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Article by DailyStocks_admin    (05-05-08 08:50 AM)

CocaCola Enterprises Inc. CEO John Brock bought 20,000 shares on 5-01-2008 at $22.58

BUSINESS OVERVIEW

Introduction



References in this report to “we,” “our,” or “us” refer to Coca-Cola Enterprises Inc. and its subsidiaries unless the context requires otherwise.



Coca-Cola Enterprises Inc. at a Glance


•

Markets, produces, and distributes nonalcoholic beverages.


•

Serves a market of approximately 414 million consumers throughout the United States (“U.S.”), Canada, the U.S. Virgin Islands and certain other Caribbean islands, Belgium, continental France, Great Britain, Luxembourg, Monaco, and the Netherlands.


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Is the world’s largest Coca-Cola bottler.


•

Represents approximately 18 percent of total Coca-Cola product volume worldwide.



We were incorporated in Delaware in 1944 by The Coca-Cola Company (“TCCC”), and we have been a publicly-traded company since 1986.



We sold approximately 42 billion bottles and cans (or 2 billion physical cases) throughout our territories during 2007. Products licensed to us through TCCC and its affiliates and joint ventures represented approximately 93 percent of our volume during 2007.



We have perpetual bottling rights within the U.S. for products with the name “Coca-Cola.” For substantially all other products within the U.S., and all products elsewhere, the bottling rights have stated expiration dates. For all bottling rights granted by TCCC with stated expiration dates, we believe our interdependent relationship with TCCC and the substantial cost and disruption to TCCC that would be caused by nonrenewals of these licenses ensure that they will be renewed upon expiration. The terms of these licenses are discussed in more detail in the sections of this report entitled “North American Beverage Agreements” and “European Beverage Agreements.”



Relationship with The Coca-Cola Company



TCCC is our largest shareowner. At December 31, 2007, TCCC owned approximately 35 percent of our outstanding common stock. Two of our thirteen directors are executive officers of TCCC.



We conduct our business primarily under agreements with TCCC. These agreements give us the exclusive right to market, produce, and distribute beverage products of TCCC in authorized containers in specified territories. These agreements provide TCCC with the ability, at its sole discretion, to establish prices, terms of payment, and other terms and conditions for our purchases of concentrates and syrups from TCCC. Other significant transactions and agreements with TCCC include arrangements for cooperative marketing, advertising expenditures, purchases of sweeteners, juices, mineral waters and finished products, strategic marketing initiatives, cold drink equipment placement, and, from time-to-time, acquisitions of bottling territories.



We and TCCC continuously review key aspects of our respective operations to ensure we operate in the most efficient and effective way possible. This analysis includes our supply chains, information services, and sales organizations. In addition, our objective is to continue to simplify our relationship and to better align our mutual economic interests while continuing to work toward our common global agenda of innovating with new and existing brands and packages across all nonalcoholic beverage categories.

Territories



Our bottling territories in North America are located in 46 states of the U.S., the District of Columbia, the U.S. Virgin Islands and certain other Caribbean islands, and all 10 provinces of Canada. At December 31, 2007, these territories contained approximately 267 million people, representing approximately 79 percent of the population of the U.S. and 98 percent of the population of Canada.



Our bottling territories in Europe consist of Belgium, continental France, Great Britain, Luxembourg, Monaco, and the Netherlands. The aggregate population of these territories was approximately 147 million at December 31, 2007.



During 2007, our operations in North America and Europe contributed 70 percent and 30 percent, respectively, of our net operating revenues. Great Britain contributed 44 percent of our European net operating revenues in 2007.



Products and Packaging



As used throughout this report, the term “sparkling” beverage means nonalcoholic ready-to-drink beverages with carbonation, including energy drinks and waters and flavored waters with carbonation. The term “still” beverage means nonalcoholic beverage without carbonation, including waters and flavored waters without carbonation, juice and juice drinks, teas, coffees, and sports drinks.



We derive our net operating revenues from marketing, producing, and distributing nonalcoholic beverages. Our beverage portfolio includes some of the most recognized brands in the world, including the world’s most valuable sparkling beverage brand, Coca-Cola. We manufacture most of our finished product from syrups and concentrates that we buy from TCCC and other licensors. We deliver most of our product directly to retailers for sale to the ultimate consumers. The remainder of our product is principally distributed through wholesalers who deliver to retailers.

Seasonality



Sales of our products tend to be seasonal, with the second and third calendar quarters accounting for higher sales volumes than the first and fourth quarters. Sales in Europe tend to be more volatile than those in North America due, in part, to a higher sensitivity of European consumption to weather conditions.



Large Customers



Approximately 54 percent of our North American bottle and can volume and approximately 42 percent of our European bottle and can volume are sold through the supermarket channel. The supermarket industry has been in the process of consolidating, and a few chains control a significant amount of the volume. The loss of one or more chains as a customer could have a material adverse effect upon our business, but we believe that any such loss in North America would be unlikely because of our products’ proven ability to bring retail traffic into the supermarket and the resulting benefits to the store and because we are the only source for our bottle and can products within our exclusive territories. Within the European Union (“EU”), however, our customers can order from any other Coca-Cola bottler within the EU and those bottlers may have lower prices than the prices of our European bottlers.



No single customer accounted for 10 percent or more of our total consolidated net operating revenues in 2007. In North America, Wal-Mart Stores Inc. (and its affiliated companies) accounted for approximately 11 percent of our 2007 net operating revenues. No single customer accounted for more than 10 percent of our 2007 net operating revenues in Europe.



Raw Materials and Other Supplies



We purchase syrups and concentrates from TCCC and other licensors to manufacture products. In addition, we purchase sweeteners, juices, mineral waters, finished product, carbon dioxide, fuel, PET preforms, glass, aluminum and plastic bottles, aluminum and steel cans, pouches, closures, post-mix (fountain syrup) packaging, and other packaging materials. We generally purchase our raw materials, other than concentrates, syrups, mineral waters, and sweeteners, from multiple suppliers. The beverage agreements with TCCC provide that all authorized containers, closures, cases, cartons and other packages, and labels for the products of TCCC must be purchased from manufacturers approved by TCCC.

In the U.S. and Canada, high fructose corn syrup is the principal sweetener for beverage products of TCCC and other licensors’ brands (other than low-calorie products). Sugar (sucrose) is also used as a sweetener in Canada. During 2007, substantially all of our requirements for sweeteners in the U.S. were supplied through purchases by us from TCCC. In Europe, the principal sweetener is sugar derived from sugar beets. Our sugar purchases in Europe are made from multiple suppliers. We do not separately purchase low-calorie sweeteners, because sweeteners for low-calorie beverage products are contained in the syrups or concentrates that we purchase.



We currently purchase most of our requirements for plastic bottles in North America from manufacturers jointly owned by us and other Coca-Cola bottlers. We are the majority shareowner of Western Container Corporation, a major producer of plastic bottles. In Europe, we produce most of our plastic bottle requirements using preforms purchased from multiple suppliers. We believe that ownership interests in certain suppliers, participation in cooperatives, and the self-manufacture of certain packages serve to ensure supply and to reduce or manage our costs.



We, together with all other bottlers of Coca-Cola in the U.S., are a member of the Coca-Cola Bottlers Sales & Services Company LLC (“CCBSS”). CCBSS combines the purchasing volumes for goods and supplies of multiple Coca-Cola bottlers to achieve efficiencies in purchasing. CCBSS also participates in procurement activities with other large Coca-Cola bottlers worldwide. Through its Customer Business Solutions group, CCBSS also consolidates North American sales information for national customers.



