities are subject to normal banking terms and conditions.
Some of the financial arrangements require compensating balances, none of which
is presently significant to our Company.
NOTE 6: LONG-TERM DEBT
Long-term debt consists of the following (in millions):
December 31, 1999 1998
------------------------------------------------------------------
6% U.S. dollar notes due 2000 $ 250 $ 251
6 5/8% U.S. dollar notes due 2002 150 150
6% U.S. dollar notes due 2003 150 150
5 3/4% U.S. dollar notes due 2009 399 -
7 3/8% U.S. dollar notes due 2093 116 116
Other, due 2000 to 2013 50 23
-----------------------------------------------------------------
1,115 690
Less current portion 261 3
-----------------------------------------------------------------
$ 854 $ 687
=================================================================
After giving effect to interest rate management instruments, the principal
amount of our long-term debt that had fixed and variable interest rates,
respectively, was $690 million and $425 million on December 31, 1999, and $190
million and $500 million on December 31, 1998. The weighted-average interest
rate on our Company's long-term debt was 5.6 percent and 6.2 percent for the
years ended December 31, 1999 and 1998, respectively. Total interest paid was
approximately $314 million, $298 million and $264 million in 1999, 1998 and
1997, respectively. For a more complete discussion of interest rate management,
refer to Note 9.
Maturities of long-term debt for the five years succeeding December 31,
1999, are as follows (in millions):
2000 2001 2002 2003 2004
------------------------------------------------------------------------
$ 261 $ 22 $ 154 $ 153 $ 1
========================================================================
The above notes include various restrictions, none of which is presently
significant to our Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p53
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTE 7: COMPREHENSIVE INCOME
Accumulated other comprehensive income consists of the following (in
millions):
December 31, 1999 1998
------------------------------------------------------------------
Foreign currency
translation adjustment $ (1,510) $ (1,320)
Unrealized gain on
available-for-sale securities 34 11
Minimum pension liability (16) (41)
-----------------------------------------------------------------
$ (1,492) $ (1,350)
=================================================================
A summary of the components of other comprehensive income for the years
ended December 31, 1999, 1998 and 1997, is as follows (in millions):
Before-Tax Income After-Tax
December 31, Amount Tax Amount
-----------------------------------------------------------------
1999
Net foreign currency
translation $ (249) $ 59 $ (190)
Net change in unrealized
gain (loss) on available-
for-sale securities 37 (14) 23
Minimum pension liability 38 (13) 25
-----------------------------------------------------------------
Other comprehensive
income (loss) $ (174) $ 32 $ (142)
=================================================================
Before-Tax Income After-Tax
December 31, Amount Tax Amount
-----------------------------------------------------------------
1998
Net foreign currency
translation $ 52 $ - $ 52
Net change in unrealized
gain (loss) on available-
for-sale securities (70) 23 (47)
Minimum pension liability (5) 1 (4)
-----------------------------------------------------------------
Other comprehensive
income (loss) $ (23) $ 24 $ 1
=================================================================
Before-Tax Income After-Tax
December 31, Amount Tax Amount
-----------------------------------------------------------------
1997
Net foreign currency
translation $ (710) $ - $ (710)
Net change in unrealized
gain (loss) on available-
for-sale securities (163) 65 (98)
Minimum pension liability (10) 4 (6)
-----------------------------------------------------------------
Other comprehensive
income (loss) $ (883) $ 69 $ (814)
=================================================================
NOTE 8: FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in our consolidated balance sheets for cash,
cash equivalents, marketable equity securities, marketable cost method
investments, receivables, loans and notes payable and long-term debt approximate
their respective fair values. Fair values are based primarily on quoted prices
for those or similar instruments. A comparison of the carrying value and fair
value of our hedging instruments is included in Note 9.
CERTAIN DEBT AND MARKETABLE EQUITY SECURITIES
Investments in debt and marketable equity securities, other than
investments accounted for by the equity method, are categorized as either
trading, available for sale or held to maturity. On December 31, 1999 and 1998,
we had no trading securities. Securities categorized as available for sale are
stated at fair value, with unrealized gains and losses, net of deferred income
taxes, reported as a component of accumulated other comprehensive income. Debt
securities categorized as held to maturity are stated at amortized cost.
On December 31, 1999 and 1998, available-for-sale and held-to-maturity
securities consisted of the following (in millions):
Gross Gross Estimated
Unrealized Unrealized Fair
December 31, Cost Gains Losses Value
------------------------------------------------------------------------------
1999
Available-for-sale
securities
Equity securities $ 246 $ 69 $ (13) $ 302
Collateralized
mortgage
obligations 45 - (1) 44
Other debt
securities 8 - - 8
-------------------------------------------------------------------------------
$ 299 $ 69 $ (14) $ 354
===============================================================================
Held-to-maturity
securities
Bank and
corporate debt $ 1,137 $ - $ - $ 1,137
Other debt
securities 49 - - 49
-------------------------------------------------------------------------------
$ 1,186 $ - $ - $ 1,186
===============================================================================
Gross Gross Estimated
Unrealized Unrealized Fair
December 31, Cost Gains Losses Value
-------------------------------------------------------------------------------
1998
Available-for-sale
securities
Equity securities $ 304 $ 67 $ (48) $ 323
Collateralized
mortgage
obligations 89 - (1) 88
Other debt
securities 11 - - 11
-------------------------------------------------------------------------------
$ 404 $ 67 $ (49) $ 422
===============================================================================
Held-to-maturity
securities
Bank and
corporate debt $ 1,339 $ - $ - $ 1,339
Other debt
securities 92 - - 92
-------------------------------------------------------------------------------
$ 1,431 $ - $ - $ 1,431
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p54
THE COCA-COLA COMPANY AND SUBSIDIARIES
On December 31, 1999 and 1998, these investments were included in the
following captions in our consolidated balance sheets (in millions):
Available-for-Sale Held-to-Maturity
December 31, Securities Securities
------------------------------------------------------------------------------
1999
Cash and cash equivalents $ - $ 1,061
Current marketable securities 76 125
Cost method investments,
principally bottling companies 227 -
Marketable securities and
other assets 51 -
------------------------------------------------------------------------------
$ 354 $ 1,186
==============================================================================
1998
Cash and cash equivalents $ - $ 1,227
Current marketable securities 79 80
Cost method investments,
principally bottling companies 251 -
Marketable securities and
other assets 92 124
------------------------------------------------------------------------------
$ 422 $ 1,431
==============================================================================
The contractual maturities of these investments as of December 31, 1999,
were as follows (in millions):
Available-for-Sale Held-to-Maturity
Securities Securities
------------------ ------------------------
Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------------------------------------------
2000
$ - $ - $ 1,186 $ 1,186
2001- 2004 8 8 - -
Collateralized
mortgage
obligations 45 44 - -
Equity securities 246 302 - -
-----------------------------------------------------------------------------
$ 299 $ 354 $ 1,186 $ 1,186
=============================================================================
For the years ended December 31, 1999 and 1998, gross realized gains and
losses on sales of available-for-sale securities were not material. The cost of
securities sold is based on the specific identification method.
NOTE 9: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
Our Company uses derivative financial instruments primarily to reduce our
exposure to adverse fluctuations in interest rates and foreign exchange rates
and, to a lesser extent, to reduce our exposure to adverse fluctuations in
commodity prices and other market risks. When entered into, these financial
instruments are designated as hedges of underlying exposures. Because of the
high correlation between the hedging instrument and the underlying exposure
being hedged, fluctuations in the value of the instruments are generally offset
by changes in the value of the underlying exposures. Virtually all our
derivatives are "over-the-counter" instruments. Our Company does not enter into
derivative financial instruments for trading purposes.
The estimated fair values of derivatives used to hedge or modify our risks
fluctuate over time. These fair value amounts should not be viewed in
isolation, but rather in relation to the fair values of the underlying hedging
transactions and investments and to the overall reduction in our exposure to
adverse fluctuations in interest rates, foreign exchange rates, commodity
prices and other market risks.
The notional amounts of the derivative financial instruments do not
necessarily represent amounts exchanged by the parties and, therefore, are not
a direct measure of our exposure from our use of derivatives. The amounts
exchanged are calculated by reference to the notional amounts and by other
terms of the derivatives, such as interest rates, exchange rates or other
financial indices.
We have established strict counterparty credit guidelines and enter into
transactions only with financial institutions of investment grade or better. We
monitor counterparty exposures daily and review any downgrade in credit rating
immediately. If a downgrade in the credit rating of a counterparty were to
occur, we have provisions requiring collateral in the form of U.S. government
securities for substantially all of our transactions. To mitigate presettlement
risk, minimum credit standards become more stringent as the duration of the
derivative financial instrument increases. To minimize the concentration of
credit risk, we enter into derivative transactions with a portfolio of financial
institutions. As a result, we consider the risk of counterparty default to be
minimal.
INTEREST RATE MANAGEMENT
Our Company maintains a percentage of fixed and variable rate debt within
defined parameters. We enter into interest rate swap agreements that maintain
the fixed/variable mix within these parameters. These contracts had maturities
ranging from one to four years on December 31, 1999. Variable rates are
predominantly linked to the London Interbank Offered Rate. Any differences paid
or received on interest rate swap agreements are recognized as adjustments to
interest expense over the life of each swap, thereby adjusting the effective
interest rate on the underlying obligation.
FOREIGN CURRENCY MANAGEMENT
The purpose of our foreign currency hedging activities is to reduce the
risk that our eventual dollar net cash inflows resulting from sales outside the
United States will be adversely affected by changes in exchange rates.
We enter into forward exchange contracts and purchase currency options
(principally European currencies and Japanese yen) to hedge firm sale
commitments denominated in foreign currencies. We also purchase currency
options (principally European currencies and Japanese yen) to hedge certain
anticipated sales. Premiums paid and realized gains and losses, including those
on any terminated contracts, are included in prepaid expenses and other assets.
These are recognized in income, along with unrealized gains and losses in the
same period the hedging transactions
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p55
THE COCA-COLA COMPANY AND SUBSIDIARIES
are realized. Approximately $85 million and $43 million of realized losses on
settled contracts entered into as hedges of firmly committed transactions that
have not yet occurred were deferred on December 31, 1999 and 1998, respectively.
Deferred gains/losses from hedging anticipated transactions were not material on
December 31, 1999 or 1998. In the unlikely event that the underlying transaction
terminates or becomes improbable, the deferred gains or losses on the associated
derivative will be recorded in our income statement.
Gains and losses on derivative financial instruments that are designated
and effective as hedges of net investments in international operations are
included in share-owners' equity as a foreign currency translation adjustment,
a component of accumulated other comprehensive income.
The following table presents the aggregate notional principal amounts,
carrying values, fair values and maturities of our derivative financial
instruments outstanding on December 31, 1999 and 1998 (in millions):
Notional
Principal Carrying Fair
December 31, Amounts Values Values Maturity
-------------------------------------------------------------------------------
1999
Interest rate
management
Swap agreements
Assets $ 250 $ 2 $ 6 2000-2003
Liabilities 200 (1) (8) 2000-2003
Foreign currency
management
Forward contracts
Assets 1,108 57 71 2000-2001
Liabilities 344 (6) (3) 2000-2001
Swap agreements
Assets 102 9 16 2000
Liabilities 412 - (77) 2000-2002
Purchased options
Assets 1,770 47 18 2000
Other
Assets 185 - 2 2000
Liabilities 126 (8) (8) 2000
-------------------------------------------------------------------------------
$ 4,497 $ 100 $ 17
===============================================================================
Notional
Principal Carrying Fair
December 31, Amounts Values Values Maturity
-------------------------------------------------------------------------------
1998
Interest rate
management
Swap agreements
Assets $ 325 $ 2 $ 19 1999-2003
Liabilities 200 (2) (13) 2000-2003
Foreign currency
management
Forward contracts
Assets 809 6 (54) 1999-2000
Liabilities 1,325 (6) (73) 1999-2000
Swap agreements
Assets 344 4 6 1999-2000
Liabilities 704 - (51) 1999-2002
Purchased options
Assets 232 5 3 1999
Other
Liabilities 243 (25) (26) 1999-2000
-------------------------------------------------------------------------------
$ 4,182 $ (16) $ (189)
===============================================================================
Maturities of derivative financial instruments held on December 31, 1999,
are as follows (in millions):
2000 2001 2002 2003
-----------------------------------------------------
$4,018 $ 268 $ 136 $ 75
=====================================================
NOTE 10: COMMITMENTS AND CONTINGENCIES
On December 31, 1999, we were contingently liable for guarantees of
indebtedness owed by third parties in the amount of $409 million, of which $7
million related to independent bottling licensees. We do not consider it
probable that we will be required to satisfy these guarantees.
We believe our exposure to concentrations of credit risk is limited, due
to the diverse geographic areas covered by our operations.
We have committed to make future marketing expenditures of $760 million,
of which the majority is payable over the next 12 years. Additionally, under
certain circumstances, we have committed to make future investments in
bottling companies. However, we do not consider any of these commitments to be
individually significant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p56
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTE 11: NET CHANGE IN OPERATING ASSETS AND LIABILITIES
The changes in operating assets and liabilities, net of effects of
acquisitions and divestitures of businesses and unrealized exchange gains/
losses, are as follows (in millions):
1999 1998 1997
----------------------------------------------------------------
Increase in trade accounts
receivable $ (96) $ (237) $ (164)
Increase in inventories (163) (12) (43)
Increase in prepaid expenses
and other assets (547) (318) (145)
Increase (decrease) in
accounts payable
and accrued expenses 281 (70) 299
Increase (decrease) in
accrued taxes (36) 120 393
Increase (decrease) in
other liabilities 4 (33) (387)
----------------------------------------------------------------
$ (557) $ (550) $ (47)
================================================================
NOTE 12: RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS
Our Company currently sponsors restricted stock award plans and stock
option plans. Our Company applies Accounting Principles Board Opinion No. 25
and related Interpretations in accounting for our plans. Accordingly, no
compensation cost has been recognized for our stock option plans. The
compensation cost charged against income for our restricted stock award plans
was $39 million in 1999, $14 million in 1998 and $56 million in 1997. For our
Incentive Unit Agreements and Performance Unit Agreements, which were both paid
off in 1997, the charge against income was $31 million in 1997. Had compensation
cost for the stock option plans been determined based on the fair value at the
grant dates for awards under the plans, our Company's net income and net income
per share (basic and diluted) would have been as presented in the following
table.
The pro forma amounts are indicated below (in millions, except per share
amounts):
Year Ended December 31, 1999 1998 1997
----------------------------------------------------------------
Net income
As reported $ 2,431 $ 3,533 $ 4,129
Pro forma $ 2,271 $ 3,405 $ 4,026
Basic net income per share
As reported $ .98 $ 1.43 $ 1.67
Pro forma $ .92 $ 1.38 $ 1.63
Diluted net income per share
As reported $ .98 $ 1.42 $ 1.64
Pro forma $ .91 $ 1.36 $ 1.60
================================================================
Under the amended 1989 Restricted Stock Award Plan and the amended 1983
Restricted Stock Award Plan (the Restricted Stock Award Plans), 40 million and
24 million shares of restricted common stock, respectively, may be granted to
certain officers and key employees of our Company.
On December 31, 1999, 33 million shares were available for grant under the
Restricted Stock Award Plans. In 1999, there were 32,100 shares of restricted
stock granted at an average price of $53.86. In 1998, there were 707,300 shares
of restricted stock granted at an average price of $67.03. In 1997, 162,000
shares of restricted stock were granted at $59.75. Participants are entitled to
vote and receive dividends on the shares and, under the 1983 Restricted Stock
Award Plan, participants are reimbursed by our Company for income taxes imposed
on the award, but not for taxes generated by the reimbursement payment. The
shares are subject to certain transfer restrictions and may be forfeited if a
participant leaves our Company for reasons other than retirement, disability or
death, absent a change in control of our Company.
Under our 1991 Stock Option Plan (the 1991 Option Plan), a maximum of 120
million shares of our common stock was approved to be issued or transferred to
certain officers and employees pursuant to stock options and stock appreciation
rights granted under the 1991 Option Plan. The stock appreciation rights permit
the holder, upon surrendering all or part of the related stock option, to
receive cash, common stock or a combination thereof, in an amount up to 100
percent of the difference between the market price and the option price. Options
to purchase common stock under the 1991 Option Plan have been granted to Company
employees at fair market value at the date of grant.
A new stock option plan (the 1999 Option Plan) was approved by share
owners in April of 1999. Following the approval of the 1999 Option Plan, no
grants were made from the 1991 Option Plan and shares available under the 1991
Option Plan were no longer available to be granted. Under the 1999 Option Plan,
a maximum of 120 million shares of our common stock was approved to be issued
or transferred to certain officers and employees pursuant to stock options
granted under the 1999 Option Plan. Options to purchase common stock under the
1999 Option Plan have been granted to Company employees at fair market value at
the date of grant.
Generally, stock options become exercisable over a four-year vesting period
and expire 15 years from the date of grant. Prior to 1999, generally, stock
options became exercisable over a three-year vesting period and expired 10 years
from the date of grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend
yields of 1.2, 0.9 and 1.0 percent; expected volatility of 27.1, 24.1 and 20.1
percent; risk-free interest rates of 6.2, 4.0 and 6.0 percent; and expected
lives of four years for all years. The weighted-average fair value of options
granted was $15.77, $15.41 and $13.92 for the years ended December 31, 1999,
1998 and 1997, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p57
THE COCA-COLA COMPANY AND SUBSIDIARIES
The following table summarizes information about stock options at December
31, 1999 (shares in millions):
In 1988, our Company entered into Incentive Unit Agreements whereby,
subject to certain conditions, certain officers were given the right to receive
cash awards based on the market value of 2.4 million shares of our common stock
at the measurement dates. Under the Incentive Unit Agreements, an employee is
reimbursed by our Company for income taxes imposed when the value of the units
is paid, but not for taxes generated by the reimbursement payment. In 1997, all
outstanding units were paid at a price of $58.50 per unit.
