[COCA-COLA ENTERPRISES INC. LOGO]
FORM 10-Q/A
QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 27, 2002
FILED PURSUANT TO SECTION 13
OF THE
SECURITIES EXCHANGE ACT OF 1934
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 27, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-09300
[COCA-COLA ENTERPRISES INC. LOGO]
(Exact name of registrant as specified in its charter)
DELAWARE 58-0503352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 WINDY RIDGE PARKWAY, SUITE 700
ATLANTA, GEORGIA 30339
(Address of principal executive offices) (Zip Code)
770-989-3000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock.
449,377,591 SHARES OF $1 PAR VALUE COMMON STOCK AS OF NOVEMBER 1, 2002
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COCA-COLA ENTERPRISES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 27, 2002
INDEX
Page
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PART I - FINANCIAL INFORMATION
Reason for Amendment................................................ 1
Item 1. Financial Statements
Condensed Consolidated Income Statements for the Quarters
ended September 27, 2002 and September 28, 2001................... 2
Condensed Consolidated Income Statements for the Nine Months
ended September 27, 2002 and September 28, 2001................... 3
Condensed Consolidated Balance Sheets as of September 27, 2002
and December 31, 2001............................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 27, 2002 and September 28, 2001................... 6
Notes to Condensed Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 38
Item 4. Controls and Procedures............................................. 38
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................... 39
Signatures.................................................................. 40
Certifications.............................................................. 40
PART I. FINANCIAL INFORMATION
REASON FOR AMENDMENT
Pursuant to this Form 10-Q/A, the registrant amends "Item 1. Financial
Statements--Notes to Condensed Consolidated Financial Statements" and "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of Part I--Financial Information of its Quarterly Report on Form
10-Q for the quarterly period ended September 27, 2002.
Changes being made to Item 1. Financial Statements--Notes to Condensed
Consolidated Financial Statements include 1) the addition of a new "Note C -
Significant Accounting Policies" to discuss our accounting policies with respect
to credit risk and sale of accounts receivable, marketing programs and sales
incentives, fair value of financial instruments and derivatives, and income
taxes, 2) the clarification of "Note P - Adoption of SFAS No. 142, Goodwill and
Other Intangible Assets" to add information on our SFAS No. 142 adoption
methodology, and 3) additional information surrounding our Kmart receivable
disclosures included in "Note Q - Commitments and Contingencies".
Changes being made to Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations include 1) the removal of all discussion of
our non-GAAP EBITDA measurement, 2) the removal of all discussion of our
non-GAAP free cash flow measurement, 3) the addition to "Results of
Operations - Overview" of a discussion of our reasons for adopting the
change in accounting for Jumpstart payments as of January 1, 2001, 4) the
addition to "Results of Operations - Net Operating Revenues and Cost of Sales"
of a discussion of our marketing programs and sales incentives and a
clarification of the impact of price and package mix, 5) the addition of a
tabular presentation of our restructuring charges and the addition of a
discussion of the reasons for the increase in our depreciation expense to
"Results of Operations - Selling Delivery and Administrative Expenses",
6) the addition of our tabular presentation of transactions with The Coca-Cola
Company from "Note K - Related Party Transactions" to "Results of
Operations - Transactions with The Coca-Cola Company", 7) additional information
surrounding our Kmart receivable disclosures included in "Known Trends and
Uncertainties - Contingencies", and 8) the clarification of "Accounting
Developments - Adoption of SFAS No. 142, Goodwill and Other Intangible Assets"
to add information on our SFAS No. 142 adoption methodology.
-1-
ITEM 1. FINANCIAL STATEMENTS
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED; IN MILLIONS EXCEPT PER SHARE DATA)
QUARTER ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
------------- -------------
NET OPERATING REVENUES ............................. $ 4,549 $ 4,250
Cost of sales ...................................... 2,810 2,660
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GROSS PROFIT ....................................... 1,739 1,590
Selling, delivery, and administrative expenses ..... 1,298 1,375
------- -------
OPERATING INCOME ................................... 441 215
Interest expense, net .............................. 166 189
Other nonoperating expenses (income), net .......... (2) (1)
------- -------
INCOME BEFORE INCOME TAXES ......................... 277 27
Income tax expense before rate change benefit ...... 86 22
Income tax rate change (benefit) ................... -- (6)
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NET INCOME ......................................... 191 11
Preferred stock dividends .......................... 1 1
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NET INCOME APPLICABLE TO COMMON SHAREOWNERS ........ $ 190 $ 10
======= =======
BASIC NET INCOME PER SHARE APPLICABLE TO COMMON
SHAREOWNERS ...................................... $ 0.42 $ 0.02
======= =======
DILUTED NET INCOME PER SHARE APPLICABLE TO COMMON
SHAREOWNERS ...................................... $ 0.42 $ 0.02
======= =======
DIVIDENDS PER SHARE APPLICABLE TO COMMON
SHAREOWNERS ...................................... $ 0.04 $ 0.04
======= =======
INCOME (EXPENSE) AMOUNTS FROM TRANSACTIONS WITH
THE COCA-COLA COMPANY
Net operating revenues ........................... $ 259 $ 221
Cost of sales .................................... (1,425) (1,191)
Selling, delivery, and administrative expenses ... 46 20
See Notes to Condensed Consolidated Financial Statements.
-2-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED; IN MILLIONS EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
------------- -------------
NET OPERATING REVENUES ........................... $12,639 $11,661
Cost of sales .................................... 7,794 7,273
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GROSS PROFIT ..................................... 4,845 4,388
Selling, delivery, and administrative
expenses ....................................... 3,732 3,879
------- -------
OPERATING INCOME ................................. 1,113 509
Interest expense, net ............................ 495 568
Other nonoperating expenses (income), net ........ (3) (1)
------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ......... 621 (58)
Income tax expense (benefit) before rate
change benefit ................................. 205 (23)
Income tax rate change (benefit) ................. -- (52)
------- -------
NET INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE .............................. 416 17
Cumulative effect of accounting change, net
of taxes ....................................... -- (302)
------- -------
NET INCOME (LOSS) ................................ 416 (285)
Preferred stock dividends ........................ 2 3
------- -------
NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREOWNERS .................................... $ 414 $ (288)
======= =======
BASIC NET INCOME PER SHARE APPLICABLE TO
COMMON SHAREOWNERS BEFORE CUMULATIVE EFFECT .... $ 0.92 $ 0.03
======= =======
BASIC NET INCOME (LOSS) PER SHARE APPLICABLE
TO COMMON SHAREOWNERS .......................... $ 0.92 $ (0.67)
======= =======
DILUTED NET INCOME PER SHARE APPLICABLE TO
COMMON SHAREOWNERS BEFORE CUMULATIVE EFFECT .... $ 0.91 $ 0.03
======= =======
DILUTED NET INCOME (LOSS) PER SHARE APPLICABLE
TO COMMON SHAREOWNERS .......................... $ 0.91 $ (0.67)
======= =======
DIVIDENDS PER SHARE APPLICABLE TO COMMON
SHAREOWNERS .................................... $ 0.12 $ 0.12
======= =======
INCOME (EXPENSE) AMOUNTS FROM TRANSACTIONS
WITH THE COCA-COLA COMPANY:
Net operating revenues ......................... $ 675 $ 609
Cost of sales .................................. (3,830) (3,377)
Selling, delivery, and administrative
expenses ..................................... 115 63
See Notes to Condensed Consolidated Financial Statements.
-3-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
SEPTEMBER 27, DECEMBER 31,
ASSETS 2002 2001
------------- -------------
(Unaudited)
CURRENT
Cash and cash investments, at cost
approximating market ......................... $ 929 $ 284
Trade accounts receivable, less allowance
reserves of $59 and $73, respectively ........ 1,844 1,540
Inventories:
Finished goods ............................... 522 458
Raw materials and supplies ................... 267 232
------- -------
789 690
Prepaid expenses and other current assets ...... 357 362
------- -------
Total Current Assets ....................... 3,919 2,876
PROPERTY, PLANT, AND EQUIPMENT
Land ........................................... 437 390
Buildings and improvements ..................... 1,789 1,718
Machinery and equipment ........................ 9,295 8,614
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11,521 10,722
Less allowances for depreciation ............... 5,442 4,726
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6,079 5,996
Construction in progress ....................... 188 210
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Net Property, Plant, and Equipment ............ 6,267 6,206
GOODWILL ......................................... 575 569
FRANCHISE LICENSE INTANGIBLE ASSETS .............. 13,387 13,124
OTHER NONCURRENT ASSETS, NET ..................... 1,029 944
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$25,177 $23,719
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See Notes to Condensed Consolidated Financial Statements.
-4-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT SHARE DATA)
SEPTEMBER 27, DECEMBER 31,
LIABILITIES AND SHAREOWNERS' EQUITY 2002 2001
------------- ------------
(Unaudited)
CURRENT
Accounts payable and accrued expenses .......... $ 2,681 $ 2,610
Amounts payable to The Coca-Cola Company, net .. 205 38
Deferred cash payments from The Coca-Cola
Company ...................................... 75 70
Current portion of long-term debt .............. 1,719 1,804
------- -------
Total Current Liabilities .................. 4,680 4,522
LONG-TERM DEBT, LESS CURRENT MATURITIES .......... 11,078 10,365
RETIREMENT AND INSURANCE PROGRAMS AND OTHER
LONG-TERM OBLIGATIONS .......................... 1,157 1,166
DEFERRED CASH PAYMENTS FROM THE COCA-COLA
COMPANY ........................................ 441 510
DEFERRED INCOME TAX LIABILITIES .................. 4,513 4,336
SHAREOWNERS' EQUITY
Preferred stock ................................ 37 37
Common stock, $1 par value - Authorized
- 1,000,000,000 shares; Issued -
457,026,914 and 453,262,107 shares,
respectively ................................. 457 453
Additional paid-in capital ..................... 2,562 2,527
Reinvested earnings ............................ 580 220
Accumulated other comprehensive income (loss) .. (196) (292)
Common stock in treasury, at cost - 8,517,712
and 8,146,325 shares, respectively ........... (132) (125)
------- -------
Total Shareowners' Equity .................. 3,308 2,820
------- -------
$25,177 $23,719
======= =======
See Notes to Condensed Consolidated Financial Statements.
-5-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN MILLIONS)
NINE MONTHS ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .............................. $ 416 $ (285)
Adjustments to reconcile net income (loss) to
net cash derived from operating activities:
Cumulative effect of accounting change ..... -- 302
Depreciation ............................... 711 665
Amortization ............................... 56 338
Deferred income tax expense (benefit) ...... 133 (134)
Deferred cash payments from The Coca-Cola
Company .................................. (64) 66
Net changes in current assets and current
liabilities ................................ (128) (372)
Other ........................................ (20) (23)
------- -------
Net cash derived from operating activities ..... 1,104 557
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in capital assets .................. (661) (605)
Capital asset disposals ........................ 9 2
Cash investments in bottling operations, net
of cash acquired ............................. (26) (906)
Other investing activities ..................... (39) (31)
------- -------
Net cash used in investing activities .......... (717) (1,540)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in commercial paper .... (406) 181
Proceeds from issuance of debt ................. 1,704 1,189
Payments on long-term debt ..................... (1,021) (483)
Stock purchases for treasury ................... -- (8)
Cash dividend payments on common and
preferred stock .............................. (38) (36)
Exercise of employee stock options ............. 19 26
------- -------
Net cash derived from financing activities ..... 258 869
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
INVESTMENTS .................................... 645 (114)
Cash and cash investments at beginning of
period ....................................... 284 294
------- -------
CASH AND CASH INVESTMENTS AT END OF PERIOD ....... $ 929 $ 180
======= =======
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITIES
Investments in bottling operations:
Debt issued and assumed .................... $ -- $ (15)
Equity issued .............................. -- (404)
Other liabilities assumed .................. -- (331)
Fair value of assets acquired .............. 26 1,656
------- -------
Cash paid, net of cash acquired ............ $ 26 $ 906
======= =======
See Notes to Condensed Consolidated Financial Statements.
-6-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments consisting of normal
recurring accruals considered necessary for a fair presentation have been
included. For further information, refer to the consolidated financial
statements and footnotes included in the Coca-Cola Enterprises Inc. ("CCE")
Annual Report on Form 10-K for the year ended December 31, 2001.