We do not use any materials or supplies that are currently in short supply, although the supply and price of specific materials or supplies are periodically adversely affected by strikes, weather conditions, abnormally high demand, governmental controls, national emergencies, and price or supply fluctuations of their raw material components.



Advertising and Marketing



We rely extensively on advertising and sales promotions in marketing our products. TCCC and the other licensors that supply concentrates, syrups, and finished products to us make advertising expenditures in all major media to promote sales in the local areas we serve. We also benefit from national advertising programs conducted by TCCC and other licensors. Certain of the marketing expenditures by TCCC and other licensors are made pursuant to annual arrangements.



We and TCCC engage in a variety of marketing programs to promote the sale of products of TCCC in territories in which we operate. The amounts to be paid to us by TCCC under the programs are determined annually and periodically as the programs progress. Except in certain limited circumstances, TCCC has no contractual obligation to participate in expenditures for advertising, marketing, and other support. The amounts paid and terms of similar programs may differ with other licensees. Marketing support funding programs granted to us provide financial support, principally based on our product sales or upon the completion of stated requirements, to offset a portion of the costs to us of the programs.

Global Marketing Fund



We and TCCC have established a Global Marketing Fund, under which TCCC is paying us $61.5 million annually through December 31, 2014, as support for marketing activities. The term of the agreement will automatically be extended for successive 10-year periods thereafter unless either party gives written notice to terminate the agreement. The marketing activities to be funded under this agreement are agreed upon each year as part of the annual joint planning process and are incorporated into the annual marketing plans of both companies. TCCC may terminate this agreement for the balance of any year in which we fail to timely complete the marketing plans or are unable to execute the elements of those plans, when such failure is within our reasonable control.



Cold Drink Equipment Programs



We and TCCC (or its affiliates) are parties to Cold Drink Equipment Purchase Partnership programs (“Jumpstart Programs”) covering most of our territories in the U.S., Canada, and Europe. The Jumpstart Programs are designed to promote the purchase and placement of cold drink equipment. We received approximately $1.2 billion in support payments under the Jumpstart Programs from TCCC during the period 1994 through 2001. There are no additional amounts payable to us from TCCC under the Jumpstart Programs. Under the Jumpstart Programs, as amended, we agree to:


•

Purchase and place specified numbers of cold drink equipment (principally vending machines and coolers) each year through 2010 (approximately 1.8 million cumulative units of equipment). We earn “credits” toward annual purchase and placement requirements based upon the type of equipment placed;


•

Maintain the equipment in service, with certain exceptions, for a minimum period of 12 years after placement;


•

Maintain and stock the equipment in accordance with specified standards for marketing TCCC products;


•

Report to TCCC during the period the equipment is in service whether or not, on average, the equipment purchased has generated a stated minimum sales volume of TCCC products; and


•

Relocate equipment if the previously placed equipment is not generating sufficient sales volume of TCCC products to meet the minimum requirements. Movement of the equipment is only required if it is determined that, on average, sufficient volume is not being generated and it would help to ensure our performance under the Jumpstart Programs.



The U.S. and Canadian agreements provide that no violation of the Jumpstart Programs will occur, even if we do not attain the required number of credits in any given year, so long as (1) the shortfall does not exceed 20 percent of the required credits for that year; (2) a minimal compensating payment is made to TCCC or its affiliate; (3) the shortfall is corrected in the following year; and (4) we meet all specified credit requirements by the end of 2010.



If we fail to meet our minimum purchase requirements for any calendar year, we will meet with TCCC to mutually develop a reasonable solution/alternative, based on (1) marketplace developments; (2) mutual assessment and agreement relative to the continuing availability of profitable placement opportunities; and (3) continuing participation in the market planning process between the two companies. The Jumpstart Programs can be terminated if no agreement about the shortfall is reached, and the shortfall is not remedied by the end of the first quarter of the succeeding calendar year. The Jumpstart Programs can also be terminated if the agreement is otherwise breached by us and not resolved within 90 days after notice from TCCC. Upon termination, certain funding amounts previously paid to us would be repaid to TCCC, plus interest at 1 percent per month from the date of initial funding. However, provided that we have partially performed, such repayment obligation shall be reduced to such lesser amount as TCCC shall reasonably determine will be adequate to deliver the financial returns that would have been received by TCCC had all equipment placement commitments been fully performed, and had the volume of product sold through such equipment reasonably anticipated by TCCC been achieved. We would be excused from any failure to perform under the Jumpstart Programs that is occasioned by any cause beyond our reasonable control. No refunds of amounts previously earned have ever been paid under the Jumpstart Programs, and we believe the probability of a partial refund of amounts previously earned under the Jumpstart Programs is remote. We believe we would, in all cases, resolve any matters that might arise regarding these Jumpstart Programs. We and TCCC have amended prior agreements to reflect, where appropriate, modified goals and provisions, and we believe that we can continue to resolve any differences that might arise over our performance requirements under the Jumpstart Programs.



North American Beverage Agreements



POWERade Litigation



Certain aspects of the U.S. beverage agreements described in this report are affected by the settlement of the Ozarks Coca-Cola/Dr Pepper Bottling Company and the Coca-Cola Bottling Company United lawsuits discussed later in this report in “Item 3—Legal Proceedings.” Approved alternative route to market projects undertaken by us, TCCC, and other bottlers of Coca-Cola would, in some instances, permit delivery of certain products of TCCC into the territories of almost all U.S. bottlers (in exchange for compensation in most circumstances) despite the terms of the U.S. beverage agreements making such territories exclusive.



Pricing



Pursuant to the North American beverage agreements, TCCC establishes the prices charged to us for concentrates for beverages bearing the trademark “Coca-Cola” or “Coke” (the “Coca-Cola Trademark Beverages”), Allied Beverages (as defined later), still beverages, and post-mix. TCCC has no rights under the U.S. beverage agreements to establish the resale prices at which we sell our products.



U.S. Cola and Allied Beverage Agreements with TCCC



We purchase concentrates from TCCC and market, produce, and distribute our principal nonalcoholic beverage products within the U.S. (excluding the U.S. Virgin Islands) under two basic forms of beverage agreements with TCCC: beverage agreements that cover the Coca-Cola Trademark Beverages (the “Cola Beverage Agreements”), and beverage agreements that cover other sparkling and some still beverages of TCCC (the “Allied Beverages” and “Allied Beverage Agreements”) (referred to collectively in this report as the “U.S. Cola and Allied Beverage Agreements”), although in some instances we distribute sparkling and still beverages without a written agreement. We are a party to one Cola Beverage Agreement and to various Allied Beverage Agreements for each territory. In this “North American Beverage Agreements” section, unless the context indicates otherwise, a reference to us refers to the legal entity in the U.S. that is a party to the beverage agreements with TCCC.



U.S. Cola Beverage Agreements with TCCC



Exclusivity . The Cola Beverage Agreements provide that we will purchase our entire requirements of concentrates and syrups for Coca-Cola Trademark Beverages from TCCC at prices, terms of payment, and other terms and conditions of supply determined from time-to-time by TCCC at its sole discretion. We may not produce, distribute, or handle cola products other than those of TCCC. We have the exclusive right to manufacture and distribute Coca-Cola Trademark Beverages for sale in authorized containers within our territories. TCCC may determine, at its sole discretion, what types of containers are authorized for use with products of TCCC. We may not sell Coca-Cola Trademark Beverages outside our territories.