In 1985, we entered into Performance Unit Agreements whereby certain
officers were given the right to receive cash awards based on the difference
in the market value of approximately 4.4 million shares of our common stock at
the measurement dates and the base price of $2.58, the market value as of
January 2, 1985. In 1997, all outstanding units were paid based on a market
price of $58.50 per unit.
NOTE 13: PENSION AND OTHER POSTRETIREMENT
BENEFIT PLANS
Our Company sponsors and/or contributes to pension and postretirement
health care and life insurance benefit plans covering substantially all U.S.
employees and certain employees in international locations. We also sponsor
nonqualified, unfunded defined benefit pension plans for certain officers and
other employees. In addition, our Company and its subsidiaries have various
pension plans and other forms of postretirement arrangements outside the United
States.
Total expense for all benefit plans, including defined benefit pension
plans and postretirement health care and life insurance benefit plans, amounted
to approximately $108 million in 1999, $119 million in 1998 and $109 million in
1997. Net periodic cost for our pension and other benefit plans consists of the
following (in millions):
Pension Benefits
---------------------------------
Year Ended December 31, 1999 1998 1997
----------------------------------------------------------------
Service cost $ 67 $ 56 $ 49
Interest cost 111 105 93
Expected return on
plan assets (119) (105) (95)
Amortization of prior
service cost 6 3 7
Recognized net actuarial loss 7 9 14
----------------------------------------------------------------
Net periodic pension cost $ 72 $ 68 $ 68
================================================================
Other Benefits
---------------------------------
Year Ended December 31, 1999 1998 1997
----------------------------------------------------------------
Service cost $ 14 $ 14 $ 11
Interest cost 22 25 23
Expected return on plan assets (1) (1) (1)
Recognized net actuarial gain - - (1)
-----------------------------------------------------------------
Net periodic cost $ 35 $ 38 $ 32
=================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p58
THE COCA-COLA COMPANY AND SUBSIDIARIES
The following table sets forth the change in benefit obligation for our
benefit plans (in millions):
Pension Other
Benefits Benefits
--------------- -------------------
December 31, 1999 1998 1999 1998
-----------------------------------------------------------------------------
Benefit obligation
at beginning of year $ 1,717 $ 1,488 $ 381 $ 327
Service cost 67 56 14 14
Interest cost 111 105 22 25
Foreign currency
exchange rate changes (13) 25 - -
Amendments 4 8 - -
Actuarial (gain) loss (137) 124 (101) 31
Benefits paid (84) (86) (14) (16)
Other 5 (3) 1 -
------------------------------------------------------------------------------
Benefit obligation
at end of year $ 1,670 $ 1,717 $ 303 $ 381
==============================================================================
The following table sets forth the change in plan assets for our benefit
plans (in millions):
Pension Other
Benefits Benefits
--------------- -------------------
December 31, 1999 1998 1999 1998
-----------------------------------------------------------------------------
Fair value of plan assets
at beginning of year {1} $ 1,516 $ 1,408 $ 36 $ 40
Actual return on
plan assets 259 129 1 2
Employer contribution 34 25 5 10
Foreign currency
exchange rate changes (20) 18 - -
Benefits paid (69) (68) (14) (16)
Other 2 4 1 -
-----------------------------------------------------------------------------
Fair value of plan assets
at end of year {1} $ 1,722 $ 1,516 $ 29 $ 36
=============================================================================
{1} Pension benefit plan assets primarily consist of listed stocks (including
1,584,000 shares of common stock of our Company with a fair value of $92 million
and $106 million as of December 31, 1999 and 1998, respectively), bonds and
government securities. Other benefit plan assets consist of corporate bonds,
government securities and short-term investments.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $556 million, $434 million and $161 million,
respectively, as of December 31, 1999, and $536 million, $418 million and $149
million, respectively, as of December 31, 1998.
The accrued pension and other benefit costs recognized in our accompanying
consolidated balance sheets is computed as follows (in millions):
Pension Other
Benefits Benefits
----------------- -----------------
December 31, 1999 1998 1999 1998
-----------------------------------------------------------------------------
Funded status $ 52 $ (201) $ (274) $ (345)
Unrecognized net (asset)
liability at transition 4 - - -
Unrecognized prior
service cost 54 43 4 4
Unrecognized net (gain)
loss (285) (10) (91) 10
-----------------------------------------------------------------------------
Net liability recognized $ (175) $ (168) $ (361) $ (331)
-----------------------------------------------------------------------------
Prepaid benefit cost $ 73 $ 54 $ - $ -
Accrued benefit liability (305) (303) (361) (331)
Accumulated other
comprehensive income 26 64 - -
Intangible asset 31 17 - -
-----------------------------------------------------------------------------
Net liability recognized $ (175) $ (168) $ (361) $ (331)
=============================================================================
The weighted-average assumptions used in computing the preceding
information are as follows:
Pension Benefits
-----------------------------
December 31, 1999 1998 1997
---------------------------------------------------------------
Discount rates 7% 6 1/2% 7%
Rates of increase in
compensation levels 4 1/2% 4 1/2% 4 3/4%
Expected long-term
rates of return on
assets 8 1/2% 8 3/4% 9%
Other Benefits
-------------------------------
December 31, 1999 1998 1997
---------------------------------------------------------------
Discount rates 8% 6 3/4% 7 1/4%
Rates of increase in
compensation levels 5% 4 1/2% 4 3/4%
Expected long-term
rates of return on
assets 3% 3% 3%
The rate of increase in per capita costs of covered health care benefits is
assumed to be 7 1/2 percent in 2000, decreasing gradually to 5 1/4 percent by
the year 2005.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p59
THE COCA-COLA COMPANY AND SUBSIDIARIES
A one percentage point change in the assumed health care cost trend rate
would have the following effects (in millions):
One Percentage One Percentage
Point Increase Point Decrease
--------------------------------------------
Effect on accumulated
postretirement benefit
obligation as of
December 31, 1999 $ 42 $ (34)
Effect on net periodic
postretirement benefit
cost in 1999 $ 6 $ (5)
NOTE 14: INCOME TAXES
Income before income taxes consists of the following (in millions):
Year Ended December 31, 1999 1998 1997
----------------------------------------------------------------
United States $ 1,504 $ 1,979 $ 1,515
International 2,315 3,219 4,540
---------------------------------------------------------------
$ 3,819 $ 5,198 $ 6,055
===============================================================
Income tax expense (benefit) consists of the following (in millions):
Year Ended United State &
December 31, States Local International Total
------------------------------------------------------------------------------
1999
Current $ 395 $ 67 $ 829 $ 1,291
Deferred 182 11 (96) 97
1998
Current $ 683 $ 91 $ 929 $ 1,703
Deferred (73) 28 7 (38)
1997
Current $ 240 $ 45 $ 1,261 $ 1,546
Deferred 180 21 179 380
==============================================================================
We made income tax payments of approximately $1,404 million, $1,559 million
and $982 million in 1999, 1998 and 1997, respectively.
A reconciliation of the statutory U.S. federal rate and effective rates is
as follows:
Year Ended December 31, 1999 1998 1997
---------------------------------------------------------------
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income taxes-net of
federal benefit 1.0 1.0 1.0
Earnings in jurisdictions taxed
at rates different from the
statutory U.S. federal rate (6.0) (4.3) (2.6)
Equity income or loss 1.6 - (.6)
Other operating charges 5.3 - -
Other-net (.6) .3 (1.0)
---------------------------------------------------------------
36.3% 32.0% 31.8%
===============================================================
Our effective tax rate reflects the tax benefit derived from having
significant operations outside the United States that are taxed at rates lower
than the U.S. statutory rate of 35 percent, 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 tax rate on operations.
In 1999, the Company recorded a charge of $813 million, primarily reflecting
the impairment of certain bottling, manufacturing and intangible assets. For
some locations with impaired assets, management concluded that it was more
likely than not that no local tax benefit would be realized. Accordingly, a
valuation allowance was recorded offsetting the future tax benefits for such
locations. This resulted in an increase in our effective tax rate for 1999.
Excluding the impact, the Company's effective tax rate for 1999 would have
been 31.0 percent.
We have provided appropriate U.S. and international taxes for earnings of
subsidiary companies that are expected to be remitted to the parent company.
Exclusive of amounts that would result in little or no tax if remitted, the
cumulative amount of unremitted earnings from our international subsidiaries
that is expected to be indefinitely reinvested was approximately $3.4 billion
on December 31, 1999. The taxes that would be paid upon remittance of these
indefinitely reinvested earnings are approximately $1.2 billion, based on
current tax laws.
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities consist of the following (in millions):
December 31, 1999 1998
---------------------------------------------------------------
Deferred tax assets:
Benefit plans $ 311 $ 309
Liabilities and reserves 169 166
Net operating loss carryforwards 196 49
Other operating charges 254 -
Other 272 176
---------------------------------------------------------------
Gross deferred tax assets 1,202 700
Valuation allowance (443) (18)
---------------------------------------------------------------
$ 759 $ 682
===============================================================
Deferred tax liabilities:
Property, plant and equipment $ 320 $ 244
Equity investments 397 219
Intangible assets 197 139
Other 99 320
---------------------------------------------------------------
$ 1,013 $ 922
===============================================================
Net deferred tax asset (liability){1} $ (254) $ (240)
---------------------------------------------------------------
{1} Deferred tax assets of $244 million and $184 million have been
included in the consolidated balance sheet caption "Marketable
securities and other assets" at December 31, 1999 and 1998, respectively.
On December 31, 1999 and 1998, we had approximately $233 million and $171
million, respectively, of gross deferred tax assets, net of valuation
allowances, located in countries outside the United States.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p60
THE COCA-COLA COMPANY AND SUBSIDIARIES
On December 31, 1999, we had $608 million of operating loss carryforwards
available to reduce future taxable income of certain international subsidiaries.
Loss carryforwards of $320 million must be utilized within the next five years;
$288 million can be utilized over an indefinite period. A valuation allowance
has been provided for a portion of the deferred tax assets related to these loss
carryforwards.
NOTE 15: NONRECURRING ITEMS
In the fourth quarter of 1999, we recorded charges of approximately $813
million. Of this $813 million, approximately $543 million related to the
impairment of certain bottling, manufacturing and intangible assets, primarily
within our Russian and Caribbean bottlers and in the Middle and Far East and
North America. These impairment charges were recorded to reduce the carrying
value of the identified assets to fair value. Fair values were derived using
a variety of methodologies, including cash flow analysis, estimates of sales
proceeds and independent appraisals. The charges were primarily the result of
our revised outlook in certain markets due to the prolonged severe economic
downturns. The remaining carrying value of long-lived assets within these
operations as of December 31, 1999, was approximately $140 million.
Of the remainder, approximately $196 million related to charges associated
with the impairment of the distribution and bottling assets of our vending
operations in Japan and our bottling operations in the Baltics. The charges
reduced the carrying value of these assets to their fair value less the cost
to sell. Consistent with our long-term bottling investment strategy, management
has committed to a plan to sell our ownership interest in these operations to
one of our strategic business partners. It is management's intention that this
plan will be completed within approximately the next 12 months. The remaining
carrying value of long-lived assets within these operations and the loss from
operations on an after-tax basis as of and for the 12-month period ending
December 31, 1999, were approximately $152 million and $5 million,
respectively.
The remainder of the $813 million charges, approximately $74 million,
primarily related to the change in senior management and charges related to
organizational changes within the Greater Europe, Latin America and Corporate
segments. These charges were incurred during the fourth quarter of 1999.
In the second quarter of 1998, we recorded a nonrecurring charge primarily
related to the impairment of certain assets in North America of $25 million
and Corporate of $48 million.
In the second quarter of 1997, we recorded a nonrecurring charge of $60
million related to enhancing manufacturing efficiencies in North America.
Substantially all of the charges required as a result of these provisions have
been realized as of December 31, 1999.
NOTE 16: OPERATING SEGMENTS
During the three years ended December 31, 1999, our Company's operating
structure included 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.
SEGMENT PRODUCTS AND SERVICES
The business of our Company is nonalcoholic ready-to-drink beverages,
principally soft drinks, but also a variety of noncarbonated beverages. Our
operating segments derive substantially all their revenues from the manufacture
and sale of beverage concentrates and syrups with the exception of Corporate,
which derives its revenues primarily from the licensing of our brands in
connection with merchandise.
METHOD OF DETERMINING SEGMENT PROFIT OR LOSS
Management evaluates the performance of its operating segments
separately to individually monitor the different factors affecting financial
performance. Segment profit or loss includes substantially all of the
segment's costs of production, distribution and administration. Our
Company manages income taxes on a global basis. Thus, we evaluate segment
performance based on profit or loss before income taxes, exclusive of any
significant gains or losses on the disposition of investments or other
assets. Our Company typically manages and evaluates equity investments and
related income on a segment level. However, we manage certain significant
investments, such as our equity interests in Coca-Cola Enterprises, at the
corporate level. We manage financial costs, such as exchange gains and
losses and interest income and expense, on a global basis at the Corporate
segment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p61
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p62
THE COCA-COLA COMPANY AND SUBSIDIARIES
NET OPERATING REVENUES BY OPERATING SEGMENT {1}
[pie charts]
Year Ended December 31, 1999 1998 1997
------------------------------------------------------------------------------
North America 38% 37% 35%
Greater Europe 23% 26% 29%
Latin America 10% 12% 11%
Middle and Far East 26% 22% 22%
Africa 3% 3% 3%
OPERATING INCOME BY OPERATING SEGMENT {1}
Year Ended December 31, 1999 1998 1997
------------------------------------------------------------------------------
North America 32% 25% 22%
Greater Europe 23% 29% 31%
Latin America 18% 18% 19%
Middle and Far East 23% 24% 25%
Africa 4% 4% 3%
{1} Charts and percentages are calculated excluding Corporate
[pie charts]
NOTE 17: ACQUISITIONS AND INVESTMENTS
During 1999, the Company's acquisition and investment activity, which
included the acquisition of beverage brands from Cadbury Schweppes plc in more
than 160 countries around the world and investments in the bottling operations
of Embotelladora Arica S.A., F&N Coca-Cola Pte Limited, and Coca-Cola West
Japan Company, Ltd., totaled $1.9 billion. During 1998 and 1997, the Company's
acquisition and investment activity totaled $1.4 billion and $1.1 billion,
respectively. None of the acquisitions and investment activity in 1998 and 1997
was individually significant.
The acquisitions and investments have been accounted for by the purchase
method of accounting and, accordingly, their results have been included in the
consolidated financial statements from their respective dates of acquisition.
Had the results of these businesses been included in operations commencing with
1997, the reported results would not have been materially affected.
NOTE 18: SUBSEQUENT EVENTS
In the second half of 1999, we undertook a detailed review of each of our
business functions. The purpose of this review was to determine the optimal
organizational structure to serve the needs of our customers and consumers at
the local level.
As a result of this review, in January 2000 we announced a major
organizational realignment (the Realignment). The Realignment will reduce our
workforce around the world while transferring responsibilities from our
corporate headquarters to revenue-generating operating units. The intent of the
Realignment is to effectively align our corporate resources, support systems and
business culture to fully leverage the local capabilities of our system. Under
the Realignment, approximately 6,000 positions worldwide, including employees of
the Company, open positions and contract labor, will be eliminated. Of these
identified positions, approximately 3,300 are based within the United States and
approximately 2,700 are based outside of the United States. The entire reduction
will take place during calendar year 2000.
Employees separating from our Company as a result of the Realignment will
be offered severance packages which include both financial and nonfinancial
components. Charges related to the Realignment will be recognized during
calendar year 2000.
REPORT OF INDEPENDENT AUDITORS KO-ar99-p63
THE COCA-COLA COMPANY AND SUBSIDIARIES
BOARD OF DIRECTORS AND SHARE OWNERS
THE COCA-COLA COMPANY
We have audited the accompanying consolidated balance sheets of The
Coca-Cola Company and subsidiaries as of December 31, 1999 and 1998,and the
related consolidated statements of income, share-owners' equity, and cash
flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Coca-Cola
Company and subsidiaries at December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG
Atlanta, Georgia
January 25, 2000
THE COCA-COLA COMPANY AND SUBSIDIARIES KO-ar99-p65
The fourth quarter of 1999 includes provisions of $813 million ($.31 per share
after income taxes, basic and diluted) recorded in other operating charges,
primarily relating to the impairment of certain bottling, manufacturing and
intangible assets. For a more complete discussion of these provisions, refer to
Note 15 in our Consolidated Financial Statements.
The second quarter of 1998 includes a gain of approximately $191 million
($.03 per share after income taxes, basic and diluted) on the sale of our
previously consolidated bottling and canning operations in Italy in June
1998. The second quarter of 1998 also includes provisions of $73 million
($.02 per share after income taxes, basic and diluted) related to the
impairment of certain assets in North America and Corporate.
The third quarter of 1998 includes a noncash gain on the issuance of stock by
CCEAG of approximately $27 million ($.01 per share after income taxes, basic
and diluted).