As of January 1, 2001, CCE changed its method of accounting for payments
received under the Jumpstart market development programs. CCE previously
recognized the payments as an offset to operating expenses as incurred in the
period for which the payments were designated. As of January 1, 2001, the
payments are recognized primarily as offsets to operating expenses as cold drink
equipment is placed, through 2008, and over the period CCE has the potential
requirement to move equipment, through 2020. The change in accounting resulted
in a noncash cumulative effect adjustment in first-quarter 2001 of $(302)
million, net of $185 million taxes, or $(0.70) per common share.
NOTE B - RECLASSIFICATIONS
Reclassifications have been made in the 2001 income statements to conform to
classifications used in the current year, under Emerging Issues Task Force
("EITF") No. 01-09, "Accounting for Consideration Given by a Vendor to a
Customer or Reseller of the Vendor's Products." EITF 01-09 requires certain
payments made to customers by CCE, previously classified as selling expenses, to
be classified as deductions from revenue. CCE reclassified, as deductions in net
operating revenues, approximately $26 million and $72 million of selling
expenses which were previously classified as selling, delivery, and
administrative expenses in the statement of operations for the quarter and nine
months ended September 28, 2001, respectively.
NOTE C - SIGNIFICANT ACCOUNTING POLICIES
Credit Risk and Sale of Accounts Receivable: CCE has an agreement whereby
designated pools of accounts receivable can be sold with recourse at a discount
to a Canadian financial institution. At any given time, the maximum capacity
available under this agreement is $75 million Canadian dollars (approximately
$48 million and $49 million, at September 27, 2002 and 2001, respectively). At
September 27, 2002 and 2001 CCE had sold approximately $48 million and $49
million, respectively, of receivables under this agreement, which are
excluded from the accompanying balance sheets. CCE retains collection and
administrative responsibilities for the accounts receivable sold. The
primary benefit of this arrangement to CCE is more timely availability of cash.
CCE believes the benefits of the arrangement more than offset the cost of
retaining servicing responsibilities and receiving a discounted payment for the
accounts receivable. CCE's liability to service the receivables sold is
indistinguishable from other collection responsibilities and not separately
recorded as a liability. CCE's recourse liability is limited to the
requirement to repurchase any balance that ceases to be a part of the designated
pool.
-7-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Marketing Programs and Sales Incentives: CCE participates in various programs
and arrangements with customers designed to increase the sale of our products by
these customers. Among the programs negotiated with customers are arrangements
in which allowances can be earned by the customer for attaining agreed upon
sales levels or for participating in specific marketing programs. CCE also
participates in customer arrangements that guarantee pouring or vending rights
in specific athletic venues, specific school districts, or other locations.
Coupon programs and under-the-cap promotions are also developed on a territory
specific basis with the intent of increasing sales by all customers. The cost of
these various programs, included as deductions in net operating revenues,
totaled approximately $445 million and $366 million for the quarters ended
September 27, 2002 and September 28, 2001, respectively, and $1,232 million and
$1,030 million for the nine months ended September 27, 2002, and September 28,
2001, respectively. The 2001 amounts reflect the reclassifications described in
Note B.
Fair Value of Financial Instruments and Derivatives: The fair values of
financial instruments and derivatives are estimated based on market rates. The
fair value of long-term debt, including current portions, is estimated based on
rates currently offered to CCE for debt of the same remaining maturities. The
estimated fair values of derivative instruments are calculated based on market
rates. These values represent the estimated amounts CCE would receive or pay to
terminate agreements, taking into consideration current market rates and the
current creditworthiness of the counterparties.
Income Taxes: CCE provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes".
FAS 109 requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax basis of assets and liabilities.
NOTE D - SEASONALITY OF BUSINESS
Operating results for the third quarter and nine months ended September 27, 2002
are not indicative of results that may be expected for the year ending December
31, 2002 because of business seasonality. Business seasonality results from a
combination of higher unit sales of CCE's products in the second and third
quarters versus the first and fourth quarters of the year and the methods of
accounting for fixed costs such as depreciation, amortization, and interest
expense which are not significantly impacted by business seasonality.
NOTE E - INCOME TAXES
CCE's effective tax rates for the first nine months of 2002 and 2001 were
approximately 34% and 40%, respectively, excluding a $4 million nonrecurring
accrual reversal in 2002 and the rate change benefit in 2001. CCE is currently
implementing a corporate structuring of certain subsidiaries, which, if fully
implemented as expected in fourth-quarter 2002, will reduce our full-
-8-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - INCOME TAXES (CONTINUED)
year 2002 effective tax rate by approximately 1/2 percent. A reconciliation of
the income tax provision at the statutory federal rate to CCE's actual income
tax provision follows (in millions):
NINE MONTHS ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 28,
2002 2001
------------- -------------
U.S. federal statutory expense (benefit) ......... $217 $(21)
State expense (benefit), net of federal effect ... 6 (2)
Taxation of European and Canadian operations,
net ............................................ (28) 3
Valuation allowance provision .................... 5 --
Nondeductible items .............................. 9 (1)
Other, net ....................................... (4) (2)
---- ----
$205 $(23)
==== ====
NOTE F - LONG-TERM DEBT
Long-term debt balances summarized below are adjusted for the effects of
interest rate and currency swap agreements (in millions):
SEPTEMBER 27, DECEMBER 31,
2002 2001
------------- -------------
U.S. commercial paper (weighted average
rates of 1.8% and 2.0%) ........................ $ 1,281 $ 1,759
Canadian dollar commercial paper (weighted
average rates of 2.9% and 2.5%)(C) ............. 258 251
Canadian dollar notes due 2002 - 2009
(weighted average rates of 4.9%
and 4.7%)(C) ................................... 709 686
Notes due 2002 - 2037 (weighted average
rates of 5.4% and 6.5%)(A)(B) .................. 4,050 2,885
Debentures due 2012 - 2098 (weighted average
rate of 7.4%) .................................. 3,783 3,783
Euro notes due 2002 - 2021 (weighted average
rates of 6.5% and 6.3%)(C) ..................... 2,211 2,268
Various foreign currency debt .................... 250 236
Additional debt .................................. 251 254
------- -------
Long-term debt including effect of net asset
positions of currency swaps ................... 12,793 12,122
Net asset positions of currency swap
agreements .................................... 4 47
------- -------
$12,797 $12,169
======= =======
(A) In April 2002, CCE issued $500 million in floating rate notes due 2004 and
$500 million in fixed rate notes due 2007 under CCE's shelf registration
statement with the Securities and Exchange Commission. The initial interest
rate on the floating rate notes was 2.19 percent and the interest rate on
the fixed notes is 5.25 percent.
-9-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - LONG-TERM DEBT (CONTINUED)
(B) In September 2002, CCE issued $500 million in fixed rate notes due 2009
under CCE's shelf registration statement with the Securities and Exchange
Commission. The interest rate on the notes is 4.38 percent.
(C) After the end of the quarter, on September 30, 2002, CCE retired $500
million maturing Eurobonds. On October 15, 2002, CCE retired approximately
$111 million in maturing Canadian dollar notes and approximately $248
million in Canadian commercial paper.
Aggregate maturities of long-term debt for the five twelve-month periods
subsequent to September 27, 2002 are as follows (in millions): 2003 - $1,719;
2004 - $1,313; 2005 - $1,396; 2006 - $460; and 2007 - $956.
At September 27, 2002 and December 31, 2001, CCE had $3.2 billion and $3.3
billion, respectively, available under domestic and international credit
facilities. These facilities serve as a back-up to CCE's domestic and
international commercial paper programs and support working capital needs. At
September 27, 2002 and December 31, 2001, CCE had $49 million and $-0- million,
respectively, of short-term borrowings outstanding under these credit
facilities.
At September 27, 2002 and December 31, 2001, approximately $1.8 billion and $2.3
billion, respectively, of borrowings due in the next 12 months were classified
as maturing after one year due to CCE's intent and ability through its credit
facilities to refinance these borrowings on a long-term basis.
At September 27, 2002 and December 31, 2001, CCE had available for issuance
approximately $0.2 billion and $1.7 billion, respectively, under a registration
statement with the Securities and Exchange Commission. In October 2002, CCE
filed a new registration statement with the Securities and Exchange Commission
which, when effective, will increase the amount available for issuance by $3.5
billion. At September 27, 2002 and December 31, 2001, CCE had available for
issuance approximately $1.2 billion and $1.3 billion, respectively, under a
Canadian Medium Term Note Program. In addition, at September 27, 2002 and
December 31, 2001, CCE had available for issuance approximately $1.7 billion and
$1.0 billion, respectively, under a Euro Medium Term Note Program.
The credit facilities and outstanding notes and debentures contain various
provisions that, among other things, require CCE to maintain a defined leverage
ratio and limit the incurrence of certain liens or encumbrances in excess of
defined amounts. These requirements currently are not, and it is not anticipated
they will become, restrictive to CCE's liquidity or capital resources.
NOTE G - PREFERRED STOCK
In connection with the 1998 acquisition of Great Plains Bottlers and Canners,
Inc., CCE issued 401,528 shares of $1 par value voting convertible preferred
stock ("Great Plains series"). The mandatory conversion date for the Great
Plains series is August 7, 2003. As of September 27, 2002, 35,000 shares of the
Great Plains series have been voluntarily converted into 154,778 shares of
common stock.
-10-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - STOCK-BASED COMPENSATION PLANS
CCE granted approximately 7.9 million service-vested stock options to certain
executive and management level employees during the first nine months of 2002.
These options vest over a period of 3 years and expire 10 years from the date of
grant. All of the options were granted at an exercise price equal to the fair
market value of the stock on the grant date.
CCE granted 966,000 restricted stock shares and 124,000 restricted stock units
to certain key employees of CCE during the first nine months of 2002. These
awards vest upon continued employment for a period of at least 4 years.
An aggregate of 3.0 million shares of common stock were issued during the first
nine months of 2002 from the exercise of stock options.
CCE applies APB Opinion No. 25 and related interpretations in accounting for its
stock-based compensation plans. FAS 123, if fully adopted, would change the
method for cost recognition on CCE's stock-based compensation plans.
If compensation cost for CCE's grants under stock-based compensation plans had
been determined under FAS 123, CCE's net income applicable to common
shareowners, and basic and diluted net income per share applicable to common
shareowners for the quarter and nine months ending September 27, 2002, would
approximate the pro forma amounts below (in millions, except per share data):
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 27, 2002 SEPTEMBER 27, 2002
---------------------- ----------------------
REPORTED PRO FORMA REPORTED PRO FORMA
-------- --------- -------- ---------
Net income applicable
to common shareowners ... $ 190 $ 180 $ 414 $ 383
===== ===== ===== =====
Basic net income
applicable to common
shareowners ............. $0.42 $0.40 $0.92 $0.85
===== ===== ===== =====
Diluted net income
applicable to common
shareowners ............. $0.42 $0.39 $0.91 $0.84
===== ===== ===== =====
FAS 123, if fully adopted, would change the method for cost recognition on CCE's
stock-based compensation plans. FAS 123 does not apply to awards prior to 1995,
and additional awards in future years are possible. The estimated effect on
full-year 2002 earnings from adopting FAS 123 for grants made solely in the
current year (assuming adoption on current grants only and not previous grants
still outstanding) on both basic and diluted earnings per share is approximately
$(0.02).
-11-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - SHARE REPURCHASES
Under the 1996 and 2000 share repurchase programs authorizing the repurchase of
up to 60 million shares, CCE can repurchase shares in the open market and in
privately negotiated transactions. During the first nine months of 2002, CCE did
not repurchase any shares. A total of 26.7 million shares have been repurchased
under the programs since their inception.
Management considers market conditions and alternative uses of cash and/or debt,
balance sheet ratios, and shareowner returns when evaluating share repurchases.
Repurchased shares are added to treasury stock and are available for general
corporate purposes including acquisition financing and the funding of various
employee benefit and compensation plans. In 2002 and 2003, CCE plans to use
excess cash primarily for debt reduction.
NOTE J - DERIVATIVES
CCE uses certain risk management instruments to manage its interest rate and
foreign exchange exposures. These instruments are accounted for as fair value
and cash flow hedges, as appropriate, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended.
