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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 30, 2000
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)
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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 the number of shares outstanding of each of the
issuer's classes of common stock.
418,310,612 SHARES OF $1 PAR VALUE COMMON STOCK AS OF JULY 28, 2000
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COCA-COLA ENTERPRISES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2000
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Quarters
ended June 30, 2000 and July 2, 1999........................... 1
Condensed Consolidated Statements of Operations for the Six Months
ended June 30, 2000 and July 2, 1999........................... 2
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999.......................................... 3
Condensed Consolidated Statements of Cash Flows for the Six Months
ended June 30, 2000 and July 2, 1999........................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 20
Item 6. Exhibits and Reports on Form 8-K.................................. 20
Signatures................................................................ 21
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN MILLIONS EXCEPT PER SHARE DATA)
QUARTER ENDED
---------------------------
JUNE 30, JULY 2,
2000 1999
------------ ------------
NET OPERATING REVENUES ........................... $4,027 $3,797
Cost of sales .................................... 2,483 2,433
------ ------
GROSS PROFIT ..................................... 1,544 1,364
Selling, delivery, and administrative expenses ... 1,156 1,127
------ ------
OPERATING INCOME ................................. 388 237
Interest expense, net ............................ 200 186
Other nonoperating expenses, net ................. 1 1
------ ------
INCOME BEFORE INCOME TAXES ....................... 187 50
Income tax expense ............................... 64 16
------ ------
NET INCOME ....................................... 123 34
Preferred stock dividends ........................ 1 1
------ ------
NET INCOME APPLICABLE TO COMMON SHAREOWNERS ...... $ 122 $ 33
====== ======
BASIC NET INCOME PER SHARE APPLICABLE TO COMMON
SHAREOWNERS ................................... $ 0.29 $ 0.08
====== ======
DILUTED NET INCOME PER SHARE APPLICABLE TO COMMON
SHAREOWNERS ................................... $ 0.29 $ 0.08
====== ======
DIVIDENDS PER SHARE APPLICABLE TO COMMON
SHAREOWNERS .................................... $ 0.04 $ 0.04
====== ======
See Notes to Condensed Consolidated Financial Statements.
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COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN MILLIONS EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
---------------------------
JUNE 30, JULY 2,
2000 1999
------------ ------------
NET OPERATING REVENUES ........................... $ 7,321 $ 7,066
Cost of sales .................................... 4,495 4,476
------- -------
GROSS PROFIT ..................................... 2,826 2,590
Selling, delivery, and administrative expenses ... 2,294 2,258
------- -------
OPERATING INCOME ................................. 532 332
Interest expense, net ............................ 396 373
------- -------
INCOME (LOSS) BEFORE INCOME TAXES ................ 136 (41)
Income tax expense (benefit) ..................... 46 (14)
------- -------
NET INCOME (LOSS) ................................ 90 (27)
Preferred stock dividends ........................ 2 2
------- -------
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREOWNERS $ 88 $ (29)
======= =======
BASIC NET INCOME (LOSS) PER SHARE APPLICABLE TO
COMMON SHAREOWNERS .............................. $ 0.21 $ (0.07)
======= =======
DILUTED NET INCOME (LOSS) PER SHARE APPLICABLE TO
COMMON SHAREOWNERS .............................. $ 0.20 $ (0.07)
======= =======
DIVIDENDS PER SHARE APPLICABLE TO COMMON
SHAREOWNERS ..................................... $ 0.08 $ 0.08
======= =======
See Notes to Condensed Consolidated Financial Statements.
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COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
------------ ------------
(Unaudited)
CURRENT
Cash and cash investments, at cost approximating
market ......................................... $ 170 $ 141
Trade accounts receivable, less allowance reserves
of $62 and $62, respectively ................... 1,517 1,347
Inventories:
Finished goods ................................. 447 403
Raw materials and supplies ..................... 232 266
------- -------
679 669
Prepaid expenses and other current assets ........ 438 424
------- -------
Total Current Assets ........................... 2,804 2,581
PROPERTY, PLANT, AND EQUIPMENT
Land ............................................. 366 359
Buildings and improvements ....................... 1,412 1,371
Machinery and equipment .......................... 7,429 7,210
------- -------
9,207 8,940
Less allowances for depreciation ................. 3,813 3,595
------- -------
5,394 5,345
Construction in progress ......................... 144 249
------- -------
Net Property, Plant, and Equipment ............. 5,538 5,594
FRANCHISES AND OTHER NONCURRENT ASSETS, NET ........ 14,032 14,555
------- -------
$22,374 $22,730
======= =======
See Notes to Condensed Consolidated Financial Statements.
