<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended July 3, 1998
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.
(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)
___________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock.
404,519,007 Shares of $1 Par Value Common Stock as of August 3, 1998
<PAGE> 2
COCA-COLA ENTERPRISES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JULY 3, 1998
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the
Quarters ended July 3, 1998 and June 27, 1997.......... 1
Condensed Consolidated Statements of Income for the Six
Months ended July 3, 1998 and June 27, 1997............ 2
Condensed Consolidated Balance Sheets as of July 3, 1998
and December 31, 1997.................................. 3
Condensed Consolidated Statements of Cash Flows for the
Six Months ended July 3, 1998 and June 27, 1997........ 5
Notes to Condensed Consolidated Financial Statements..... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 14
PART II - OTHER INFORMATION
Item 2. Changes in Securities.................................... 20
Item 6. Exhibits and Reports on Form 8-K......................... 21
Signatures....................................................... 22
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions except per share data)
Quarter ended
---------------------
July 3, June 27,
1998 1997
-------- --------
NET OPERATING REVENUES ................. $3,687 $2,905
Cost of sales .......................... 2,297 1,821
------ ------
GROSS PROFIT ........................... 1,390 1,084
Selling, delivery, and administrative
expenses ............................. 1,048 774
------ ------
OPERATING INCOME ....................... 342 310
Interest expense, net .................. 170 127
Other nonoperating deductions, net ..... -- 1
------ ------
INCOME BEFORE INCOME TAXES ............. 172 182
Income tax expense ..................... 61 71
------ ------
NET INCOME APPLICABLE TO COMMON
SHARE OWNERS ......................... $ 111 $ 111
====== ======
BASIC NET INCOME PER SHARE APPLICABLE TO
COMMON SHARE OWNERS .................. $ 0.28 $ 0.29
====== ======
DILUTED NET INCOME PER SHARE APPLICABLE
TO COMMON SHARE OWNERS ............... $ 0.27 $ 0.28
====== ======
See Notes to Condensed Consolidated Financial Statements.
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COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions except per share data)
Six Months ended
---------------------
July 3, June 27,
1998 1997
-------- --------
NET OPERATING REVENUES .................. $6,645 $5,046
Cost of sales ........................... 4,173 3,162
------ ------
GROSS PROFIT ............................ 2,472 1,884
Selling, delivery, and administrative
expenses .............................. 2,041 1,516
------ ------
OPERATING INCOME ........................ 431 368
Interest expense, net ................... 338 234
Other nonoperating expenses, net ........ -- 6
------ ------
INCOME BEFORE INCOME TAXES .............. 93 128
Income tax expense ...................... 33 50
------ ------
NET INCOME .............................. 60 78
Preferred stock dividends ............... -- 2
------ ------
NET INCOME APPLICABLE TO COMMON
SHARE OWNERS .......................... $ 60 $ 76
====== ======
BASIC NET INCOME PER SHARE APPLICABLE
TO COMMON SHARE OWNERS ................ $ 0.15 $ 0.20
====== ======
DILUTED NET INCOME PER SHARE APPLICABLE
TO COMMON SHARE OWNERS ................ $ 0.15 $ 0.20
====== ======
See Notes to Condensed Consolidated Financial Statements.
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<PAGE> 5
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
July 3, December 31,
ASSETS 1998 1997
----------- ------------
(Unaudited)
CURRENT
Cash and cash investments, at cost
approximating market............ $ 27 $ 45
Trade accounts receivable, less
reserves of $60 and $58 million,
respectively.................... 1,473 1,007
Inventories:
Finished goods.................. 437 330
Raw materials and supplies...... 177 132
------- -------
614 462
Current deferred income tax assets 75 70
Prepaid expenses and other current
assets.......................... 257 229
------- -------
Total Current Assets.......... 2,446 1,813
PROPERTY, PLANT, AND EQUIPMENT
Land.............................. 319 297
Buildings and improvements........ 1,127 1,065
Machinery and equipment........... 5,380 4,653
------- -------
6,826 6,015
Less allowances for depreciation.. 2,584 2,295
------- -------
4,242 3,720
Construction in progress.......... 260 142
------- -------
Net Property, Plant, and
Equipment..................... 4,502 3,862
FRANCHISES AND OTHER NONCURRENT
ASSETS, NET........................ 13,488 11,812
------- -------
$20,436 $17,487
======= =======
See Notes to Condensed Consolidated Financial Statements.