At September 27, 2002, there was less than $100,000 in accumulated other
comprehensive income related to cash flow hedges of forecasted international raw
materials purchases. Further, during the first nine months of 2002, the amount
of ineffectiveness related to cash flow hedges of international raw materials
purchases was a gain of approximately $1 million.
CCE enters into certain nonfunctional currency borrowings to hedge net
investments in international subsidiaries. During the first nine months of 2002,
the net amount included in comprehensive income related to these borrowings was
a loss, net of tax, of approximately $(69) million.
-12-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - RELATED PARTY TRANSACTIONS
The following table details amounts included in the income statements for
transactions with The Coca-Cola Company ("TCCC"):
QUARTER ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Income (expense)
in millions:
Net operating
revenues:
Direct marketing
support .......... $ 218 $ 162 $ 607 $ 434
Fountain syrup and
packaged product
sales ............ 100 104 285 296
Cooperative trade
arrangements ..... (60) (46) (220) (123)
Other transactions . 1 1 3 2
------- ------- ------- -------
$ 259 $ 221 $ 675 $ 609
======= ======= ======= =======
Cost of sales:
Purchases of syrup
and concentrate .. $(1,186) $(1,001) $(3,245) $(2,820)
Purchases of
sweetener ........ (94) (66) (236) (220)
Purchases of
finished
products ......... (145) (124) (349) (337)
------- ------- ------- -------
$(1,425) $(1,191) $(3,830) $(3,377)
======= ======= ======= =======
Selling, delivery,
and administrative
expenses:
Operating expense
support payments . $ 28 $ 16 $ 64 $ 58
Cooperative
advertising
programs ......... -- (14) -- (40)
Operating expense
reimbursements:
To TCCC ........ (4) (3) (13) (10)
From TCCC ...... 9 6 26 14
Reimbursement of
dispensing
equipment
repair costs ..... 13 15 38 41
------- ------- ------- -------
$ 46 $ 20 $ 115 $ 63
======= ======= ======= =======
As of January 1, 2002 all costs in North America associated with customer
cooperative trade marketing programs ("CTM"), excluding certain specific
customers, are funded by CCE, and all costs for local media programs in North
America are funded by TCCC. The amount of marketing support funding from TCCC
that CCE will receive for 2002 was established based on historical funding
levels and increased for the net effect of increased 2001 CTM cost and decreased
2001 local media cost. The shift of CTM and local media costs impacts income
statement comparisons between 2002 and 2001, but does not have an impact on
CCE's 2001 net income. The impact of this shift on 2002 and future operating
income is dependent upon the level of CTM spending by CCE.
-13-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - RELATED PARTY TRANSACTIONS (CONTINUED)
In early 2002, CCE entered into a multi-year agreement with TCCC to support
profitable growth in brands of TCCC in our territories (Sales Growth Initiative,
"SGI", agreement). Total cash support expected to be received by CCE under the
agreement in 2002 is $150 million. Of this amount, $30 million is being
recognized during 2002 as sales occur. The remaining $120 million ("volume
growth funding") is earned only by attaining mutually established sales volume
growth rates. The agreement establishes minimum targets for 2002 of 3 percent
192 ounce equivalent unit case sales volume ("Unit Case") growth in North
America and 5 percent Unit Case growth in Europe. Sales volume growth is
determined through a formula with adjustments for brand conversions, brand
acquisitions, and new brand introductions. Growth that exceeds the target in
North America offsets any shortfalls in Europe and vice versa. For the first
nine months of 2002, the shortfall in Europe was more than offset by CCE's
performance in North America. Because of the offset provisions in the agreement,
CCE expects the total $120 million available will be earned in full-year 2002.
The entire SGI agreement can be canceled by either party at the end of a fiscal
year with at least six months' prior written notice. In addition, during the
first three quarters of any year, either party may cancel for ensuing quarters
the sales volume growth targets and cash support funding provisions of the
agreement for that year by providing ten days notice prior to the end of such
quarter. Upon such quarterly cancellation, all other provisions of the agreement
will remain in full force and effect. Volume growth funding is advanced to CCE
equally over the four quarters of the program year within thirty days after the
beginning of each quarter. CCE recognizes quarterly volume growth funding as
sales volume growth is attained as a reduction of sales discounts and allowances
within net revenues. Based on year-to-date performance, CCE recognized the
entire amount specified for the third quarter and first nine months of 2002 of
$30 million and $90 million, respectively.
The agreement provides for refunds of volume growth funding advances should CCE
not attain specified minimum sales volume growth targets and upon the failure of
performance by either party in specified circumstances. Accordingly, should CCE
not attain specified minimum sales volume growth targets in the ensuing quarters
of a given year, amounts recognized to date for that year would be subject to
refund to TCCC.
CCE recently reached agreement with TCCC modifying the terms of the SGI
agreement relating to 2003 and beyond. Under the amended agreement, funding for
2003, anticipated to be $250 million under the old agreement, will decrease to
$200 million. The new amendment, however, brings an additional $275 million in
funding to CCE over the next nine years (2003 - 2011) and significantly reduces
the annual reductions in funding that were a part of the original agreement. In
addition, the amendment provides for each company to retain all cost savings it
generates from future system efficiency initiatives. The previous agreement
called for a 50/50 sharing between CCE and TCCC of combined proceeds above set
targets.
Under the terms of the SGI agreement, CCE and TCCC negotiate concentrate price
increases. Based on the progress of the 2003 business planning discussions, CCE
expects concentrate prices to increase 1 percent in North America in 2003.
-14-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - RELATED PARTY TRANSACTIONS (CONTINUED)
CCE also entered into two new arrangements with TCCC, the first of which assigns
responsibility for hot-fill production in North America to TCCC. Accordingly,
CCE will sell its Truesdale, Missouri hot fill plant to TCCC for its carrying
value of approximately $55 million in 2003. The second arrangement, beginning in
2003, provides for CCE to receive 50% of TCCC's profits generated from the
Danone joint venture in CCE territories. This arrangement is not expected to
have a significant impact on CCE's 2003 results.
NOTE L - GEOGRAPHIC OPERATING INFORMATION
CCE operates in one industry: the marketing, distribution, and production of
liquid nonalcoholic refreshments. On September 27, 2002, CCE operated in 46
states in the United States, the District of Columbia, the 10 provinces of
Canada (collectively referred to as the "North American" territories), and in
Belgium, continental France, Great Britain, Luxembourg, Monaco, and the
Netherlands (collectively referred to as the "European" territories).
The following presents net operating revenues for the nine months ended
September 27, 2002 and September 28, 2001 and long-lived assets as of September
27, 2002 and December 31, 2001 by geographic territory (in millions):
2002 2001
--------------------- -----------------------
NET LONG- NET LONG-
OPERATING LIVED OPERATING LIVED
REVENUES ASSETS REVENUES ASSETS
--------- ------- --------- -------
North American........... $ 9,686 $16,806 $ 8,917 $16,695
European................. 2,953 4,452 2,744 4,148
------- ------- ------- -------
Consolidated............. $12,639 $21,258 $11,661 $20,843
======= ======= ======= =======
CCE has no material amounts of sales or transfers between its North American and
European territories and no significant United States export sales.
NOTE M - RESTRUCTURING AND OTHER CHARGES
During 2001, CCE recorded restructuring and other charges totaling $78 million.
In third quarter 2002, the total estimate was reduced by $3 million as a result
of a revised estimate of costs to be incurred. The restructuring charge related
to a series of steps designed to improve CCE's cost structure including the
elimination of unnecessary support functions following the consolidation of
North America into one operating unit and streamlining management of the North
American operations responsive to the current business environment.
Employees affected by the restructuring were provided both financial and
nonfinancial benefits. Restructuring costs include costs associated with
involuntary terminations and other direct costs associated with implementation
of the restructuring. Salary and other benefits are being paid over the
severance period. Other direct costs include relocation costs and costs of
development, communication, and administration which are expensed as incurred.
In third quarter 2002, CCE recorded an additional restructuring charge of
approximately $5 million for severance benefits related to eliminating
refillable bottles for products produced in Great Britain. The elimination of
refillable bottles in Great Britain will result in the elimination
-15-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE M - RESTRUCTURING AND OTHER CHARGES (CONTINUED)
of approximately 100 positions. The estimated severance benefits will be paid
over the benefit period.
The table below summarizes the activity in the restructuring accrual for the
nine months ended September 27, 2002 (in millions):
ACCRUED ACCRUED
BALANCE BALANCE
RESTRUCTURING DECEMBER 31, ESTIMATE SEPTEMBER 27,
SUMMARY 2001 PROVISIONS PAYMENTS ADJUSTMENTS 2002
--------------------------------------------------------------------------------
Employee
terminations
Severance pay
and benefits... $40 $5 $(20) $(3) $22
Other direct
costs ......... 1 - (1) -- --
--- -- ---- --- ---
Total ............ $41 $5 $(21) $(3) $22
=== == ==== === ===
NOTE N - EARNINGS PER SHARE
The following table presents information concerning basic and diluted earnings
per share (in millions, except per share data; per share data is calculated
prior to rounding to millions). Diluted loss per share equals basic loss per
share because dilutive securities are not considered in loss calculations.
QUARTER ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income before
cumulative effect
of accounting
change ............. $ 191 $ 11 $ 416 $ 17
Cumulative effect of
accounting change .. -- -- -- (302)
----- ------ ----- -----
Net income (loss) .... 191 11 416 (285)
Preferred stock
dividends .......... 1 1 2 3
----- ------ ----- -----
Basic and diluted
net income (loss)
applicable to
common shareowners . $ 190 $ 10 $ 414 $ (288)
===== ===== ===== ======
Basic average
common shares
outstanding ........ 450 442 449 427
Effect of dilutive
securities:
Stock compensation
awards ........... 8 7 8 8
----- ------ ----- -----
Diluted average
common shares
outstanding ........ 458 449 457 435
===== ===== ===== ======
Basic net income
(loss) per share
applicable to
common shareowners . $0.42 $0.02 $0.92 $(0.67)
===== ===== ===== ======
Diluted net income
(loss) per share
applicable to
common shareowners . $0.42 $0.02 $0.91 $(0.67)
===== ===== ===== ======
-16-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE O - COMPREHENSIVE INCOME (LOSS)
The following table (in millions) presents a calculation of comprehensive income
(loss), comprised of net income (loss) and other adjustments. Other adjustments
to comprehensive income (loss) may include minimum pension liability adjustments
as defined by FAS 87, currency items such as foreign currency translation
adjustments and hedges of net investments in international subsidiaries,
unrealized gains and losses on certain investments in debt and equity
securities, and changes in the fair value of certain derivative financial
instruments which qualify as cash flow hedges. CCE provides income taxes on
currency items, except for income taxes on the impact of currency translations,
as earnings from international subsidiaries are considered to be indefinitely
reinvested.
QUARTER ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income
(loss) ........... $191 $ 11 $416 $(285)
Currency
translations ..... 124 25 166 48
Hedges of net
investments,
net of tax ....... (53) (11) (69) (24)
Unrealized gain
on securities,
net of tax ....... 2 -- 5 1
Unrealized
(loss) gain on
cash flow
hedges, net
of tax ........... (22) (9) (27) 17
Reclassifications
into earnings on
cash flow hedges,
net of tax ....... 18 3 21 11
Cumulative effect
of adopting
SFAS 133, net
of tax ........... -- -- -- (26)
---- ---- ---- -----
Net adjustments
to accumulated
comprehensive
income (loss) .... 69 8 96 27
---- ---- ---- -----
Comprehensive
income (loss) .... $260 $ 19 $512 $(258)
==== ==== ==== =====
NOTE P - ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
141, "Business Combinations" ("FAS 141"), and Statement 142, "Goodwill and Other
Intangible Assets" ("FAS 142"), that supersede APB Opinion No. 16, "Business
Combinations," and APB Opinion No. 17, "Intangible Assets". The two statements
modify the method of accounting for business combinations entered into after
June 30, 2001 and address the accounting for intangible assets.