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COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
LIABILITIES AND SHAREOWNERS' EQUITY 2000 1999
------------ ------------
(Unaudited)
CURRENT
Accounts payable and accrued expenses ........... $ 2,181 $ 2,389
Current portion of long-term debt ............... 1,363 1,225
------- -------
Total Current Liabilities ..................... 3,544 3,614
LONG-TERM DEBT, LESS CURRENT MATURITIES ........... 10,156 10,153
RETIREMENT AND INSURANCE PROGRAMS AND OTHER
LONG-TERM OBLIGATIONS ........................... 1,061 1,088
LONG-TERM DEFERRED INCOME TAX LIABILITIES ......... 4,834 4,951
SHAREOWNERS' EQUITY
Preferred stock ................................. 44 47
Common stock, $1 par value - Authorized -
1,000,000,000 shares; Issued - 449,223,207 and
448,467,105 shares, respectively .............. 449 448
Additional paid-in capital ...................... 2,655 2,667
Reinvested earnings ............................. 501 447
Accumulated other comprehensive income (loss) ... (170) (74)
Common stock in treasury, at cost - 31,045,524
and 27,149,854 shares, respectively ........... (700) (611)
------- -------
Total Shareowners' Equity ..................... 2,779 2,924
------- -------
$22,374 $22,730
======= =======
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COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN MILLIONS)
SIX MONTHS ENDED
---------------------------
JUNE 30, JULY 2,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................... $ 90 $ (27)
Adjustments to reconcile net income (loss) to net
cash derived from operating activities:
Depreciation .................................. 400 437
Amortization .................................. 227 222
Deferred income tax benefit ................... -- (47)
Net changes in current assets and current
liabilities ................................. (485) (356)
Other ......................................... 62 55
----- ------
Net cash derived from operating activities .... 294 284
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in capital assets ................... (448) (601)
Fixed asset disposals ........................... 10 2
Cash investments in bottling operations, net of
cash acquired ................................. (30) (10)
Other investing activities ...................... (17) (45)
----- ------
Net cash used in investing activities ........... (485) (654)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in commercial paper ................ 305 507
Issuance of long-term debt ...................... 482 703
Payments on long-term debt ...................... (477) (877)
Stock purchases for treasury .................... (114) (1)
Cash dividend payments on common and preferred
stock ......................................... (35) (36)
Exercise of employee stock options .............. 5 27
Cash received on currency hedges ................ 54 121
----- ------
Net cash derived from financing activities ...... 220 444
----- ------
NET INCREASE IN CASH AND CASH INVESTMENTS ......... 29 74
Cash and cash investments at beginning of period 141 68
----- ------
CASH AND CASH INVESTMENTS AT END OF PERIOD ........ $ 170 $ 142
===== ======
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITIES
Investments in bottling operations:
Fair value of assets acquired ................. $ 30 $1,146
Debt issued and assumed ....................... -- (114)
Other liabilities assumed ..................... -- (425)
Equity issued ................................. -- (597)
----- ------
Cash paid, net of cash acquired ............... $ 30 $ 10
===== ======
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 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. ("the
Company") Annual Report on Form 10-K for the year ended December 31, 1999.
NOTE B - SEASONALITY OF BUSINESS
Operating results for the second quarter and six months ended June 30, 2000 are
not indicative of results that may be expected for the year ending December 31,
2000 because of business seasonality. Business 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 2000 includes one less selling day than the first
half of 1999, affecting period comparisons.
NOTE C - PROPERTY, PLANT, AND EQUIPMENT
Effective January 1, 2000, the Company prospectively revised the estimated
useful lives and residual values of certain fixed assets based on the results of
a comprehensive analysis completed in late 1999 of the Company's historical
fixed asset experience. This historical experience consisted primarily of
various programs designed to improve asset management and enhance functionality.
Specifically, the Company implemented operational systems to track and monitor
assets, structured maintenance and refurbishment programs, and enhanced purchase
specification requirements. The study confirmed that these programs have
extended the useful lives of certain fixed assets, principally vehicles and cold
drink equipment, and increased the value of certain assets upon disposition.
These changes in accounting estimates generally result in certain of the
Company's operating assets being depreciated over longer useful lives, although
the Company's asset life ranges generally did not change.
The impact of the changes in estimates was to decrease depreciation expense
during the six month period ended June 30, 2000 by approximately $76 million or
$0.11 per share after taxes. The revisions will decrease depreciation expense
for full-year 2000 by approximately $161 million.
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COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - NONRECURRING COSTS
In the second quarter of 2000, the Company recorded a $12 million nonrecurring
charge related to the restructuring of operations in Great Britain. Once
complete, the restructuring will entail the elimination of approximately 300
administrative and managerial positions. The charge was included in selling,
delivery, and administrative expenses. As of June 30, 2000, 124 employees had
been terminated and $1.9 million of the $12 million had been paid.
In June 1999, the Company recalled product in certain parts of Europe.