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COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions except share data)
July 3, December 31,
LIABILITIES AND SHARE-OWNERS' EQUITY 1998 1997
----------- ------------
(Unaudited)
CURRENT
Accounts payable and accrued
expenses........................ $ 2,298 $ 2,000
Current portion of long-term debt. 1,186 1,032
------- -------
Total Current Liabilities..... 3,484 3,032
LONG-TERM DEBT, LESS CURRENT
MATURITIES......................... 8,979 7,760
RETIREMENT AND INSURANCE PROGRAMS
AND OTHER LONG-TERM OBLIGATIONS.... 943 917
LONG-TERM DEFERRED INCOME TAX
LIABILITIES........................ 4,608 3,996
SHARE-OWNERS' EQUITY
Preferred stock................... 10 -
Common stock, $1 par value -
Authorized - 1,000,000,000
shares;
Issued - 445,048,065 and
442,971,597 shares,
respectively.................. 445 443
Additional paid-in capital........ 1,931 1,364
Reinvested earnings............... 408 374
Cumulative comprehensive income
adjustments..................... (27) (16)
Common stock in treasury, at cost
(40,215,917 and 56,418,084
shares, respectively)........... (345) (383)
------- -------
Total Share-Owners' Equity.... 2,422 1,782
------- -------
$20,436 $17,487
======= =======
- 4 -
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COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
Six Months ended
---------------------
July 3, June 27,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................. $ 60 $ 78
Adjustments to reconcile net income
to net cash derived from
operating activities:
Depreciation ........................ 342 259
Amortization ........................ 182 171
Deferred income tax benefit ......... (21) (20)
Net changes in current assets and
current liabilities ............... (364) (288)
Additional nonoperating cash flows .. 36 63
------- -------
Net cash derived from operating
activities ........................ 235 263
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets ............... (838) (416)
Fixed asset disposals ................... 3 9
Cash investments in bottling businesses,
net of cash acquired .................. (208) (1,023)
Other investing activities .............. (68) -
------- -------
Net cash used in investing
activities ........................ (1,111) (1,430)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt .............. 2,696 1,470
Payments on long-term debt .............. (1,775) (321)
Cash dividend payments on common and
preferred stock ....................... (26) (5)
Exercise of employee stock options ...... 14 7
Stock purchases for treasury ............ (51) -
------- -------
Net cash derived from financing
activities ........................ 858 1,151
------- -------
NET DECREASE IN CASH AND CASH
INVESTMENTS ........................... (18) (16)
Cash and cash investments at beginning
of period ............................. 45 47
------- -------
CASH AND CASH INVESTMENTS AT END OF
PERIOD ................................ $ 27 $ 31
======= =======
SUPPLEMENTAL NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisitions:
Fair value of assets acquired........ $ 2,126 $ 3,351
Debt issued and assumed ............. (497) (1,338)
Other liabilities assumed ........... (800) (990)
Equity issued ....................... (621) -
------- -------
Cash paid, net of cash acquired ..... $ 208 $ 1,023
======= =======
See Notes to Condensed Consolidated Financial Statements.
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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 generally accepted accounting
principles (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 Company's annual report on Form 10-K
for the year ended December 31, 1997.
NOTE B - SEASONALITY OF BUSINESS
Operating results for the second quarter and six months ended July
3, 1998 are not indicative of results that may be expected for the
year ending December 31, 1998 because of business seasonality.
This seasonality results from a combination of higher unit sales
of the Company'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. In addition, the first half of 1998 includes
four more selling days than the first half of 1997, influencing period
comparisons.
NOTE C - ACQUISITIONS
Completed Transactions
On January 30, 1998, the Company acquired the Coca-Cola bottling
operations, along with the exclusive rights to manufacture and
distribute products of The Coca-Cola Company, in Luxembourg. The
total transaction value (purchase price and acquired debt, net of cash
acquired) for this acquisition was approximately $20 million. Also
in January 1998, the Company acquired the remaining shares of The
Coca-Cola Bottling Company of New York, Inc.("Coke New York")
held by minority share owners.
On June 5, 1998, the Company acquired CCBG Corporation and Texas
Bottling Group, Inc. (collectively known as Coke Southwest). The
acquisition was completed for a transaction value (purchase price
and acquired debt) of approximately $1.1 billion with 55% of the
transaction funded through the issuance of 17.7 million shares of the
Company's common stock and the remaining 45% funded through debt
issued and assumed. Coke Southwest operates in parts of Colorado,
Kansas, New Mexico, Oklahoma, and Texas.
On June 12, 1998, the Company acquired The Coca-Cola Bottling
Company of Bellingham for a purchase price of approximately $12
million. This transaction was funded through a combination of cash, a
promissory note, and the issuance of convertible preferred stock. The
Bellingham bottler is located in the Northwest corner of Washington
State.
- 6 -
<PAGE> 9
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE C - ACQUISITIONS (CONTINUED)
Pending Transactions
In June 1998, the Company signed a letter of intent to purchase Great
Plains Bottler and Canners, Inc. (Great Plains), a Coca-Cola and Dr
Pepper bottler. Great Plains operates in parts of Kansas, Nebraska,
and South Dakota. On August 7, 1998, the Great Plains acquisition
closed. Additionally, in July 1998, the Company signed a letter of
intent to purchase Soo Coca-Cola Bottling, Inc. located in the upper
peninsula of Michigan. This transaction is expected to close by the
end of third-quarter 1998.
The following table summarizes unaudited pro forma financial
information of the Company as if the following acquisitions were
completed effective January 1, 1997:
- Coca-Cola Beverages Ltd.,
- Coke New York, and
- Amalgamated Beverages Great Britain Limited.
The effect of the following acquisitions were not considered in
the unaudited pro forma financial information presented below
because they are not significant to the Company's consolidated
financial results:
- Luxembourg bottler,
- Coke Southwest,
- The Coca-Cola Bottling Company of Bellingham,
- Great Plains, and
- Soo Coca-Cola Bottling, Inc.