Our Obligations . We are obligated to:


•

Maintain such plant and equipment, staff and distribution, and vending facilities as are capable of manufacturing, packaging, and distributing Coca-Cola Trademark Beverages in accordance with the Cola Beverage Agreements and in sufficient quantities to satisfy fully the demand for these beverages in our territories;


•

Undertake adequate quality control measures prescribed by TCCC;


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Develop and stimulate the demand for Coca-Cola Trademark Beverages in our territories;


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Use all approved means and spend such funds on advertising and other forms of marketing as may be reasonably required to satisfy that objective; and


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Maintain such sound financial capacity as may be reasonably necessary to ensure our performance of our obligations to TCCC.



We are required to meet annually with TCCC to present our marketing, management, and advertising plans for the Coca-Cola Trademark Beverages for the upcoming year, including financial plans showing that we have the consolidated financial capacity to perform our duties and obligations to TCCC. TCCC may not unreasonably withhold approval of such plans. If we carry out our plans in all material respects, we will be deemed to have satisfied our obligations to develop, stimulate, and satisfy fully the demand for the Coca-Cola Trademark Beverages and to maintain the requisite financial capacity. Failure to carry out such plans in all material respects would constitute an event of default that, if not cured within 120 days of written notice of the failure, would give TCCC the right to terminate the Cola Beverage Agreements. If we, at any time, fail to carry out a plan in all material respects in any geographic segment of our territory, and if such failure is not cured within six months after written notice of the failure, TCCC may reduce the territory covered by that Cola Beverage Agreement by eliminating the portion of the territory in which such failure has occurred.



Acquisition of Other Bottlers. If we acquire control, directly or indirectly, of any bottler of Coca-Cola Trademark Beverages in the U.S., or any party controlling a bottler of Coca-Cola Trademark Beverages in the U.S., we must cause the acquired bottler to amend its agreement for the Coca-Cola Trademark Beverages to conform to the terms of the Cola Beverage Agreements.



Term and Termination. The Cola Beverage Agreements are perpetual, but they are subject to termination by TCCC upon the occurrence of an event of default by us. Events of default with respect to each Cola Beverage Agreement include:


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Production or sale of any cola product not authorized by TCCC;


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Insolvency, bankruptcy, dissolution, receivership, or the like;


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Any disposition by us of any voting securities of any bottling company subsidiary without the consent of TCCC; and


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Any material breach of any of our obligations under that Cola Beverage Agreement that remains unresolved for 120 days after written notice by TCCC.



If any Cola Beverage Agreement is terminated because of an event of default, TCCC has the right to terminate all other Cola Beverage Agreements we hold.



Each Cola Beverage Agreement provides TCCC with the right to terminate that Cola Beverage Agreement if a person or affiliated group (with specified exceptions) acquires or obtains any contract or other right to acquire, directly or indirectly, beneficial ownership of more than 10 percent of any class or series of our voting securities. However, TCCC has agreed with us that this provision will apply only with respect to the ownership of voting securities of any of our bottling company subsidiaries.



The provisions of the Cola Beverage Agreements that make it an event of default to dispose of any Cola Beverage Agreement or more than 10 percent of the voting securities of any of our bottling company subsidiaries without the consent of TCCC and that prohibit the assignment or transfer of the Cola Beverage Agreements are designed to preclude any person not acceptable to TCCC from obtaining an assignment of a Cola Beverage Agreement or from acquiring voting securities of our bottling company subsidiaries. These provisions prevent us from selling or transferring any of our interest in any bottling operations without the consent of TCCC. These provisions may also make it impossible for us to benefit from certain transactions, such as mergers or acquisitions, that might be beneficial to us and our shareowners, but which are not acceptable to TCCC.



U.S. Allied Beverage Agreements with TCCC



The Allied Beverages are beverages of TCCC or its subsidiaries that are either sparkling beverages, but not Coca-Cola Trademark Beverages, or are certain still beverages, such as Hi-C fruit drinks. The Allied Beverage Agreements contain provisions that are similar to those of the Cola Beverage Agreements with respect to the sale of beverages outside our territories, authorized containers, planning, quality control, transfer restrictions, and related matters but have certain significant differences from the Cola Beverage Agreements.



Exclusivity . Under the Allied Beverage Agreements, we have exclusive rights to distribute the Allied Beverages in authorized containers in specified territories. Like the Cola Beverage Agreements, we have advertising, marketing, and promotional obligations, but without restriction for most brands as to the marketing of products with similar flavors, as long as there is no manufacturing or handling of other products that would imitate, infringe upon, or cause confusion with, the products of TCCC. TCCC has the right to discontinue any or all Allied Beverages, and we have a right, but not an obligation, under many of the Allied Beverage Agreements to elect to market any new beverage introduced by TCCC under the trademarks covered by the respective Allied Beverage Agreements.



Term and Termination . Most Allied Beverage Agreements have a term of 10 or 15 years and are renewable by us for an additional 10 or 15 years at the end of each term. Renewal is at our option. We currently intend to renew substantially all the Allied Beverage Agreements as they expire. The Allied Beverage Agreements are subject to termination in the event we default. TCCC may terminate an Allied Beverage Agreement in the event of:


•

Insolvency, bankruptcy, dissolution, receivership, or the like;


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Termination of our Cola Beverage Agreement by either party for any reason; or


•

Any material breach of any of our obligations under the Allied Beverage Agreement that remains unresolved after required prior written notice by TCCC.



U.S. Still Beverage Agreements with TCCC



We purchase and distribute certain still beverages such as isotonics and juice drinks in finished form from TCCC, or its designees or joint ventures, and market, produce, and distribute Dasani water products, pursuant to the terms of marketing and distribution agreements (the “Still Beverage Agreements”). The Still Beverage Agreements contain provisions that are similar to the U.S. Cola and Allied Beverage Agreements with respect to authorized containers, planning, quality control, transfer restrictions, and related matters but have certain significant differences from the U.S. Cola and Allied Beverage Agreements.



Exclusivity . Unlike the U.S. Cola and Allied Beverage Agreements, which grant us exclusivity in the distribution of the covered beverages in our territory, the Still Beverage Agreements grant exclusivity but permit TCCC to test-market the still beverage products in our territory, subject to our right of first refusal to do so, and to sell the still beverages to commissaries for delivery to retail outlets in the territory where still beverages are consumed on-premises, such as restaurants. TCCC must pay us certain fees for lost volume, delivery, and taxes in the event of such commissary sales. Also, under the Still Beverage Agreements, we may not sell other beverages in the same product category.



Pricing . TCCC, at its sole discretion, establishes the prices we must pay for the still beverages or, in the case of Dasani, the concentrate or finished good, but has agreed, under certain circumstances for some products, to give the benefit of more favorable pricing if such pricing is offered to other bottlers of Coca-Cola products.



Term. Each of the Still Beverage Agreements has a term of 10 or 15 years and is renewable by us for an additional 10 years at the end of each term. Renewal is at our option. We currently intend to renew substantially all of the Still Beverage Agreements as they expire.



In August 2007, we entered into a distribution agreement with Energy Brands Inc. (“Energy Brands”), a wholly owned subsidiary of TCCC. Energy Brands, also known as glacéau, is a producer and distributor of branded enhanced water products including vitaminwater, smartwater, and vitaminenergy. The agreement was effective November 1, 2007 for a period of 10 years, and will automatically renew for succeeding 10-year terms, subject to a 12-month nonrenewal notification. The agreement covers most, but not all, of our U.S. territories, requires us to distribute Energy Brands enhanced water products exclusively, and permits Energy Brands to distribute the products in some channels within our territories. In conjunction with the execution of the Energy Brands agreement, we entered into an agreement with TCCC whereby we agreed not to introduce new brands or certain brand extensions in the U.S. through August 31, 2010, unless mutually agreed to by us and TCCC.