Approximately 17 million unit cases of product were recalled, less than 1% of
the Company's total annual volume. The Company incurred approximately $103
million of nonrecurring costs in connection with the recall, of which
approximately $91 million was expensed in cost of sales with the remaining
amount included in selling, delivery, and administrative expenses. The Company
continues to expect recovery of some of the nonrecurring recall costs from
insurance and/or third parties; however, our ultimate recovery is uncertain
since discussions continue with the insurers. Product destruction has been
completed and all costs have been incurred as of June 30, 2000.
NOTE E - LONG-TERM DEBT
Long-term debt balances, including current maturities, are adjusted for the
effects of interest rate and currency swap agreements (in millions):
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
U.S. commercial paper (weighted average rates of
6.2% and 4.8%)(A) ............................... $ 1,980 $ 1,737
Canadian dollar commercial paper (weighted
average rates of 6.0% and 5.3%) ................. 529 509
Canadian dollar notes due 2002 - 2009 (weighted
average rate of 5.9%) ........................... 451 460
Notes due 2001 - 2037 (weighted average rates of
6.9% and 6.8%)(B) ............................... 2,115 2,250
Debentures due 2012 - 2098 (weighted average rate
of 7.4%) ........................................ 3,800 3,800
8.35% zero coupon notes due 2020 (net of
unamortized discount of $506 and $1,570,
respectively) (C) ............................. 123 362
Euro notes due 2002 - 2021 (weighted average
rates of 6.6% and 6.7%)(D) ...................... 1,858 1,722
Various foreign currency debt ..................... 428 326
Additional debt ................................... 195 212
------- -------
Long-term debt including effect of net asset
positions of currency swaps ................... 11,479 11,378
Net asset positions of currency swap
agreements(E) ................................. 40 --
------- -------
$11,519 $11,378
======= =======
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COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - LONG-TERM DEBT (CONTINUED)
(A) At June 30, 2000 and December 31, 1999, $781 million and $1,154 million of
the Company's U.S. commercial paper 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
euros, Canadian dollars, 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.
(B) In March 2000, approximately $135 million of 5.71% 40 year notes maturing
in 2037 were retired by the Company at the option of the holder under the
notes' annual put option feature.
(C) In June 2000, zero coupon notes with a face value of approximately $1.3
billion were retired by the Company at the option of the holder under the
notes' one-time put option feature. Cash paid by the Company totaled
approximately $254 million.
(D) During the first six months of 2000, the Company issued $288 million of
5.875% notes due 2007 under its Euro Medium Term Note Program.
(E) The net asset positions of currency swap agreements are included in the
balance sheet as assets.
Aggregate maturities of long-term debt for the five twelve-month periods
subsequent to June 30, 2000 are as follows (in millions): 2001 - $1,363; 2002 -
$2,344; 2003 - $1,069; 2004 - $547; and 2005 - $209.
The Company has domestic and international credit facilities to support its
commercial paper programs and other borrowings as needed. At June 30, 2000 and
December 31, 1999, the Company had $259 million and $157 million, respectively,
of short-term borrowings outstanding under these credit facilities. At June 30,
2000 and December 31, 1999, the Company had $3.5 billion and $3.9 billion,
respectively, of amounts available under domestic and international credit
facilities.
At June 30, 2000 and December 31, 1999, $2 billion of borrowings due in the next
12 months were classified as maturing after one year due to the Company's intent
and ability through its credit facilities to refinance these borrowings on a
long-term basis.
At June 30, 2000 and December 31, 1999, the Company had available for issuance
$2.7 billion in registered debt securities under a registration statement with
the Securities and Exchange Commission. At June 30, 2000 and December 31, 1999,
the Company had available for issuance approximately $1 billion and $1.3
billion, respectively, in debt securities under a Euro Medium Term Note Program
and at June 30, 2000 and December 31, 1999, the Company had $0.9 billion
available for issuance under a Canadian Medium Term Note Program.
The credit facilities and 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.
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COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - INCOME TAXES
The Company's effective tax rates for the first six months of 2000 and 1999 were
34% and 33%, respectively. A reconciliation of the income tax provision at the
statutory federal rate to the Company's actual income tax provision (benefit)
follows (in millions):
SIX MONTHS ENDED
---------------------------
JUNE 30, JULY 2,
2000 1999
------------ ------------
U.S. federal statutory expense ................... $47 $ 22
State expense (benefit), net of federal
(benefit) expense .............................. 3 (1)
Taxation of European and Canadian operations,
net ............................................ (8) (42)
Valuation allowance provision .................... -- 4
Nondeductible items .............................. 3 3
Other, net ....................................... 1 --
--- ----
$46 $(14)
=== ====
NOTE G - STOCK-BASED COMPENSATION PLANS
The Company granted approximately 1.2 million service-vested stock options to
certain executive and management level employees and non-employee officers
during the first six months of 2000. These options vest over a period of up to
six years and expire ten years from the date of grant. Of the total options
granted, 0.8 million were granted at an exercise price equal to the fair market
value of the stock on the grant date, and 0.4 million were granted at exercise
prices in excess of fair market value.