The unaudited pro forma financial information presented below for
the second quarter and six months ended June 27, 1997 reflects
adjustments for: (i) financing of the transactions at an
estimated financing cost for each acquisition, (ii)
amortization of the value of the acquired franchise assets over 40
years, and (iii) the income tax effect of the foregoing (in
millions except per share data):
Quarter Six Months
ended ended
June 27, June 27,
1997 1997
-------- ----------
Net Operating Revenues.......... $3,361 $6,001
====== ======
Pro Forma Net Income Applicable
to Common Share Owners........ $ 103 $ 33
====== ======
Pro Forma Basic Net Income Per
Share Applicable to Common
Share Owners.................. $ 0.27 $ 0.09
====== ======
Pro Forma Diluted Net Income Per
Share Applicable to Common
Share Owners.................. $ 0.26 $ 0.09
====== ======
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<PAGE> 10
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE D - LONG-TERM DEBT
Long-term debt balances, including current maturities, are adjusted
for the effects of interest rate and currency swap agreements (in
millions):
July 3, December 31,
1998 1997
------- ------------
Commercial Paper (weighted
average rates of 4.5% and
4.3%)(A)....................... $ 1,426 $ 773
Canadian dollar loans payable
(weighted average rates of
4.9% and 4.2%)................. 882 892
British pound sterling loans
payable (weighted average rates
of 7.7% and 6.9%).............. 540 1,194
Notes due 1999 - 2037
(weighted average rate
of 7.2%)....................... 1,550 1,550
Debentures due 2012 - 2098
(weighted average rates
of 7.5% and 7.6%)(B)........... 3,400 2,900
8.35% Zero Coupon Notes due
2020 (net of unamortized
discount of $1,612 and
$1,625, respectively).......... 320 307
Euro notes due 2002 - 2011
(weighted average rates of
7.2% and 7.5%)(B).............. 1,181 531
Various foreign currency
debt........................... 384 138
Additional debt(A)............... 480 504
------- ------
Long-term debt including
effect of net asset positions
of currency swaps.............. 10,163 8,789
Net asset positions of
currency swap agreements(C).... 2 3
------- ------
$10,165 $8,792
======= ======
Aggregate maturities of long-term debt for the five twelve-month
periods subsequent to July 3, 1998 are as follows (in millions):
1999 - $1,186; 2000 - $229; 2001 - $23; 2002 - $2,351; and 2003 -
$701.
(A) At July 3, 1998 and December 31, 1997, $1,016 million and $957
million of the Company's commercial paper and additional debt
had been effectively exchanged into non-U.S. dollar
obligations through currency swap arrangements. These currency
swap arrangements provide for the exchange of U.S. dollars into
Belgian francs, Canadian dollars, French francs, Dutch florins,
and British pounds sterling, and also provide for the periodic
exchange of interest payments. The Company intends to renew
these short-term currency swap arrangements as they expire.
These currency swap arrangements hedge net investments in
international subsidiaries.
- 8 -
<PAGE> 11
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE D - LONG-TERM DEBT (CONTINUED)
(B) During the first six months of 1998 the Company issued
$500 million of debentures due 2038-2098 with a weighted
average interest rate of 6.88% and $666 million in notes due
2003 - 2011 with a weighted average interest rate of 6.9% under
the European Medium Term Note Program.
(C) The net asset positions of currency swap agreements are included
in the balance sheet as assets.
The Company has a $1.5 billion multicurrency revolving bank credit
agreement maturing in November 2001. This credit facility supports
the commercial paper program and other borrowings as needed. No
amounts were outstanding under this credit agreement at July 3,
1998; at December 31, 1997, $422 million of short-term British
pound sterling loans had been issued under this credit agreement.
At July 3, 1998 and December 31, 1997, a total of $1.5 billion of
borrowings due in the next 12 months was classified as maturing
after one year under this agreement due to the Company's ability and
intent to refinance these borrowings on a long-term basis.
At July 3, 1998 and December 31, 1997, the Company had approximately
$1,689 million and $1,217 million, respectively, outstanding under
various short-term credit facilities with additional amounts available
of $1,242 million and $1,238 million, respectively. Included in the
outstanding balance at July 3, 1998 and December 31, 1997, is
approximately $882 million and $866 million, respectively, of
Canadian dollar-denominated loans issued under revolving credit
facilities. Because the Company has the option to convert these
revolving credit facilities to a five-year loan, amounts have been
classified as maturing after one year.
At July 3, 1998 and December 31, 1997, the Company had available
for issuance approximately $1.5 billion and $2 billion, respectively,
in registered debt securities under a registration statement with the
Securities and Exchange Commission and approximately $1.3 billion and
$2 billion, respectively, in debt securities under its European Medium
Term Note Program.
The multicurrency revolving bank credit agreement and the outstanding
notes and debentures contain various provisions which, among other
things, require the Company 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 on the Company's
liquidity or capital resources.
NOTE E - PREFERRED STOCK
In the second quarter of 1998 the Company was authorized by the
Board of Directors to issue 120,000 shares of $1 par value voting
convertible preferred stock with a stated value of $100 per share
(Bellingham series). In connection with the June 1998 acquisition of
The Coca-Cola Bottling Company of Bellingham, the Company issued
96,600 shares of preferred stock. The Bellingham series pays
quarterly dividends equaling 4% annually. The shareholders have the
option to convert each share into one share of common stock prior to
June 30, 2001, at which time all shares must be converted.