As of January 1, 2002, CCE no longer amortizes goodwill and franchise license
intangible assets with an indefinite life, but will instead evaluate them for
impairment annually under FAS 142. The 2001 results on a historical basis do not
reflect the amortization provisions of FAS 142. Had CCE adopted FAS 142 on
January 1, 2001, the historical net income (loss) and basic and diluted
-17-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE P - ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
(CONTINUED)
net income (loss) per common share would have been changed to the adjusted
amounts in the following table:
AS REPORTED ADD: INCOME
HISTORICAL FRANCHISE TAX ADJUSTED
BASIS AMORTIZATION IMPACT BALANCE
-------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 28, 2001:
-------------------------------------------------------------------------------
Net income (loss) $ 11 $ 98 $ (36) $ 73
Basic and diluted net
income (loss) per basic
common share $ 0.02 $0.22 $(0.08) $ 0.16
-------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 28, 2001:
-------------------------------------------------------------------------------
Net income (loss) $ (285) $ 293 $ (107) $ 99
Basic and diluted net
income (loss)
per basic
common share $(0.67) $0.69 $(0.25) $(0.23)
-------------------------------------------------------------------------------
CCE makes acquisitions to expand its franchise territories. Prior to the
adoption of FAS 141, CCE assigned all costs of acquisitions in excess of the
value of tangible net assets acquired to franchise intangible assets and none to
goodwill. FAS 141 specifically defines goodwill and provides criteria to apply
in recognizing other intangible assets. Under the definitions of goodwill
outlined in FAS 141, the cost of an acquisition relating to the fair value of
expected synergies is "core goodwill". As a result of the new definition and
criteria, effective with the adoption of FAS 141 and beginning with the Herb
acquisition in July 2001, CCE assigns the cost of acquisitions in excess of the
value of tangible net assets acquired to franchise license intangibles and
goodwill as determined using discounted cash flow models. Specifically, CCE
includes values paid for synergies in goodwill. Goodwill amounts also result
through the establishment of deferred tax liabilities associated with
franchise license intangibles that are not deductible for tax purposes. The
transition provisions of FAS 141 prohibit CCE from changing amounts assigned to
assets and liabilities assumed in business combinations prior to July 1, 2001.
Franchise agreements contain performance requirements and convey to the
licensee the rights to distribute and sell products of the licensor within
specified territories. CCE's domestic cola franchise agreements with TCCC do
not expire, reflecting a long and ongoing relationship. CCE's agreements with
TCCC covering its United States non-cola and European and Canadian operations
are periodically renewable. TCCC does not grant perpetual franchise rights
outside the United States. However, these agreements can be renewed at no cost
for varying additional terms at CCE's request. CCE believes and expects these
and other renewable franchisor agreements will be renewed at each expiration
date. After consideration of the renewal factors and our mutually beneficial
relationship with The Coca-Cola Company, all franchise license intangible
assets have been assigned an indefinite life.
CCE completed initial impairment tests on franchise license intangibles with
indefinite lives in the first quarter of 2002. CCE's completion of impairment
analyses was directly impacted by an Emerging Issues Task Force (EITF) issue
resolved in early 2002. EITF Issue No. 02-7, "Unit of Accounting for Testing
Impairment of Indefinite-Lived Intangible Assets" addressed the topic of when,
if ever, different indefinite-lived intangible assets, such as CCE's
territory-specific
-18-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE P - ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
(CONTINUED)
franchise license agreements, should be combined into a single unit for the
purpose of performing impairment tests. The EITF reached a consensus on Issue
No. 02-7 outlining a number of factors to evaluate for determining whether
indefinite-lived intangible assets should be combined for impairment testing.
These factors include whether the assets are used together, whether the
marketing and branding strategy provide evidence that the intangible assets are
complementary, and whether the intangible assets as a group represent the
highest and best use of the assets. CCE concluded that the provisions of EITF
02-7 require impairment testing of franchise license intangible assets at the
North American and European group levels. The impairment tests for franchise
license intangibles consisted of a comparison of the fair value of the franchise
license intangibles with their carrying amounts. The fair value of the
franchise license intangibles exceeded their carrying amount, and no impairment
loss was recognized. If the carrying amount had exceeded the fair value, FAS
142 would require CCE to recognize an impairment loss in an amount equal to
that excess.
The fair values of the franchise license intangibles in each group were
determined using discounted cash flow models similar to those used internally by
CCE for evaluating acquisitions; comparisons to estimated market values were
also made. These discounted cash flow models involved projections of cash flows
for ten years, adopting a perpetuity valuation technique with an assumed
long-term growth rate of 3 percent, and discounting the projected cash flows,
including the perpetuity value, based on CCE's weighted average cost of capital.
A weighted average cost of capital of approximately 7 percent was utilized.
Growth rates used included approximately 3 percent consolidated volume growth, 2
percent consolidated revenue and cost of sales per case growth and approximately
5 percent consolidated administrative expense growth, with differing rates in
our North American and European groups. Changes in these assumptions could
materially impact the fair value estimates.
Initial goodwill impairment testing at the reporting unit level was also
completed in the first quarter of 2002. Using the guidelines in SFAS 142, CCE
determined that its reporting units are its groups, North America and Europe.
As discussed above, goodwill has been recognized since July 2001 only, as
required by SFAS 141. As a result, CCE's goodwill is entirely contained in the
North American reporting unit. The first step of CCE's impairment test for
goodwill compared the carrying amount of the North American group with its fair
value. The fair value of the North American reporting unit was determined using
discounted cash flow models developed in the same manner as those discussed
previously. The fair value of the group exceeded its carrying amount, and
goodwill is therefore not considered impaired. Had the carrying amount of North
American exceeded its fair value, a second step in the impairment test would be
required to measure the amount of impairment loss. This step would compare the
implied fair value of the North American reporting unit's goodwill with the
carrying amount of that goodwill. If the carrying amount of reporting unit
goodwill exceeds the implied fair value of goodwill, an impairment loss would
be recognized in an amount equal to that excess.
CCE provides deferred income taxes on franchise license intangible assets that
are not deductible for tax purposes under FASB Statement 109, "Accounting for
Income Taxes". Prior to FAS 142, franchise license intangible assets were
amortized over the maximum allowed period of 40 years. As this amortization cost
was recognized, the related deferred tax liability was recognized as a
-19-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE P - ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
(CONTINUED)
decrease to income tax expense. Under FAS 142, previously recognized unamortized
balances of franchise license intangible assets and associated deferred income
tax liabilities will remain unchanged except for any impairment in the value of
these assets or any ultimate sale of territories. At December 31, 2001, CCE had
approximately $4.6 billion of deferred tax liabilities provided on franchise
license intangible assets. These deferred tax liabilities, while impacted by tax
rate changes and currency translations, will only decrease for the reasons above
but will increase for the effect of any tax deductions realized on tax
deductible franchise license assets.
The $6 million change in CCE's consolidated goodwill balance in the first nine
months of 2002 was due entirely to adjustments to the value of the assets and
liabilities acquired in acquisitions completed in 2001. Changes in CCE's
unamortized franchise license intangibles balance in the first nine months of
2002 were due primarily to the effects of foreign currency translations, which
increased the balance by approximately $225 million, as well as acquisitions
completed during the first nine months of 2002, which increased the franchise
license intangible balance by approximately $26 million. Other changes in the
balance (which netted to $12 million) were due to adjustments to the value of
assets acquired and liabilities assumed in acquisitions completed over the last
12 months. The ultimate goodwill and franchise license intangibles associated
with acquisitions completed in the last 12 months may continue to be adjusted as
the value of the assets and liabilities acquired are finalized.
On July 10, 2001, CCE completed the acquisition of 100% of the outstanding
common and preferred shares of Hondo Incorporated and Herbco Enterprises, Inc.,
collectively known as Herb Coca-Cola, for consideration of approximately $1.4
billion, including cash of $1 billion and 25 million shares of common stock
valued at approximately $400 million. The cost of Herb Coca-Cola was reduced in
the second quarter of 2002 by approximately $7 million due to the final
settlement of working capital balances. This settlement resulted in a return to
CCE of approximately 400,000 shares held in escrow recorded as treasury stock.
CCE finalized the purchase price allocation for Herb Coca-Cola in the third
quarter of 2002.
CCE participates in contractual arrangements with customers for pouring or
vending rights in various locations. The net unamortized balance of these
arrangements at September 27, 2002 totaled approximately $382 million
(consisting of gross amounts of $564 million net of $182 million in
accumulated amortization), which is included in Other Noncurrent Assets in our
Consolidated Balance Sheet. Amortization expense on these assets totaled
approximately $54 million in 2001. Estimated amortization expense for the next
five fiscal years is as follows (in millions): 2002 - $67; 2003 - $63; 2004 -
$58; 2005 - $51; and 2006 - $44.
NOTE Q - COMMITMENTS AND CONTINGENCIES
In North America, CCE purchases PET (plastic) bottles from manufacturing
cooperatives. CCE has guaranteed payment of up to $285 million of indebtedness
owed by these manufacturing cooperatives to third parties. At September 27,
2002, these cooperatives had approximately $178 million of indebtedness
guaranteed by CCE.
In addition, CCE has issued letters of credit principally under self-insurance
programs aggregating approximately $267 million.
-20-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE Q - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Under the Jumpstart programs with TCCC, CCE received payments from TCCC for a
portion of the cost of developing the infrastructure (consisting primarily of
people and systems) necessary to support accelerated placements of cold drink
equipment. CCE recognizes the payments primarily as cold drink equipment is
placed, through 2008, and over the period CCE has the potential requirement to
move equipment, through 2020.
Under the programs, CCE agrees to: (1) purchase and place specified numbers of
venders/coolers or cold drink equipment each year through 2008; (2) maintain the
equipment in service, with certain exceptions, for a period of at least 12 years
after placement; (3) maintain and stock the equipment in accordance with
specified standards for marketing TCCC products; and (4) during the period the
equipment is in service report to TCCC whether, on average, the equipment
purchased under the programs has generated a stated minimum volume of products
of TCCC. Should CCE not satisfy these or other provisions of the program, the
agreement provides for the parties to meet to work out mutually agreeable
solutions. If the parties were unable to agree on an alternative solution, TCCC
would be able to seek a partial refund of amounts previously paid. No refunds
have ever been paid under this program, and CCE believes the probability of a
partial refund of amounts previously paid under the program is remote. CCE
believes it would in all cases resolve any matters that might arise with TCCC.
CCE's and its subsidiaries' tax filings are routinely subjected to audit by tax
authorities in most jurisdictions where they conduct business. These audits may
result in assessments of additional taxes that are subsequently resolved with
the authorities or potentially through the courts. Currently, there are
assessments involving certain of CCE's subsidiaries, including subsidiaries in
Canada and France, that may not be resolved for many years. CCE believes it has
substantial defenses to the questions being raised and intends to pursue all
legal remedies available if it is unable to reach a resolution with the
authorities. CCE believes it has adequately provided for any ultimate amounts
that would result from these proceedings, however, it is too early to predict a
final outcome in these matters.
In January 2002, Kmart Corporation (Kmart) filed for bankruptcy protection. At
the date of filing CCE had approximately $20 million in trade receivables from
Kmart. In first-quarter 2002, we recognized the potential losses on these
accounts receivable by charging the amounts, net of estimated recoverable
portions, against the reserve for doubtful accounts. We believe the net
receivable after write-off will be collected. We are also exposed to losses on
possible preference action claims for amounts paid to us prior to the filing. It
is not possible to predict the ultimate amount of losses to us, if any, which
might result from preference claims.
CCE is currently under investigation by the European Commission in various
jurisdictions for alleged abuses of an alleged dominant position under Article
82 of the EU Treaty. CCE does not believe that it has a dominant position in the
relevant markets, or that its current or past commercial practices violate EU
law. Nonetheless, the Commission has considerable discretion in reaching
conclusions and levying fines, which are subject to judicial review. The
Commission has not notified CCE when it might reach any conclusions.
-21-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE Q - COMMITMENTS AND CONTINGENCIES (CONTINUED)
CCE's California subsidiary has been sued by several current and former
employees over alleged violations of state wage and hour rules. The subsidiary
is still investigating the claims, and it is too early in the litigation to
predict the outcome. The subsidiary is defending the claims vigorously.
CCE has filed suit against two of its insurers to recover losses incurred in
connection with the 1999 European product recall. We are unable to predict the
final outcome of this action at this time.