An aggregate of 0.7 million shares of common stock were issued during the first
six months of 2000 from the exercise of stock options.
NOTE H - PREFERRED STOCK
In connection with the acquisition of The Coca-Cola Bottling Company of
Bellingham and the acquisition of Great Plains Bottlers and Canners, Inc., the
Company issued 96,900 shares of $1 par value voting convertible preferred stock
("Bellingham series") and issued 401,474 shares of $1 par value voting
convertible preferred stock ("Great Plains series"). The Bellingham series must
be converted no later than June 30, 2001, and the Great Plains series must be
converted no later than August 7, 2003. As of June 30, 2000, 22,200 shares of
Bellingham series have been converted into 94,331 shares of common stock and
35,000 shares of Great Plains series have been converted into 154,778 shares of
common stock from treasury.
-9-
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COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - SHARE REPURCHASES
Under the April 1996 share repurchase program authorizing the repurchase of up
to 30 million shares, the Company can repurchase shares in the open market and
in privately negotiated transactions. In the first six months of 2000, the
Company repurchased and settled approximately 5.9 million shares of common stock
for an aggregate cost of approximately $114 million. The Company has repurchased
a total of 25.7 million shares under the program.
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.
NOTE J - COMPREHENSIVE INCOME (LOSS)
The following table (in millions) presents a reconciliation of comprehensive
income (loss), comprised of net income (loss) and other adjustments. Other
adjustments to comprehensive income (loss) may include minimum pension liability
adjustments, currency items such as foreign currency translation adjustments and
hedges of net investments in international subsidiaries, and unrealized gains
and losses on certain investments in debt and equity securities. The Company
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 SIX MONTHS ENDED
------------------ -----------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
2000 1999 2000 1999
-------- -------- -------- --------
Net income (loss)...................... $123 $ 34 $ 90 $(27)
Currency items, including tax
effects of hedges.................... (66) (32) (95) (59)
Unrealized loss on securities, net of
tax.................................. (3) -- (1) --
---- ---- ---- ----
Comprehensive income (loss)............ $ 54 $ 2 $ (6) $(86)
==== ==== ==== ====
-10-
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COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - 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).
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
2000 1999 2000 1999
-------- -------- -------- --------
Net income (loss) ..................... $ 123 $ 34 $ 90 $ (27)
Preferred stock dividends ............. 1 1 2 2
------ ------ ------ -------
Basic and diluted net income (loss)
applicable to common shareowners .... $ 122 $ 33 $ 88 $ (29)
====== ====== ====== =======
Basic average common shares
outstanding ......................... 420 426 420 424
Effect of dilutive securities:
Stock compensation awards ........... 9 11 11 --
------ ------ ------ -------
Diluted average common shares
outstanding ......................... 429 437 431 424
====== ====== ====== =======
Basic net income (loss) per share
applicable to common shareowners .... $ 0.29 $ 0.08 $ 0.21 $ (0.07)
====== ====== ====== =======
Diluted net income (loss) per share
applicable to common shareowners .... $ 0.29 $ 0.08 $ 0.20 $ (0.07)
====== ====== ====== =======
NOTE L - GEOGRAPHIC OPERATING INFORMATION
The Company operates in one industry: the marketing, distribution, and
production of liquid nonalcoholic refreshments. On June 30, 2000, the Company
operated in 46 states in the United States, the District of Columbia, and in 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 six months ended June 30,
2000 and July 2, 1999 and long-lived assets as of June 30, 2000 and December 31,
1999 by geographic territory (in millions):
2000 1999
----------------------- -----------------------
NET LONG- NET LONG-
OPERATING LIVED OPERATING LIVED
REVENUES (A) ASSETS REVENUES (A) ASSETS
------------ ------- ------------ --------
North American............. $5,531 $15,272 $5,299 $15,430
European................... 1,790 4,298 1,767 4,719
------ ------- ------ -------
Consolidated............... $7,321 $19,570 $7,066 $20,149
====== ======= ====== =======
(A) Because of acquisitions and business seasonality, reported results may
not be indicative of full-year results for periods presented.
The Company has no material amounts of sales or transfers between its North
American and European territories and no significant United States export sales.
-11-
<PAGE> 14
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE M - COMMITMENTS AND CONTINGENCIES
In North America, the Company purchases PET (plastic) bottles from manufacturing
cooperatives. The Company has guaranteed payment of up to $262 million of
indebtedness owed by these manufacturing cooperatives to third parties. At June
30, 2000, these cooperatives had approximately $168 million of indebtedness
guaranteed by the Company. The Company has also issued letters of credit
aggregating approximately $181 million primarily under self-insurance programs.