STOCK PRICES
Below are the New York Stock Exchange high, low and closing prices of
The Coca-Cola Company's stock for each quarter of 1999 and 1998.
SHARE-OWNER INFORMATION
COMMON STOCK
Ticker symbol: KO
The Coca-Cola Company is one of 30 companies
in the Dow Jones Industrial Average.
Share owners of record at year end: 394,603
Shares outstanding at year end: 2.47 billion
STOCK EXCHANGES
INSIDE THE UNITED STATES:
Common stock listed and traded: New York Stock Exchange, the
principal market for our common stock.
Common stock traded: Boston, Chicago, Cincinnati, Pacific and
Philadelphia stock exchanges.
OUTSIDE THE UNITED STATES:
Common stock listed and traded: The German exchange in
Frankfurt and the Swiss exchange in Zurich.
DIVIDENDS
At its February 2000 meeting, our Board increased our quarterly
dividend to 17 cents per share, equivalent to an annual dividend
of 68 cents per share. The Company has increased dividends each
of the last 38 years.
The Coca-Cola Company normally pays dividends four times a year,
usually on April 1, July 1, October 1 and December 15. The Company
has paid 315 consecutive quarterly dividends, beginning in 1920.
SHARE-OWNER ACCOUNT ASSISTANCE
For address changes, dividend checks, direct deposit of dividends,
account consolidation, registration changes, lost stock certificates,
stock holdings and the Dividend and Cash Investment Plan, please
contact:
Registrar and Transfer Agent
First Chicago Trust Company, a division of EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
Toll-free: (888) COKESHR (265-3747)
For hearing impaired: (201) 222-4955
E-mail: [email protected]
Internet: www.equiserve.com
DIVIDEND AND CASH INVESTMENT PLAN
The Dividend and Cash Investment plan permits share owners of record
to reinvest dividends from Company stock in shares of The Coca-Cola
Company. The Plan provides a convenient, economical and systematic
method of acquiring additional shares of our common stock. All
share owners of record are eligible to participate. Share owners
also may purchase Company stock through voluntary cash investments
of up to $125,000 per year.
At year end, 74 percent of the Company's share owners of record
were participants in the Plan. In 1999, share owners invested $40
million in dividends and $78 million in cash in the Plan.
If your shares are held in street name by your broker and you
are interested in participating in the Dividend and Cash Investment
Plan, you may have your broker transfer the shares to First Chicago
Trust Company, a division of EquiServe, electronically through the
Direct Registration System.
For more details on the Dividend and Cash Investment Plan,
please contact the Plan Administrator, First Chicago Trust Company,
a division of EquiServe, or visit the investor section of our
Company's Web site, www.thecoca-colacompany.com, for more information.
SHARE-OWNER INTERNET ACCOUNT ACCESS
Share owners of record may access their accounts via the Internet
to obtain share balance, current market price of shares, historical
stock prices and the toal value of their investment. In addition,
they may sell or request issuance of Dividend and Cash Investment
Plan shares.
For information on how to access this secure site, please call
First Chicago Trust Company, a division of EquiServe, toll-free at
(877) 843-9327. For share owners of record outside North America,
please call (201) 536-8071.
ANNUAL MEETING OF SHARE OWNERS
April 19, 2000 at 9 a.m. local time
The Playhouse Theatre
DuPont Building
10th and Market Streets
Wilmington, Delaware
CORPORATE OFFICES
The Coca-Cola Company
One Coca-Cola Plaza
Atlanta, Georgia 30313
INSTITUTIONAL INVESTOR INQUIRIES
(404) 676-5766
INFORMATION RESOURCES
INTERNET SITE
You can find our stock price, news and earnings releases, and more
financial information about our Company on our Web site,
www.thecoca-colacompany.com.
PUBLICATIONS
The Company's Annual Report, Proxy Statement, Form 10-K and Form 10-Q
reports are available free of charge upon request from our Industry &
Consumer Affairs Department at the Company's corporate address, listed
above.
HOTLINE
The Company's hotline (800) INVSTKO (468-7856), offers taped highlights
from the most recent quarter and may be used to request the most recent
quarterly results news release.
AUDIO ANNUAL REPORT
An audiocassette version of this report is available without charge as
a service to the visually impaired. To receive a copy, please contact
our Industry & Consumer Affairs Department at (800) 571-2653.
DUPLICATE MAILINGS
If you are receiving duplicate or unwanted copies of our publications,
please contact First Chicago Trust Company, a division of EquiServe,
at (888) COKESHR (265-3747).
GLOSSARY
[Following are certain definitions extracted from page 69.]
DIVIDEND PAYOUT RATIO: Calculated by dividing cash dividends on common stock
by net income available to common share owners.
ECONOMIC PROFIT: Income from continuing operations, after giving effect to
taxes and excluding the effects of interest, in excess of a computed capital
charge for average operating capital employed.
FREE CASH FLOW: Cash provided by operations less cash used in business
reinvestment. The Company uses free cash flow along with borrowings to pay
dividends, make share repurchases and make acquisitions.
INTEREST COVERAGE RATIO: Income before taxes, excluding unusual items, plus
interest expense divided by the sum of interest expense and capitalized
interest.
NET CAPITAL: Calculated by adding share-owners' equity to net debt.
NET DEBT: Calculated by subtracting from debt the sum of cash, cash
equivalents, marketable securities and certain temporary bottling investments,
less the amount of cash determined to be necessary for operations.
RETURN ON CAPITAL: Calculated by dividing income from continuing operations --
before changes in accounting principles, adding back interest expense -- by
average total capital.
RETURN ON COMMON EQUITY: Calculated by dividing income from continuing
operations -- before changes in accounting principles, less preferred stock
dividends -- by average common share-owners' equity.
TOTAL CAPITAL: Equals share-owners' equity plus interest-bearing debt.
TOTAL MARKET VALUE OF COMMON STOCK: Stock price at year end multiplied by
the number of shares outstanding at year end.
THE COCA-COLA COMPANY AND SUBSIDIARIES
Our mission is to maximize share-owner value over time. In order to achieve
this mission, we must create value for all the constituents we serve, including
our consumers, our customers, our bottlers and our communities. The Coca-Cola
Company and its subsidiaries (our Company) create value by executing a
comprehensive business strategy guided by six key beliefs: (1) consumer demand
drives everything; (2) brand Coca-Cola is the core of our business; (3) we will
serve consumers a broad selection of the nonalcoholic ready-to-drink beverages
they want to drink throughout the day; (4) we will be the best marketers in the
world; (5) we will think and act locally; and (6) we will lead as a model
corporate citizen. The ultimate objectives of our business strategy are to
increase volume, expand our share of worldwide nonalcoholic ready-to-drink
beverage sales, maximize our long-term cash flows and create economic value
added by improving economic profit. We pursue these objectives by strategically
investing in the high-return beverage business and by optimizing our cost of
capital through appropriate financial strategies.
There are nearly 6 billion people in the world who decide every day whether
or not to buy our products. Each of these people represents a potential consumer
of our Company's products. As we increase consumer demand for our portfolio of
brands, we produce growth throughout the Coca-Cola system. This growth typically
comes in the form of increased finished product purchases by our consumers,
increased finished product sales by our customers, increased case sales by our
bottling partners and increased gallon sales by our Company.
The Coca-Cola system has more than 16 million customers around the world
that sell or serve our products directly to consumers. We keenly focus on
enhancing value for these customers and providing solutions to grow their
beverage businesses. Our approach includes understanding each customer's
business and needs, whether that customer is a sophisticated retailer in a
developed market or a kiosk owner in an emerging market.
Ultimately, our success in achieving our Company's mission depends on our
ability to satisfy more of the nonalcoholic ready-to-drink beverage
consumption demands of these 6 billion consumers and our ability to add value
for these customers. This can be achieved when we place the right products in
the right markets at the right time.
INVESTMENTS
With a business system that operates locally in nearly 200 countries and
generates superior cash flows, we consider our Company to be uniquely positioned
to capitalize on profitable investment opportunities. Our criteria for
investment are simple: new investments must directly enhance our existing
operations and must be expected to provide cash returns that exceed our
long-term, after-tax, weighted-average cost of capital, currently estimated at
approximately 11 percent.
Because it consistently generates high returns, the beverage business is a
particularly attractive investment for us. In highly developed markets, our
expenditures focus primarily on marketing our Company's brands. In emerging and
developing markets, our objective is to increase the penetration of our
products. In these markets, we allocate most of our investments to enhancing
infrastructure such as production facilities, distribution networks, sales
equipment and technology. We make these investments by forming strategic
business alliances with local bottlers and by matching local expertise with our
experience, resources and focus. Our investment strategy focuses on three
fundamental components of our business: marketing, brands and our bottling
system.
MARKETING
To meet our long-term growth objectives, we make significant investments in
marketing to support our brands. Marketing investments enhance consumer
awareness and increase consumer preference for our brands. This produces
long-term growth in volume, per capita consumption and our share of worldwide
nonalcoholic ready-to-drink beverage sales.
We heighten consumer awareness and product appeal for our brands using
integrated marketing programs. Through our bottling investments and strategic
alliances with other bottlers of our products, we create and implement these
programs locally. In developing a strategy for a Company brand, we conduct
product and packaging research, establish brand positioning, develop precise
consumer communications and solicit consumer feedback. Our integrated marketing
programs include activities such as advertising, point-of-sale merchandising and
product sampling.
BRANDS
We compete in the nonalcoholic ready-to-drink beverage business. Our
offerings in this category include some of the world's most valuable brands, 232
in all. These include soft drinks and noncarbonated beverages such as sports
drinks, juice and juice drinks, water products, teas and coffees. As discussed
earlier, to meet our long-term growth objectives, we make significant
investments to support our brands. This involves investments to support existing
brands and to acquire new brands, when appropriate.
In July 1999, we completed the acquisition of Cadbury Schweppes plc
beverage brands in 155 countries for approximately $700 million. These brands
included Schweppes, Canada Dry, Dr Pepper, Crush and certain regional brands.
Among the countries excluded from this transaction were the United States, South
Africa, Norway, Switzerland and the European Union member nations (other than
the United Kingdom, Ireland and Greece). In September 1999, we completed the
acquisition of Cadbury Schweppes beverage brands in New Zealand for
approximately $20 million. Also in September 1999, in a separate transaction
valued at approximately $250 million, we acquired the carbonated soft drink
business of Cadbury Schweppes (South Africa) Limited in South Africa, Botswana,
Namibia, Lesotho and Swaziland. Our acquisitions of Cadbury Schweppes beverage
brands are still pending in several countries, subject to certain conditions
including regulatory review.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p32
THE COCA-COLA COMPANY AND SUBSIDIARIES
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. The
transaction was rejected by regulatory authorities of the French government in
November 1999.
BOTTLING SYSTEM
Our Company has business relationships with three types of bottlers: (1)
independently owned bottlers, in which we have no ownership interest; (2)
bottlers in which we have invested and have a noncontrolling ownership interest;
and (3) bottlers in which we have invested and have a controlling ownership
interest.
During 1999, independently owned bottling operations produced and
distributed approximately 27 percent of our worldwide unit case volume. Bottlers
in which we own a noncontrolling ownership interest produced and distributed
approximately 58 percent of our 1999 worldwide unit case volume. Controlled
bottling and fountain operations produced and distributed approximately 15
percent.
We view certain bottling operations in which we have a noncontrolling
ownership interest as key or anchor bottlers due to their level of
responsibility and performance. The strong commitment of both key and anchor
bottlers to their own profitable volume growth helps us meet our strategic goals
and furthers the interests of our worldwide production, distribution and
marketing systems. These bottlers tend to be large and geographically diverse,
with strong financial resources for long-term investment and strong management
resources. These bottlers give us strategic business partners on every major
continent.
Consistent with our strategy, in January 1999, two Japanese bottlers,
Kita Kyushu Coca-Cola Bottling Company Ltd. and Sanyo Coca-Cola Bottling Company
Ltd., announced plans for a merger to become a new, publicly traded bottling
company, Coca-Cola West Japan Company Ltd. The transaction, which was completed
in July 1999 and was valued at approximately $2.2 billion, created our first
anchor bottler in Japan. As of December 31, 1999, we owned approximately 5
percent of this new anchor bottler.
In 1998, Coca-Cola Amatil Ltd. (Coca-Cola Amatil) completed a spin-off of
its European operations into a new publicly traded European anchor bottler,
Coca-Cola Beverages plc (Coca-Cola Beverages). On December 31, 1999, we owned
approximately 50.5 percent of Coca-Cola Beverages. Our expectation is that we
will reduce our ownership position to less than 50 percent in 2000; therefore,
we are accounting for the investment by the equity method of accounting.
Historically, in certain situations, we have viewed it to be advantageous
for our Company to acquire a controlling interest in a bottling operation.
Owning such a controlling interest allowed us to compensate for limited local
resources and enabled us to help focus the bottler's sales and marketing
programs, assist in developing its business and information systems and
establish appropriate capital structures.
In July 1999, our Company acquired from Fraser and Neave Limited its 75
percent ownership interest in F&N Coca-Cola Pte Limited (F&N Coca-Cola). Prior
to the acquisition, our Company held a 25 percent equity interest in F&N
Coca-Cola. Acquisition of Fraser and Neave Limited's 75 percent stake gave our
Company full ownership of F&N Coca-Cola. F&N Coca-Cola holds a majority
ownership in bottling operations in Brunei, Cambodia, Nepal, Pakistan, Sri
Lanka, Singapore and Vietnam.
In line with our long-term bottling strategy, we periodically consider
options for reducing our ownership interest in a bottler. One option is to
combine our bottling interests with the bottling interests of others to form
strategic business alliances. Another option is to sell our interest in a
bottling operation to one of our equity investee bottlers. In both of these
situations, we continue participating in the bottler's earnings through our
portion of the equity investee's income.
As stated earlier, our investments in a bottler can represent either a
noncontrolling or a controlling interest. Through noncontrolling investments in
bottling companies, we provide expertise and resources to strengthen those
businesses.
In 1999, we increased our interest in Embotelladora Arica S.A., a bottler
headquartered in Chile, from approximately 17 percent to approximately 45
percent.
Our bottling investments generally have been profitable over time. Equity
income or loss, included in our consolidated net income, represents our share of
the net earnings or losses of our investee companies. In 1999, our Company's
share of losses from equity method investments totaled $184 million. For a more
complete discussion of these investments, refer to Note 2 in our Consolidated
Financial Statements.
The following table illustrates the difference in calculated fair values,
based on quoted closing prices of publicly traded shares, and our Company's
carrying values for selected equity method investees (in millions):
Fair Carrying
December 31, Value Value Difference {1}
--------------------------------------------------------------------------------
1999
Coca-Cola Enterprises Inc. $ 3,400 $ 728 $2,672
Coca-Cola Beverages plc 1,028 788 240
Coca-Cola Amatil Ltd. 1,019 1,133 (114)
Coca-Cola FEMSA,
S.A. de C.V. 751 124 627
Panamerican
Beverages, Inc. 630 714 (84)
Grupo Continental, S.A. 231 123 108
Embotelladora Arica S.A. 217 255 (38)
Coca-Cola Bottling Co.
Consolidated 118 70 48
Embotelladoras Argos S.A. 63 111 (48)
Embotelladoras Polar S.A. 46 55 (9)
--------------------------------------------------------------------------------
$ 3,402
--------------------------------------------------------------------------------
{1} In instances where carrying value exceeds fair value, this excess is
considered to be temporary.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p33
THE COCA-COLA COMPANY AND SUBSIDIARIES
FINANCIAL STRATEGIES
The following strategies allow us to optimize our cost of capital,
increasing our ability to maximize share-owner value.
DEBT FINANCING
Our Company maintains debt levels we consider prudent based on our cash
flow, interest coverage and percentage of debt to capital. We use debt financing
to lower our overall cost of capital, which increases our return on
share-owners' equity.
Our capital structure and financial policies have earned long-term credit
ratings of "A+" from Standard & Poor's and "Aa3" from Moody's, and a credit
rating of "A-1" and "P-1" for our commercial paper programs from Standard &
Poor's and Moody's, respectively.
Our global presence and strong capital position give us easy
access to key financial markets around the world, enabling us to raise funds
with a low effective cost. This posture, coupled with the active management of
our mix of short-term and long-term debt, results in a lower overall cost of
borrowing. Our debt management policies, in conjunction with our share
repurchase programs and investment activity, typically result in current
liabilities exceeding current assets.
In managing our use of debt capital, we consider the following financial
measurements and ratios:
Year Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
Net debt (in billions) $ 4.5 $ 3.3 $ 2.0
Net debt-to-net capital 32% 28% 22%
Free cash flow to net debt 52% 57% 144%
Interest coverage 14x 19x 22x
Ratio of earnings to
fixed charges 11.6x 17.3x 20.8x
--------------------------------------------------------------------------------
SHARE REPURCHASES
In October 1996, our Board of Directors authorized a plan to repurchase up
to 206 million shares of our Company's common stock through the year 2006. In
1999, we did not repurchase any shares under the 1996 plan due primarily to our
utilization of cash for our recent brand and bottler acquisitions.
We do not anticipate the repurchase of any shares under the 1996 plan
during the first half of the year 2000. This is due to our anticipated
utilization of cash for an organizational realignment and the projected impact
on cash from the planned reduction in concentrate inventory levels at selected
bottlers, as discussed under the heading "Recent Developments." We intend to
reevaluate our cash needs during the second half of the year.
Since the inception of our initial share repurchase program in 1984 through
our current program as of December 31, 1999, we have repurchased more than 1
billion shares. This represents 32 percent of the shares outstanding as of
January 1, 1984, at an average price per share of $12.46.