U.S. Post-Mix Sales and Marketing Agreements with TCCC



We have a distributorship appointment to sell and deliver certain post-mix products of TCCC. The appointment is terminable by either party for any reason upon 10 days’ written notice. Under the terms of the appointment, we are authorized to distribute such products to retailers for dispensing to consumers within the U.S. Unlike the U.S. Cola and Allied Beverage Agreements, there is no exclusive territory, and we face competition not only from sellers of other such products but also from other sellers of the same products (including TCCC). In 2007, we sold and/or delivered such post-mix products in all of our major territories in the U.S. Depending on the territory, we are involved in differing degrees in the sale, distribution, and marketing of post-mix syrups. In some territories, we sell syrup on our own behalf, but the primary responsibility for marketing lies with TCCC. In other territories, we are responsible for marketing post-mix syrup to certain customers.



U.S. Beverage Agreements with Other Licensors



The beverage agreements in the U.S. between us and other licensors of beverage products and syrups contain restrictions generally similar in effect to those in the U.S. Cola and Allied Beverage Agreements as to use of trademarks and trade names, approved bottles, cans and labels, sale of imitations, and causes for termination. Those agreements generally give those licensors the unilateral right to change the prices for their products and syrups at any time in their sole discretion. Some of these beverage agreements have limited terms of appointment and, in most instances, prohibit us from dealing in products with similar flavors in certain territories. Our agreements with subsidiaries of Cadbury Schweppes plc (“Cadbury Schweppes”), which represented approximately 7 percent of the beverages sold by us in the U.S. and the Caribbean during 2007, provide that the parties will give each other at least one year’s notice prior to terminating the agreement for any brand and pay certain fees in some circumstances. Also, we have agreed that we would not cease distributing Dr Pepper, Canada Dry, Schweppes, or Squirt brand products prior to December 31, 2010. The termination provisions for Dr Pepper renew for five-year periods; those for the other Cadbury brands renew for three-year periods.



We distribute certain packages of AriZona Tea in the U.S. Our distribution agreement with AriZona was amended in late 2007 to provide for more limited rights, beginning in 2008, to distribute certain AriZona brands and packages in certain channels in certain parts of our U.S. territories for five years, with options to renew. We have additional rights of first refusal for any additional flavors of the same package in these territories.



In 2005, we began distributing Rockstar beverages under a subdistribution agreement with TCCC that has terms and conditions similar in many respects to the Allied Beverage Agreements. The Rockstar subdistribution agreement has a four-year term, does not cover all of our territory in the U.S., and permits certain other sellers of Rockstar beverages to continue distribution in our territories. We purchase Rockstar beverages from Rockstar, Inc. and pay certain fees to TCCC.



In 2007, we began distributing Campbell Soup Company (“Campbell”) fruit and vegetable juice beverages under a subdistribution agreement with TCCC that has terms and conditions similar in many respects to the Rockstar subdistribution agreement. The Campbell subdistribution agreement has a five-year term, covers all of our territories in the U.S. and Canada, and permits Campbell and certain other sellers of Campbell beverages to continue distribution in our territories. We purchase Campbell beverages from a subsidiary of Campbell.

CEO BACKGROUND

Mr. Aguirre has been Chairman of the Board, Chief Executive Officer, and President of Chiquita Brands International, Inc., an international marketer, producer, and distributor of bananas and other fresh produce, since January 2004. From July 2002 until January 2004, he served as President, Special Projects, for The Procter & Gamble Company (“P&G”), a manufacturer and distributor of consumer products, and from July 2000 until June 2002, he was President of the Global Feminine Care business unit of P&G.

Mr. Brock has been President and Chief Executive Officer of the company since April 2006. From February 2003 until December 2005, he was Chief Executive Officer of InBev, S.A., a global brewer, and from March 1999 until December 2002, he was Chief Operating Officer of Cadbury Schweppes plc, an international beverage and confectionery company.

Mr. Finan has been Executive Vice President of The Coca-Cola Company since October 2004 and its President of Bottling Investments and Supply Chain since August 2004. Before that, he was Chief Executive Officer of Coca-Cola Hellenic Bottling Company S.A., one of the world’s largest Coca-Cola bottlers, from May 2001 until 2003. He is a member of the board of directors of Coca-Cola Hellenic Bottling Company S.A., Coca-Cola FEMSA, S.A. de C.V., a Latin American bottler of Coca-Cola, Coca-Cola Amatil Limited, an Australian bottler of Coca-Cola, and a member of the Advisory Board of Coca-Cola Erfrischungsgetraenke AG, a German bottler of Coca-Cola. He is also a member of the boards of the nonprofit Galway University Foundation and Co-operation Ireland USA.

Mr. Ingram has been President and Chief Executive Officer of Ingram Industries Inc., a diversified products and services company, since 1999. Before that, he held various positions with Ingram Materials Company and Ingram Barge Company, and was co-president of Ingram Industries from January 1996 to June 1999. He is a director of Ingram Micro Inc., a global information technology distributor.

Mr. Welling has been President and Chief Executive Officer of AmeriCares Foundation, a nonprofit worldwide humanitarian aid and disaster relief organization, since 2002. Before that, he had served as Chief Executive Officer of Princeton eCom Corp. and SG Cowen Securities Corporation, and held several executive and management positions with Bear, Stearns, and Co.

Mr. Fayard has been Executive Vice President of The Coca-Cola Company since February 2003, and its Chief Financial Officer since December 1999. He is a director of Coca-Cola FEMSA, S.A. de C.V., and an alternate director of Coca-Cola Sabco, a bottler of Coca-Cola products in Southern and East Africa and in Asia.

Mr. Herb has been Chairman of HERBCO L.L.C. since July 2001. Before that, he was President and director of Herbco Enterprises Inc., a Coca-Cola bottler, until it was acquired by Coca-Cola Enterprises in July 2001. He is also a director of Barrington Venture Holding Company LLC, a continuing care retirement community.

Mr. Johnson was Chairman and Chief Executive Officer of Chesapeake Corporation, a specialty packaging company, from 2004 until his retirement in November 2005, after which he served as Vice Chairman until April 2006. From 2000 to 2004, he was Chairman, President, and Chief Executive Officer of Chesapeake. He is a member of the boards of directors of CMGI, Inc., a global supply chain management service, Mirant Corp., a producer of electricity, Superior Essex Inc., a wire and cable manufacturer, and Universal Corp., a tobacco merchant and processor.

Mr. Copeland retired as Chief Executive Officer of Deloitte & Touche USA, LLP and Deloitte Touche Tohmatsu in May 2003, having served in that position since 1999. He is also a director of Equifax Inc., a credit information provider, Time Warner Cable Inc., an in-home entertainment, communications and information provider, and ConocoPhillips, an integrated energy company. Mr. Copeland is retiring from our board following this year’s annual meeting.

Mr. Kline has served as Chairman of our board of directors since April 2002 and served as our Chief Executive Officer from December 2005 until April 2006. He previously served as Chief Executive Officer from April 2001 until January 2004. He was Vice Chairman of the board from April 2000 until April 2002. He is a director of The Dixie Group, Inc., a marketer and manufacturer of high-end residential and commercial broadloom carpet and rugs, and of Jackson Furniture Industries, a furniture manufacturer. Mr. Kline will retire from the board following this year’s annual meeting.

COMPENSATION

Elements of Our Executive Compensation Program

Each senior officer’s total direct compensation is comprised of:


•

base salary;


•

annual incentive opportunity; and


•

long-term equity opportunity.