The Company's bottler in Canada, acquired in 1997, is being audited for the
years 1990 through 1997 by the Canadian Customs and Revenue Agency, with the
year 1997 added in the second quarter of 2000. The authorities have raised
issues that could result in an assessment of additional taxes. The bottler
believes it has substantial defenses to the issues being raised; however, it is
too early to accurately predict the amount of any ultimate assessment or the
final outcome of this matter. If an assessment is made, the authorities by law
may require as much as one-half of any amount assessed to become immediately due
and payable while the bottler pursues an appeal.
The Company is a defendant in various other matters of litigation 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 the Company's financial
position, results of operations, or liquidity.
-12-
<PAGE> 15
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS SUMMARY AND OBJECTIVES
The Company is the world's largest marketer, producer, and distributor of
products of The Coca-Cola Company. The Company also distributes other beverage
brands in select markets. The Company 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.
Our primary objective is to deliver a superior investment return to our
shareowners through sustainable, profitable, long-term per capita consumption
growth. Our continued growth is dependent on the strength of our brands, the
success of our marketing and executional efforts, and consumer confidence in our
products.
Developing profitable business alliances with our customers and the communities
in which we do business is one of our key strategies. Our initiatives for 2000
include continued margin enhancement for the Company and our customers and
sustainable increases in volume across all channels with specific focus on
channels, products, and packages yielding higher margins. We continue to enhance
profitability and achieve significant volume growth in the higher margin
immediate consumption channels of our business and have made good progress in
improving the overall profitability of the future consumption channels of our
business.
By building on existing relationships and developing new partnerships, we will
continue to build brand equity and deliver value to our customers and our
shareowners. Over the past year and a half, we established more profitable
pricing in future consumption channels in North America and successfully
recovered from the product recall in Europe through effective marketing programs
and the exceptional efforts of our employees.
OUTLOOK
Market conditions in Great Britain, where the pound sterling has appreciated
significantly versus the euro since the beginning of 1999, have resulted in
alternative sourcing options for our customers within certain distribution
channels. These conditions are causing significant pricing pressure on our
operations in Great Britain. However, pricing initiatives and promotions
targeted at the channels most impacted by the weakness of the euro have
stabilized volume and will continue while these conditions persist. It is
unclear when or if these conditions will reverse.
As consumers continue to acclimate to higher price levels established in 1999
and early 2000, we believe that planned promotional activity will generate
increased demand in the second half of 2000. Based upon this belief we expect
full-year North American volume to be flat to up 1 percent versus prior year
results.
In our May 2000 press release, we indicated that cash operating profit would be
in the range of $2.4 billion to $2.44 billion. As a result of lower than
expected volume in North America, we now expect to be at the lower end of this
range. Including the impact of currency translations at current levels and
excluding nonrecurring items, diluted net income per common share for full-year
2000 is expected to approximate $0.50. Operating free cash flow for 2000 is
expected to remain at the previously announced level of approximately
$200 million as the Company reduces total capital spending to $1.2
billion for the year.
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<PAGE> 16
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, was $696
million in the second quarter of 2000, 21 percent over reported second-quarter
1999 results. Adjusting for the $12 million nonrecurring charge related to
restructuring in Great Britain and the second-quarter 1999 product recall charge
of $103 million, the comparable cash operating profit growth rate was 5 percent.
Second-quarter 2000 operating income totaled $388 million, representing an
increase of $151 million above reported second-quarter 1999 results. Operating
income would have been $45 million less had the revisions adopted earlier this
year to the depreciable lives of certain equipment categories not been made.
Excluding the impact of these revisions as well as 1999 and 2000 nonrecurring
charges, operating income would have increased 5 percent for the quarter.
Cash operating profit ("COP") is used as an 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 GAAP. COP is similar
to EBITDA (earnings before interest, taxes, depreciation, and amortization), a
financial measure of the investment community.
NET OPERATING REVENUES AND COST OF SALES
The Company's second-quarter 2000 net operating revenues increased 6 percent to
more than $4 billion. Excluding the impact of foreign currency translations, net
operating revenues increased approximately 8 percent, reflecting the impact of
price increases as well as increased volume in Europe offset by the Company's
volume performance in North America. Six-month 2000 net operating revenues
increased 4 percent to $7.3 billion. Excluding the impact of foreign currency
translations, net operating revenues increased approximately 6 percent for the
same period. For the first half of 2000, North America represented 76 percent of
total revenues while Europe contributed the remaining 24 percent.
Excluding the impact of currency translations, net revenues per physical case to
retailers (bottle and can) grew 5 percent for second-quarter 2000 and for the
first six months of 2000. The second-quarter 2000 increase of 5 percent is
comprised of a 7 percent increase in North America and a slight increase in
Europe. Net revenues per case to retailers (bottle and can) growth throughout
the second-quarter reflected our higher pricing and favorable product, package,
and channel mix shifts, partially offset by pricing pressures in Great Britain.
Cost of sales per physical case (bottle and can) decreased 0.5 percent from the
second quarter of 1999 to the second quarter of 2000. Comparable cost of sales
per physical case, which eliminates the impact of the nonrecurring product
recall costs and excludes the impact of foreign currency translations, increased
less than 6 percent for second-quarter 2000 and increased 5 percent for the
first six months of 2000. We expect a weighted average increase in concentrate
costs for full-year 2000 of approximately 5 percent.