In 2000, CCE and TCCC were found by a Texas jury to be jointly liable in
a combined final amount of $15.2 million to five plaintiffs, each of whom is
a distributor of competing beverage products. These distributors had sued
alleging that CCE and TCCC engaged in unfair marketing practices. CCE is
appealing the decision and believes there are substantial grounds for appeal.
The complaint of four remaining plaintiffs is in discovery and has not yet gone
to trial. It is impossible to predict at this time the final outcome of
CCE's appeal in this matter or the ultimate costs under all of the complaints.
CCE is a defendant in various other matters of litigation generally arising out
of the normal course of business. Although it is difficult to predict the
ultimate outcome of these cases, management believes, based on discussions with
counsel, that any ultimate liability would not materially affect CCE's financial
position, results of operations, or liquidity.
-22-
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS SUMMARY AND OBJECTIVES
Coca-Cola Enterprises Inc. ("CCE") is the world's largest marketer, producer,
and distributor of products of The Coca-Cola Company ("TCCC"). CCE also
distributes other beverage brands in select markets. CCE operates in parts of 46
states in the United States, all 10 provinces of Canada, and in portions of
Europe, including Belgium, continental France, Great Britain, Luxembourg,
Monaco, and the Netherlands.
In the third quarter of 2002, net income applicable to common shareowners rose
to $190 million, or $0.42 per diluted common share, including a $0.01
nonrecurring tax benefit, versus comparable earnings per diluted common share of
$0.20 in the same quarter last year. We achieved these results by expanding our
operating margins through a combination of volume growth, expense control, and
favorable cost of goods trends. Our volume growth accelerated from the second
quarter, with North American volume up 5 1/2 percent in the quarter. Europe
finished the quarter with a 3 1/2 percent increase in volume, despite hurdling
growth of more than 12% for the same quarter a year ago. Europe achieved this
volume performance while also increasing pricing by 3 percent.
In North America and in Europe, new products and brand extensions, such as
Vanilla Coke, our Minute Maid juice drinks, diet Coke and Coke light with lemon
have reinvigorated our brand portfolio. We still have significant opportunities
ahead, such as the introduction of diet Vanilla Coke that is just now getting
underway. On the expense side, the programs we began to put into place last year
to control expenses continue to keep our costs under control. Comparable
operating expenses on a currency-neutral basis are up 2 percent for the first
nine months versus a comparable currency-neutral increase of over 10% in
full-year 2001. Cost of goods trends also continued to be favorable, with
currency-neutral bottle and can costs per case down 1/2 percent year to date. In
addition, we continue to benefit from favorable interest rate trends.
The overall pricing environment this year in North America has been generally
flat to slightly down. While the environment has not enabled us to post pricing
improvement to date in 2002, we are expecting improvement in the fourth-quarter
2002. Pricing improvement is essential for us in 2003 and we are working
diligently to achieve it.
OUTLOOK
For fourth-quarter 2002, we now expect earnings of $0.10 to $0.12 per diluted
common share, versus comparable results of $0.10 per diluted common share for
the fourth quarter of 2001. We have raised our estimates for 2002 full-year
earnings per share to a range of $1.00 to $1.03. This includes the adjustment of
our effective tax rate from 35% to 34%, included in our third-quarter 2002
results. Based on the progress of the 2003 business planning process, CCE
expects concentrate prices to increase 1 percent in North America in 2003.
Preliminary expectations for 2003 earnings per diluted common share are in line
with current analyst expectations, with a consensus of $1.16 per common share as
reported by First Call.
We recently reached agreement with TCCC modifying the terms of the Sales Growth
Initiative, "SGI", agreement relating to 2003 and beyond. Under the amended
agreement, funding for 2003, anticipated to be $250 million under the old
agreement, will decrease to $200 million. The
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new amendment, however, brings an additional $275 million in funding to CCE over
the next nine years (2003 - 2011) and significantly reduces the annual
reductions in funding that were a part of the original agreement. In addition,
the amendment provides for each company to retain all cost savings it generates
from future system efficiency initiatives. The previous agreement called for a
50/50 sharing between CCE and TCCC of combined proceeds above set targets.
We also entered into two new arrangements with TCCC, the first of which assigns
responsibility for hot-fill production in North America to TCCC. Accordingly, we
will sell our Truesdale, Missouri hot fill plant to TCCC for its carrying value
of approximately $55 million in 2003. The second arrangement, beginning in 2003,
provides for us to receive 50% of TCCC's profits generated from the Danone joint
venture in our territories. This arrangement is not expected to have a
significant impact on our 2003 results.
Our multi-year business processes redesign, referred to as Project Pinnacle,
continues with the objective of enhancing shareowner value by (i) developing
standard global processes and to leverage synergies, (ii) increasing information
capabilities, and (iii) providing system flexibility. The project covers all
functional areas of the business and is staffed with associates from all aspects
of the business with representatives from both Europe and North America. We
anticipate that completion through implementation will encompass a three-year
period beginning in 2002 and that the cost to our Company will be approximately
$(300) million with approximately $(200) million of that being capital costs. We
project we will spend approximately $(30) million in 2002 in development costs,
none of which represent capital costs. The operating and capital costs for this
project are factored into our current business plans. Our goal is to recover our
investment in this project by decreasing and sustaining lower administrative
costs, reducing the complexity of our core transaction systems, improving the
speed at which new or enhanced systems are delivered, increasing our information
capabilities for customers and suppliers, and providing flexibility for changes
from the business environment with minimal disruptions to our existing business.
Management's Discussion and Analysis should be read in conjunction with CCE's
accompanying unaudited condensed consolidated financial statements and the
accompanying footnotes along with the cautionary statements at the end of this
section.
RESULTS OF OPERATIONS
OVERVIEW
Reported operating income increased to $441 million, 25% higher than comparable
operating income of $354 million. The increase in comparable operating income is
due to increased margins resulting primarily from lower than expected cost of
goods as well as pricing growth in Europe and favorable foreign currency
translation rates.
Comparable consolidated bottle and can net pricing per case increased 1/2
percent in third-quarter 2002 and in the first nine months of 2002 compared to
third-quarter 2001 and the first nine months of 2001, excluding the impact of
currency exchange rate fluctuations. These consolidated results include a
decrease in unit pricing per case in North America of 1/2 percent and an
increase in European pricing of 3 percent for the same periods. Net price per
case is the invoice price charged to retailers less any promotional allowances
and excludes marketing credits received from franchisers. Our year-to-date
pricing comparisons also exclude the impact of the $22 million settlement of
promotional programs and accruals that occurred in second-quarter 2002. Our
comparable consolidated bottle and can cost of sales per case decreased 1
percent and 1/2 percent on a currency-neutral basis for third-quarter 2002 and
the first nine months of 2002, respectively.
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Our net income applicable to common shareowners was $190 million, or $0.42 per
diluted common share for the third quarter of 2002, compared to reported net
income applicable to common shareowners of $0.02 per diluted common share, and
comparable net income applicable to common shareowners of $0.20 per diluted
common share, for the third quarter of 2001, adjusted as discussed below.
As of January 1, 2001 CCE changed its method of accounting for infrastructure
development payments received from TCCC under its cold-drink "Jumpstart"
programs. The change in accounting resulted in a noncash cumulative effect
adjustment in first-quarter 2001 of $(302) million, net of $185 million taxes,
or $(0.70) per common share. CCE participates in Jumpstart market development
programs with TCCC that are designed to accelerate the placement of cold drink
equipment in CCE's franchise territories. These programs began in 1994.
To support the accelerated placement of equipment, CCE received payments from
TCCC for the development of infrastructure. Prior to this change, these payments
were recognized as an offset to operating expenses as incurred in the period for
which the payments were designated. CCE will now recognize the payments received
under these programs as it meets the requirements of the programs. These
requirements principally consist of equipment placements in CCE's franchise
territories as well as potential requirements to move equipment to ensure
sufficient sales volumes are reported during the life of the equipment. CCE
changed to this preferred method of accounting because it defers recognition
of cash payments received to give accounting recognition to the equipment
placement requirements and the potential requirement to move equipment under the
programs.
Under the new accounting method, the support payments are allocated to equipment
units based on per unit funding amounts. The amount allocated to the requirement
to place equipment is the balance remaining after determining the potential cost
of moving the equipment after placement. The amount allocated to the requirement
to place equipment is recognized as the equipment is placed. The amount
allocated to the potential cost of moving placed equipment will be recognized on
a straight-line basis over the 12-year in-service requirement under the
agreements beginning after the equipment is placed.
The amount allocated to the potential cost of moving placed equipment is
determined based on an estimate of the units of equipment that could potentially
be moved after 2001 and an estimate of the cost of movement. The estimate of
potential move costs is based on potential moves of vending equipment serviced
by CCE, which does not include vending equipment used by third parties and
cooler equipment because movement of this equipment by CCE is not probable.
Significant assumptions and judgments made in making the computations included:
(1) the population of equipment that could potentially be moved, (2) the costs
of moving equipment, (3) requirements of the programs that are outside routine
operations of CCE and could potentially be considered material obligations, and
(4) the probability of the assertion of refund rights by TCCC.
CCE believes the accounting method as outlined above is consistent with our
rights and performance obligations under the programs as it reflects the primary
obligation for equipment placements, the parties' business relationship, and our
operating practices.
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All comparable 2001 results exclude the cumulative effect of $302 million in
first-quarter 2001 for the change in our method of accounting for Jumpstart
payments, exclude franchise amortization of $98 million and $293 million for
third-quarter 2001 and the first nine months of 2001, respectively, as if FASB
Statement No. 142, "Goodwill and Other Intangible Assets", was in effect as of
January 1, 2001, exclude $41 million in restructuring and other charges incurred
in third-quarter 2001, exclude nonrecurring reductions in income taxes of $6
million and $52 million in third-quarter 2001 and the first nine months of 2001,
respectively, and include the Herb acquisition as of January 1, 2001. Comparable
volume growth also includes a one-day reduction to the number of selling days in
the first nine months of 2001 to equate to the same number of days for the first
nine months of 2002.
Our operating results in the third quarter of each year reflect the seasonality
of our business. Our unit sales traditionally are higher in the hotter months
during the second and third quarters, while costs such as interest,
depreciation, and amortization are not as significantly impacted by business
seasonality.
NET OPERATING REVENUES AND COST OF SALES
CCE's reported third-quarter 2002 net operating revenues increased 7 percent to
nearly $4.55 billion, primarily reflecting the impact of improved volume
(approximately 5 percent) and favorable currency translation rates
(approximately 2 percent). Comparable net operating revenues, including the
impact of acquisitions and adjusted for the impact of foreign currency
translations, increased 5 percent in the third quarter of 2002. The revenue
split between our North American and European operations was 76% and 24%,
respectively. Great Britain contributed approximately 51% of European revenues
for the third quarter of 2002.
Comparable bottle and can net price per case increased 2 1/2 percent (1/2
percent on a currency neutral basis) in third-quarter 2002 and increased 1
percent (1/2 percent on a currency-neutral basis) in the first nine months of
2002 compared to the same periods in 2001. The consolidated currency-neutral
results include a decrease in pricing in North America of 1/2 percent and an
increase in European pricing of 3 percent in third-quarter 2002 and in the first
nine months of 2002. All per case amounts are calculated based on physical
cases. Net price per case is impacted by the price charged per package, the
volume generated in each package, and the channels in which those packages are
sold. To the extent we are able to increase volume in higher margin packages
that are sold through higher margin channels, our bottle and can net price per
case will increase, without an actual increase to wholesale pricing. As an
example, we typically charge a lower net price per case and realize a lower
gross profit per case on a physical case of 12-ounce cans sold in a
supermarket than a case of 20-ounce bottles sold in convenience stores.
Our comparable consolidated bottle and can cost of sales per case increased 1
1/2 percent (decreased 1 percent on a currency-neutral basis) in third-quarter
2002 and increased nearly 1/2 percent (decreased nearly 1/2 percent on a
currency-neutral basis) in the first nine months of 2002. Lower packaging
material costs offset our increase in ingredient costs for the quarter.
Ingredient costs are impacted by the increase in carbonated beverage concentrate
costs for full-year 2002 of approximately 1 1/2 percent in North America and 2
1/2 percent in Europe.