The following section describes these elements and explains how they are designed to meet our executive compensation program’s objectives. In addition, information is provided about specific decisions that were made with respect to the Named Executive Officers’ compensation for 2007.

Base Salary

Our senior officers’ base salaries are intended to provide a fixed, baseline level of compensation that is not directly tied to the company’s performance, although individual performance does influence annual salary adjustments. We generally target senior officer base salaries to approximate the median of the competitive labor market, but we also consider an officer’s experience, individual performance, and relative responsibilities within the executive leadership team.

In February 2007, the Committee departed from its base compensation philosophy and approved across-the-board increases in the base salaries of the senior officers (other than Mr. Brock, whose base salary was not increased, at his request) by 3%. This decision was based largely on Mr. Brock’s recommendation that each officer should receive the same adjustment for 2007 because he had been our CEO for only a portion of 2006, and he therefore did not have an adequate basis for evaluating each officer’s full-year performance. The Committee also approved 2007 salaries of Messrs. Marks and Douglas that reflected additional increases of 7% and 9%, respectively, to bring their salaries closer to the median of their respective benchmarks.

The base salary amounts actually earned by the Named Executive Officers during fiscal 2007 (which include three months of 2006 salary) are shown in the “Salary” column of the Summary Compensation Table on page 44 .

Annual Incentive

We provide our senior officers with an annual cash incentive opportunity under our Executive Management Incentive Plan (“MIP”). Annual incentive opportunities under the MIP are primarily dependent on the company’s attainment of pre-established business performance goals for the year.

An analysis of our executive compensation program showed that the target award levels under the MIP had been, in recent years, above the median of our peer group for senior officer positions other than the CEO. Therefore, the Compensation Committee reduced the 2007 target annual incentive for those officers, setting each officer’s new target incentive by reference to one of two factors: the median target incentive for the officer’s position within the peer group or the officer’s relative responsibilities within the executive leadership team.

Specifically, the Compensation Committee approved adjusted target annual incentive opportunities for Messrs. Brock, Marks, and Culhane approximating the applicable peer group medians. The Committee approved annual incentive opportunities for Messrs. Douglas and Higgins approximating the 60 th and 75 th percentiles, respectively, of our peer group. Mr. Brock requested these above-median target award levels to provide Messrs. Douglas and Higgins annual incentive opportunities at the same percentage of salary (90%) as Mr. Marks. Mr. Brock felt that this parity in incentive opportunity was necessary to foster a team approach among our top leaders and to emphasize the comparable importance of the positions of Messrs. Marks (president of our North American business unit), Higgins (president of our European business unit), and Douglas (our CFO) in delivering the corporate-wide financial performance measured under the MIP.

Business Performance Goals

Annual incentives are based primarily on the company’s performance against the budget approved by the board of directors for company-wide operating income and return on invested capital (“ROIC”). We believe these measures are appropriate performance goals for our annual incentive because they are key indicators of our financial success and are generally within the control and influence of senior management.

In particular, the operating income goal focuses our senior officers on maximizing revenue and minimizing cost. This performance goal represents the larger portion (75%) of the annual incentive opportunity because it is the best measure of our profitability and drives a number of other important financial metrics (e.g., earnings per share, return on invested capital, etc.). In 2007, we included ROIC as a second MIP business goal in order to increase senior officers’ focus on producing operating income efficiently. We believe that linking a portion (25%) of the annual incentive to our annual ROIC budget will encourage management to maximize shareowners’ returns while carefully deploying capital.

For purposes of the MIP, predetermined adjustments are made to actual operating income results to eliminate any potential windfall or penalty for nonrecurring charges and gains. Adjustments to 2007 operating income, as reported in our financial statements, were made to reflect increases in our restructuring reserve, proceeds from legal settlements, gains on the sale of real estate, and variances in currency exchange rates. In calculating ROIC results, operating income is adjusted in the same manner as described above, and average invested capital is determined on a currency neutral basis.

A senior officer’s target annual incentive, which is expressed as a percentage of year-end base salary, is the award that would be earned if the company attained 100% of its annual budget for both operating income and ROIC.

Calculation of Portion of the 2007 MIP Awards Attributable to Business Performance

The portion of the 2007 MIP awards related to business performance was calculated according to the following formula and based on the following performance results:

(Salary x Operating Income Award %) + (Salary x ROIC Award %)


•

Operating Income —The company achieved 99.5% of its operating income budget of $1.513 billion, taking into account actual results and predetermined adjustments, which resulted in an operating income award level of 95% of the senior officers’ target award for this goal.


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Return on Invested Capital —The company achieved 101.8% of its ROIC budget of 7.4%, which resulted in an ROIC award level of 122.5% of the senior officers’ target award for this goal.

In considering any adjustment to Mr. Brock’s annual incentive, the Compensation Committee takes into consideration the Governance and Nominating Committee’s review of his performance. For 2007, the Committee adjusted Mr. Brock’s business performance award by a factor of 1.10 to recognize his 2007 accomplishments, which included establishing a global operating framework, initiating an aggressive long-term strategic plan, achieving 2007 business results in a very difficult operating environment, and launching significant corporate responsibility and sustainability initiatives.

The Committee based individual performance adjustments for the other senior officers on Mr. Brock’s evaluation of their performance against goals related to demonstrated leadership, comprehensive talent management and succession planning initiatives, realization of increased efficiencies, and achievement of functional or operational (as applicable) business results. The adjustment factors for the Named Executive Officers ranged from 1.00 to 1.15. Each Named Executive Officer’s total 2007 MIP incentive is shown in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 44.

Long-term Equity Incentive Awards

We believe that equity awards are the most effective way to focus our leaders’ attention on the long-term performance of the company and to align their financial interests with those of our shareowners. As an employee’s level of responsibility increases, the percentage of his or her total compensation that is comprised of equity increases. As a result, our senior officers have relatively larger amounts of their total compensation at-risk than our other employees. Equity awards also serve as a retention tool because they vest only after specified periods of service, even if performance-vesting conditions have been met.

Over the past several years, we have decreased our use of stock options and increased our use of performance-based restricted stock and restricted stock units. The Compensation Committee believes that this recent emphasis on restricted stock/stock units in our equity mix is consistent with competitive market trends. More importantly, restricted stock/stock units make more efficient use of our equity program’s share reserves and reduce overall dilution because it takes fewer shares than options to deliver the same amount of incentive compensation opportunity. Still, because stock options provide value only if the price of the company’s stock increases, they remain an important component of our equity program. The 2007 total equity award value provided to our senior officers was allocated 40% to stock options and 60% to share units, based on the compensation expense to the company under Statement of Financial Accounting Standards 123R (“SFAS 123R”).

For the past several years, our annual equity awards included grants of performance share-based awards (restricted stock or restricted stock units) that vested only if specified increases in our stock price were achieved. In 2007, the Compensation Committee determined that the share-based portion of the annual award should be provided in the form of performance share units (“PSUs”). As described in more detail below, a PSU award is made as a “target award,” but the number of shares ultimately earned will be a multiple (or fraction) of the target award, based on the extent to which the applicable performance target is attained. We made this change to our share-based awards to emphasize our objective of paying higher compensation when performance targets are exceeded and paying lower, if any, compensation when targets are not achieved.

Although the starting point for determining the value of each senior officer’s equity award is the approximate median of our peer group, the Compensation Committee may increase or decrease award values based on individual performance. For 2007, Messrs. Brock, Douglas, and Marks received equity grants approximating the 60th percentile of our peer group.