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<PAGE> 17
VOLUME
Volume comparisons for 2000 were impacted by our pricing initiatives which began
in certain territories in March 1999 in North America as well as one less
selling day in first-quarter 2000. Comparable volume results below adjust for
one less selling day in first-quarter 2000 and for the impact of acquisitions.
--------------------------------------------------------------------------------
SECOND-QUARTER 2000 SIX-MONTHS 2000
------------------- ------------------
COMPARA- COMPARA-
REPORTED BLE REPORTED BLE
CHANGE CHANGE CHANGE CHANGE
-------- -------- -------- --------
Physical Case Bottle and Can Volume:
Consolidated 3.5 % 3 % 0.5 % 0.5 %
North American Territories (0.5)% (0.5)% (2)% (1.5)%
European Territories 17.5 % 15.5 % 9.5 % 8.5 %
--------------------------------------------------------------------------------
North America represented 75 percent of total physical case volume in
second-quarter 2000 and 76 percent in the first six months of 2000, with Europe
contributing the remaining amounts. Second-quarter 2000 North American volume
performance reflects the impacts of a 5 percent increase in immediate
consumption channels and a 2 percent decrease in future consumption channels.
The second-quarter 2000 European reported volume performance comparisons must be
viewed in light of the June 1999 product recall in certain parts of the
Company's European territories. Comparable volume was up 10 percent for the
second quarter of 2000 in both France and the Netherlands, and volume in Belgium
has returned to pre-recall levels. Volume in Great Britain, where no product was
recalled, increased 7 percent in the second quarter of 2000.
In North America, Coca-Cola classic and diet Coke grew modestly in the second
quarter of 2000, while brands such as Sprite, Barq's and Citra declined by more
than the consolidated growth rate. The non-carbonated brands such as PowerAde
and Dasani increased substantially.
PER SHARE DATA
In second-quarter 2000, our basic and diluted net income applicable to common
shareowners was $122 million, or $0.29 per common share, compared to $0.08 per
common share in the second quarter of 1999. Excluding the nonrecurring
restructuring charge of $12 million in second-quarter 2000 and the nonrecurring
product recall costs of $103 million in second-quarter 1999, net income per
common share was $0.30 compared to second-quarter 1999 net income per common
share of $0.24. We revised depreciable lives of certain classes of fixed assets
and vehicle salvage values effective January 1, 2000 to reflect the success of
our capital management programs. Depreciation expense for second-quarter 2000
would have been approximately $45 million higher ($0.06 per share after taxes),
and depreciation expense for the first six months of 2000 would have been
approximately $76 million higher ($0.11 per share after taxes) had the revisions
not been made.
SELLING, DELIVERY, AND ADMINISTRATIVE EXPENSES
In second-quarter 2000, consolidated selling, delivery, and administrative
expenses as a percentage of net operating revenues declined slightly to 28.7%
from second-quarter 1999 results of 29.7%. This decline was impacted by lower
depreciation expense as a result of our revisions to depreciable lives and
vehicle salvage values.
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<PAGE> 18
INTEREST EXPENSE
Second-quarter and year-to-date 2000 net interest expense increased from
reported 1999 levels due to higher average debt balances, a result of the
Company's capital spending and share repurchase programs. The weighted average
interest rate for the second quarter and first half of 2000 was 6.8 percent and
6.7 percent, respectively, compared to 6.6 percent in the second quarter and
first six months of 1999.
INCOME TAXES
The Company's effective tax rates for the first six months of 2000 and 1999 were
34 percent and 33 percent, respectively. The effective tax rate for full-year
1999 was 33 percent. The Company's second-quarter 2000 effective tax rate
reflects the expected full-year 2000 pretax earnings combined with the
beneficial tax impact of certain international operations.
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.
For long-term financing needs, we had available at June 30, 2000 (i) $2.7
billion in registered debt securities for issuance under a registration
statement with the Securities and Exchange Commission, (ii) $1 billion in debt
securities under a Euro Medium Term Note Program, and (iii) an additional $0.9
billion in debt securities under a Canadian 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 June 30, 2000, we had $259 million outstanding under
these credit facilities, with an additional $3.5 billion available for future
borrowings. 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 second-quarter 2000, the Company's debt
portfolio was 73 percent fixed rate debt and 27 percent floating rate debt.
SUMMARY OF CASH ACTIVITIES
Cash and cash investments increased $29 million during the first half of 2000
from net cash transactions. Our primary uses of cash during the first six months
of 2000 were capital expenditures totaling $448 million, long-term debt payments
totaling $477 million and stock purchases for treasury of $114 million. Our
primary sources of cash for the first six months of 2000 were proceeds from the
increase in commercial paper and the issuance of long-term debt aggregating $787
million and proceeds from our operations of approximately $294 million, net of
working capital requirements of $485 million.