- 9 -
<PAGE> 12
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE F - SHARE REPURCHASES
The Company can repurchase shares in the open market and in privately
negotiated transactions based on prevailing market conditions under
a share repurchase program authorizing the repurchase of up to 30
million shares. The Company repurchased 1,535,360 shares of common
stock during the first half of 1998, for an aggregate cost of
approximately $51 million. Management considers market conditions
and alternative uses of cash and/or debt, balance sheet ratios, and
share-owner 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.
NOTE G - INCOME TAXES
The Company's effective tax rates for the first six months of 1998
and 1997 were 36% and 39%, respectively. A reconciliation of
the income tax provision at the statutory federal rate to the
Company's actual income tax provision follows (in millions):
Six Months ended
--------------------
July 3, June 27,
1998 1997
------- --------
U.S. Federal statutory expense..... $32 $45
State expense, net of Federal
benefit.......................... - 4
Taxation of European and Canadian
operations, net.................. (7) (6)
Valuation allowance provision...... 4 4
Nondeductible items................ 3 2
Other, net......................... 1 1
--- ---
$33 $50
=== ===
NOTE H - STOCK-BASED COMPENSATION PLANS
An aggregate 1,996,000 shares of common stock were issued during the
first six months of 1998 from the exercise of stock options.
The Company granted 5,048,000 service-vested stock options to certain
executive and management level employees and 47,000 stock options to
non-employee members of the Board of Directors during the first six
months of 1998. All options vest over a five-year period or ratably
over a three-year period and expire ten years from the date of grant.
Of the total options granted, 1,404,000 were granted at an exercise
price equal to the fair market value of the stock on the grant date,
and 3,691,000 were premium-priced options.
- 10 -
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COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE I - COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes new rules for reporting
comprehensive income, comprised of net income and other adjustments to
comprehensive income such as foreign currency translation adjustments
and hedges of net investments in foreign subsidiaries. The adoption of
this statement had no impact on the Company's net income or
share-owners' equity.
A reconciliation of comprehensive income follows (in millions):
Quarter ended Six Months ended
------------------ ------------------
July 3, June 27, July 3, June 27,
1998 1997 1998 1997
-------- -------- -------- --------
Net income ................... $111 $111 $ 60 $ 78
Currency items, including
tax effects of hedges ...... 9 (26) (11) (44)
---- ---- ---- ----
Comprehensive income ......... $120 $ 85 $ 49 $ 34
==== ==== ==== ====
NOTE J - EARNINGS PER SHARE
In the first quarter of 1998, dividends in the amount of $0.025 per
common share were declared for share owners of record on April 1,
1998. On April 17, 1998, the Company's Board of Directors approved an
increase in the regular quarterly dividend to $0.04 per common share.
This dividend increase was effective and payable July 1, 1998 and
declared for share owners of record on June 19, 1998. Dividends are
declared at the discretion of the Company's Board of Directors.
- 11 -
<PAGE> 14
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE J - EARNINGS PER SHARE (CONTINUED)
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)
Quarter ended Six Months ended
------------------ ------------------
July 3, June 27, July 3, June 27,
1998 1997 1998 1997
-------- -------- -------- --------
Net Income ................... $ 111 $ 111 $ 60 $ 78
Preferred stock dividends .... - - - 2
----- ----- ----- -----
Basic and Diluted Net Income
Applicable to Common Share
Owners .................... $ 111 $ 111 $ 60 $ 76
===== ===== ===== =====
Basic Average Common Shares
Outstanding ............... 394 383 390 380
Effect of Dilutive Securities:
Stock Compensation
Awards .................... 13 11 14 10
----- ----- ----- -----
Diluted Average Common Shares
Outstanding ............... 407 394 404 390
===== ===== ===== =====
Basic Net Income Per Share
Applicable to Common Share
Owners .................... $0.28 $0.29 $0.15 $0.20
===== ===== ===== =====
Diluted Net Income Per Share
Applicable to Common Share
Owners .................... $0.27 $0.28 $0.15 $0.20
===== ===== ===== =====
NOTE K - GEOGRAPHIC OPERATING INFORMATION
The Company operates in one industry: the marketing, distribution, and
production of bottle and can liquid nonalcoholic refreshments. On
July 3, 1998, the Company operated in 45 states in the United States,
the District of Columbia, and in the 10 provinces of Canada
(collectively referred to as the Company's "North American"
operations), and in Belgium, Great Britain, most of France,
Luxembourg, and the Netherlands (collectively referred to as the
Company's "European" operations).
- 12 -
<PAGE> 15
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE K - GEOGRAPHIC OPERATING INFORMATION (CONTINUED)
The following presents net operating revenues for the six months ended
July 3, 1998 and June 27, 1997 and long-lived assets as of July 3,
1998 and December 31, 1997 by geographic territory (in millions):
1998 1997
---------------------- ----------------------
Net (A) Long- Net (B) Long-
Operating lived Operating lived
Revenues Assets Revenues Assets
--------- --------- --------- ---------
North American.... $ 4,937 $13,405 $ 3,640 $11,174
European ......... 1,708 4,585 1,406 4,500
------- ------- ------- -------
Consolidated ..... $ 6,645 $17,990 $ 5,046 $15,674
======= ======= ======= =======
(A) 1998 net operating revenues include results beginning June 5,
1998 for the Coke Southwest acquisition acquired in
second-quarter 1998. Therefore, reported 1998 information is
not indicative of full-year results.