MANAGEMENT DISCUSSION FROM LATEST 10K

Business



Coca-Cola Enterprises Inc. (“we,” “our,” or “us”) is the world’s largest marketer, producer, and distributor of nonalcoholic beverages. We market, produce, and distribute our products to customers and consumers through license territories in 46 states in the United States (“U.S.”), the District of Columbia, the U.S. Virgin Islands and certain other Caribbean islands, and the 10 provinces of Canada (collectively referred to as “North America”). We are also the sole licensed bottler for products of The Coca-Cola Company (“TCCC”) in Belgium, continental France, Great Britain, Luxembourg, Monaco, and the Netherlands (collectively referred to as “Europe”).



We operate in the highly competitive beverage industry and face strong competition from other general and specialty beverage companies. We, along with other beverage companies, are affected by a number of factors including, but not limited to, cost to manufacture and distribute products, economic conditions, consumer preferences, local and national laws and regulations, availability of raw materials, fuel prices, and weather patterns. Sales of our products tend to be seasonal, with the second and third calendar quarters accounting for higher sales volumes than the first and fourth quarters. Sales in Europe tend to be more volatile than those in North America due, in part, to a higher sensitivity of European consumption to weather conditions.



Relationship with TCCC



We are a marketer, producer, and distributor principally of Coca-Cola products with approximately 93 percent of our sales volume consisting of sales of TCCC products. Our license arrangements with TCCC are governed by licensing territory agreements. TCCC owned approximately 35 percent of our outstanding shares as of December 31, 2007. Our financial success is greatly impacted by our relationship with TCCC. Our collaborative efforts with TCCC are necessary to (1) create and develop new brands; (2) market our products more effectively; (3) find ways to maximize efficiency; and (4) profitably grow the entire Coca-Cola system. During 2007, we made significant progress toward our common global agenda of innovating with new and existing brands and packages across all nonalcoholic beverage categories. This progress is illustrated by the increasingly strong synergy that we have achieved with TCCC to enhance our brand portfolio. For information about our transactions with TCCC during 2007, 2006, and 2005, refer to Note 3 of the Notes to Consolidated Financial Statements.



Financial Results



Our net income in 2007 was $711 million, or $1.46 per diluted common share, compared to a net loss of $1.1 billion, or $2.41 per diluted common share, in 2006. Our 2007 results reflect the impact of (1) strong pricing growth in North America necessitated by an unprecedented increase in our cost of sales; (2) lower volume in North America due to the impact of our pricing initiatives and weak sparkling beverage trends, offset partially by positive brand and package expansion; (3) balanced volume and pricing growth in Europe principally due to the continued strength of our business in continental Europe and the performance of Coca-Cola Zero; (4) operating expense control initiatives throughout our organization; (5) favorable currency exchange rate changes, which added approximately 5 percent to our diluted net income per share as compared to 2006; and (6) one additional selling day in 2007 as compared to 2006.



In addition, the following items of significance impacted our 2007 financial results when compared to 2006:


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charges totaling $121 million ($79 million net of tax, or $0.16 per diluted common share) related to restructuring activities, primarily in North America;


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a $20 million ($14 million net of tax, or $0.03 per diluted common share) gain on the sale of land in Newark, New Jersey;


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a $13 million ($8 million net of tax, or $0.02 per diluted common share) benefit from a legal settlement accrual reversal;


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a $12 million ($8 million net of tax, or $0.02 per diluted common share) loss on the extinguishment of debt;


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a $14 million ($10 million net of tax, or $0.02 per diluted common share) loss to write-off the value of Bravo! warrants;


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a $12 million ($8 million net of tax, or $0.02 per diluted common share) gain on the termination of our Bravo! master distribution agreement (“MDA”); and


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a net tax benefit totaling $99 million ($0.20 per diluted common share) from United Kingdom, Canadian, and U.S. state tax rate changes.



The following items of significance impacted our 2006 financial results when compared to 2007:


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a $2.9 billion ($1.8 billion net of tax, or $3.80 per common share) noncash impairment charge to reduce the carrying amount of our North American franchise license intangible assets to their estimated fair value based upon the results of our annual impairment test of these assets;


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charges totaling $66 million ($44 million net of tax, or $0.09 per common share) related to restructuring activities, primarily in Europe;


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a $35 million ($22 million net of tax, or $0.05 per common share) increase in compensation expense related to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”) on January 1, 2006;


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expenses totaling $14 million related to the settlement of litigation ($8 million net of tax, or $0.02 per common share); and


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a net tax benefit totaling $95 million ($0.20 per common share) primarily for U.S. state tax law changes, Canadian federal and provincial tax rate changes, and the revaluation of various income tax obligations.



Revenue and Volume Growth



During 2007, our consolidated bottle and can net price per case grew 4.0 percent, while our volume decreased 1.0 percent. In North America, we achieved bottle and can net price per case growth of 4.5 percent primarily driven by significant rate increases implemented due to the unprecedented increase in our cost of sales. The negative impact of higher prices, along with weak sparkling beverage trends, resulted in the 2.0 percent decline in North American sales volume. We did, however, continue to experience positive growth in our energy drinks, sports drinks, and waters, and benefited from the strong performance of Coca-Cola Zero and the enhancement of our still beverage portfolio with the introduction of FUZE, Campbell, and glacéau products in late 2007. During 2008, we expect these new still beverages, which are primarily sold in single-serve packages, to create a positive mix impact on our pricing due to their higher selling price per case. However, this benefit is expected to be partially offset by additional investments in our sparkling brands.



In Europe, we achieved balanced volume and pricing growth with an increase in bottle and can net price per case of 1.5 percent and a volume increase of 1.5 percent. Our volume growth was driven, in part, by a 2.5 percent increase in our higher-margin immediate consumption packages. This increase was attributable to strong execution of our “Boost Zone” program, particularly in France where immediate consumption growth exceeded 20 percent. In our continental European territories, we experienced a 4.5 percent growth in sales of our Coca-Cola trademark products, sparked by the strong performance of Coca-Cola Zero. Volume levels in Great Britain, our largest European territory, continued to be impacted by marketplace challenges, including persistent sparkling beverage category weakness and lack of a strong water brand strategy.



Cost of Sales



Our consolidated bottle and can ingredient and packaging cost per case grew 7.0 percent during 2007. In North America, we faced an unprecedented cost of sales environment, which led to a year-over-year bottle and can ingredient and packaging cost per case increase of 9.5 percent. This increase was primarily driven by significant increases in the cost of aluminum and high fructose corn syrup (“HFCS”), but also reflects a slight increase due to product mix. The increase in the cost of aluminum was due to the expiration of a supplier pricing agreement on December 31, 2006 that capped the price we paid for a majority of our North American purchases. Our 2007 cost of sales increases in Europe were comparable to those we have experienced in recent years. During 2008, we expect our core raw material costs in North America to increase less than they did in 2007, but to remain above historical averages. Our costs of sales will also increase due to the mix impact of higher cost glacéau products and other still beverages.



Operating Expenses



Our continued focus on operating expense initiatives, along with some initial benefit from our restructuring activities that are enhancing the effectiveness and efficiency of our operations, allowed us to once again successfully control the growth of our underlying operating expenses during 2007. We intend to remain diligent in our efforts to control our operating expenses during 2008 as we manage through a continued high cost of sales environment and drive greater operational improvement throughout our organization.