Operating Activities: Operating activities resulted in $294 million of net cash
provided during the first six months of 2000 compared to $284 million in the
first six months of 1999.
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<PAGE> 19
Investing Activities: Net cash used in investing activities resulted primarily
from our continued capital investments. We expect full-year 2000 capital
expenditures to be approximately $1.2 billion.
Financing Activities: The Company continued to refinance portions of its
short-term borrowings with longer-term fixed and floating rate debt. In the
first half of 2000, the Company issued $288 million in notes under its Euro
Medium Term Note Program.
FINANCIAL CONDITION
The decrease in net property, plant, and equipment resulted from the impact of
foreign currency translation and depreciation costs net of capital expenditures.
The increase in long-term debt primarily resulted from the financing of our
capital expenditures and working capital needs, partially offset by the impact
of foreign currency translation.
In the first half of 2000, activities in currency markets resulted in a loss in
comprehensive income of $95 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
NONRECURRING PRODUCT RECALL COSTS
In 1999, the Company withdrew products in certain European territories because
of quality concerns. The Company incurred approximately $103 million of
nonrecurring costs under the recall in addition to the cost of lost sales. The
Company continues to expect recovery of some of the recall costs from insurance
and/or third parties; however, settlement of reimbursement amounts is in process
and the amount of our ultimate recovery is uncertain.
EURO CURRENCY CONVERSIONS
On January 1, 1999, 11 of the 15 Member States of the European Union established
fixed conversion rates between existing currencies and the European Union's
common currency ("euro"). The Company conducts business in several of these
Member States, and in one (the United Kingdom) that chose not to participate.
The transition period for the introduction of the euro for the participating
countries is January 1, 1999, through January 1, 2002, and by July 1, 2002, all
national currencies for the participating countries will be replaced by the
euro.
We have established a multifunctional task force engaged to address the issues
involved with the introduction of the euro. The issues facing the Company
include converting information technology systems, adapting business processes
and equipment such as vending machines, reassessing currency risk, and
processing tax and accounting records.
The Company is in the process of identifying all material risks and is
developing an implementation plan for the conversion to the euro. The following
table lists certain milestones identified and their projected completion dates
with respect to the euro conversion.
-17-
<PAGE> 20
MILESTONES KEY DATES
-------------------------------------------- -----------------
Business requirements gathering Completed
Strategy design and schedule Completed
Development of strategies 3rd Qtr. 2000
Implementation of strategies 4th Qtr. 2000
Begin managing business operations in euro 1st Qtr. 2001
Vending machines ready for euro coinage 4th Qtr. 2001
Finalize local currency conversions 2nd Qtr. 2002
As of June 30, 2000, the Company had incurred and expensed less than $4 million
in costs associated with this conversion process. The Company estimates the
total cost to complete this project will be in the range of $30 million to $40
million, and approximately 70% of these costs will be capitalized. These costs
represent principal projects to be undertaken to ensure a smooth conversion. Our
business resources currently available are sufficient to meet the requirements
needed to complete the euro initiative. The euro system activities will be a key
part of our ongoing systems standardization process. Total information
technology (IT) spending in Europe for 2000 is expected to approximate 1999 IT
spending levels.
The euro conversion may have long-term competitive pricing implications by
enhancing cross-border product price transparency among the participating
countries of the European Union and by changing established local currency price
points. We are continuing to assess our pricing and marketing strategies to
ensure we remain competitive locally and in the broader European market.
However, we cannot reasonably predict the long-term effects one common currency
may have on pricing and costs or the resulting impact, if any, on financial
condition or results of operations. Additionally, the Company may be at risk to
the extent third parties are unable to deal effectively with the impact of the
euro conversion, which in turn could impact Company operations.
Based upon progress to date, the Company believes use of the euro will not have
a significant impact on the manner in which it conducts business or processes
accounting records. However, due to numerous uncertainties we cannot be assured
that all issues related to the euro conversion have been identified and that any
additional issues would not have a material effect on the Company's operations
or financial condition.
TAX CONTINGENCY
The Company's bottler in Canada, acquired in 1997, is being audited for the
years 1990 through 1997 by the Canadian Customs and Revenue Agency, with the
year 1997 added in the second quarter of 2000. The authorities have raised
issues that could result in an assessment of additional taxes. If an assessment
is made, the authorities by law may require as much as one-half of any amount
assessed to become immediately due and payable while the bottler pursues an
appeal. The bottler believes it has substantial defenses to the issues being
raised; however, it is too early to accurately predict the amount of any
ultimate assessment or the final outcome of this matter.
LITIGATION CONTINGENCY
In June 2000, the Company and The Coca-Cola Company were found by a Texas jury
to be jointly liable in the amount of a combined $15.3 million to a competing
distributor, who had sued alleging that the Company and The Coca-Cola Company
had engaged in unfair marketing practices. The Company plans to vigorously
defend itself and believes there are substantial grounds for appeal. It is
impossible to accurately predict the final outcome of the Company's appeals in
this matter.