DIVIDEND POLICY
At its February 2000 meeting, our Board of Directors again increased our
quarterly dividend, raising it to $.17 per share. This is equivalent to a
full-year dividend of $.68 in 2000, our 38th consecutive annual increase. Our
annual common stock dividend was $.64 per share, $.60 per share and $.56 per
share in 1999, 1998 and 1997, respectively.
In 1999, our dividend payout ratio was approximately 65 percent of our net
income, reflecting the impact of the other operating charges recorded in the
fourth quarter. A detailed discussion follows under the heading "Other Operating
Charges." To free up additional cash for reinvestment in our high-return
beverage business, our Board of Directors intends to gradually reduce our
dividend payout ratio to 30 percent over time.
FINANCIAL RISK MANAGEMENT
Our Company uses derivative financial instruments primarily to reduce our
exposure to adverse fluctuations in interest rates and foreign exchange rates
and, to a lesser extent, adverse fluctuations in commodity prices and other
market risks. We do not enter into derivative financial instruments for trading
purposes. As a matter of policy, all our derivative positions are used to reduce
risk by hedging an underlying economic exposure. Because of the high correlation
between the hedging instrument and the underlying exposure, fluctuations in the
value of the instruments are generally offset by reciprocal changes in the value
of the underlying exposure. The derivatives we use are straightforward
instruments with liquid markets.
Our Company monitors our exposure to financial market risks using several
objective measurement systems, including value-at-risk models. For the
value-at-risk calculations discussed below, we used a historical simulation
model to estimate potential future losses our Company could incur as a result of
adverse movements in foreign currency and interest rates. We have not considered
the potential impact of favorable movements in foreign currency and interest
rates on our calculations. We examined historical weekly returns over the
previous 10 years to calculate our value at risk. Our value-at-risk calculations
do not represent actual losses that our Company expects to incur.
FOREIGN CURRENCY
We manage most of our foreign currency exposures on a consolidated basis,
which allows us to net certain exposures and take advantage of any natural
offsets. With approximately 70 percent of 1999 operating income generated
outside the United States, weakness in one particular currency is often offset
by strengths in others over time. We use derivative financial instruments to
further reduce our net exposure to currency fluctuations.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p34
THE COCA-COLA COMPANY AND SUBSIDIARIES
Our Company enters into forward exchange contracts and purchases currency
options (principally European currencies and Japanese yen) to hedge firm sale
commitments denominated in foreign currencies. We also purchase currency options
(principally European currencies and Japanese yen) to hedge certain anticipated
sales. Premiums paid and realized gains and losses, including those on any
terminated contracts, are included in prepaid expenses and other assets. These
are recognized in income, along with unrealized gains and losses, in the same
period we realize the hedged transactions. Gains and losses on derivative
financial instruments that are designated and effective as hedges of net
investments in international operations are included in share-owners' equity as
a foreign currency translation adjustment, a component of other comprehensive
income.
Our value-at-risk calculation estimates foreign currency risk on our
derivatives and other financial instruments. The average value at risk
represents the simple average of quarterly amounts for the past year. We have
not included in our calculation the effects of currency movements on anticipated
foreign currency denominated sales and other hedged transactions. We performed
calculations to estimate the impact to the fair values of our derivatives and
other financial instruments over a one-week period resulting from an adverse
movement in foreign currency exchange rates. As a result of our calculations, we
estimate with 95 percent confidence that the fair values would decline by less
than $71 million using 1999 average fair values and by less than $56 million
using December 31, 1999, fair values. On December 31, 1998, we estimated the
fair value would decline by less than $60 million. However, we would expect that
any loss in the fair value of our derivatives and other financial instruments
would generally be offset by an increase in the fair value of our underlying
exposures.
INTEREST RATES
Our Company maintains our percentage of fixed and variable rate debt within
defined parameters. We enter into interest rate swap agreements that maintain
the fixed-to-variable mix within these parameters. We recognize any differences
paid or received on interest rate swap agreements as adjustments to interest
expense over the life of each swap.
Our value-at-risk calculation estimates interest rate risk on our
derivatives and other financial instruments. The average value at risk
represents the simple average of quarterly amounts for the past year. According
to our calculations, we estimate with 95 percent confidence that any increase in
our average and in our December 31, 1999, net interest expense due to an adverse
move in interest rates over a one-week period would not have a material impact
on our Consolidated Financial Statements. Our December 31, 1998, estimate also
was not material to our Consolidated Financial Statements.
PERFORMANCE TOOLS
Economic profit provides a framework by which we measure the value of our
actions. We define economic profit as income from continuing operations, after
giving effect to taxes and excluding the effects of interest, in excess of a
computed capital charge for average operating capital employed.
We use value-based management (VBM) as a tool to help improve our
performance in planning and execution. VBM principles assist us in managing
economic profit by clarifying our understanding of what creates value and what
destroys it and encouraging us to manage for increased value. With VBM, we
determine how best to create value in every area of our business. We believe
that by using VBM as a planning and execution tool, and economic profit as a
performance measurement tool, we greatly enhance our ability to build
share-owner value over time.
We seek to maximize economic profit by strategically investing in the
high-return beverage business and by optimizing our cost of capital through
appropriate financial policies.
TOTAL RETURN TO SHARE OWNERS
Our Company has provided share owners with an excellent return on their
investments over the past decade. A $100 investment in our Company's common
stock on December 31, 1989, together with reinvested dividends, grew in pretax
value to approximately $681 on December 31, 1999, an average annual compound
return of 21 percent.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p35
THE COCA-COLA COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OUR BUSINESS
We are the world's leading manufacturer, marketer and distributor of
nonalcoholic beverage concentrates and syrups. Our Company manufactures beverage
concentrates and syrups and, in certain instances, finished beverages, which we
sell to bottling and canning operations, authorized fountain wholesalers and
some fountain retailers. We also market and distribute juice and juice-drink
products. In addition, we have ownership interests in numerous bottling and
canning operations.
VOLUME
We measure our sales volume in two ways: (1) gallon sales and (2) unit
cases of finished products. Gallon sales represent our primary business and
measure the volume of concentrates and syrups we sell to our bottling partners
or customers, plus the gallon sales equivalent of the juice and juice-drink
products sold by The Minute Maid Company. Most of our revenues are based on this
measure of "wholesale" activity. We also measure volume in unit cases, which
represent the amount of finished products we and our bottling system sell to
customers. We believe unit case volume more accurately measures the underlying
strength of our business system because it measures trends at the retail level.
We include in both measures fountain syrups sold by the Company to customers
directly or through wholesalers or distributors. The Company now includes
products sold by The Minute Maid Company in its calculations of unit case volume
and gallon sales. Accordingly, all historical unit case volume data in this
report reflect the inclusion of these products. In all years presented, the
impact on our unit case volume and gallon sales was not material.
Against a challenging economic environment in many of our key markets, our
worldwide unit case volume increased nearly 2 percent in 1999, on top of a 6
percent increase in 1998. Approximately 1 percentage point of the increase in
unit case volume in 1999 was attributable to the Cadbury Schweppes brands
acquired during the second half of 1999, as discussed under the heading
"Brands." Our business system sold 16.5 billion unit cases in 1999.
OPERATIONS
NET OPERATING REVENUES AND GROSS MARGIN
In 1999, on a consolidated basis, our net revenues and our gross profit
grew 5 percent and 4 percent, respectively. The growth in net revenues was
primarily due to price increases in certain markets, the consolidation in 1999
of our recently acquired bottling operations in India and our vending operations
in Japan, partially offset by the impact of a stronger U.S. dollar and the sale
of our previously consolidated bottling and canning operations in Italy in June
1998.
Our gross profit margin decreased slightly to 69.7 percent in 1999,
primarily due to the consolidation in 1999 of our recently acquired bottling
operations in India and our vending operations in Japan. Generally, the
consolidation of bottling and vending operations shifts a greater portion of our
net revenues to the higher revenue, but lower margin, bottling and vending
operations.
In 1998, on a consolidated basis, our net revenues remained even with 1997,
and our gross profit grew 3 percent. Net revenues remained even with 1997,
primarily due to an increase in gallon sales and price increases in certain
markets, offset by the impact of a stronger U.S. dollar and the sale of our
previously consolidated bottling and canning operations in Italy in June 1998.
Our gross profit margin increased to 70.4 percent in 1998 from 68.1 percent in
1997, primarily as a result of the sale in 1997 of previously consolidated
bottling and canning operations.
SELLING, ADMINISTRATIVE AND GENERAL EXPENSES
Selling expenses totaled $7,266 million in 1999, $6,552 million in 1998 and
$6,283 million in 1997. The increase in 1999 was primarily due to the temporary
product withdrawal in Belgium and France and marketing expenditures associated
with brand building activities. The increase in 1998 was primarily due to higher
marketing expenditures in support of our Company's volume growth.
Administrative and general expenses totaled $1,735 million in 1999, $1,659
million in 1998 and $1,509 million in 1997. The increase in 1999 was primarily
related to the consolidation in 1999 of our recently acquired bottling
operations in India and our vending operations in Japan. The increase in 1998
was mainly due to the expansion of our business into emerging markets.
Offsetting this increase was the impact of the sale of our bottling and canning
operations in Italy in June 1998.
Administrative and general expenses, as a percentage of net operating
revenues, totaled approximately 9 percent in 1999, 9 percent in 1998 and 8
percent in 1997.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p36
THE COCA-COLA COMPANY AND SUBSIDIARIES
OTHER OPERATING CHARGES
In the fourth quarter of 1999, we recorded charges of approximately $813
million. Of this $813 million, approximately $543 million related to the
impairment of certain bottling, manufacturing and intangible assets, primarily
within our Russian and Caribbean bottlers and in the Middle and Far East and
North America. These impairment charges were recorded to reduce the carrying
value of the identified assets to fair value. Fair values were derived using a
variety of methodologies, including cash flow analysis, estimates of sales
proceeds and independent appraisals. Where cash flow analyses were used to
estimate fair values, key assumptions employed, consistent with those used in
our internal planning process, included our estimates of future growth in unit
case sales, estimates of gross margins and estimates of the impact of inflation
and foreign currency fluctuations. The charges were primarily the result of our
revised outlook in certain markets due to the prolonged severe economic
downturns. The remaining carrying value of long-lived assets within these
operations as of December 31, 1999, was approximately $140 million.
Of the remainder, approximately $196 million related to charges associated
with the impairment of the distribution and bottling assets of our vending
operations in Japan and our bottling operations in the Baltics. The charges
reduced the carrying value of these assets to their fair value less the cost to
sell. Consistent with our long-term bottling investment strategy, management has
committed to a plan to sell our ownership interest in these operations to one of
our strategic business partners. It is management's intention that this plan
will be completed within approximately the next 12 months. The remaining
carrying value of long-lived assets within these operations and the loss from
operations on an after-tax basis as of and for the 12-month period ending
December 31, 1999, were approximately $152 million and $5 million, respectively.
The remainder of the $813 million charges, approximately $74 million,
primarily related to the change in senior management and charges related to
organizational changes within the Greater Europe, Latin America and Corporate
segments. These charges were incurred during the fourth quarter of 1999.
In the second quarter of 1998, we recorded nonrecurring provisions
primarily related to the impairment of certain assets in North America of $25
million and Corporate of $48 million.
In the second quarter of 1997, we recorded certain nonrecurring provisions
of approximately $60 million related to enhancing manufacturing efficiencies in
North America. Substantially all of the charges required as a result of these
provisions have been realized as of December 31, 1999.
OPERATING INCOME AND OPERATING MARGIN
On a consolidated basis, our operating income declined 20 percent in 1999
to $3,982 million. This follows a decline of less than 1 percent in 1998 to
$4,967 million. The 1999 results reflect the recording of nonrecurring
provisions, as previously discussed under the heading "Other Operating Charges,"
the difficult economic conditions in many markets throughout the world, the
temporary product withdrawal in Belgium and France, the impact of the stronger
U.S. dollar and the consolidation in 1999 of our recently acquired bottling
operations in India and vending operations in Japan.
The 1998 results reflect an increase in gallon sales coupled with an
increase in gross profit margins, offset by the impact of the stronger U.S.
dollar and the sales of previously consolidated bottling operations. Our
consolidated operating margin was 20.1 percent in 1999, 26.4 percent in 1998 and
26.5 percent in 1997.
MARGIN ANALYSIS
--------------------------------------------------------------------------------
1999 1998 1997
Net Operating Revenues
(in billions) $ 19.8 $ 18.8 $ 18.9
Gross Margin 69.7% 70.4% 68.1%
Operating Margin 20.1% 26.4% 26.5%
--------------------------------------------------------------------------------
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p37
THE COCA-COLA COMPANY AND SUBSIDIARIES
INTEREST INCOME AND INTEREST EXPENSE
Our interest income increased 19 percent in 1999 and 4 percent in 1998,
primarily due to cash held in locations outside the United States earning higher
interest rates, on a comparative basis.
Interest expense increased 22 percent in 1999 due to higher total
borrowings throughout the period. Average 1999 debt balances increased from 1998
primarily due to brand and bottler acquisitions during the period. Interest
expense increased 7 percent in 1998 due to higher average commercial paper
borrowings. Average 1998 debt balances increased from 1997 primarily due to
additional investments in bottling operations.
EQUITY INCOME (LOSS)
In 1999, our Company's share of losses from equity method investments
totaled $184 million, reflecting the negative impact of difficult economic
conditions in many worldwide markets, continued structural change in the
bottling system, the impact of the temporary product withdrawal in Belgium and
France, and one-time charges taken by certain equity investees. Our Company's
share of the one-time charges taken by certain equity investees in countries
such as Venezuela and the Philippines was approximately $22 million. Our
Company's share of Coca-Cola Enterprises Inc.'s (Coca-Cola Enterprises)
nonrecurring product recall costs resulting from the product withdrawal was
approximately $28 million.
Equity income decreased approximately 79 percent to $32 million in 1998,
principally due to the weak economic environments around the world, the impact
of a stronger U.S. dollar, continued structural changes and losses in start-up
bottling operations.
OTHER INCOME-NET
In 1999, other income-net decreased 57 percent to $98 million, primarily
reflecting the impact of the gains recorded on the sales of our bottling and
canning operations in Italy in June 1998, partially offset by an increase in
exchange gains in 1999.
In 1998, other income-net decreased 61 percent to $230 million, primarily
reflecting the impact of gains on the sales of our interests in Coca-Cola &
Schweppes Beverages Ltd., Coca-Cola Beverages Ltd. of Canada and The Coca-Cola
Bottling Company of New York, Inc., in 1997, partially offset by gains recorded
on the sales of our bottling and canning operations in Italy in June 1998.
GAINS ON ISSUANCES OF STOCK BY EQUITY INVESTEES
At the time an equity investee sells its stock to third parties at a price
in excess of our book value, our Company's equity in the underlying net assets
of that investee increases. We generally record an increase to our investment
account and a corresponding gain in these transactions. No gains on issuances of
stock by equity investees were recorded during 1999.
As a result of sales of stock by certain equity investees, we recorded
pretax gains of approximately $27 million in 1998 and approximately $363 million
in 1997. These gains represent the increase in our Company's equity in the
underlying net assets of the related investee. For a more complete description
of these transactions, refer to Note 3 in our Consolidated Financial Statements.
INCOME TAXES
Our effective tax rates were 36.3 percent in 1999, 32.0 percent in 1998 and
31.8 percent in 1997. The change in our effective tax rate in 1999 was primarily
the result of our inability to realize a tax benefit associated with a majority
of the charge taken in the fourth quarter of 1999, as previously discussed under
the heading "Other Operating Charges." Our effective tax rates reflect 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 tax rate on operations. For a more complete
description of our income taxes, refer to Note 14 in our Consolidated Financial
Statements.
INCOME PER SHARE
Our basic net income per share declined by 31 percent in 1999, compared to
a 14 percent decline in 1998 and a 19 percent increase in 1997. Diluted net
income per share declined 31 percent in 1999, compared to a 13 percent decline
in 1998 and a 19 percent increase in 1997.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p38
THE COCA-COLA COMPANY AND SUBSIDIARIES
RECENT DEVELOPMENTS
In the second half of 1999, we undertook a detailed review of each of our
business functions. The purpose of this review was to determine the optimal
organizational structure to serve the needs of our customers and consumers at
the local level.
As a result of this review, in January 2000 we announced a major
organizational realignment (the Realignment). The Realignment will reduce our
workforce around the world while transferring responsibilities from our
corporate headquarters to revenue-generating operating units. The intent of the
Realignment is to effectively align our corporate resources, support systems and
business culture to fully leverage the local capabilities of our system. Under
the Realignment, approximately 6,000 positions worldwide, including employees of
the Company, open positions and contract labor, will be eliminated. Of these
identified positions, approximately 3,300 are based within the United States and
approximately 2,700 are based outside of the United States. The entire reduction
will take place during calendar year 2000.
Employees separating from our Company as a result of the Realignment will
be offered severance packages which include both financial and nonfinancial
components. We estimate that as a result of the Realignment, our Company will
take a pretax charge of approximately $800 million during calendar year 2000.
Also, we estimate that the Realignment will yield an annual expense reduction of
approximately $300 million following full implementation of the new
organizational structure.
Effective January 1, 2000, two of our Company's operating segments were
renamed and geographically reconfigured. The Middle and Far East Group was
renamed the Asia Pacific Group, while the Africa Group became known as the
Africa and Middle East Group. At the same time, the Middle East and North Africa
Division ceased to be part of the Asia Pacific Group and became part of the
expanded Africa and Middle East Group.