(B) 1997 net operating revenues do not include the results of
operations for the New York and Canadian bottlers acquired
in third-quarter 1997 nor for the Coke Southwest acquisition
completed in June 1998. Additionally, 1997 net operating
revenues include results beginning March 1997 for the Great
Britain bottler acquired in first-quarter 1997. Therefore,
reported 1997 information is not indicative of full-year
results.
The Company has no material amounts of sales or transfers between
North American and European operations and no significant United
States export sales.
NOTE L - CONTINGENCIES
In North America, the Company purchases PET (plastic) bottles from
manufacturing cooperatives involved in the manufacture of plastic
bottles. The Company and its subsidiaries have guaranteed payment of
up to $281 million of indebtedness owed by these manufacturing
cooperatives to third parties. At July 3, 1998, these cooperatives
had approximately $161 million of indebtedness guaranteed by the
Company. The Company has also issued letters of credit aggregating
approximately $152 million under self-insurance programs.
The Company is a defendant in various litigation matters generally
arising out of the normal course of business. Although it is
difficult to predict the ultimate outcome of these cases, management
believes the ultimate costs of these cases would not materially affect
the Company's financial position, results of operations, or liquidity.
- 13 -
<PAGE> 16
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
BUSINESS SUMMARY
Coca-Cola Enterprises Inc. ("the Company") is the world's largest
marketer, distributor, and producer of bottled and canned liquid
nonalcoholic refreshments. The Company distributes approximately
20% of The Coca-Cola Company's world-wide volume and is the largest
anchor bottler in the Coca-Cola system. In the United States and
Canada, we distribute more than 65% of The Coca-Cola Company's bottle
and can products. We are also the sole licensed bottler for products
of The Coca-Cola Company in Belgium, Great Britain, Luxembourg, the
Netherlands, and most of France.
Management's discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and the
accompanying footnotes along with the cautionary statements at the end
of this section.
RESULTS OF OPERATIONS
OVERVIEW
Consolidated cash operating profit, or net income before deducting
interest, taxes, depreciation, amortization, and other nonoperating
expenses, reached $955 million in the first half of 1998, 20% ahead
of reported 1997 results. As expected, operating and net income
margins decreased over comparable 1997 margins primarily because
of increased infrastructure spending. We still anticipate a
comparable cash operating profit growth of 10% for full-year 1998.
Comparable operating results are determined by adjusting reported 1998
performance to exclude results for the recently completed Coke
Southwest acquisition and by adjusting reported 1997 performance to
include results of material 1997 acquisitions as if they occurred on
January 1, 1997. After adjusting 1997 comparable cash operating
profit for the effects of four additional selling days included
in first-quarter 1998 and the impact of currency translations,
comparable cash operating profit growth for the second quarter and
first half of 1998 was 6%.
Management's primary objective is to deliver a superior investment
return to our share owners through long-term increases in operating
cash flows and profitable increases in sales volume. Our strong brand
portfolio combined with our emphasis on local market execution and our
significant investments in infrastructure are driving our consistent
long-term growth.
In line with our objective, we have continued the integration and
expansion of our operations through acquisitions and infrastructure
investments in North America and Europe. We recently announced the
approval, by the Board of Directors, of the Company's July 1998 to
December 2001 Capital Spending Plan totaling approximately $5
billion. This Capital Spending Plan will allow the Company to make
the necessary infrastructure capital investments required to support
our objective of growing faster than the industry and to maintain
our commitment to expand the highly profitable cold drink channel.
- 14 -
<PAGE> 17
The tables included in management's discussion and analysis summarize
changes in key operating information on a reported and comparable
basis for the second quarter and first half of 1998.
CASH OPERATING PROFIT (COP)
In the opinion of management, COP is one of the key standards for
measuring our operating performance. COP is used by management as an
additional indicator of operating performance and not as a
replacement of measures such as cash flows from operating activities
and operating income as defined and required by generally accepted
accounting principles.
- ----------------------------------------------------------------------
Second-quarter 1998 Six-months 1998
-------------------- --------------------
Reported Comparable Reported Comparable
Change Change Change Change
- ----------------------------------------------------------------------
Cash Operating Profit:
Consolidated 17% 5% 20% 8%
Currency-neutral 6% 6%
- ----------------------------------------------------------------------
The reported COP growth rates are affected by acquisitions completed
in 1997 and 1998 and by the 4 additional selling days in first-quarter
1998. Comparable cash operating profit growth is impacted by the
inclusion of operating results for the Canadian and New York
acquisitions for the first six months of 1997, periods prior to our
ownership. Since that time, we have invested heavily in these
operations and expect to begin realizing benefits from these
investments in the last six months of 1998.
VOLUME
Volume results were driven by growth in brands of The Coca-Cola
Company with particularly strong performance in Coca-Cola classic,
diet Coke, Coca-Cola light, Barq's, Fanta, Sprite, and the Company's
noncarbonated brand portfolio. Comparable volume information has
been adjusted for acquisitions and for the 4 additional selling days
in the first quarter of 1998.