-18-
<PAGE> 21
ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," in June 1998,
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of the FASB Statement No. 133," in June 1999 and
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133," in June 2000. SFAS No. 133
requires that all derivatives be recorded at fair market values on the balance
sheet and establishes new accounting rules for hedging instruments. SFAS No. 137
defers the effective date of SFAS No. 133 for one year. SFAS No. 133 will now be
effective for fiscal years beginning after June 15, 2000; early adoption is
allowed. SFAS No. 138 amends the accounting and reporting standards of SFAS No.
133 for certain derivative instruments and certain hedging activities. The
Company is conducting an evaluation of hedging policies and strategies for
existing derivatives and any future derivative transactions. The effect of
adoption on the Company's financial statements will ultimately depend on the
policies adopted.
In September 1999, the FASB issued an exposure draft that would amend APB
Opinion No. 16, "Business Combinations," and supersede APB Opinion No. 17,
"Intangible Assets." This exposure draft proposes to modify the method of
accounting for business combinations and addresses the accounting for intangible
assets. The Company is currently examining the effects these proposed changes
may have on the operating results and the financial statements of the Company.
CAUTIONARY STATEMENTS
Certain expectations and projections regarding future performance of the Company
referenced in this report are forward-looking statements. 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 volume resulting from
efforts to improve pricing in the future consumption channels of our business,
an inability to meet performance requirements for expected levels of marketing
support payments from The Coca-Cola Company, material changes from expectations
in the cost of raw materials and ingredients, an inability to achieve the
expected timing for returns on cold drink equipment and employee infrastructure
expenditures, uncertainty of expected reimbursements from insurance and/or third
parties relating to the second-quarter 1999 European recall costs, an inability
to meet projections for performance in newly acquired territories, potential
assessment of additional taxes resulting from audits conducted by the Canadian
Customs and Revenue Agency, unexpected costs or effect on European sales
associated with conversion to the common European currency (the euro), 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 the Company's Annual Report for the fiscal year
ended December 31, 1999.
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<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1993, the Company was named as a defendant, along with The Coca-Cola Company,
certain other Coke bottlers, PepsiCo, Inc. and a Pepsi bottler, in a lawsuit
brought in Daingerfield, Texas in Texas State Court by five distributors of
Royal Crown beverages and other carbonated soft drinks. The petition alleged
that certain of the Company's marketing practices with grocery stores,
convenience stores and mass merchandisers violated the Texas antitrust laws.
These marketing practices are common in the industry. In particular, the
plaintiffs challenge the requirement that certain of these promotional
opportunities be afforded to the Company exclusively during certain periods of
time. Eventually, nine Royal Crown distributors became plaintiffs in the suit.
The PepsiCo defendants settled prior to trial. In the second quarter of 2000,
the claims of five of the nine plaintiffs were tried to a jury that returned a
verdict in favor of the plaintiffs and against the Company and The Coca-Cola
Company in the amount of $5,153,898.80. The jury also made the requisite finding
for the trebling of the verdict, when finally calculated and entered. No
judgement has been entered on the verdict at this time as a hearing for
injunctive relief is set for the fourth quarter of 2000. The plaintiffs are
seeking restrictions on the uses of exclusive marketing agreements and
divestiture of the Company's Dr Pepper brands in the plaintiffs' territories.
The Company intends to appeal the judgement when entered. The challenged
practices are similar to those investigated by the Federal Trade Commission
in the late 1980's. The FTC took no action at that time.
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 OR
NUMBER DESCRIPTION FILED HEREWITH
----------- ----------------------------------------------- ---------------
3 Bylaws of Coca-Cola Enterprises Inc. as amended Filed Herewith
through July 18, 2000
12 Statements regarding computations of ratios Filed Herewith
27 Financial Data Schedule for the quarter and six Filed Herewith
months ended June 30, 2000
(b) Reports on Form 8-K:
During second-quarter 2000, the Company filed the following current reports on
Form 8-K:
DATE OF REPORT DESCRIPTION
---------------- ------------------------------------------------------------
April 18, 2000 Condensed Consolidated Statements of Operations and
Balance Sheet (unaudited) of the Company, reporting results
of operations and financial position for the first quarter
of 2000. Report filed on April 20, 2000.
May 15, 2000 Press release announcing revised operating expectations
for year 2000. Report filed on May 17, 2000.
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<PAGE> 23
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: July 28, 2000 /s/ Patrick J. Mannelly
------------------------------
Patrick J. Mannelly
Senior Vice President and
Chief Financial Officer
Date: July 28, 2000 /s/ Michael P. Coghlan
------------------------------
Michael P. Coghlan
Vice President, Controller and
Principal Accounting Officer
-21-