In January 2000, we announced the intention of the Coca-Cola system to
reduce concentrate inventory levels at selected bottlers. This was based on a
review performed in conjunction with bottlers around the world in order to
determine the optimum level of bottler concentrate inventories. Management of
the Coca-Cola system determined that opportunities exist to reduce the level of
concentrate inventory carried by bottlers in selected regions of the world, such
as Eastern Europe, Japan and Germany. As such, bottlers in these regions have
indicated that they intend to reduce their inventory levels during the first
half of the year 2000. This move is intended to take the average bottler
inventories to the optimal worldwide level of 34 days. This reduction in bottler
inventory levels will result in our Company shipping less concentrate and is
therefore expected to reduce our Company's diluted earnings per share by
approximately $.11-$.13 after tax during the first half of the year 2000.
Also in January 2000, we announced our plans to perform a comprehensive
review of our India bottling franchise investments during the first quarter of
the year 2000 with the intent of streamlining the business. Based on this
review, as well as the current excise tax levels in India, which are presently
under review by the Indian government, we will be evaluating the carrying value
of these assets.
LIQUIDITY AND CAPITAL RESOURCES
We believe our ability to generate cash from operations to reinvest in our
business is one of our fundamental financial strengths. We anticipate that our
operating activities in 2000 will continue to provide us with cash flows to
assist in our business expansion and to meet our financial commitments.
FREE CASH FLOW
Free cash flow is the cash remaining from operations after we have
satisfied our business reinvestment opportunities. We focus on increasing free
cash flow to achieve our primary objective: maximizing share-owner value over
time. We use free cash flow, along with borrowings to pay dividends, make share
repurchases and make acquisitions. The consolidated statements of our cash flows
are summarized as follows (in millions):
Year Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
Cash flows provided by
(used in):
Operations $ 3,883 $ 3,433 $ 4,033
Business reinvestment (1,551) (1,557) (1,082)
--------------------------------------------------------------------------------
Free Cash Flow {1} 2,332 1,876 2,951
Cash flows (used in)
provided by:
Acquisitions,
net of disposals (1,870) (604) 582
Share repurchases (15) (1,563) (1,262)
Other financing activities (456) 230 (1,833)
Exchange (28) (28) (134)
--------------------------------------------------------------------------------
Increase (decrease) in cash $ (37) $ (89) $ 304
--------------------------------------------------------------------------------
{1} All years presented have been restated to exclude net cash flows related to
acquisitions.
Cash provided by operations in 1999 amounted to $3.9 billion, a 13 percent
increase from 1998. In 1998, cash provided by operations amounted to $3.4
billion, a 15 percent decrease from 1997. This change was primarily due to an
increased use of cash for operating assets and liabilities in 1998.
In 1999, net cash used in investing activities increased by $1.3 billion
compared to 1998. The increase was primarily the result of brand and bottler
acquisitions during 1999. For a more complete description of these transactions,
refer to Note 17 in our Consolidated Financial Statements.
In 1998, net cash used in investing activities increased compared to 1997.
During 1998, investing activities included additional investments in
territories, such as India and Latin American countries. Investing activities in
1997 included incremental proceeds of approximately $1 billion from the disposal
of investments and other assets, which included the dispositions of
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p39
THE COCA-COLA COMPANY AND SUBSIDIARIES
our interests in Coca-Cola & Schweppes Beverages Ltd., The Coca-Cola
Bottling Company of New York Inc. and Coca-Cola Beverages Ltd. of Canada,
partially offset by acquisitions and investments, primarily in bottling
operations, including three South Korean bottlers.
Total capital expenditures for property, plant and equipment (including our
investments in information technology) and the percentage distribution by
operating segment for 1999, 1998 and 1997 are as follows (in millions):
Year Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
Capital expenditures $ 1,069 $ 863 $ 1,093
--------------------------------------------------------------------------------
North America {1} 25% 32% 24%
Africa 2% 2% 2%
Greater Europe 20% 25% 30%
Latin America 6% 8% 7%
Middle & Far East 30% 13% 18%
Corporate 17% 20% 19%
--------------------------------------------------------------------------------
{1} Includes The Minute Maid Company
FINANCING ACTIVITIES
Our financing activities include net borrowings, dividend payments and
share issuances and repurchases. Net cash used in financing activities totaled
$.5 billion in 1999, $1.3 billion in 1998 and $3.1 billion in 1997. The change
between 1999 and 1998 was primarily due to a decrease in treasury stock
repurchases due to our utilization of cash for our brand and bottler
acquisitions during 1999. The decrease between 1998 and 1997 was due to our net
repayments of debt in 1997 from proceeds of disposals of investments and other
assets.
Cash used to purchase common stock for treasury totaled $15 million in
1999, $1.6 billion in 1998 and $1.3 billion in 1997.
Commercial paper is our primary source of short-term financing. On December
31, 1999, we had $4.9 billion outstanding in commercial paper borrowings
compared to $4.3 billion outstanding at the end of 1998, a $.6 billion increase
in borrowings. The 1999 increase in loans and notes payable was due to
additional commercial paper borrowings used for our brand acquisitions during
1999 and additional investments in bottling operations. The Company's commercial
paper borrowings normally mature less than three months from the date of
issuance. In 1999, as part of our Year 2000 plan, we increased the amount of
commercial paper borrowings with maturity dates greater than three months. The
gross payments and receipts of borrowings greater than three months from the
date of issuance have been included in the consolidated statements of cash
flows. In addition, on December 31, 1999, we had $3.1 billion in lines of credit
and other short-term credit facilities available, of which approximately $167
million was outstanding.
On December 31, 1999, we had $854 million outstanding in long-term debt,
compared to $687 million outstanding at the end of 1998, a $167 million increase
in borrowings. The 1999 increase in long-term debt was primarily due to the
issuance of long-term notes in the European marketplace.
EXCHANGE
Our international operations are subject to certain opportunities and
risks, including currency fluctuations and government actions. We closely
monitor our operations in each country and seek to adopt appropriate strategies
that are responsive to changing economic and political environments and to
fluctuations in foreign currencies.
We use approximately 60 functional currencies. Due to our global
operations, weaknesses in some of these currencies are often offset by strengths
in others. In 1999, 1998 and 1997, the weighted-average exchange rates for
foreign currencies, and for certain individual currencies, strengthened
(weakened) against the U.S. dollar as follows:
Year Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
All currencies Even (9)% (10)%
--------------------------------------------------------------------------------
Australian dollar 3% (16)% (6)%
British pound (2)% 2% 4%
Canadian dollar Even (7)% (1)%
French franc (2)% (3)% (12)%
German mark (2)% (3)% (13)%
Japanese yen 15% (6)% (10)%
--------------------------------------------------------------------------------
These percentages do not include the effects of our hedging activities and,
therefore, do not reflect the actual impact of fluctuations in exchange on our
operating results. Our foreign currency management program mitigates over time a
portion of the impact of exchange on net income and earnings per share. The
impact of a stronger U.S. dollar reduced our operating income by approximately 4
percent in 1999 and by approximately 9 percent in 1998.
Exchange gains (losses)-net amounted to $87 million in 1999, $(34) million
in 1998 and $(56) million in 1997, and were recorded in other income-net.
Exchange gains (losses)-net includes the remeasurement of certain currencies
into functional currencies and the costs of hedging certain exposures of our
balance sheet.
Additional information concerning our hedging activities is presented in
Note 9 in our Consolidated Financial Statements.
FINANCIAL POSITION
The carrying value of our investment in Coca-Cola Enterprises increased in
1999, primarily as a result of Coca-Cola Enterprises' issuance of stock in its
acquisitions of various bottling operations. The carrying value of our
investment in Coca-Cola Amatil decreased, primarily due to the transfer of
approximately 57 million shares of Coca-Cola Amatil to Fraser and Neave Limited
in conjunction with our acquisition of its 75 percent interest in F&N Coca-Cola.
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 our brand and bottler acquisitions during
1999.
The carrying value of our investment in Coca-Cola Enterprises increased in
1998 as a result of Coca-Cola Enterprises' issuance of stock in its acquisitions
of various bottling operations. The carrying value of our investment in
Coca-Cola Amatil increased due to
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p40
THE COCA-COLA COMPANY AND SUBSIDIARIES
its acquisition of our bottling operations in South Korea, offset by the
spin-off of Coca-Cola Beverages to its share owners. The increase for Coca-Cola
Beverages in 1998 is primarily a result of our equity participation in its
formation in 1998, as previously discussed under the heading "Bottling System,"
and the sale to Coca-Cola Beverages of our bottling and canning operations in
Italy in June 1998. The increase in prepaid expenses and other assets is
primarily due to increases in receivables from equity method investees,
marketing prepaid expenses and miscellaneous receivables.
YEAR 2000
As previously reported, over the past several years our Company developed
and implemented a plan to address the anticipated impacts of the so-called Year
2000 problem on our information technology (IT) systems and on non-IT systems
involving embedded chip technologies. We also surveyed selected third parties to
determine the status of their Year 2000 compliance programs. In addition, we
developed contingency plans specifying what the Company would do if we or
important third parties experienced disruptions to critical business activities
as a result of the Year 2000 problem.
Our Company's Year 2000 plan was completed in all material respects prior
to the anticipated Year 2000 failure dates. As of February 15, 2000, the Company
has not experienced any materially important business disruptions or system
failures as a result of Year 2000 issues, nor is it aware of any Year 2000
issues that have impacted its bottlers, customers, suppliers or other
significant third parties to an extent significant to the Company. However, Year
2000 compliance has many elements and potential consequences, some of which may
not be foreseeable or may be realized in future periods. Consequently, there can
be no assurance that unforeseen circumstances may not arise, or that the Company
will not in the future identify equipment or systems which are not Year 2000
compliant.
As of December 31, 1999, the Company's total incremental costs (historical
plus estimated future costs) of addressing Year 2000 issues are estimated to be
approximately $131 million, of which approximately $129 million has been
incurred. These costs are being funded through operating cash flow. These
amounts do not include: (i) approximately $4 million in costs associated with
the implementation of contingency plans, or (ii) costs associated with
replacements of computerized systems or equipment in cases where replacement was
not accelerated due to Year 2000 issues.
For further information regarding Year 2000 matters, refer to disclosures
under Forward-Looking Statements on page 41.
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 the 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.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation affects the way we operate in many markets around the world. In
general, we are able to increase prices to counteract the inflationary effects
of increasing costs and to generate sufficient cash flows to maintain our
productive capability.
NEW ACCOUNTING STANDARDS
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 that SFAS No. 133
will have on our Consolidated Financial Statements.
OUTLOOK
While we cannot predict future performance, we believe considerable
opportunities exist for sustained, profitable growth, not only in the developing
population centers of the world, but also in our most established markets,
including the United States and Mexico.
We firmly believe that the strength of our brands, our unparalleled
distribution system, our global presence, our strong financial condition and
the skills of our people give us the flexibility to capitalize on growth
opportunities as we continue to pursue our goal of increasing share-owner
value over time.
FINANCIAL REVIEW INCORPORATING MANAGEMENT'S DISCUSSION AND ANALYSIS KO-ar99-p41
THE COCA-COLA COMPANY AND SUBSIDIARIES
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 Company filings with the Securities and Exchange Commission and in our
reports to share owners. Generally, the words "believe," "expect," "intend,"
"estimate," "anticipate," "will" and similar expressions identify
forward-looking statements. 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, and speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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.
-- 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.
-- 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.
-- 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. 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 and the
ability of third parties to adequately address their own Year 2000 issues.
-- Our ability to resolve issues relating to introduction of the European
Union's common currency (the Euro) in a timely fashion.
The foregoing list of important factors is not exclusive.
ADDITIONAL INFORMATION
For additional information about our operations, cash flows, liquidity and
capital resources, please refer to the information on pages 44 through 64 of
this report. Additional information concerning our operating segments is
presented on pages 60 through 62.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p49
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Coca-Cola Company and subsidiaries (our Company) is predominantly
a manufacturer, marketer and distributor of nonalcoholic beverage concentrates
and syrups. Operating in nearly 200 countries worldwide, we primarily sell our
concentrates and syrups to bottling and canning operations, fountain
wholesalers and fountain retailers. We also market and distribute juice and
juice-drink products. We have significant markets for our products in all the
world's geographic regions. We record revenue when title passes to our
customers or our bottling partners.
BASIS OF PRESENTATION
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
CONSOLIDATION
Our Consolidated Financial Statements include the accounts of The
Coca-Cola Company and all subsidiaries except where control is temporary or
does not rest with our Company. Our investments in companies in which we have
the ability to exercise significant influence over operating and financial
policies, including certain investments where there is a temporary majority
interest, are accounted for by the equity method. Accordingly, our Company's
share of the net earnings of these companies is included in consolidated net
income. Our investments in other companies are carried at cost or fair value,
as appropriate. All significant intercompany accounts and transactions are
eliminated upon consolidation.
ISSUANCES OF STOCK BY EQUITY INVESTEES
When one of our equity investees issues additional shares to third
parties, our percentage ownership interest in the investee decreases. In the
event the issuance price per share is more or less than our average carrying
amount per share, we recognize a noncash gain or loss on the issuance. This
noncash gain or loss, net of any deferred taxes, is generally recognized in
our net income in the period the change of ownership interest occurs.
If gains have been previously recognized on issuances of an equity
investee's stock and shares of the equity investee are subsequently
repurchased by the equity investee, gain recognition does not occur on
issuances subsequent to the date of a repurchase until shares have been issued
in an amount equivalent to the number of repurchased shares. This type of
transaction is reflected as an equity transaction and the net effect is
reflected in the accompanying consolidated balance sheets. For specific
transaction details, refer to Note 3.
ADVERTISING COSTS
Our Company expenses production costs of print, radio and television
advertisements as of the first date the advertisements take place. Advertising
expenses included in selling, administrative and general expenses were $1,699
million in 1999, $1,597 million in 1998 and $1,576 million in 1997. As of
December 31, 1999 and 1998, advertising costs of approximately $523 million and
$365 million, respectively, were recorded primarily in pre-paid expenses and
other assets in the accompanying consolidated balance sheets.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted-average number of shares outstanding. Diluted net income per share
includes the dilutive effect of stock options.
CASH EQUIVALENTS
Marketable securities that are highly liquid and have maturities of three
months or less at the date of purchase are classified as cash equivalents.
INVENTORIES
Inventories consist primarily of raw materials and supplies and are valued
at the lower of cost or market. In general, cost is determined on the basis of
average cost or first-in, first-out methods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated
principally by the straight-line method over the estimated useful lives of the
assets.
OTHER ASSETS
Our Company invests in infrastructure programs with our bottlers which are
directed at strengthening our bottling system and increasing unit case sales.
The costs of these programs are recorded in other assets and are subsequently
amortized over the periods to be directly benefited.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets are stated on the basis of cost and
are amortized, principally on a straight-line basis, over the estimated future
periods to be benefited (not exceeding 40 years). Goodwill and other intangible
assets are periodically reviewed for impairment to ensure they are appropriately
valued. Conditions which may indicate an impairment issue exists include a
negative economic downturn in a worldwide market or a change in the assessment
of future operations. In the event that a condition is identified which may
indicate an impairment issue exists, an assessment is performed using a variety
of methodologies, including cash flow analysis, estimates of sales proceeds and
independent appraisals. Where applicable, an appropriate interest rate is
utilized, based on location specific economic factors. Accumulated amortization
was approximately $154 million and $119 million on December 31, 1999 and 1998,
respectively.
USE OF ESTIMATES
In conformity with generally accepted accounting principles, the
preparation of our financial statements requires our management to make
estimates and assumptions that affect the amounts reported in our financial
statements and accompanying notes including our assessment of the carrying
value of our investments in bottling operations. Although these estimates are
based on our knowledge of current events and actions we may undertake in the
future, actual results may ultimately differ from estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p50
THE COCA-COLA COMPANY AND SUBSIDIARIES
NEW ACCOUNTING STANDARDS
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 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.
We adopted the American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" and SOP 98-5, "Reporting on
the Costs of Start-Up Activities," on January 1, 1999. There was no material
impact on our Consolidated Financial Statements as a result.
NOTE 2: BOTTLING INVESTMENTS
COCA-COLA ENTERPRISES INC.
Coca-Cola Enterprises is the largest soft-drink bottler in the world,
operating in eight countries, and is one of our anchor bottlers. On December 31,
1999, our Company owned approximately 40 percent of the outstanding common stock
of Coca-Cola Enterprises, and accordingly, we account for our investment by
the equity method of accounting. The excess of our equity in the underlying net
assets of Coca-Cola Enterprises over our investment is primarily amortized on a
straight-line basis over 40 years. The balance of this excess, net of
amortization, was approximately $445 million on December 31, 1999. A summary of
financial information for Coca-Cola Enterprises is as follows (in millions):
December 31, 1999 1998
------------------------------------------------------------------
Current assets $ 2,557 $ 2,285
Noncurrent assets 20,149 18,847
------------------------------------------------------------------
Total assets $ 22,706 $ 21,132
==================================================================
Current liabilities $ 3,590 $ 3,397
Noncurrent liabilities 16,192 15,297
------------------------------------------------------------------
Total liabilities $ 19,782 $ 18,694
==================================================================
Share-owners' equity $ 2,924 $ 2,438
==================================================================
Company equity investment $ 728 $ 584
==================================================================
Year Ended December 31, 1999 1998 1997
------------------------------------------------------------------
Net operating revenues $ 14,406 $ 13,414 $ 11,278
Cost of goods sold 9,015 8,391 7,096
------------------------------------------------------------------
Gross profit $ 5,391 $ 5,023 $ 4,182
==================================================================
Operating income $ 839 $ 869 $ 720
==================================================================
Cash operating profit{1} $ 2,187 $ 1,989 $ 1,666
==================================================================
Net income $ 59 $ 142 $ 171
==================================================================
Net income available
to common share owners $ 56 $ 141 $ 169
==================================================================
{1} Cash operating profit is defined as operating income plus
depreciation expense, amortization expense and other noncash
operating expenses.