CCE participates in various programs and arrangements with customers designed to
increase the sale of our products by these customers. Among the programs
negotiated with customers are arrangements in which allowances can be earned by
the customer for attaining agreed upon sales levels and/or for participating
in specific marketing programs. CCE also participates in contractual
arrangements for pouring or vending rights in specific athletic venues, specific
school
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districts, or other locations. Coupon programs and under-the-cap promotions are
also developed on a territory specific basis with the intent of increasing sales
by all customers. The cost of these various programs, included as deductions in
net operating revenues, totaled approximately $445 million and $366 million for
the quarters ended September 27, 2002 and September 28, 2001, respectively, and
$1,232 million and $1,030 million for the nine months ended September 27, 2002,
and September 28, 2001, respectively. The increase in the cost of these programs
is due to volume increases as well as the change in our relationship with TCCC.
Beginning in 2002, all costs in North America associated with CTM, excluding
certain specific customers, shifted to us and all costs for local media programs
in North America shifted to TCCC. We believe our participation in these programs
is essential to ensuring continued volume and revenue growth in the competitive
marketplace.
VOLUME
Volume results, adjusted for acquisitions completed in 2001, and for one less
selling day in first-quarter 2002 (which increased the nine-month changes shown
below by approximately 1/2 percent), are shown in the table below:
3RD QUARTER NINE MONTHS
2002 2002
---------------------------
COMPARABLE CHANGE
---------------------------
Physical Case Bottle and Can Volume:
Consolidated...................................... 5% 4%
North American Territories........................ 5 1/2% 4%
European Territories.............................. 3 1/2% 4%
New brands and brand extensions are driving volume growth in both North America
and Europe. For third-quarter 2002, non-carbonated brand volume in North America
increased nearly 21%, due primarily to Dasani, up 37%, POWERade, up 17%, and the
success of Minute Maid Lemonade. In addition, Vanilla Coke contributed to volume
growth in the quarter, particularly in higher margin 20-ounce packages. Our
20-ounce volume overall grew more than 9 percent in the quarter. Our sugared
trademark brands - Coca-Cola classic, Cherry Coke, caffeine free classic, and
Vanilla Coke - enjoyed growth of more than 8 percent in the quarter, and diet
Coke brands grew 4 1/2 percent. With the addition of diet Vanilla Coke to our
portfolio in fourth-quarter 2002, we expect continued growth in the diet
category.
In Europe, overall volume grew 3 1/2 percent on a comparable basis. Fanta grew
more than 43% in Great Britain, based largely on the strong popularity of a new
brand extension, Fanta Fruit Twist, and grew nearly 16% in Europe as a whole. In
addition to Fruit Twist, we also added new flavors on the continent, such as
Latina in France and Sapaya in Belgium, and introduced new, proprietary 500ml
packaging. Our 500ml European PET volume grew more than 11% in the third quarter
of 2002 compared to the third quarter of 2001. Diet Coke with lemon and Coke
light with lemon provided incremental growth in each territory and has proved
extremely popular with European consumers. Diet Coke/Coca-Cola light volume grew
more than 18% overall in Europe.
PER SHARE DATA
For third-quarter 2002, our reported net income applicable to common shareowners
was $190 million, or $0.42 per diluted common share, (including the nonrecurring
reduction in income tax accruals of $4 million, or $0.01 per diluted common
share) versus reported third-quarter 2001 net income applicable to common
shareowners of $10 million, or $0.02 per diluted common share and comparable
third-quarter 2001 net
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income applicable to common shareowners of $91 million, or $0.20 per diluted
common share. The comparable results primarily reflect the impact of improved
volume, a favorable cost environment, and lower interest costs.
SELLING, DELIVERY, AND ADMINISTRATIVE EXPENSES
In third-quarter 2002, consolidated selling, delivery, and administrative
expenses as a percentage of net operating revenues decreased to 28.5% from
reported third-quarter 2001 results of 32.4% and comparable third quarter 2001
results of 28.9%. This decrease from comparable results is largely due to the
benefits of our restructuring announced in 2001.
The table below summarizes the activity in the restructuring accrual for the
nine months ended September 27, 2002 (in millions):
ACCRUED ACCRUED
BALANCE BALANCE
RESTRUCTURING DECEMBER 31, ESTIMATE SEPTEMBER 27,
SUMMARY 2001 PROVISIONS PAYMENTS ADJUSTMENTS 2002
--------------------------------------------------------------------------------------------------------------------
Employee terminations
Severance pay
and benefits ..................... $40 $5 $(20) $(3) $22
Other direct
costs ............................ 1 - (1) -- --
--- -- ---- --- ---
Total ................................ $41 $5 $(21) $(3) $22
=== == ==== === ===
For the first nine months of 2002, our restructuring accrual decreased by
approximately $19 million, due to expenditures for benefits totaling $21
million, an estimate adjustment totaling $3 million, and an increase of $5
million due to a restructuring in Great Britain, to approximately $22 million at
September 27, 2002. The restructuring in Great Britain is to record severance
benefits related to eliminating refillable bottles for products produced. The
elimination of refillable bottles in Great Britain will result in the
elimination of approximately 100 positions.
CCE recognized approximately $28 million of Jumpstart funding as a reduction of
selling, delivery, and administrative expenses, as compared to $16 million in
the third quarter of 2001. This increase was a result of more vending equipment
placements in the third quarter of 2002 than the third quarter of 2001. We
expect full-year Jumpstart funding recognized for 2002 to approximate $70
million to $75 million.
As discussed further under Accounting Developments, CCE implemented Financial
Accounting Standards Board Statement 142, "Goodwill and Other Intangible Assets"
("FAS 142"). Under FAS 142, CCE no longer amortizes goodwill and franchise
license intangible assets. Adoption of the non-amortization provisions of FAS
142 as of January 1, 2001 would have reduced amortization expense by
approximately $98 million and $293 million for the quarterly and nine month
periods ending September 28, 2001, respectively. We completed our initial
impairment tests under FAS 142 which supported the carrying values of these
assets and, accordingly, no impairment charge resulted from FAS 142 adoption.
EITF No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendor's Products," is effective for CCE beginning January 1,
2002, and requires certain selling expenses incurred by CCE to be classified as
deductions from revenue. Comparable amounts in prior years are required to be
reclassified in accordance with this EITF consensus. CCE reclassified
approximately $26 million and $72 million of selling expenses as deductions in
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net operating revenues which were previously classified as selling, delivery,
and administrative expenses in the third quarter and first nine months of 2001,
respectively.
In January 2002, Kmart Corporation filed for bankruptcy protection. CCE had
approximately $20 million in trade receivables from Kmart at the date of their
bankruptcy filing. We are uncertain how much of these trade receivables we will
ultimately recover. In first-quarter 2002, CCE recognized the potential losses
on these accounts receivable by charging the amounts, net of estimated
recoverable portions, against the reserve for doubtful accounts. This write-off
had no impact on our results of operations for first-quarter 2002 as CCE was
adequately reserved for these losses.
Depreciation expense increased approximately $46 million in the first nine
months of 2002 as compared to the first nine months of 2001. Approximately $35
million of this increase was included in selling, delivery and administrative
expenses, with the balance included in cost of sales. Approximately $23 million
of the total increase is due to depreciation of assets acquired in the Herb
acquisition, with the remaining increase due to increased capital expenditures
in recent years.
INTEREST EXPENSE
Third-quarter 2002 net interest expense decreased from reported 2001 levels due
to a decline in our weighted average cost of debt and a decline in our average
debt balance. Year-to-date 2002 interest expense decreased from reported 2001
levels due to a decline in our weighted average cost of debt partially offset by
a higher average debt balance. The weighted average interest rate for the
third-quarter and first nine months of 2002 was 5.5 percent compared to 6.1
percent and 6.5 percent for third-quarter and full-year 2001, respectively.
INCOME TAXES
CCE's effective tax rates for the first nine months of 2002 and 2001 were
approximately 34% and 40%, respectively, excluding a $4 million nonrecurring
accrual adjustment in 2002 and the rate change benefit in 2001. CCE's
third-quarter 2002 effective tax rate reflects expected full-year 2002 pretax
earnings combined with the beneficial tax impact of certain international
operations. We are currently implementing a corporate structuring of certain
subsidiaries, which, if fully implemented as expected in fourth-quarter 2002,
will reduce our full-year 2002 effective tax rate by approximately 1/2 percent.
Our effective tax rate for the remainder of 2002 is also dependent upon
operating results and may change if the results for the year are different from
current expectations.
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TRANSACTIONS WITH THE COCA-COLA COMPANY
The following table details amounts included in the income statements for
transactions with The Coca-Cola Company ("TCCC"):
QUARTER ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
2002 2001 2002 2001
---------------------------- ----------------------------
Income (expense)
in millions:
Net operating
revenues:
Direct marketing
support .......... $ 218 $ 162 $ 607 $ 434
Fountain syrup
and packaged
product sales .... 100 104 285 296
Cooperative
trade arrangements. (60) (46) (220) (123)
Other transactions . 1 1 3 2
------- ------- ------- -------
$ 259 $ 221 $ 675 $ 609
======= ======= ======= =======
Cost of sales:
Purchases of
syrup and
concentrate ...... $(1,186) $(1,001) $(3,245) $(2,820)
Purchases of
sweetener ........ (94) (66) (236) (220)
Purchases of
finished products. (145) (124) (349) (337)
------- ------- ------- -------
$(1,425) $(1,191) $(3,830) $(3,377)
======= ======= ======= =======
Selling, delivery, and
administrative
expenses:
Operating expense
support payments.. $ 28 $ 16 $ 64 $ 58
Cooperative
advertising
programs ......... -- (14) -- (40)
Operating expense
reimbursements:
To TCCC ......... (4) (3) (13) (10)
From TCCC ....... 9 6 26 14
Reimbursement of
dispensing
equipment
repair costs ....... 13 15 38 41
------- ------- ------- -------
$ 46 $ 20 $ 115 $ 63
======= ======= ======= =======
In the third quarter of 2002 CCE recognized $218 million of direct marketing
support in net revenues as compared to $162 million in the third quarter of
2001. This increase from 2001 to 2002 was a result of higher volume and was
impacted by customer cooperative trade marketing programs ("CTM") and media cost
shifts and the $30 million in SGI funding recognized and discussed further
below.
In the third quarter of 2002, CCE recognized approximately $28 million of
Jumpstart funding as a reduction of selling, delivery, and administrative
expenses, as compared to $16 million in the third quarter of 2001. CCE expects
to recognize approximately $70 million to $75 million in Jumpstart funding for
full-year 2002.
Payments recognized under the Jumpstart programs with TCCC are included in
"Operating expense support payments" above. Under the Jumpstart programs with
TCCC, CCE received payments from TCCC for a portion of the cost of developing
the infrastructure (consisting primarily of people and systems) necessary to
support accelerated placements of cold drink equipment. CCE recognizes the
payments primarily as cold drink
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equipment is placed, through 2008, and over the period CCE has the potential
requirement to move equipment, through 2020.
Under the Jumpstart programs, CCE agrees to: (1) purchase and place specified
numbers of venders/coolers or cold drink equipment each year through 2008; (2)
maintain the equipment in service, with certain exceptions, for a period of at
least 12 years after placement; (3) maintain and stock the equipment in
accordance with specified standards for marketing TCCC products; and (4) during
the period the equipment is in service report to TCCC whether, on average, the
equipment purchased under the programs has generated a stated minimum volume of
products of TCCC. Should CCE not satisfy these or other provisions of the
program, the agreement provides for the parties to meet to work out mutually
agreeable solutions. If the parties were unable to agree on an alternative
solution, TCCC would be able to seek a partial refund of amounts previously
paid. No refunds have ever been paid under this program, and CCE believes the
probability of a partial refund of amounts previously paid under the program is
remote. CCE believes it would in all cases resolve any matters that might arise
with TCCC.