- ----------------------------------------------------------------------
Second-quarter 1998 Six-months 1998
-------------------- --------------------
Reported Comparable Reported Comparable
Change Change Change Change
- ----------------------------------------------------------------------
Physical Case Bottle and
Can Volume:
Consolidated 27% 8% 32% 8%
North American
Territories 9% 8%
European Territories 4% 9%
- ----------------------------------------------------------------------
- 15 -
<PAGE> 18
VOLUME (CONTINUED)
The 4% European volume growth in second-quarter 1998 was impacted
by the cold and rainy weather experienced during the months of April
and June in most of our European territories. Even with the effects
of the weather conditions, our European territories continued to
grow faster than the industry. For the second quarter and first half
of 1998, our European operations represented 23% and 24%, respectively,
of physical case bottle and can volume.
NET OPERATING REVENUES AND COST OF SALES
In the second quarter of 1998, net operating revenues were up
27% to $3.7 billion. Six-month 1998 operating revenues increased 32%
to $6.6 billion. Our operations in North America represented 75%
and 74% of second-quarter and six-month 1998 net operating revenues,
respectively.
- ----------------------------------------------------------------------
Second-quarter 1998 Six-months 1998
-------------------- --------------------
Reported Comparable Reported Comparable
Change Change Change Change
- ----------------------------------------------------------------------
Net Revenues Per Case
(Bottle and Can) Flat Flat Flat (0.5)%
Currency-neutral 1 % 0.5 %
- ----------------------------------------------------------------------
Cost of Sales Per Case
(Bottle and Can) (0.5)% (1)% 0.5% (0.5)%
Currency-neutral Flat 0.5 %
- ----------------------------------------------------------------------
PER SHARE DATA
In the first half of 1998, the Company generated basic and diluted net
income from operations of $0.15 per common share as compared to
reported 1997 basic and diluted net income of $0.20 per common share.
The net income per share for the first half of 1997 includes a
first-quarter 1997 one-time charge of $6 million ($0.01 per common
share after tax) for the redemption of $142 million in debt. In the
second quarter of 1998 basic net income per share was $0.28 while
diluted net income per share was $0.27 as compared to $0.29 and $0.28,
respectively, for second-quarter 1997.
The primary contributors to our decreases in earnings per share were
the increased infrastructure spending throughout our territories,
particularly in Canada and New York, as well as dilution resulting
from increased costs from acquisitions such as amortization and
interest costs. Additionally, the number of shares outstanding
increased because of the 17.7 million common shares issued as part of
the Coke Southwest acquisition.
The Company repurchased 1,535,360 shares of common stock during the
first six months of 1998 for an aggregate cost of approximately $51
million under its share repurchase program authorizing the repurchase
of up to 30 million shares.
On April 17, 1998, the Company's Board of Directors approved an
increase of the regular quarterly dividend to $0.04 per common share
up from $0.025 per share. This dividend increase was effective and
payable July 1, 1998 and declared for share owners of record on June
19, 1998.
- 16 -
<PAGE> 19
SELLING, DELIVERY, AND ADMINISTRATIVE EXPENSES
In second-quarter 1998, consolidated selling, delivery, and
administrative expenses as a percent of net operating revenues
increased to 28.4% from second-quarter 1997 results of 26.6%.
Year-to-date 1998 consolidated selling, delivery, and administrative
expenses as a percent of net operating revenues increased to 30.7%
from 30% for the first half of 1997. These increases result from
increases in infrastructure spending in New York and Canada.
INTEREST EXPENSE
Second-quarter and year-to-date 1998 net interest expense increased
from reported 1997 levels due to higher average debt balances from
acquisitions. The weighted average interest rate for second-quarter
1998 and second-quarter 1997 was 6.9%. The weighted average interest
rate for the first half of 1998 was 7% compared to 6.9% for full-year
1997.
INCOME TAX EXPENSE
The Company's effective tax rates for the first six months of 1998 and
1997 were 36% and 39%, respectively. The effective tax rate for
full-year 1997 was 37%. The reduction in the Company's projected
1998 effective tax rate in the second quarter is a result of the
favorable effect of our expanded operations in Europe, including
the favorable tax treatment granted to certain foreign operations
under a tax holiday expiring in the year 1999 and the Company's
current expectations for full-year 1998 earnings.
On July 31, 1998, the United Kingdom's income tax rate was reduced
from 31% to 30%. This rate change reduced deferred tax liabilities
associated with the Company's operations in the United Kingdom by
approximately $29 million or $0.07 per common share. This deferred
tax liability reduction was recognized as a credit to income tax
expense in the third quarter of 1998.
CASH FLOW AND LIQUIDITY REVIEW
CAPITAL RESOURCES
Our sources of capital include, but are not limited to, the issuance
of public or private placement debt, bank borrowings, and the
issuance of equity securities. We believe that short-term and
long-term capital resources available to us are sufficient to fund
our capital expenditure and working capital requirements,
scheduled debt payments, interest and income tax obligations,
dividends to our share owners, acquisitions, and plans for share
repurchases.