Our net concentrate/syrup sales to Coca-Cola Enterprises were $3.3 billion
in 1999, $3.1 billion in 1998 and $2.5 billion in 1997, or approximately 17
percent, 16 percent and 13 percent of our 1999, 1998 and 1997 net operating
revenues, respectively. Coca-Cola Enterprises purchases sweeteners through our
Company; however, related collections from Coca-Cola Enterprises and payments
to suppliers are not included in our Consolidated Statements of Income. These
transactions amounted to $308 million in 1999, $252 million in 1998 and $223
million in 1997. We also provide certain administrative and other services to
Coca-Cola Enterprises under negotiated fee arrangements.
Our direct support for certain marketing activities of Coca-Cola
Enterprises and participation with them in cooperative advertising and other
marketing programs amounted to approximately $767 million in 1999, $899 million
in 1998 and $604 million in 1997. Pursuant to cooperative advertising and
trade arrangements with Coca-Cola Enterprises, we received $243 million, $173
million and $144 million in 1999, 1998 and 1997, respectively, from Coca-Cola
Enterprises for local media and marketing program expense reimbursements.
Additionally, in 1999 and 1998, we committed approximately $338 million and
$324 million, respectively, to Coca-Cola Enterprises under a Company
program that encourages bottlers to invest in building and supporting beverage
infrastructure.
If valued at the December 31, 1999, quoted closing price of publicly
traded Coca-Cola Enterprises shares, the calculated value of our investment
in Coca-Cola Enterprises would have exceeded its carrying value by
approximately $2.7 billion.
COCA-COLA AMATIL LTD.
We own approximately 37 percent of Coca-Cola Amatil, an Australian-based
anchor bottler that operates in seven countries. Accordingly, we account for
our investment in Coca-Cola Amatil by the equity method. The excess of our
investment over our equity in the underlying net assets of Coca-Cola Amatil
is being amortized on a straight-line basis over 40 years. The balance of this
excess, net of amortization, was approximately $261 million at December 31,
1999. A summary of financial information for Coca-Cola Amatil is as follows
(in millions):
December 31, 1999 1998{1}
-------------------------------------------------------------------
Current assets $ 1,259 $ 1,057
Noncurrent assets 3,912 4,002
-------------------------------------------------------------------
Total assets $ 5,171 $ 5,059
===================================================================
Current liabilities $ 1,723 $ 1,065
Noncurrent liabilities 1,129 1,552
-------------------------------------------------------------------
Total liabilities $ 2,852 $ 2,617
===================================================================
Share-owners' equity $ 2,319 $ 2,442
===================================================================
Company equity investment $ 1,133 $ 1,255
===================================================================
Year Ended December 31, 1999 1998{1} 1997
===================================================================
Net operating revenues $ 2,427 $ 2,731 $ 3,290
Cost of goods sold 1,426 1,567 1,856
-------------------------------------------------------------------
Gross profit $ 1,001 $ 1,164 $ 1,434
===================================================================
Operating income $ 162 $ 237 $ 276
===================================================================
Cash operating profit {2} $ 387 $ 435 $ 505
===================================================================
Net income $ 29 $ 65 $ 89
===================================================================
{1} 1998 reflects the spin-off of Coca-Cola Amatil's European operations.
{2} Cash operating profit is defined as operating income plus
depreciation expense, amortization expense and other noncash operating
expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p51
THE COCA-COLA COMPANY AND SUBSIDIARIES
Our net concentrate sales to Coca-Cola Amatil were approximately $431
million in 1999, $546 million in 1998 and $588 million in 1997. We also
participate in various marketing, promotional and other activities with
Coca-Cola Amatil.
In July 1999, we acquired from Fraser and Neave Limited its 75 percent
ownership interest in F&N Coca-Cola in exchange for approximately 57 million
shares of Coca-Cola Amatil and the assumption of debt. The transaction reduced
our ownership in Coca-Cola Amatil from approximately 43 percent to
approximately 37 percent. In August 1998, we exchanged our Korean bottling
operations with Coca-Cola Amatil for an additional ownership interest in
Coca-Cola Amatil.
If valued at the December 31, 1999, quoted closing price of publicly traded
Coca-Cola Amatil shares, the calculated value of our investment in Coca-Cola
Amatil would have been below its carrying value by approximately $114 million.
OTHER EQUITY INVESTMENTS
Operating results include our proportionate share of income (loss) from our
equity investments. A summary of financial information for our equity
investments in the aggregate, other than Coca-Cola Enterprises and Coca-Cola
Amatil, is as follows (in millions):
December 31, 1999 1998
-------------------------------------------------------------------
Current assets $ 5,393 $ 4,453
Noncurrent assets 17,394 16,825
-------------------------------------------------------------------
Total assets $ 22,787 $ 21,278
===================================================================
Current liabilities $ 4,827 $ 4,968
Noncurrent liabilities 7,007 6,731
-------------------------------------------------------------------
Total liabilities $ 11,834 $ 11,699
===================================================================
Share-owners' equity $ 10,953 $ 9,579
===================================================================
Company equity investment $ 4,581 $ 4,452
===================================================================
Year Ended December 31, 1999 1998 1997
-------------------------------------------------------------------
Net operating revenues $ 17,358 $ 15,244 $ 13,688
Cost of goods sold 10,659 9,555 8,645
-------------------------------------------------------------------
Gross profit $ 6,699 $ 5,689 $ 5,043
===================================================================
Operating income $ 647 $ 668 $ 869
===================================================================
Cash operating profit{1} $ 2,087 $ 1,563 $ 1,794
==================================================================
Net income (loss) $ (163) $ 152 $ 405
===================================================================
Equity investments include certain nonbottling investees.
{1} Cash operating profit is defined as operating income plus
depreciation expense, amortization expense and other noncash
operating expenses.
Net sales to equity investees other than Coca-Cola Enterprises and
Coca-Cola Amatil were $2.8 billion in 1999, $2.1 billion in 1998 and $1.5
billion in 1997. Our direct support for certain marketing activities with
equity investees other than Coca-Cola Enterprises, the majority of which are
located outside the United States, was approximately $685 million, $640
million and $528 million for 1999, 1998 and 1997, respectively.
In June 1998, we sold our previously consolidated Italian bottling
and canning operations to Coca-Cola Beverages plc (Coca-Cola Beverages).
This transaction resulted in proceeds valued at approximately $1 billion
and an after-tax gain of approximately $.03 per share (basic and diluted).
If valued at the December 31, 1999, quoted closing prices of shares
actively traded on stock markets, the calculated value of our equity investments
in publicly traded bottlers other than Coca-Cola Enterprises and Coca-Cola
Amatil would have exceeded our carrying value by approximately $844 million.
NOTE 3: ISSUANCES OF STOCK BY EQUITY INVESTEES
In the first quarter of 1999, Coca-Cola Enterprises completed its
acquisition of various bottlers. These transactions were funded primarily with
shares of Coca-Cola Enterprises common stock. The Coca-Cola Enterprises common
stock issued was valued in an amount greater than the book value per share of
our investment in Coca-Cola Enterprises. As a result of these transactions, our
equity in the underlying net assets of Coca-Cola Enterprises increased, and we
recorded a $241 million increase to our Company's investment basis in Coca-Cola
Enterprises. Due to Coca-Cola Enterprises' share repurchase programs, the
increase in our investment in Coca-Cola Enterprises 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 Coca-Cola
Enterprises. The transactions reduced our ownership in Coca-Cola Enterprises
from approximately 42 percent to approximately 40 percent.
In December 1998, Coca-Cola Enterprises completed its acquisition of
certain independent bottling operations operating in parts of Texas, New Mexico
and Arizona (collectively known as the Wolslager Group). The transactions were
funded primarily with the issuance of shares of Coca-Cola Enterprises common
stock. The Coca-Cola Enterprises common stock issued in exchange for these
bottlers was valued at an amount greater than the book value per share of our
investment in Coca-Cola Enterprises. As a result of this transaction, our equity
in the underlying net assets of Coca-Cola Enterprises increased, and we recorded
a $116 million increase to our Company's investment basis in Coca-Cola
Enterprises. Due to Coca-Cola Enterprises' share repurchase program, the
increase in our investment in Coca-Cola Enterprises was recorded as an equity
transaction, and no gain was recognized. We recorded a deferred tax liability of
approximately $46 million on this increase to our investment in Coca-Cola
Enterprises. At the completion of this transaction, our ownership in Coca-Cola
Enterprises was approximately 42 percent.
In September 1998, Coca-Cola Erfrischungsgetranke AG (CCEAG), our anchor
bottler in Germany, issued new shares valued at approximately $275 million to
affect 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.
In June 1998, Coca-Cola Enterprises 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.
Approximately 55 percent of the transaction was funded with the issuance of
approximately 17.7 million shares
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p52
THE COCA-COLA COMPANY AND SUBSIDIARIES
of Coca-Cola Enterprises common stock, and the remaining portion was funded
through debt and assumed debt. The Coca-Cola Enterprises common stock issued in
exchange for Coke Southwest was valued at an amount greater than the book
value per share of our investment in Coca-Cola Enterprises. As a result of
this transaction, our equity in the underlying net assets of Coca-Cola
Enterprises increased and we recorded a $257 million increase to our Company's
investment basis in Coca-Cola Enterprises. Due to Coca-Cola Enterprises' share
repurchase program, the increase in our investment in Coca-Cola Enterprises 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 Coca-Cola Enterprises. At the completion of this transaction, our
ownership in Coca-Cola Enterprises was approximately 42 percent.
In the second quarter of 1997, our Company and San Miguel Corporation sold
our respective interests in Coca-Cola Bottlers Philippines, Inc., to Coca-Cola
Amatil in exchange for approximately 293 million shares of Coca-Cola Amatil
stock. In connection with this transaction, Coca-Cola Amatil issued
approximately 210 million shares to San Miguel valued at approximately $2.4
billion. The issuance to San Miguel resulted in a one-time noncash pretax gain
for our Company of approximately $343 million. We provided deferred taxes of
approximately $141.5 million on this gain. This transaction resulted in a
dilution of our Company's approximately 36 percent interest in Coca-Cola Amatil
to approximately 33 percent.
Also in the second quarter of 1997, our Company and the Cisneros Group
sold our respective interests in Coca-Cola y Hit de Venezuela, S.A., 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.
NOTE 4: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
millions):
December 31, 1999 1998
------------------------------------------------------------------
Accrued marketing $ 1,056 $ 967
Container deposits 53 14
Accrued compensation 164 166
Sales, payroll and other taxes 297 183
Accounts payable and
other accrued expenses 2,144 1,811
-----------------------------------------------------------------
$ 3,714 $ 3,141
=================================================================
NOTE 5: SHORT-TERM BORROWINGS AND CREDIT ARRANGEMENTS
Loans and notes payable consist primarily of commercial paper issued in the
United States. On December 31, 1999, we had $4.9 billion outstanding in
commercial paper borrowings. In addition, we had $3.1 billion in lines of credit
and other short-term credit facilities available, of which approximately $167
million was outstanding. Our weighted-average interest rates for commercial
paper outstanding were approximately 6.0 and 5.2 percent at December 31, 1999
and 1998, respectively.
These facilities are subject to normal banking terms and conditions.
Some of the financial arrangements require compensating balances, none of which
is presently significant to our Company.
NOTE 6: LONG-TERM DEBT
Long-term debt consists of the following (in millions):
December 31, 1999 1998
------------------------------------------------------------------
6% U.S. dollar notes due 2000 $ 250 $ 251
6 5/8% U.S. dollar notes due 2002 150 150
6% U.S. dollar notes due 2003 150 150
5 3/4% U.S. dollar notes due 2009 399 -
7 3/8% U.S. dollar notes due 2093 116 116
Other, due 2000 to 2013 50 23
-----------------------------------------------------------------
1,115 690
Less current portion 261 3
-----------------------------------------------------------------
$ 854 $ 687
=================================================================
After giving effect to interest rate management instruments, the principal
amount of our long-term debt that had fixed and variable interest rates,
respectively, was $690 million and $425 million on December 31, 1999, and $190
million and $500 million on December 31, 1998. The weighted-average interest
rate on our Company's long-term debt was 5.6 percent and 6.2 percent for the
years ended December 31, 1999 and 1998, respectively. Total interest paid was
approximately $314 million, $298 million and $264 million in 1999, 1998 and
1997, respectively. For a more complete discussion of interest rate management,
refer to Note 9.
Maturities of long-term debt for the five years succeeding December 31,
1999, are as follows (in millions):
2000 2001 2002 2003 2004
------------------------------------------------------------------------
$ 261 $ 22 $ 154 $ 153 $ 1
========================================================================
The above notes include various restrictions, none of which is presently
significant to our Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p53
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTE 7: COMPREHENSIVE INCOME
Accumulated other comprehensive income consists of the following (in
millions):
December 31, 1999 1998
------------------------------------------------------------------
Foreign currency
translation adjustment $ (1,510) $ (1,320)
Unrealized gain on
available-for-sale securities 34 11
Minimum pension liability (16) (41)
-----------------------------------------------------------------
$ (1,492) $ (1,350)
=================================================================
A summary of the components of other comprehensive income for the years
ended December 31, 1999, 1998 and 1997, is as follows (in millions):
Before-Tax Income After-Tax
December 31, Amount Tax Amount
-----------------------------------------------------------------
1999
Net foreign currency
translation $ (249) $ 59 $ (190)
Net change in unrealized
gain (loss) on available-
for-sale securities 37 (14) 23
Minimum pension liability 38 (13) 25
-----------------------------------------------------------------
Other comprehensive
income (loss) $ (174) $ 32 $ (142)
=================================================================
Before-Tax Income After-Tax
December 31, Amount Tax Amount
-----------------------------------------------------------------
1998
Net foreign currency
translation $ 52 $ - $ 52
Net change in unrealized
gain (loss) on available-
for-sale securities (70) 23 (47)
Minimum pension liability (5) 1 (4)
-----------------------------------------------------------------
Other comprehensive
income (loss) $ (23) $ 24 $ 1
=================================================================
Before-Tax Income After-Tax
December 31, Amount Tax Amount
-----------------------------------------------------------------
1997
Net foreign currency
translation $ (710) $ - $ (710)
Net change in unrealized
gain (loss) on available-
for-sale securities (163) 65 (98)
Minimum pension liability (10) 4 (6)
-----------------------------------------------------------------
Other comprehensive
income (loss) $ (883) $ 69 $ (814)
=================================================================
NOTE 8: FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in our consolidated balance sheets for cash,
cash equivalents, marketable equity securities, marketable cost method
investments, receivables, loans and notes payable and long-term debt approximate
their respective fair values. Fair values are based primarily on quoted prices
for those or similar instruments. A comparison of the carrying value and fair
value of our hedging instruments is included in Note 9.
CERTAIN DEBT AND MARKETABLE EQUITY SECURITIES
Investments in debt and marketable equity securities, other than
investments accounted for by the equity method, are categorized as either
trading, available for sale or held to maturity. On December 31, 1999 and 1998,
we had no trading securities. Securities categorized as available for sale are
stated at fair value, with unrealized gains and losses, net of deferred income
taxes, reported as a component of accumulated other comprehensive income. Debt
securities categorized as held to maturity are stated at amortized cost.
On December 31, 1999 and 1998, available-for-sale and held-to-maturity
securities consisted of the following (in millions):
Gross Gross Estimated
Unrealized Unrealized Fair
December 31, Cost Gains Losses Value
------------------------------------------------------------------------------
1999
Available-for-sale
securities
Equity securities $ 246 $ 69 $ (13) $ 302
Collateralized
mortgage
obligations 45 - (1) 44
Other debt
securities 8 - - 8
-------------------------------------------------------------------------------
$ 299 $ 69 $ (14) $ 354
===============================================================================
Held-to-maturity
securities
Bank and
corporate debt $ 1,137 $ - $ - $ 1,137
Other debt
securities 49 - - 49
-------------------------------------------------------------------------------
$ 1,186 $ - $ - $ 1,186
===============================================================================
Gross Gross Estimated
Unrealized Unrealized Fair
December 31, Cost Gains Losses Value
-------------------------------------------------------------------------------
1998
Available-for-sale
securities
Equity securities $ 304 $ 67 $ (48) $ 323
Collateralized
mortgage
obligations 89 - (1) 88
Other debt
securities 11 - - 11
-------------------------------------------------------------------------------
$ 404 $ 67 $ (49) $ 422
===============================================================================
Held-to-maturity
securities
Bank and
corporate debt $ 1,339 $ - $ - $ 1,339
Other debt
securities 92 - - 92
-------------------------------------------------------------------------------
$ 1,431 $ - $ - $ 1,431
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p54
THE COCA-COLA COMPANY AND SUBSIDIARIES
On December 31, 1999 and 1998, these investments were included in the
following captions in our consolidated balance sheets (in millions):
Available-for-Sale Held-to-Maturity
December 31, Securities Securities
------------------------------------------------------------------------------
1999
Cash and cash equivalents $ - $ 1,061
Current marketable securities 76 125
Cost method investments,
principally bottling companies 227 -
Marketable securities and
other assets 51 -
------------------------------------------------------------------------------
$ 354 $ 1,186
==============================================================================
1998
Cash and cash equivalents $ - $ 1,227
Current marketable securities 79 80
Cost method investments,
principally bottling companies 251 -
Marketable securities and
other assets 92 124
------------------------------------------------------------------------------
$ 422 $ 1,431
==============================================================================
The contractual maturities of these investments as of December 31, 1999,
were as follows (in millions):
Available-for-Sale Held-to-Maturity
Securities Securities
------------------ ------------------------
Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------------------------------------------
2000
$ - $ - $ 1,186 $ 1,186
2001- 2004 8 8 - -
Collateralized
mortgage
obligations 45 44 - -
Equity securities 246 302 - -
-----------------------------------------------------------------------------
$ 299 $ 354 $ 1,186 $ 1,186
=============================================================================
For the years ended December 31, 1999 and 1998, gross realized gains and
losses on sales of available-for-sale securities were not material. The cost of
securities sold is based on the specific identification method.