Our Strategic Priorities



In order to remain focused on implementing a strategic, long-term business plan that will position our organization to excel in a dynamic and changing market environment, we have identified three priorities that are essential to our transformation. The following is a summary of the key initiatives that we believe will help drive our future performance and enable us to achieve our vision of being the best beverage sales and customer service company:



• Strengthen our brand portfolio



We must continue to strengthen our position in each beverage category by growing the value of our existing brands, while at the same time strategically broadening our presence in fast growing beverage groups. Our goal is to be “number one” or a strong “number two” in every beverage category in which we choose to compete. One of the keys to success with our sparkling beverages is the “Red, Black, and Silver” three-cola initiative, which maximizes the strength of Coca-Cola, the world’s most valuable sparkling beverage brand. While sparkling beverages remain profitable and vital to our success, the broadening of our presence in faster growing beverage groups is necessary. Essential to our future growth is leveraging our strong relationship with TCCC, which is committed to expanding its product portfolio. TCCC demonstrated its commitment during 2007 and greatly enhanced our still beverage portfolio in North America with the acquisitions of glacéau, a producer of branded enhanced water products such as vitaminwater, and FUZE, a maker of enhanced juices and teas. These significant additions have put us in a position in North America to benefit over the long-term from the fast growing still beverage category.



• Transform our go-to-market model and improve efficiency and effectiveness



As our product and package portfolio continues to expand, we must have a world-class system in place that allows us to put the right product and package in consumers’ hands at the right time and price. More than ever, we are emphasizing streamlined operations, consistent execution, and the flexibility to serve customers based on their specific needs. In North America, we have created a broad initiative called Customer Centered Excellence, which is helping create a world-class supply chain organization while better integrating customer service functions such as selling, delivery, and merchandising. During 2007, we began implementing cost-effective solutions, such as Voice Pick, a verbal order-building technology, to help us meet the evolving needs and demands created by changes in our product portfolio. Additionally, during 2007, we opened a state of the art Customer Development Center (“CDC”) in Tulsa, OK, which expands our world-class sales and services capabilities, and provides a dedicated group of employees who focus on the needs of our smaller-market customers. Moving small-customer order-taking from account managers to our CDC allows our salespeople to spend more time developing customer relationships.



As we transform our go-to-market model, we must also seek opportunities to improve our efficiency and effectiveness. This includes driving improved consistency and best practices across our organization. In recent years, we have made significant strides in this area, including redesigning our North American business model, reorganizing certain aspects of our operations in Europe, and consolidating certain administrative, financial, and accounting functions for North America into a single shared services center. During 2007, we built upon this progress in Europe by integrating our Benelux operations and creating a Pan-European Supply Chain organization that allows us to leverage the scale of our European business, share best practices more effectively, and more efficiently serve our customers. This, and other initiatives under way, represents only the beginning of our commitment to develop more efficient operating methods that allow us to obtain our goal of becoming our customers’ most valued supplier by serving the customer smarter, faster, and with greater consistency.



• Commitment to Our People



Our people are the key to our success. Therefore, we must attract, develop, and retain a highly talented and diverse workforce in order to further establish a winning and inclusive culture. We are working aggressively to succeed against this objective by standardizing job responsibilities, improving training opportunities, and creating a more visible career path for our employees. In addition, we are implementing a talent management review process focused on succession planning and leadership development to enhance our bench strength and prepare our next generation of leaders.



Responsibility to the Communities We Serve



Corporate Responsibility and Sustainability (“CRS”) is an important aspect of our business that is linked directly to our strategic priorities. Our integrated strategy to achieve this critical objective has two key elements. First, our sustainability is dependent on the product portfolio we offer to our customers. Thus, while we grow the value of our existing brands and expand our portfolio, we must also ensure the products we offer are in line with consumer preferences.

Net Operating Revenues



2007 versus 2006



Net operating revenues increased 5.5 percent in 2007 to $20.9 billion from $19.8 billion in 2006. The percentage of our 2007 net operating revenues derived from North America and Europe was 70 percent and 30 percent, respectively. Great Britain contributed 44 percent of Europe’s net operating revenues in 2007.



During 2007, our net operating revenues in North America were impacted by strong pricing growth and a decline in volume. Our pricing growth was primarily attributable to rate increases that were implemented to mitigate the unprecedented increase in our cost of goods. Our decreased volume was driven by higher prices and weak sparkling beverage trends. However, we continued to experience positive growth in our energy drinks, sports drinks, and waters, and benefited from the strong performance of Coca-Cola Zero and the introduction of FUZE, Campbell, and glacéau products in late 2007. In Europe, our net operating revenues reflected balanced volume and pricing growth, which was driven by strong sales of Coca-Cola Zero and solid volume growth in our continental European territories. Our “Boost Zone” marketing initiatives, particularly in France, helped spark sales of our higher-margin immediate consumption products and packages. We continued to experience negative sparkling beverage trends in Great Britain, which had a slight decline in volume.

Our bottle and can sales accounted for 90 percent of our total net operating revenues during 2007. Bottle and can net price per case is based on the invoice price charged to customers reduced by promotional allowances and is impacted by the price charged per package or brand, the volume generated in each package or brand, and the channels in which those packages or brands are sold. To the extent we are able to increase volume in higher-margin packages or brands that are sold through higher-margin channels, our bottle and can net pricing per case will increase without an actual increase in wholesale pricing. The increase in our 2007 bottle and can net pricing per case was primarily achieved through rate increases, which were necessary given the high cost of sales environment in North America.



We participate in various programs and arrangements with customers designed to increase the sale of our products by these customers. Among the programs negotiated are arrangements under which allowances are earned by customers for attaining agreed-upon sales levels or for participating in specific marketing programs. In the U.S., we participate in cooperative trade marketing (“CTM”) programs, which are typically developed by us but are administered by TCCC. We are responsible for all costs of these programs in our territories, except for some costs related to a limited number of specific customers. Under these programs, we pay TCCC and they pay our customers as a representative of the North American Coca-Cola bottling system. Coupon and loyalty programs are also developed on a territory-specific basis with the intent of increasing sales by all customers. We believe our participation in these programs is essential to ensuring continued volume and revenue growth in the competitive marketplace. The cost of all of these various programs, included as a reduction in net operating revenues, totaled $2.4 billion in 2007 and $2.2 billion in 2006. These amounts included net customer marketing accrual reductions related to prior year programs of $33 million and $54 million in 2007 and 2006, respectively. The cost of these various programs as a percentage of gross revenues was approximately 6.8 percent and 6.2 percent in 2007 and 2006, respectively. The increase in the cost of these various programs as a percentage of gross revenues was the result of greater marketing and promotional program activities, primarily in Europe.



We frequently participate with TCCC in contractual arrangements at specific athletic venues, school districts, colleges and universities, and other locations, whereby we obtain pouring or vending rights at a specific location in exchange for cash payments. We record our obligation of the total required payments under each contract at inception and amortize the amount using the straight-line method over the term of the contract. At December 31, 2007, the net unamortized balance of these arrangements, which was included in customer distribution rights and other noncurrent assets, net on our Consolidated Balance Sheet, totaled $377 million. Amortization expense related to these assets, included as a reduction in net operating revenues, totaled $133 million, $150 million, and $145 million in 2007, 2006, and 2005, respectively.



2006 versus 2005



Net operating revenues increased 5.5 percent in 2006 to $19.8 billion from $18.7 billion in 2005. The percentage of our 2006 net operating revenues derived from North America and Europe was 72 percent and 28 percent, respectively. Great Britain contributed 45 percent of Europe’s net operating revenues in 2006.