Beginning in 2002, all costs in North America associated with CTM, excluding
certain specific customers, shifted to us and all costs for local media programs
in North America shifted to TCCC. The amount of marketing support funding from
TCCC that we will receive for 2002 was established based on historical funding
levels and increased for the net effect of increased 2001 CTM cost and decreased
2001 local media cost. Amounts paid under customer trade marketing programs to
TCCC are included as a reduction in net operating revenues and totaled $60
million for the third quarter of 2002, as compared to $46 million for the third
quarter of 2001. The shift of CTM and local media costs impacts income statement
comparisons between 2002 and 2001, but does not have an impact on CCE's 2001 net
income. The impact of this shift on 2002 and future operating income is
dependent upon the level of CTM spending by CCE.
Sales to TCCC of bottle and can products and fountain syrup included in net
revenues totaled $100 million in the third quarter of 2002, as compared to $104
million in the third quarter of 2001.
We have a multi-year agreement with TCCC, referred to as the Sales Growth
Initiative, "SGI" agreement, to support profitable growth in brands of TCCC in
our territories. Payments recognized under the SGI agreement are included in
"Direct marketing support" above. Total cash support expected to be received
by CCE under the agreement in 2002 is $150 million. Of this amount, $30 million
is being recognized during 2002 as sales are recorded. The remaining $120
million ("volume growth funding") will be earned only by attaining mutually
established sales volume growth rates. The SGI agreement establishes minimum
targets for 2002 of 3 percent Unit Case (defined as an 192 ounce equivalent
unit) growth in North America and 5 percent Unit Case growth in Europe. Sales
volume growth is determined through a formula with adjustments for brand
conversions, brand acquisitions, and new brand introductions. Growth that
exceeds the target in North America offsets any shortfalls in Europe and vice
versa. For the first nine months of 2002, shortfall in Europe was more than
offset by an excess growth performance in North America. Because of the offset
provisions in the agreement, we expect the total $120 million available will be
earned in full-year 2002. As previously discussed, CCE and TCCC have reached
agreement modifying the terms of the SGI agreement as they relate to periods
after 2002.
The entire SGI agreement can be canceled by either party at the end of a fiscal
year with at least six months' prior written notice. In addition, during the
first three quarters of any year, either party may cancel for ensuing quarters
the sales volume growth targets and cash support funding provisions of the
agreement for that year by providing ten days notice prior to the end of such
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quarter. Upon such quarterly cancellation, all other provisions of the agreement
will remain in full force and effect.
Volume growth funding is advanced to CCE equally over the four quarters of the
program year within thirty days after the beginning of each quarter. CCE
recognizes quarterly volume growth funding as volume growth is attained as a
reduction of sales discounts and allowances within net revenues. Based on
year-to-date performance, CCE recognized the entire amount specified for third
quarter 2002 and first nine months of 2002 of $30 million and $90 million,
respectively.
The agreement provides for refunds of volume growth funding advances should CCE
not attain the specified minimum sales volume growth targets and upon the
failure of performance by either party in specified circumstances. Accordingly,
should CCE not attain specified minimum sales volume growth targets in the
ensuing quarters of a given year, amounts recognized to date for that year would
be subject to refund to TCCC.
CASH FLOW AND LIQUIDITY REVIEW
CAPITAL RESOURCES
Our sources of capital include, but are not limited to, cash flows from
operations, the issuance of public or private placement debt, bank borrowings,
and the issuance of equity securities. We believe that available short-term and
long-term capital resources are sufficient to fund our capital expenditure and
working capital requirements, scheduled debt payments, interest and income tax
obligations, dividends to our shareowners, acquisitions, and share repurchases.
At September 27, 2002, we had approximately $3.1 billion in available capital
under our public debt facilities which could be used for long-term financing,
refinancing of debt maturities, and refinancing of commercial paper. Of this
amount, we had (i) $0.2 billion in registered debt securities available for
issuance under a registration statement with the Securities and Exchange
Commission, (ii) $1.2 billion in debt securities available under a Canadian
Medium Term Note Program, and (iii) $1.7 billion in debt securities available
under a Euro Medium Term Note Program for long-term financing needs. To increase
the amounts available for issuance, we filed a new registration statement with
the Securities and Exchange Commission in October 2002, which when effective,
will increase the amounts of registered debt securities available for issuance
by $3.5 billion.
In addition, we satisfy seasonal working capital needs and other financing
requirements with short-term borrowings, under our commercial paper programs,
bank borrowings, and other credit facilities. At September 27, 2002 we had
approximately $1.6 billion outstanding in commercial paper. At September 27,
2002 we had approximately $3.2 billion available as a back-up to commercial
paper and undrawn working capital lines of credit. We intend to continue
refinancing borrowings under our commercial paper programs and our short-term
credit facilities with longer-term fixed and floating rate financings. At the
end of third-quarter 2002, CCE's debt portfolio was 68% fixed rate debt and 32%
floating rate debt.
SUMMARY OF CASH ACTIVITIES
Cash and cash investments increased $645 million during the first nine months of
2002 from net cash transactions. Our primary uses of cash were for debt payments
totaling $1,427 million and capital expenditures totaling $661 million.
Subsequent to the end of third-quarter 2002, CCE made additional payments on
maturing debt totaling approximately $859 million. Our primary
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sources of cash for third-quarter 2002 were proceeds from our operations
totaling $1,104 million and proceeds from the issuance of debt aggregating
$1,704 million.
Operating Activities: Operating activities resulted in $1,104 million of net
cash provided during third-quarter 2002 compared to $557 million of net cash
provided during the third quarter of 2001.
Investing Activities: Net cash used in investing activities resulted primarily
from our continued capital investments. We expect full-year 2002 capital
expenditures to be between $1.0 billion and $1.1 billion.
Financing Activities: CCE continues to refinance portions of its short-term
borrowings as they mature with short-term and long-term fixed and floating rate
debt.
FINANCIAL CONDITION
The increase in net property, plant, and equipment resulted from capital
expenditures and translation adjustments net of depreciation expense. The
increase in franchise license intangible assets resulted primarily from
translation adjustments. The increase in long-term debt primarily resulted from
proceeds received and translation adjustments in excess of debt payments. As
previously discussed, CCE made additional payments on maturing debt totaling
approximately $859 million subsequent to the end of the third quarter of 2002.
The decrease in the reserve for doubtful accounts resulted from CCE's
recognition of potential losses on Kmart accounts receivable, net of estimated
recoverable portions, against the reserve for doubtful accounts. The increase in
treasury stock was a result of the return of approximately 400,000 shares to
treasury after the final settlement of working capital balances associated with
the Herb acquisition.
In the first nine months of 2002, changes in currencies, including currency
translations and hedges of net investments, resulted in a gain in comprehensive
income of $97 million. As currency exchange rates fluctuate, translation of the
statements of operations for our international businesses into U.S. dollars
affects the comparability of revenues and expenses between periods.
KNOWN TRENDS AND UNCERTAINTIES
CONTINGENCIES
Under the Jumpstart programs with TCCC, CCE received payments from TCCC for a
portion of the cost of developing the infrastructure (consisting primarily of
people and systems) necessary to support accelerated placements of cold drink
equipment. CCE recognizes the payments primarily as cold drink equipment is
placed, through 2008, and over the period CCE has the potential requirement to
move equipment, through 2020.
Under the programs, CCE agrees to: (1) purchase and place specified numbers of
venders/coolers or cold drink equipment each year through 2008; (2) maintain the
equipment in service, with certain exceptions, for a period of at least 12 years
after placement; (3) maintain and stock the equipment in accordance with
specified standards for marketing TCCC products; and (4) during the period the
equipment is in service report to TCCC whether, on average, the equipment
purchased under the programs has generated a stated minimum volume of products
of TCCC. Should CCE not satisfy these or other provisions of the program, the
agreement provides for the parties to meet to work out mutually agreeable
solutions. If the parties were unable to agree on an alternative solution, TCCC
would be able to seek a partial refund of amounts previously paid. No refunds
have ever been paid under this program, and CCE believes the probability of a
partial
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refund of amounts previously paid under the program is remote. CCE believes it
would in all cases resolve any matters that might arise with TCCC.
CCE's and its subsidiaries' tax filings are routinely subjected to audit by tax
authorities in most jurisdictions where they conduct business. These audits may
result in assessments of additional taxes that are subsequently resolved with
the authorities or potentially through the courts. Currently, there are
assessments involving certain of CCE's subsidiaries, including subsidiaries in
Canada and France, that may not be resolved for many years. CCE believes it has
substantial defenses to the questions being raised and intends to pursue all
legal remedies available if it is unable to reach a resolution with the
authorities. CCE believes it has adequately provided for any ultimate amounts
that would result from these proceedings, however, it is too early to predict a
final outcome in these matters.
In January 2002, Kmart Corporation (Kmart) filed for bankruptcy protection. At
the date of filing CCE had approximately $20 million in trade receivables from
Kmart. In first-quarter 2002, we recognized the potential losses on these
accounts receivable by charging the amounts, net of estimated recoverable
portions, against the reserve for doubtful accounts. We believe the net
receivable after write-off will be collected. We are also exposed to losses on
possible preference action claims for amounts paid to us prior to the filing. It
is not possible to predict the ultimate amount of losses to us, if any, which
might result from preference claims.
CCE is currently under investigation by the European Commission in various
jurisdictions for alleged abuses of an alleged dominant position under Article
82 of the EU Treaty. CCE does not believe that it has a dominant position in the
relevant markets, or that its current or past commercial practices violate EU
law. Nonetheless, the Commission has considerable discretion in reaching
conclusions and levying fines, which are subject to judicial review. The
Commission has not notified CCE when it might reach any conclusions.
CCE's California subsidiary has been sued by several current and former
employees over alleged violations of state wage and hour rules. The subsidiary
is still investigating the claims, and it is too early in the litigation to
predict the outcome. The subsidiary is defending the claims vigorously.
CCE has filed suit against two of its insurers to recover losses incurred in
connection with the 1999 European product recall. We are unable to predict the
final outcome of this action at this time.
In 2000, CCE and TCCC were found by a Texas jury to be jointly liable
in a combined final amount of $15.2 million to five plaintiffs, each of
whom is a distributor of competing beverage products. These distributors had
sued alleging that CCE and TCCC engaged in unfair marketing practices. CCE
is appealing the decision and believes there are substantial grounds for
appeal. The complaint of four remaining plaintiffs is in discovery and has not
yet gone to trial. It is impossible to predict at this time the final
outcome of CCE's appeal in this matter or the ultimate costs under all of the
complaints.
At October 14, 2002, there were two federal and one state superfund sites for
which CCE's involvement or liability as a potentially responsible party ("PRP")
was unresolved. We believe any ultimate liability under these PRP designations
will not have a material adverse effect on our financial position, cash flows,
or results of operations. In addition, there were 34 federal and nine state
sites for which it has been concluded CCE either had no responsibility, the
ultimate liability amounts would be less than $100,000, or payments made to date
by CCE would be sufficient to satisfy CCE's liability.
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CCE is a defendant in various other matters of litigation generally arising out
of the normal course of business. Although it is difficult to predict the
ultimate outcome of these cases, management believes, based on discussions with
counsel, that any ultimate liability would not materially affect CCE's financial
position, results of operations, or liquidity.
ACCOUNTING DEVELOPMENTS
ADOPTION OF SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
141, "Business Combinations" ("FAS 141"), and Statement 142, "Goodwill and Other
Intangible Assets" ("FAS 142"), that supersede APB Opinion No. 16, "Business
Combinations," and APB Opinion No. 17, "Intangible Assets". The two statements
modify the method of accounting for business combinations entered into after
June 30, 2001 and address the accounting for intangible assets.