For long-term financing needs, we have available approximately $1.5
billion in registered debt securities for issuance under a
registration statement with the Securities and Exchange Commission and
an additional $1.3 billion in debt securities under the European
Medium Term Note Program.
We satisfy seasonal working capital needs and other financing
requirements with bank borrowings and short-term borrowings under our
commercial paper program and other credit facilities. At July 3,
1998, we had a total amount outstanding of approximately $1.7 billion
under various short-term credit facilities, with an additional
$1.2 billion available for future use. We intend to continue to
refinance borrowings under our commercial paper program and our
short-term credit facilities with longer-term fixed and floating rate
financings. At the end of second-quarter 1998, the Company's debt
portfolio was 66% fixed rate debt and 34% floating rate debt.
- 17 -
<PAGE> 20
SUMMARY OF CASH ACTIVITIES
Cash and cash investments decreased $18 million during the first
half of 1998 from net cash transactions. Our primary sources of
cash during the first six months of 1998 were from the issuance of
debt aggregating $2.7 billion and from our operations that provided
approximately $235 million. Our primary uses of cash were for
capital expenditures totaling $838 million, long-term debt payments
totaling $1.8 billion, and acquisitions of bottling businesses for a
net cash cost of approximately $208 million.
Operating Activities: Operating activities resulted in $235 million
of net cash provided during the first half of 1998 compared to $263
million provided by operations in the first six months of 1997.
The higher depreciation and amortization expense in 1998 results
from the effects of increased capital spending and the effects of
the 1997 and 1998 acquisitions.
Investing Activities: Net cash used in investing activities results
from the Company's continued capital investments in its infrastructure
and the acquisitions of bottling operations. Capital expenditures
for year-to-date 1998 doubled over the same period in 1997, primarily
because of the capital investments made by our Canadian and New
York operations. The Company has increased its original expectations
for capital spending from $1.1 billion to between $1.4 and $1.6
billion for the full-year 1998.
Financing Activities: The Company continues to refinance portions
of its short-term borrowings with longer-term fixed and floating
rate debt. In the first half of 1998, the Company issued $1,166
million in notes and debentures. During the first six months of 1998,
$51 million was used to repurchase shares of the Company's common
stock.
FINANCIAL CONDITION
The increase in property, plant, and equipment results from
capital expenditures of approximately $838 million in the first half
of 1998 and the 1998 acquisitions. The increase in long-term debt is
primarily a result of the financing of our capital expenditures,
funding of the share repurchase program, and our 1998 acquisitions.
In the first half of 1998 activities in currency markets resulted
in a $11 million adjustment to the Company's comprehensive income.
As currency exchange rates fluctuate, translation of the statements
of income for our international businesses into U.S. dollars will
affect the comparability of revenues and expenses between periods.
KNOWN TRENDS AND UNCERTAINTIES
YEAR 2000 COMPUTER CONVERSION
Companies are faced with the possibility that certain automated
information systems will not process data appropriately in transition
from the year 1999 to the year 2000 and beyond. This possibility
impacts substantially all areas of our business and may be impacted
by any future acquisitions.
- 18 -
<PAGE> 21
YEAR 2000 COMPUTER CONVERSION (CONTINUED)
We have an ongoing information systems development plan with
scheduled replacements of various systems throughout the
organization, resulting in Year 2000 compliant systems. We also
have multifunctional task forces engaged to identify and ensure all
other Year 2000 compliance issues are addressed. This involves
working closely with our business partners, including our customers
and suppliers, to ensure business processes will continue
uninterrupted into the 21st century.
Because Year 2000 compliance will result from our normal systems
implementation plan, incremental costs are not projected to be
significant to the Company. However, because of the numerous
uncertainties associated with Year 2000 compliance such as the
effect on the Company of noncompliance by third parties, we are
unable to predict whether the Year 2000 issue will ultimately
have a material adverse impact on future operating results or the
financial condition of the Company.
EURO CURRENCY CONVERSION
Companies conducting business in or having transactions denominated in
certain European currencies are facing the European Union's pending
conversion to a new common currency, the "euro." This conversion is
expected to be implemented over a three year period. On January 1,
1999, the euro will become the official currency for accounting and
tax purposes of several countries of the European Union and the
exchange rates between the euro and the local currencies will be
fixed. In 2002, the euro will replace the individual national
currencies.
We have a multifunctional task force engaged to identify and ensure
all euro conversion compliance issues are addressed. However, because
of the numerous uncertainties associated with euro conversion
compliance such as the effect on the Company of noncompliance by third
parties, we are unable to predict whether the euro issue will
ultimately have a material adverse impact on future operating
results or the financial condition of the Company.
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," in
June 1998. This statement modifies the method of accounting for
derivatives by requiring that all derivatives be recorded at their
fair values in a company's balance sheet. SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999; early adoption is
allowed. If the Company's derivative and hedging transactions are
deemed material as of the date of adoption, the Company will record a
cumulative effect of a change in an accounting principle in its
consolidated statement of income. The Company has not yet determined
the effect SFAS No. 133 will have on the operating results or the
financial position of the Company.