NOTE 9: HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
Our Company uses derivative financial instruments primarily to reduce our
exposure to adverse fluctuations in interest rates and foreign exchange rates
and, to a lesser extent, to reduce our exposure to adverse fluctuations in
commodity prices and other market risks. When entered into, these financial
instruments are designated as hedges of underlying exposures. Because of the
high correlation between the hedging instrument and the underlying exposure
being hedged, fluctuations in the value of the instruments are generally offset
by changes in the value of the underlying exposures. Virtually all our
derivatives are "over-the-counter" instruments. Our Company does not enter into
derivative financial instruments for trading purposes.
The estimated fair values of derivatives used to hedge or modify our risks
fluctuate over time. These fair value amounts should not be viewed in
isolation, but rather in relation to the fair values of the underlying hedging
transactions and investments and to the overall reduction in our exposure to
adverse fluctuations in interest rates, foreign exchange rates, commodity
prices and other market risks.
The notional amounts of the derivative financial instruments do not
necessarily represent amounts exchanged by the parties and, therefore, are not
a direct measure of our exposure from our use of derivatives. The amounts
exchanged are calculated by reference to the notional amounts and by other
terms of the derivatives, such as interest rates, exchange rates or other
financial indices.
We have established strict counterparty credit guidelines and enter into
transactions only with financial institutions of investment grade or better. We
monitor counterparty exposures daily and review any downgrade in credit rating
immediately. If a downgrade in the credit rating of a counterparty were to
occur, we have provisions requiring collateral in the form of U.S. government
securities for substantially all of our transactions. To mitigate presettlement
risk, minimum credit standards become more stringent as the duration of the
derivative financial instrument increases. To minimize the concentration of
credit risk, we enter into derivative transactions with a portfolio of financial
institutions. As a result, we consider the risk of counterparty default to be
minimal.
INTEREST RATE MANAGEMENT
Our Company maintains a percentage of fixed and variable rate debt within
defined parameters. We enter into interest rate swap agreements that maintain
the fixed/variable mix within these parameters. These contracts had maturities
ranging from one to four years on December 31, 1999. Variable rates are
predominantly linked to the London Interbank Offered Rate. Any differences paid
or received on interest rate swap agreements are recognized as adjustments to
interest expense over the life of each swap, thereby adjusting the effective
interest rate on the underlying obligation.
FOREIGN CURRENCY MANAGEMENT
The purpose of our foreign currency hedging activities is to reduce the
risk that our eventual dollar net cash inflows resulting from sales outside the
United States will be adversely affected by changes in exchange rates.
We enter into forward exchange contracts and purchase currency options
(principally European currencies and Japanese yen) to hedge firm sale
commitments denominated in foreign currencies. We also purchase currency
options (principally European currencies and Japanese yen) to hedge certain
anticipated sales. Premiums paid and realized gains and losses, including those
on any terminated contracts, are included in prepaid expenses and other assets.
These are recognized in income, along with unrealized gains and losses in the
same period the hedging transactions
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p55
THE COCA-COLA COMPANY AND SUBSIDIARIES
are realized. Approximately $85 million and $43 million of realized losses on
settled contracts entered into as hedges of firmly committed transactions that
have not yet occurred were deferred on December 31, 1999 and 1998, respectively.
Deferred gains/losses from hedging anticipated transactions were not material on
December 31, 1999 or 1998. In the unlikely event that the underlying transaction
terminates or becomes improbable, the deferred gains or losses on the associated
derivative will be recorded in our income statement.
Gains and losses on derivative financial instruments that are designated
and effective as hedges of net investments in international operations are
included in share-owners' equity as a foreign currency translation adjustment,
a component of accumulated other comprehensive income.
The following table presents the aggregate notional principal amounts,
carrying values, fair values and maturities of our derivative financial
instruments outstanding on December 31, 1999 and 1998 (in millions):
Notional
Principal Carrying Fair
December 31, Amounts Values Values Maturity
-------------------------------------------------------------------------------
1999
Interest rate
management
Swap agreements
Assets $ 250 $ 2 $ 6 2000-2003
Liabilities 200 (1) (8) 2000-2003
Foreign currency
management
Forward contracts
Assets 1,108 57 71 2000-2001
Liabilities 344 (6) (3) 2000-2001
Swap agreements
Assets 102 9 16 2000
Liabilities 412 - (77) 2000-2002
Purchased options
Assets 1,770 47 18 2000
Other
Assets 185 - 2 2000
Liabilities 126 (8) (8) 2000
-------------------------------------------------------------------------------
$ 4,497 $ 100 $ 17
===============================================================================
Notional
Principal Carrying Fair
December 31, Amounts Values Values Maturity
-------------------------------------------------------------------------------
1998
Interest rate
management
Swap agreements
Assets $ 325 $ 2 $ 19 1999-2003
Liabilities 200 (2) (13) 2000-2003
Foreign currency
management
Forward contracts
Assets 809 6 (54) 1999-2000
Liabilities 1,325 (6) (73) 1999-2000
Swap agreements
Assets 344 4 6 1999-2000
Liabilities 704 - (51) 1999-2002
Purchased options
Assets 232 5 3 1999
Other
Liabilities 243 (25) (26) 1999-2000
-------------------------------------------------------------------------------
$ 4,182 $ (16) $ (189)
===============================================================================
Maturities of derivative financial instruments held on December 31, 1999,
are as follows (in millions):
2000 2001 2002 2003
-----------------------------------------------------
$4,018 $ 268 $ 136 $ 75
=====================================================
NOTE 10: COMMITMENTS AND CONTINGENCIES
On December 31, 1999, we were contingently liable for guarantees of
indebtedness owed by third parties in the amount of $409 million, of which $7
million related to independent bottling licensees. We do not consider it
probable that we will be required to satisfy these guarantees.
We believe our exposure to concentrations of credit risk is limited, due
to the diverse geographic areas covered by our operations.
We have committed to make future marketing expenditures of $760 million,
of which the majority is payable over the next 12 years. Additionally, under
certain circumstances, we have committed to make future investments in
bottling companies. However, we do not consider any of these commitments to be
individually significant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p56
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTE 11: NET CHANGE IN OPERATING ASSETS AND LIABILITIES
The changes in operating assets and liabilities, net of effects of
acquisitions and divestitures of businesses and unrealized exchange gains/
losses, are as follows (in millions):
1999 1998 1997
----------------------------------------------------------------
Increase in trade accounts
receivable $ (96) $ (237) $ (164)
Increase in inventories (163) (12) (43)
Increase in prepaid expenses
and other assets (547) (318) (145)
Increase (decrease) in
accounts payable
and accrued expenses 281 (70) 299
Increase (decrease) in
accrued taxes (36) 120 393
Increase (decrease) in
other liabilities 4 (33) (387)
----------------------------------------------------------------
$ (557) $ (550) $ (47)
================================================================
NOTE 12: RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS
Our Company currently sponsors restricted stock award plans and stock
option plans. Our Company applies Accounting Principles Board Opinion No. 25
and related Interpretations in accounting for our plans. Accordingly, no
compensation cost has been recognized for our stock option plans. The
compensation cost charged against income for our restricted stock award plans
was $39 million in 1999, $14 million in 1998 and $56 million in 1997. For our
Incentive Unit Agreements and Performance Unit Agreements, which were both paid
off in 1997, the charge against income was $31 million in 1997. Had compensation
cost for the stock option plans been determined based on the fair value at the
grant dates for awards under the plans, our Company's net income and net income
per share (basic and diluted) would have been as presented in the following
table.
The pro forma amounts are indicated below (in millions, except per share
amounts):
Year Ended December 31, 1999 1998 1997
----------------------------------------------------------------
Net income
As reported $ 2,431 $ 3,533 $ 4,129
Pro forma $ 2,271 $ 3,405 $ 4,026
Basic net income per share
As reported $ .98 $ 1.43 $ 1.67
Pro forma $ .92 $ 1.38 $ 1.63
Diluted net income per share
As reported $ .98 $ 1.42 $ 1.64
Pro forma $ .91 $ 1.36 $ 1.60
================================================================
Under the amended 1989 Restricted Stock Award Plan and the amended 1983
Restricted Stock Award Plan (the Restricted Stock Award Plans), 40 million and
24 million shares of restricted common stock, respectively, may be granted to
certain officers and key employees of our Company.
On December 31, 1999, 33 million shares were available for grant under the
Restricted Stock Award Plans. In 1999, there were 32,100 shares of restricted
stock granted at an average price of $53.86. In 1998, there were 707,300 shares
of restricted stock granted at an average price of $67.03. In 1997, 162,000
shares of restricted stock were granted at $59.75. Participants are entitled to
vote and receive dividends on the shares and, under the 1983 Restricted Stock
Award Plan, participants are reimbursed by our Company for income taxes imposed
on the award, but not for taxes generated by the reimbursement payment. The
shares are subject to certain transfer restrictions and may be forfeited if a
participant leaves our Company for reasons other than retirement, disability or
death, absent a change in control of our Company.
Under our 1991 Stock Option Plan (the 1991 Option Plan), a maximum of 120
million shares of our common stock was approved to be issued or transferred to
certain officers and employees pursuant to stock options and stock appreciation
rights granted under the 1991 Option Plan. The stock appreciation rights permit
the holder, upon surrendering all or part of the related stock option, to
receive cash, common stock or a combination thereof, in an amount up to 100
percent of the difference between the market price and the option price. Options
to purchase common stock under the 1991 Option Plan have been granted to Company
employees at fair market value at the date of grant.
A new stock option plan (the 1999 Option Plan) was approved by share
owners in April of 1999. Following the approval of the 1999 Option Plan, no
grants were made from the 1991 Option Plan and shares available under the 1991
Option Plan were no longer available to be granted. Under the 1999 Option Plan,
a maximum of 120 million shares of our common stock was approved to be issued
or transferred to certain officers and employees pursuant to stock options
granted under the 1999 Option Plan. Options to purchase common stock under the
1999 Option Plan have been granted to Company employees at fair market value at
the date of grant.
Generally, stock options become exercisable over a four-year vesting period
and expire 15 years from the date of grant. Prior to 1999, generally, stock
options became exercisable over a three-year vesting period and expired 10 years
from the date of grant.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend
yields of 1.2, 0.9 and 1.0 percent; expected volatility of 27.1, 24.1 and 20.1
percent; risk-free interest rates of 6.2, 4.0 and 6.0 percent; and expected
lives of four years for all years. The weighted-average fair value of options
granted was $15.77, $15.41 and $13.92 for the years ended December 31, 1999,
1998 and 1997, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p57
THE COCA-COLA COMPANY AND SUBSIDIARIES
The following table summarizes information about stock options at December
31, 1999 (shares in millions):
In 1988, our Company entered into Incentive Unit Agreements whereby,
subject to certain conditions, certain officers were given the right to receive
cash awards based on the market value of 2.4 million shares of our common stock
at the measurement dates. Under the Incentive Unit Agreements, an employee is
reimbursed by our Company for income taxes imposed when the value of the units
is paid, but not for taxes generated by the reimbursement payment. In 1997, all
outstanding units were paid at a price of $58.50 per unit.
In 1985, we entered into Performance Unit Agreements whereby certain
officers were given the right to receive cash awards based on the difference
in the market value of approximately 4.4 million shares of our common stock at
the measurement dates and the base price of $2.58, the market value as of
January 2, 1985. In 1997, all outstanding units were paid based on a market
price of $58.50 per unit.
NOTE 13: PENSION AND OTHER POSTRETIREMENT
BENEFIT PLANS
Our Company sponsors and/or contributes to pension and postretirement
health care and life insurance benefit plans covering substantially all U.S.
employees and certain employees in international locations. We also sponsor
nonqualified, unfunded defined benefit pension plans for certain officers and
other employees. In addition, our Company and its subsidiaries have various
pension plans and other forms of postretirement arrangements outside the United
States.
Total expense for all benefit plans, including defined benefit pension
plans and postretirement health care and life insurance benefit plans, amounted
to approximately $108 million in 1999, $119 million in 1998 and $109 million in
1997. Net periodic cost for our pension and other benefit plans consists of the
following (in millions):
Pension Benefits
---------------------------------
Year Ended December 31, 1999 1998 1997
----------------------------------------------------------------
Service cost $ 67 $ 56 $ 49
Interest cost 111 105 93
Expected return on
plan assets (119) (105) (95)
Amortization of prior
service cost 6 3 7
Recognized net actuarial loss 7 9 14
----------------------------------------------------------------
Net periodic pension cost $ 72 $ 68 $ 68
================================================================
Other Benefits
---------------------------------
Year Ended December 31, 1999 1998 1997
----------------------------------------------------------------
Service cost $ 14 $ 14 $ 11
Interest cost 22 25 23
Expected return on plan assets (1) (1) (1)
Recognized net actuarial gain - - (1)
-----------------------------------------------------------------
Net periodic cost $ 35 $ 38 $ 32
=================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p58
THE COCA-COLA COMPANY AND SUBSIDIARIES
The following table sets forth the change in benefit obligation for our
benefit plans (in millions):
Pension Other
Benefits Benefits
--------------- -------------------
December 31, 1999 1998 1999 1998
-----------------------------------------------------------------------------
Benefit obligation
at beginning of year $ 1,717 $ 1,488 $ 381 $ 327
Service cost 67 56 14 14
Interest cost 111 105 22 25
Foreign currency
exchange rate changes (13) 25 - -
Amendments 4 8 - -
Actuarial (gain) loss (137) 124 (101) 31
Benefits paid (84) (86) (14) (16)
Other 5 (3) 1 -
------------------------------------------------------------------------------
Benefit obligation
at end of year $ 1,670 $ 1,717 $ 303 $ 381
==============================================================================
The following table sets forth the change in plan assets for our benefit
plans (in millions):
Pension Other
Benefits Benefits
--------------- -------------------
December 31, 1999 1998 1999 1998
-----------------------------------------------------------------------------
Fair value of plan assets
at beginning of year {1} $ 1,516 $ 1,408 $ 36 $ 40
Actual return on
plan assets 259 129 1 2
Employer contribution 34 25 5 10
Foreign currency
exchange rate changes (20) 18 - -
Benefits paid (69) (68) (14) (16)
Other 2 4 1 -
-----------------------------------------------------------------------------
Fair value of plan assets
at end of year {1} $ 1,722 $ 1,516 $ 29 $ 36
=============================================================================
{1} Pension benefit plan assets primarily consist of listed stocks (including
1,584,000 shares of common stock of our Company with a fair value of $92 million
and $106 million as of December 31, 1999 and 1998, respectively), bonds and
government securities. Other benefit plan assets consist of corporate bonds,
government securities and short-term investments.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $556 million, $434 million and $161 million,
respectively, as of December 31, 1999, and $536 million, $418 million and $149
million, respectively, as of December 31, 1998.
The accrued pension and other benefit costs recognized in our accompanying
consolidated balance sheets is computed as follows (in millions):
Pension Other
Benefits Benefits
----------------- -----------------
December 31, 1999 1998 1999 1998
-----------------------------------------------------------------------------
Funded status $ 52 $ (201) $ (274) $ (345)
Unrecognized net (asset)
liability at transition 4 - - -
Unrecognized prior
service cost 54 43 4 4
Unrecognized net (gain)
loss (285) (10) (91) 10
-----------------------------------------------------------------------------
Net liability recognized $ (175) $ (168) $ (361) $ (331)
-----------------------------------------------------------------------------
Prepaid benefit cost $ 73 $ 54 $ - $ -
Accrued benefit liability (305) (303) (361) (331)
Accumulated other
comprehensive income 26 64 - -
Intangible asset 31 17 - -
-----------------------------------------------------------------------------
Net liability recognized $ (175) $ (168) $ (361) $ (331)
=============================================================================
The weighted-average assumptions used in computing the preceding
information are as follows:
Pension Benefits
-----------------------------
December 31, 1999 1998 1997
---------------------------------------------------------------
Discount rates 7% 6 1/2% 7%
Rates of increase in
compensation levels 4 1/2% 4 1/2% 4 3/4%
Expected long-term
rates of return on
assets 8 1/2% 8 3/4% 9%
Other Benefits
-------------------------------
December 31, 1999 1998 1997
---------------------------------------------------------------
Discount rates 8% 6 3/4% 7 1/4%
Rates of increase in
compensation levels 5% 4 1/2% 4 3/4%
Expected long-term
rates of return on
assets 3% 3% 3%
The rate of increase in per capita costs of covered health care benefits is
assumed to be 7 1/2 percent in 2000, decreasing gradually to 5 1/4 percent by
the year 2005.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p59
THE COCA-COLA COMPANY AND SUBSIDIARIES
A one percentage point change in the assumed health care cost trend rate
would have the following effects (in millions):
One Percentage One Percentage
Point Increase Point Decrease
--------------------------------------------
Effect on accumulated
postretirement benefit
obligation as of
December 31, 1999 $ 42 $ (34)
Effect on net periodic
postretirement benefit
cost in 1999 $ 6 $ (5)
NOTE 14: INCOME TAXES
Income before income taxes consists of the following (in millions):
Year Ended December 31, 1999 1998 1997
----------------------------------------------------------------
United States $ 1,504 $ 1,979 $ 1,515
International 2,315 3,219 4,540
---------------------------------------------------------------
$ 3,819 $ 5,198 $ 6,055
===============================================================
Income tax expense (benefit) consists of the following (in millions):
Year Ended United State &
December 31, States Local International Total
------------------------------------------------------------------------------
1999
Current $ 395 $ 67 $ 829 $ 1,291
Deferred 182 11 (96) 97
1998
Current $ 683 $ 91 $ 929 $ 1,703
Deferred (73) 28 7 (38)
1997
Current $ 240 $ 45 $ 1,261 $ 1,546
Deferred 180 21 179 380
==============================================================================
We made income tax payments of approximately $1,404 million, $1,559 million
and $982 million in 1999, 1998 and 1997, respectively.