As of January 1, 2002, CCE no longer amortizes goodwill and franchise license
intangible assets with an indefinite life, but will instead evaluate them for
impairment annually under FAS 142. The 2001 results on a historical basis do not
reflect the amortization provisions of FAS 142. Had CCE adopted FAS 142 on
January 1, 2001, the historical net income (loss) and basic and diluted net
income (loss) per common share would have been changed to the adjusted amounts
in the following table:
AS REPORTED ADD: INCOME
HISTORICAL FRANCHISE TAX ADJUSTED
BASIS AMORTIZATION IMPACT BALANCE
-------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 28, 2001:
-------------------------------------------------------------------------------
Net income (loss) $ 11 $ 98 $ (36) $ 73
Basic and diluted net
income (loss) per basic
common share $ 0.02 $0.22 $(0.08) $ 0.16
-------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 28, 2001:
-------------------------------------------------------------------------------
Net income (loss) $ (285) $ 293 $ (107) $ 99
Basic and diluted net
income (loss)
per basic
common share $(0.67) $0.69 $(0.25) $(0.23)
-------------------------------------------------------------------------------
CCE makes acquisitions to expand its franchise territories. Prior to the
adoption of FAS 141, CCE assigned all costs of acquisitions in excess of the
value of tangible net assets acquired to franchise intangible assets and none to
goodwill. FAS 141 specifically defines goodwill and provides criteria to apply
in recognizing other intangible assets. Under the definitions of goodwill
outlined in FAS 141, the cost of an acquisition relating to the fair value of
expected synergies is "core goodwill". As a result of the new definition and
criteria, effective with the adoption of FAS 141 and beginning with the Herb
acquisition in July 2001, CCE assigns the cost of acquisitions in excess of the
value of tangible net assets acquired to franchise license intangibles and
goodwill as determined using discounted cash flow models. Specifically, CCE
includes values paid for synergies in goodwill. Goodwill amounts also result
through the establishment of deferred tax liabilities associated with franchise
license intangibles that are not deductible for tax purposes. The transition
provisions of FAS 141 prohibit CCE from changing amounts assigned to assets and
liabilities assumed in business combinations prior to July 1, 2001.
Franchise agreements contain performance requirements and convey to the licensee
the rights to distribute and sell products of the licensor within specified
territories. The majority of CCE's domestic cola franchise agreements with TCCC
do not expire, reflecting a long and ongoing relationship. CCE's agreements with
TCCC covering its United States non-cola and European and Canadian
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operations are periodically renewable. TCCC does not grant perpetual franchise
rights outside the United States. However, these agreements can be renewed at
no cost for varying additional terms at CCE's request. CCE believes and expects
these and other renewable franchisor agreements will be renewed at each
expiration date. After consideration of the renewal factors and our mutually
beneficial relationship with The Coca-Cola Company, all franchise license
intangible assets have been assigned an indefinite life.
CCE completed initial impairment tests on franchise license intangibles with
indefinite lives in the first quarter of 2002. CCE's completion of impairment
analyses was directly impacted by an Emerging Issues Task Force (EITF) issue
resolved in early 2002. EITF Issue No. 02-7, "Unit of Accounting for Testing
Impairment of Indefinite-Lived Intangible Assets" addressed the topic of when,
if ever, different indefinite-lived assets, such as CCE's territory-specific
franchise license agreements, should be combined into a single unit for the
purpose of performing impairment tests. The EITF reached a consensus on Issue
No. 02-7 outlining a number of factors to evaluate for determining whether
indefinite-lived intangible assets should be combined for impairment testing.
These factors include whether the assets are used together, whether the
marketing and branding strategy provide evidence that the intangible assets are
complementary, and whether the intangible assets as a group represent the
highest and best use of the assets. CCE concluded that the provisions of EITF
02-7 require impairment testing of franchise license intangible assets at
the North American and European group levels. The impairment tests for
franchise license intangibles consisted of a comparison of the fair value of
the franchise license intangibles with their carrying amounts. The fair value
of the franchise license intangibles exceeded their carrying amount, and no
impairment loss was recognized. If the carrying amount had exceeded the fair
value, FAS 142 would require CCE to recognize an impairment loss in an amount
equal to that excess.
The fair values of the franchise license intangibles in each group were
determined using discounted cash flow models similar to those used internally
by CCE for evaluating acquisitions; comparisons to estimated market values were
also made. These discounted cash flow models involved projections of cash flows
for ten years, adopting a perpetuity valuation technique with an assumed
long-term growth rate of 3 percent, and discounting the projected cash flows,
including the perpetuity value, based on CCE's weighted average cost of
capital. A weighted average cost of capital of approximately 7 percent was
utilized. Growth rates used included approximately 3 percent consolidated
volume growth, 2 percent consolidated revenue and cost of sales per case growth
and approximately 5 percent consolidated administrative expense growth, with
differing rates in our North American and European groups. Changes in these
assumptions could materially impact the fair value estimates.
Initial goodwill impairment testing at the reporting unit level was also
completed in the first quarter of 2002. Using the guidelines in SFAS 142, CCE
determined that its reporting units are its groups, North America and Europe.
As discussed above, goodwill has been recognized since July 2001 only, as
required by SFAS 141. As a result, CCE's goodwill is entirely contained in the
North American reporting unit. The first step of CCE's impairment test for
goodwill compared the carrying amount of the North American group with its
fair value. The fair value of the North American reporting unit was determined
using discounted cash flow models developed in the same manner as those
discussed previously. The fair value of the group exceeded its carrying amount,
and goodwill is therefore not considered impaired. Had the carrying amount of
North America exceeded its fair value, a second step in the impairment test
would be required to measure the amount of impairment loss. This step would
compare the implied fair value of the
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North American reporting unit's goodwill with the carrying amount of that
goodwill. If the carrying amount of reporting unit goodwill exceeds the implied
fair value of goodwill, an impairment loss would be recognized in an amount
equal to that excess.
CCE provides deferred income taxes on franchise license intangible assets that
are not deductible for tax purposes under FASB Statement 109, "Accounting for
Income Taxes". Prior to FAS 142, franchise license intangible assets were
amortized over the maximum allowed period of 40 years. As this amortization cost
was recognized, the related deferred tax liability was recognized as a decrease
to income tax expense. Under FAS 142, previously recognized unamortized balances
of franchise license intangible assets and associated deferred income tax
liabilities will remain unchanged except for any impairment in the value of
these assets or any ultimate sale of territories. At December 31, 2001, CCE had
approximately $4.6 billion of deferred tax liabilities provided on franchise
license intangible assets. These deferred tax liabilities, while impacted by tax
rate changes and currency translations, will only decrease for the reasons above
but will increase for the effect of any tax deductions realized on tax
deductible franchise license assets.
The $6 million change in CCE's consolidated goodwill balance in the first nine
months of 2002 was due entirely to adjustments to the value of the assets and
liabilities acquired in acquisitions completed in 2001. Changes in CCE's
unamortized franchise license intangibles balance in the first nine months of
2002 were due primarily to the effects of foreign currency translations, which
increased the balance by approximately $225 million, as well as acquisitions
completed during the first nine months of 2002, which increased the franchise
license intangible balance by approximately $26 million. Other changes in the
balance (which netted to $12 million) were due to adjustments to the value of
assets acquired and liabilities assumed in acquisitions completed over the last
12 months. The ultimate goodwill and franchise license intangibles associated
with acquisitions completed in the last 12 months may continue to be adjusted as
the value of the assets and liabilities acquired are finalized.
On July 10, 2001, CCE completed the acquisition of 100% of the outstanding
common and preferred shares of Hondo Incorporated and Herbco Enterprises, Inc.,
collectively known as Herb Coca-Cola, for consideration of approximately $1.4
billion, including cash of $1 billion and 25 million shares of common stock
valued at approximately $400 million. The cost of Herb Coca-Cola was reduced in
the second quarter of 2002 by approximately $7 million due to the final
settlement of working capital balances. This settlement resulted in a return to
CCE of approximately 400,000 shares held in escrow recorded as treasury stock.
CCE finalized the purchase price allocation for Herb Coca-Cola in the third
quarter of 2002.
CCE participates in contractual arrangements with customers for pouring
or vending rights in various locations. The net unamortized balance of these
arrangements at September 27, 2002 totaled approximately $382 million
(consisting of gross amounts of $564 million net of $182 million in
accumulated amortization), which is included in Other Noncurrent Assets in our
Consolidated Balance Sheet. Amortization expense on these assets totaled
approximately $54 million in 2001. Estimated amortization expense for the next
five fiscal years is as follows (in millions): 2002 - $67; 2003 - $63; 2004 -
$58; 2005 - $51; and 2006 - $44.
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CAUTIONARY STATEMENTS
Certain expectations and projections regarding future performance of CCE
referenced in this report are forward-looking statements. These expectations and
projections are based on currently available competitive, financial, and
economic data, along with CCE's operating plans and are subject to future events
and uncertainties. Among the events and uncertainties which could adversely
affect future periods are an inability to achieve price increases, marketing and
promotional programs that result in lower than expected volume, efforts to
manage price that adversely affect volume, an inability to meet performance
requirements for expected levels of various support payments from TCCC, the
cancellation or amendment of existing funding programs with TCCC, material
changes from expectations in the costs of raw materials and ingredients, an
inability to achieve the expected timing for returns on cold drink equipment
expenditures, an inability to place cold drink equipment at required levels
under our Jumpstart programs with TCCC, an inability to meet volume growth
requirements on an annual basis under the SGI program with TCCC, an unfavorable
outcome from the European Union investigation, material changes in assumptions
and CCE's cost of capital used in completing impairment analyses under FAS 142,
an inability to meet projections for performance in newly acquired territories,
potential assessment of additional taxes resulting from audits conducted by tax
authorities, and unfavorable interest rate and currency fluctuations. We caution
readers that in addition to the above cautionary statements, all forward-looking
statements contained herein should be read in conjunction with the detailed
cautionary statements found on page 48 of CCE's Annual Report for the fiscal
year ended December 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosure on this matter made in
"Management's Financial Review - Interest Rate and Currency Risk Management" on
Page 25 of our Annual Report to Shareowners for the year ended December 31,
2001.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed of the effectiveness of the design and operation of
CCE's disclosure controls and procedures, as of September 27, 2002. This
evaluation was conducted under the supervision and with the participation of
CCE's management, including its Chief Executive Officer and its Chief Financial
Officer. Based on that evaluation, CCE's Chief Executive Officer and its Chief
Financial Officer concluded that CCE's disclosure controls and procedures were
effective as of September 27, 2002. There have been no significant changes in
CCE's internal controls or in other factors that could significantly affect
internal controls subsequent to September 27, 2002.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
Exhibit Incorporated by Reference
Number Description or Filed Herewith
------- --------------------------------------- -------------------------
3 Bylaws of Coca-Cola Enterprises, as of Filed Herewith
October 15, 2002
10.1 Sweetener Sales Agreement - Bottler, Filed Herewith
dated October 15, 2002
10.2 Amendment to Employment Agreement Filed Herewith
between Coca-Cola Enterprises and
Summerfield K. Johnston, Jr., dated
April 26, 2002
10.3 Consulting Agreement between Coca-Cola Filed Herewith
Enterprises and Jean-Claude Killy,
dated October 31, 2002
10.4 Separation Summary for Michael P. Filed Herewith
Coghlan
12 Statements regarding computations Filed Herewith
of ratios
(b) Reports on Form 8-K:
During third-quarter 2002, CCE filed the following current reports on Form 8-K:
Date of Report Description
------------------- ----------------------------------------------------
July 17, 2002 Press release reporting second quarter financial
results.
August 14, 2002 Statements under oath of principal executive officer
and principal financial officer regarding facts and
circumstances relating to Exchange Act Filings.
September 5, 2002 Press release dated September 5, 2002 announcing
webcast on September 5, 2002.
September 9, 2002 Terms agreements dated as of September 4, 2002
relating to the offering and sale of $500,000,000
aggregate principal amount of CCE's 4.375% Notes
due 2009; Form of the 4.375% Notes due 2009.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COCA-COLA ENTERPRISES INC.
(Registrant)
Date: January 24, 2003 /s/ Patrick J. Mannelly
-------------------------------------------------
Patrick J. Mannelly
Senior Vice President and Chief Financial Officer
Date: January 24, 2003 /s/ Rick L. Engum
-------------------------------------------------
Rick L. Engum
Vice President, Controller and
Principal Accounting Officer
CERTIFICATIONS
I, Lowry F. Kline, Chief Executive Officer of Coca-Cola Enterprises Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Coca-Cola
Enterprises Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
-40-
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 24, 2003 /s/ Lowry F. Kline
---------------------------
Lowry F. Kline
Chief Executive Officer
I, Patrick J. Mannelly, Chief Financial Officer of Coca-Cola Enterprises Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Coca-Cola
Enterprises Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
-41-
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 24, 2003 /s/ Patrick J. Mannelly
-------------------------------------------------
Patrick J. Mannelly
Senior Vice President and Chief Financial Officer
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