During 2006, our net operating revenues in North America were impacted by moderate pricing improvement and limited volume growth. Our volume growth was negatively impacted by weak sparkling beverage category trends and downward pressure due to higher price increases that were implemented to cover rising raw material costs. Our increased pricing was offset partially by competitive pricing pressures in the water category and a decline in immediate consumption sales. In Europe, we achieved balanced volume and pricing growth driven by marketing initiatives, such as World Cup activation, the launch of Coca-Cola Zero, and “Boost Zones” in France. We experienced renewed sparkling beverage growth in our continental European territories, but continued to be negatively impacted by persistent sparkling beverage category weakness in Great Britain. In both North America and Europe we benefited from product and package innovation and experienced increases in the sale of our lower-calorie beverages, water brands, isotonics, and energy drinks.

Our bottle and can sales accounted for 90 percent of our net operating revenues during 2006. The increase in our 2006 bottle and can net pricing per case was achieved through higher rates, offset partially by negative mix in North America due to slower immediate consumption sales and increased pricing pressures in the water category.



The cost of various customer programs and arrangements designed to increase the sale of our products by these customers totaled $2.2 billion in both 2006 and 2005. These amounts included net customer marketing accrual reductions related to prior year programs of $54 million and $75 million in 2006 and 2005, respectively. The cost of these various programs as a percentage of gross revenues was approximately 6.2 percent and 6.8 percent in 2006 and 2005, respectively. The decrease in the cost of these various programs as a percentage of gross revenues was the result of higher promotional activities in 2005 in conjunction with the significant product innovation that occurred during 2005.






MANAGEMENT DISCUSSION FOR LATEST QUARTER

Net Operating Revenues

Net operating revenues increased 7.0 percent in the first quarter of 2008 to $4.9 billion. The percentage of our first quarter of 2008 net operating revenues derived from North America and Europe was 69 percent and 31 percent, respectively.

During the first quarter of 2008, our net operating revenues in North America were impacted by increased pricing associated with product and package mix shifts, offset by weak volume trends in the sparkling beverage category and lower sales of single-serve packages. Despite the persistent sparkling beverage category softness, we continued to experience positive growth in our energy drink portfolio, and benefited from the strong performance of Coca-Cola Zero. In Europe, our net operating revenues benefited from strong volume growth across our territories, a modest increase in pricing, and currency exchange rate changes. We experienced strong sales of our Coca-Cola trademark products and benefited from our “boost zone” marketing initiatives, particularly in Great Britain, and strong promotional activities.

During the first quarter of 2008, our bottle and can sales accounted for 91 percent of our total net operating revenues. Bottle and can net price per case is based on the invoice price charged to customers reduced by promotional allowances and is impacted by the price charged per package or brand, the volume generated in each package or brand, and the channels in which those packages or brands are sold. To the extent we are able to increase volume in higher margin packages or brands that are sold through higher margin channels, our bottle and can net pricing per case will increase without an actual increase in wholesale pricing. The increase in our first quarter of 2008 bottle and can net pricing per case in North America was primarily driven by the positive mix impact of higher priced glacéau products and other still beverages, but also included some benefit from rate increases for our sparkling beverages. These positive factors were offset partially by a decline in volume for higher priced single-serve packages, particularly for our core sparkling beverages and Dasani.

We participate in various programs and arrangements with customers designed to increase the sale of our products by these customers. Among the programs negotiated are arrangements under which allowances can be earned by customers for attaining agreed-upon sales levels or for participating in specific marketing programs. In the U.S., we participate in cooperative trade marketing (“CTM”) programs, which are typically developed by us but are administered by TCCC. We are responsible for all costs of these programs in our territories, except for some costs related to a limited number of specific customers. Under these programs, we pay TCCC and TCCC pays our customers as a representative of the North American bottling system. Coupon and loyalty programs are also developed on a territory-specific basis with the intent of increasing sales by all customers. We believe our participation in these programs is essential to ensuring continued volume and revenue growth in the competitive marketplace. The cost of all of these various programs, included as a reduction in net operating revenues, totaled $589 million and $550 million in the first quarter of 2008 and 2007, respectively. The cost of these various programs as a percentage of gross revenues was 7.2 percent and 7.1 percent in the first quarter of 2008 and 2007, respectively.

North America comprised 74 percent and 76 percent of our consolidated bottle and can volume during the first quarter of 2008 and 2007, respectively. Great Britain contributed 42 percent and 40 percent of our European bottle and can volume during the first quarter of 2008 and 2007, respectively.

During the first quarter of 2008, our sales volume in North America was flat when compared to the first quarter of 2007. Our volume performance was negatively impacted by persistent category weakness in the sparkling beverage category and soft economic conditions, which contributed to lower volumes in our single-serve packages. We experienced a 2.0 percent decline in our Coca-Cola trademark portfolio, which included a 2.5 percent decrease in our regular Coca-Cola trademark products and a 1.5 percent decrease in our zero-sugar Coca-Cola trademark products. The decrease in our regular Coca-Cola trademark products was primarily attributable to lower sales of Coca-Cola classic and Coca-Cola Black Cherry Vanilla, while the decrease in our zero-sugar Coca-Cola trademark products was driven by lower sales of Diet Coke and Diet Coke Black Cherry Vanilla. These declines were offset partially by a significant increase in year-over-year sales of Coca-Cola Zero.

Our sparkling flavors and energy volume in North America declined 2.5 percent during the first quarter of 2008 versus the first quarter of 2007. This decrease was primarily driven by certain of our regular sparkling beverages, including Sprite and Vault. Our energy drink portfolio continued to expand during the first quarter of 2008 with sales volume increasing 12.5 percent. This increase was driven by strong growth in the Rockstar product line offset partially by a decline in Full Throttle sales. Our juices, isotonics, and other volume increased 25.5 percent in North America during the first quarter of 2008. Recent product additions, such as glacéau’s vitaminwater, Campbell’s, and FUZE beverages, were the primary drivers of this growth. The growth in this category was offset partially by a 6.0 percent decline in the sale of POWERade and lower sales volume of our Minute Maid products. Sales volume of our water brands declined 3.0 percent during the first quarter of 2008, reflecting a decrease in volume for our Dasani single-serve packages, offset partially by an increase in volume for Dasani multi-serve packages and the addition of glacéau’s smartwater.

In Europe, our first quarter of 2008 sales volume increased 7.0 percent as compared to the first quarter of 2007. This performance reflects renewed growth in Great Britain where sales volume increased 11.0 percent and continued strength in continental Europe where volume grew 4.0 percent. Strong promotional pricing programs in our multi-serve packages in France and Great Britain helped drive this growth, which was fueled by increased sales of our Coca-Cola trademark products. We also benefited from the success of our “boost zone” marketing initiatives, particularly in Great Britain. In addition, during the first quarter of 2008, a new consumer rewards program, “Coke Zone,” was launched in Great Britain to help drive consumer loyalty and increase sales frequency for our Coca-Cola trademark products.

Our Coca-Cola trademark products in Europe increased 3.5 percent during the first quarter of 2008 as compared to the first quarter of 2007. This increase was driven by volume gains of 4.5 percent and 1.5 percent in our regular Coca-Cola trademark products and zero-sugar Coca-Cola trademark products, respectively. Sales of Coca-Cola increased 5.0 percent, while volume for Coca-Cola Zero, which was introduced in France and the Netherlands during the first quarter of 2007, continued to grow significantly. Our sparkling flavors and energy volume in Europe increased 12.0 percent during the first quarter of 2008. This growth was primarily driven by the performance of Fanta, Schweppes, and Sprite products. Our juices, isotonics, and other volume increased 22.5 percent during the first quarter of 2008 driven by strong growth in our Capri-Sun and Oasis brands.

Cost of Sales

Cost of sales increased 10.5 percent in the first quarter of 2008 to $3.1 billion. Cost of sales per case increased 10.0 percent in the first quarter of 2008 versus the first quarter of 2007.

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