A reconciliation of the statutory U.S. federal rate and effective rates is
as follows:
Year Ended December 31, 1999 1998 1997
---------------------------------------------------------------
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income taxes-net of
federal benefit 1.0 1.0 1.0
Earnings in jurisdictions taxed
at rates different from the
statutory U.S. federal rate (6.0) (4.3) (2.6)
Equity income or loss 1.6 - (.6)
Other operating charges 5.3 - -
Other-net (.6) .3 (1.0)
---------------------------------------------------------------
36.3% 32.0% 31.8%
===============================================================
Our effective tax rate reflects the tax benefit derived from having
significant operations outside the United States that are taxed at rates lower
than the U.S. statutory rate of 35 percent, 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 tax rate on operations.
In 1999, the Company recorded a charge of $813 million, primarily reflecting
the impairment of certain bottling, manufacturing and intangible assets. For
some locations with impaired assets, management concluded that it was more
likely than not that no local tax benefit would be realized. Accordingly, a
valuation allowance was recorded offsetting the future tax benefits for such
locations. This resulted in an increase in our effective tax rate for 1999.
Excluding the impact, the Company's effective tax rate for 1999 would have
been 31.0 percent.
We have provided appropriate U.S. and international taxes for earnings of
subsidiary companies that are expected to be remitted to the parent company.
Exclusive of amounts that would result in little or no tax if remitted, the
cumulative amount of unremitted earnings from our international subsidiaries
that is expected to be indefinitely reinvested was approximately $3.4 billion
on December 31, 1999. The taxes that would be paid upon remittance of these
indefinitely reinvested earnings are approximately $1.2 billion, based on
current tax laws.
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities consist of the following (in millions):
December 31, 1999 1998
---------------------------------------------------------------
Deferred tax assets:
Benefit plans $ 311 $ 309
Liabilities and reserves 169 166
Net operating loss carryforwards 196 49
Other operating charges 254 -
Other 272 176
---------------------------------------------------------------
Gross deferred tax assets 1,202 700
Valuation allowance (443) (18)
---------------------------------------------------------------
$ 759 $ 682
===============================================================
Deferred tax liabilities:
Property, plant and equipment $ 320 $ 244
Equity investments 397 219
Intangible assets 197 139
Other 99 320
---------------------------------------------------------------
$ 1,013 $ 922
===============================================================
Net deferred tax asset (liability){1} $ (254) $ (240)
---------------------------------------------------------------
{1} Deferred tax assets of $244 million and $184 million have been
included in the consolidated balance sheet caption "Marketable
securities and other assets" at December 31, 1999 and 1998, respectively.
On December 31, 1999 and 1998, we had approximately $233 million and $171
million, respectively, of gross deferred tax assets, net of valuation
allowances, located in countries outside the United States.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p60
THE COCA-COLA COMPANY AND SUBSIDIARIES
On December 31, 1999, we had $608 million of operating loss carryforwards
available to reduce future taxable income of certain international subsidiaries.
Loss carryforwards of $320 million must be utilized within the next five years;
$288 million can be utilized over an indefinite period. A valuation allowance
has been provided for a portion of the deferred tax assets related to these loss
carryforwards.
NOTE 15: NONRECURRING ITEMS
In the fourth quarter of 1999, we recorded charges of approximately $813
million. Of this $813 million, approximately $543 million related to the
impairment of certain bottling, manufacturing and intangible assets, primarily
within our Russian and Caribbean bottlers and in the Middle and Far East and
North America. These impairment charges were recorded to reduce the carrying
value of the identified assets to fair value. Fair values were derived using
a variety of methodologies, including cash flow analysis, estimates of sales
proceeds and independent appraisals. The charges were primarily the result of
our revised outlook in certain markets due to the prolonged severe economic
downturns. The remaining carrying value of long-lived assets within these
operations as of December 31, 1999, was approximately $140 million.
Of the remainder, approximately $196 million related to charges associated
with the impairment of the distribution and bottling assets of our vending
operations in Japan and our bottling operations in the Baltics. The charges
reduced the carrying value of these assets to their fair value less the cost
to sell. Consistent with our long-term bottling investment strategy, management
has committed to a plan to sell our ownership interest in these operations to
one of our strategic business partners. It is management's intention that this
plan will be completed within approximately the next 12 months. The remaining
carrying value of long-lived assets within these operations and the loss from
operations on an after-tax basis as of and for the 12-month period ending
December 31, 1999, were approximately $152 million and $5 million,
respectively.
The remainder of the $813 million charges, approximately $74 million,
primarily related to the change in senior management and charges related to
organizational changes within the Greater Europe, Latin America and Corporate
segments. These charges were incurred during the fourth quarter of 1999.
In the second quarter of 1998, we recorded a nonrecurring charge primarily
related to the impairment of certain assets in North America of $25 million
and Corporate of $48 million.
In the second quarter of 1997, we recorded a nonrecurring charge of $60
million related to enhancing manufacturing efficiencies in North America.
Substantially all of the charges required as a result of these provisions have
been realized as of December 31, 1999.
NOTE 16: OPERATING SEGMENTS
During the three years ended December 31, 1999, our Company's operating
structure included 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.
SEGMENT PRODUCTS AND SERVICES
The business of our Company is nonalcoholic ready-to-drink beverages,
principally soft drinks, but also a variety of noncarbonated beverages. Our
operating segments derive substantially all their revenues from the manufacture
and sale of beverage concentrates and syrups with the exception of Corporate,
which derives its revenues primarily from the licensing of our brands in
connection with merchandise.
METHOD OF DETERMINING SEGMENT PROFIT OR LOSS
Management evaluates the performance of its operating segments
separately to individually monitor the different factors affecting financial
performance. Segment profit or loss includes substantially all of the
segment's costs of production, distribution and administration. Our
Company manages income taxes on a global basis. Thus, we evaluate segment
performance based on profit or loss before income taxes, exclusive of any
significant gains or losses on the disposition of investments or other
assets. Our Company typically manages and evaluates equity investments and
related income on a segment level. However, we manage certain significant
investments, such as our equity interests in Coca-Cola Enterprises, at the
corporate level. We manage financial costs, such as exchange gains and
losses and interest income and expense, on a global basis at the Corporate
segment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p61
THE COCA-COLA COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS KO-ar99-p62
THE COCA-COLA COMPANY AND SUBSIDIARIES
NET OPERATING REVENUES BY OPERATING SEGMENT {1}
[pie charts]
Year Ended December 31, 1999 1998 1997
------------------------------------------------------------------------------
North America 38% 37% 35%
Greater Europe 23% 26% 29%
Latin America 10% 12% 11%
Middle and Far East 26% 22% 22%
Africa 3% 3% 3%
OPERATING INCOME BY OPERATING SEGMENT {1}
Year Ended December 31, 1999 1998 1997
------------------------------------------------------------------------------
North America 32% 25% 22%
Greater Europe 23% 29% 31%
Latin America 18% 18% 19%
Middle and Far East 23% 24% 25%
Africa 4% 4% 3%
{1} Charts and percentages are calculated excluding Corporate
[pie charts]
NOTE 17: ACQUISITIONS AND INVESTMENTS
During 1999, the Company's acquisition and investment activity, which
included the acquisition of beverage brands from Cadbury Schweppes plc in more
than 160 countries around the world and investments in the bottling operations
of Embotelladora Arica S.A., F&N Coca-Cola Pte Limited, and Coca-Cola West
Japan Company, Ltd., totaled $1.9 billion. During 1998 and 1997, the Company's
acquisition and investment activity totaled $1.4 billion and $1.1 billion,
respectively. None of the acquisitions and investment activity in 1998 and 1997
was individually significant.
The acquisitions and investments have been accounted for by the purchase
method of accounting and, accordingly, their results have been included in the
consolidated financial statements from their respective dates of acquisition.
Had the results of these businesses been included in operations commencing with
1997, the reported results would not have been materially affected.
NOTE 18: SUBSEQUENT EVENTS
In the second half of 1999, we undertook a detailed review of each of our
business functions. The purpose of this review was to determine the optimal
organizational structure to serve the needs of our customers and consumers at
the local level.
As a result of this review, in January 2000 we announced a major
organizational realignment (the Realignment). The Realignment will reduce our
workforce around the world while transferring responsibilities from our
corporate headquarters to revenue-generating operating units. The intent of the
Realignment is to effectively align our corporate resources, support systems and
business culture to fully leverage the local capabilities of our system. Under
the Realignment, approximately 6,000 positions worldwide, including employees of
the Company, open positions and contract labor, will be eliminated. Of these
identified positions, approximately 3,300 are based within the United States and
approximately 2,700 are based outside of the United States. The entire reduction
will take place during calendar year 2000.
Employees separating from our Company as a result of the Realignment will
be offered severance packages which include both financial and nonfinancial
components. Charges related to the Realignment will be recognized during
calendar year 2000.
REPORT OF INDEPENDENT AUDITORS KO-ar99-p63
THE COCA-COLA COMPANY AND SUBSIDIARIES
BOARD OF DIRECTORS AND SHARE OWNERS
THE COCA-COLA COMPANY
We have audited the accompanying consolidated balance sheets of The
Coca-Cola Company and subsidiaries as of December 31, 1999 and 1998,and the
related consolidated statements of income, share-owners' equity, and cash
flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Coca-Cola
Company and subsidiaries at December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG
Atlanta, Georgia
January 25, 2000
THE COCA-COLA COMPANY AND SUBSIDIARIES KO-ar99-p65
The fourth quarter of 1999 includes provisions of $813 million ($.31 per share
after income taxes, basic and diluted) recorded in other operating charges,
primarily relating to the impairment of certain bottling, manufacturing and
intangible assets. For a more complete discussion of these provisions, refer to
Note 15 in our Consolidated Financial Statements.
The second quarter of 1998 includes a gain of approximately $191 million
($.03 per share after income taxes, basic and diluted) on the sale of our
previously consolidated bottling and canning operations in Italy in June
1998. The second quarter of 1998 also includes provisions of $73 million
($.02 per share after income taxes, basic and diluted) related to the
impairment of certain assets in North America and Corporate.
The third quarter of 1998 includes a noncash gain on the issuance of stock by
CCEAG of approximately $27 million ($.01 per share after income taxes, basic
and diluted).
STOCK PRICES
Below are the New York Stock Exchange high, low and closing prices of
The Coca-Cola Company's stock for each quarter of 1999 and 1998.
SHARE-OWNER INFORMATION
COMMON STOCK
Ticker symbol: KO
The Coca-Cola Company is one of 30 companies
in the Dow Jones Industrial Average.
Share owners of record at year end: 394,603
Shares outstanding at year end: 2.47 billion
STOCK EXCHANGES
INSIDE THE UNITED STATES:
Common stock listed and traded: New York Stock Exchange, the
principal market for our common stock.
Common stock traded: Boston, Chicago, Cincinnati, Pacific and
Philadelphia stock exchanges.
OUTSIDE THE UNITED STATES:
Common stock listed and traded: The German exchange in
Frankfurt and the Swiss exchange in Zurich.
DIVIDENDS
At its February 2000 meeting, our Board increased our quarterly
dividend to 17 cents per share, equivalent to an annual dividend
of 68 cents per share. The Company has increased dividends each
of the last 38 years.
The Coca-Cola Company normally pays dividends four times a year,
usually on April 1, July 1, October 1 and December 15. The Company
has paid 315 consecutive quarterly dividends, beginning in 1920.
SHARE-OWNER ACCOUNT ASSISTANCE
For address changes, dividend checks, direct deposit of dividends,
account consolidation, registration changes, lost stock certificates,
stock holdings and the Dividend and Cash Investment Plan, please
contact:
Registrar and Transfer Agent
First Chicago Trust Company, a division of EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
Toll-free: (888) COKESHR (265-3747)
For hearing impaired: (201) 222-4955
E-mail: [email protected]
Internet: www.equiserve.com
DIVIDEND AND CASH INVESTMENT PLAN
The Dividend and Cash Investment plan permits share owners of record
to reinvest dividends from Company stock in shares of The Coca-Cola
Company. The Plan provides a convenient, economical and systematic
method of acquiring additional shares of our common stock. All
share owners of record are eligible to participate. Share owners
also may purchase Company stock through voluntary cash investments
of up to $125,000 per year.
At year end, 74 percent of the Company's share owners of record
were participants in the Plan. In 1999, share owners invested $40
million in dividends and $78 million in cash in the Plan.
If your shares are held in street name by your broker and you
are interested in participating in the Dividend and Cash Investment
Plan, you may have your broker transfer the shares to First Chicago
Trust Company, a division of EquiServe, electronically through the
Direct Registration System.
For more details on the Dividend and Cash Investment Plan,
please contact the Plan Administrator, First Chicago Trust Company,
a division of EquiServe, or visit the investor section of our
Company's Web site, www.thecoca-colacompany.com, for more information.
SHARE-OWNER INTERNET ACCOUNT ACCESS
Share owners of record may access their accounts via the Internet
to obtain share balance, current market price of shares, historical
stock prices and the toal value of their investment. In addition,
they may sell or request issuance of Dividend and Cash Investment
Plan shares.
For information on how to access this secure site, please call
First Chicago Trust Company, a division of EquiServe, toll-free at
(877) 843-9327. For share owners of record outside North America,
please call (201) 536-8071.
ANNUAL MEETING OF SHARE OWNERS
April 19, 2000 at 9 a.m. local time
The Playhouse Theatre
DuPont Building
10th and Market Streets
Wilmington, Delaware
CORPORATE OFFICES
The Coca-Cola Company
One Coca-Cola Plaza
Atlanta, Georgia 30313
INSTITUTIONAL INVESTOR INQUIRIES
(404) 676-5766
INFORMATION RESOURCES
INTERNET SITE
You can find our stock price, news and earnings releases, and more
financial information about our Company on our Web site,
www.thecoca-colacompany.com.
PUBLICATIONS
The Company's Annual Report, Proxy Statement, Form 10-K and Form 10-Q
reports are available free of charge upon request from our Industry &
Consumer Affairs Department at the Company's corporate address, listed
above.
HOTLINE
The Company's hotline (800) INVSTKO (468-7856), offers taped highlights
from the most recent quarter and may be used to request the most recent
quarterly results news release.
AUDIO ANNUAL REPORT
An audiocassette version of this report is available without charge as
a service to the visually impaired. To receive a copy, please contact
our Industry & Consumer Affairs Department at (800) 571-2653.
DUPLICATE MAILINGS
If you are receiving duplicate or unwanted copies of our publications,
please contact First Chicago Trust Company, a division of EquiServe,
at (888) COKESHR (265-3747).
GLOSSARY
[Following are certain definitions extracted from page 69.]
DIVIDEND PAYOUT RATIO: Calculated by dividing cash dividends on common stock
by net income available to common share owners.
ECONOMIC PROFIT: Income from continuing operations, after giving effect to
taxes and excluding the effects of interest, in excess of a computed capital
charge for average operating capital employed.
FREE CASH FLOW: Cash provided by operations less cash used in business
reinvestment. The Company uses free cash flow along with borrowings to pay
dividends, make share repurchases and make acquisitions.
INTEREST COVERAGE RATIO: Income before taxes, excluding unusual items, plus
interest expense divided by the sum of interest expense and capitalized
interest.
NET CAPITAL: Calculated by adding share-owners' equity to net debt.
NET DEBT: Calculated by subtracting from debt the sum of cash, cash
equivalents, marketable securities and certain temporary bottling investments,
less the amount of cash determined to be necessary for operations.
RETURN ON CAPITAL: Calculated by dividing income from continuing operations --
before changes in accounting principles, adding back interest expense -- by
average total capital.
RETURN ON COMMON EQUITY: Calculated by dividing income from continuing
operations -- before changes in accounting principles, less preferred stock
dividends -- by average common share-owners' equity.
TOTAL CAPITAL: Equals share-owners' equity plus interest-bearing debt.
TOTAL MARKET VALUE OF COMMON STOCK: Stock price at year end multiplied by
the number of shares outstanding at year end.