- 19 -
<PAGE> 22
CAUTIONARY STATEMENTS
Certain expectations and projections regarding future performance of
the Company referenced in this report are forward-looking statements
involving risks and uncertainties. These expectations and projections
are based on currently available competitive, financial, and economic
data, along with the Company's operating plans, and are subject to
future events and uncertainties. Among the events and uncertainties
which could adversely affect future periods are lower-than-expected
net pricing resulting from marketplace competition, an inability
to meet performance requirements for expected levels of marketing
support payments from The Coca-Cola Company, 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 and employee infrastructure expenditures, an inability to
meet projections for performance in newly acquired territories,
unexpected costs associated with Year 2000 conversions or the business
risk associated with Year 2000 noncompliance by customers and/or
suppliers, 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 28 of the Company's Annual Report for the fiscal year
ended December 31, 1997.
Part II. Other Information
Item 2. Changes in Securities
On June 5, 1998, the Company completed the acquisition of The
Coca-Cola Bottling Group (Southwest), Inc. and Texas Bottling
Group, Inc. and in connection therewith issued 17,728,344 shares
of the Company's Common Stock, $1.00 par value per share ("Common
Stock"), in a transaction exempt from registration pursuant to Rule
506 under the Securities Act of 1933, as amended. The total
transaction value (purchase price and acquired debt) was approximately
$1.1 billion with 55 percent of the transaction funded with the
issuance of Common Stock and the remaining 45 percent funded through
debt issued and assumed.
On June 12, 1998, the Company completed the acquisition of The
Coca-Cola Bottling Company of Bellingham and in connection therewith
issued 96,900 shares of the Company's convertible preferred stock with
a par value of $1.00 per share and a $100 stated value per share and
$530,000 aggregate principal amount of the Company's 7% offset
promissory note, in a transaction exempt from registration pursuant
to Rule 506 under the Securities Act of 1933, as amended. The purchase
price was approximately $12,000,000, in the form of cash, convertible
preferred stock and a promissory note, as described above. Each share
of preferred stock may be converted into that number of shares of
Common Stock which is (i) $100 increased at an annual rate of 4% plus
an amount equal to all dividends accrued and unpaid thereon to the
date of conversion (whether or not declared), divided by (ii) the
Conversion Date Price. For the purposes of this computation, the
"Conversion Date Price" means the average of the closing sales price
per share of Common Stock on the New York Stock Exchange composite
tape for the ten consecutive trading days immediately prior to the
second trading day prior to the conversion date.
- 20 -
<PAGE> 23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
Incorporated by
Exhibit Reference
Number Description or Filed Herewith
- ------- ------------------------------------------- -----------------
12 Statements regarding computations of ratios Filed Herewith
27 Financial Data Schedule Filed Herewith
(b) Reports on Form 8-K:
During second-quarter 1998, the Company filed the following current
reports on Form 8-K:
Date of Report Description
- -------------- -------------------------------------------------------
April 17, 1998 Press release announcing the Board's election of
Henry Schimberg as Chief Executive Officer effective
April 17, 1998. Report filed on April 23, 1998.
April 21, 1998 Condensed Consolidated Statements of Operations and
Balance Sheet (unaudited) of the Company, filed on
April 22, 1998, reporting results of operations and
financial position for the first quarter of 1998.
May 13, 1998 Terms agreement, filed June 1, 1998, form of 7%
Debentures due May 2098.
- 21 -
<PAGE> 24
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: August 10, 1998 /s/ John R. Alm
-------------------------------
John R. Alm
Executive Vice President and
Chief Financial Officer
Date: August 10, 1998 /s/ O. Michael Whigham
-------------------------------
O. Michael Whigham
Vice President, Controller and
Principal Accounting Officer
- 22 -
<PAGE> 1
COCA-COLA ENTERPRISES INC. Exhibit 12
EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(In millions except ratios)
Quarter ended Six Months ended
-------------------- --------------------
July 3, June 27, July 3, June 27,
1998 1997 1998 1997
-------- -------- -------- --------
Computation of Earnings:
Earnings from continuing
operations before income
taxes..................... $172 $182 $ 93 $128
Add:
Interest expense.......... 175 126 349 230
Amortization of
capitalized interest.... - - 1 1
Amortization of debt
premium/discount
and expenses............ 7 6 13 12
Interest portion of rent
expense................. 7 6 13 11
---- ---- ---- ----
Earnings as Adjusted.......... $361 $320 $469 $382
==== ==== ==== ====
Computation of Fixed Charges:
Interest expense............ $175 $126 $349 $230
Capitalized interest........ 1 1 3 1
Amortization of debt premium
/discount and expenses.... 7 6 13 12
Interest portion of rent
expense................... 7 6 13 11
---- ---- ---- ----
Fixed Charges................. 190 139 378 254
Preferred Stock Dividends..... - - - 3
---- ---- ---- ----
Combined Fixed Charges and
Preferred Stock Dividends.. $190 $139 $378 $257
==== ==== ==== ====
Ratio of Earnings to Fixed
Charges (a)............... 1.90 2.30 1.24 1.50
==== ==== ==== ====
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends (a)....... 1.90 2.30 1.24 1.49
==== ==== ==== ====
(a) Ratios were calculated prior to rounding to millions.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF THE FILER FOR THE PERIOD ENDED JULY 3, 1998
INCLUDED IN ITS QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JULY 3,
1998 (COMMISSION FILE NO. 001-9300) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> COCA-COLA ENTERPRISES
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