U.S. Securities & Exchange Commission
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U.S. Securities and Exchange Commission



Washington, D.C., April 18, 2005 - The U.S. Securities and Exchange Commission today announced an enforcement action against The Coca-Cola Company relating to its failure to disclose certain end-of-quarter sales practices used to meet earnings expectations. Coca-Cola simultaneously agreed, without admitting or denying the Commission's findings, to settle the proceedings by consenting to a cease-and-desist order finding violations of the antifraud and periodic reporting requirements of the federal securities laws. Coca-Cola also voluntarily has undertaken steps to strengthen its internal disclosure review process to prevent future violations.

Richard Wessel, District Administrator of the Commission's Atlanta District Office, stated, "MD&A requires companies to provide investors with the truth behind the numbers. Coca-Cola misled investors by failing to disclose end of period practices that impacted the company's likely future operating results."

Katherine Addleman, Associate Director of Enforcement for the Commission's Atlanta District Office, stated, "In addition, Coca-Cola made misstatements in a January 2000 Form 8-K concerning a subsequent inventory reduction and in doing so continued to conceal the impact of prior end of period practices and further mislead investors."

In its order, the Commission found that, at or near the end of each reporting period between 1997 and 1999, Coca-Cola implemented an undisclosed "channel stuffing" practice in Japan known as "gallon pushing" for the purpose of pulling sales forward into a current period. To accomplish gallon pushing's purpose, Japanese bottlers were offered extended credit terms to induce them to purchase quantities of beverage concentrate the bottlers otherwise would not have purchased until a following period. As Coca-Cola typically sells gallons of concentrate to its bottlers corresponding to its bottlers' sales of finished products to retailers, typically bottlers' concentrate inventory levels increase approximately in proportion to their sales of finished products to retailers.

However, as a result of gallon pushing, from 1997 to 1999 Coca-Cola's Japanese bottlers' concentrate inventory levels increased at a rate more than five times greater than that of finished product sales to retailers. Gallon pushing pulled forward sales from subsequent periods and made it likely that Coca-Cola's bottlers would purchase less concentrate in subsequent periods. This practice contributed approximately $0.01 to $0.02 to Coca-Cola's quarterly earnings per share and was the difference in 8 out of the 12 quarters from 1997 through 1999 between Coca-Cola meeting and missing analysts' consensus or modified consensus earnings estimates. Despite the impact to current earnings and the likely impact to future earnings, Coca-Cola failed to disclose its gallon pushing practice in its periodic reports.

On Jan. 26, 2000, Coca-Cola filed a Form 8-K with the Commission which disclosed, among other things, a worldwide concentrate inventory reduction planned to occur during the first half of the year 2000. The impact on Coca-Cola's earnings for the first and second quarter of 2000 was estimated to be between $0.11 and $0.13 per share. The Form 8-K did not disclose that more than $0.05 of the estimated earnings impact would be attributable to an anticipated reduction of sales for Japan with a corresponding gross profit impact more than five times greater than that of any other operating division in the world.

In describing the inventory reduction, Coca-Cola stated that: (a) "[t]hroughout the past several months, [Coca-Cola had] worked with bottlers around the world to determine the optimum level of bottler inventory;" (b) the management of Coca-Cola and its bottlers, specifically including bottlers in Japan, had jointly determined "that opportunities exist to reduce concentrate inventory carried by bottlers;" and (c) certain bottlers throughout the world, specifically including those in Japan, had "indicated that they intend to reduce their inventory levels during the first half of the year 2000."

The Commission found that these statements were false and misleading because a review of inventory levels had not occurred throughout the past several months but began, at the earliest, in January 2000. Moreover, prior to the Form 8-K being filed, bottlers were not aware of any planned inventory reduction. The Form 8-K further is misleading in that, despite its language describing the inventory reduction as a joint proactive efficiency measure between Coca-Cola and its bottlers, the inventory reduction was in fact solely a Coca-Cola initiative.

Although Coca-Cola's accounting treatment for sales made in connection with gallon pushing was found to be without issue, the Commission still found that Coca-Cola's failure to disclose the impact of gallon pushing on current and future earnings, as well as the false statements and omissions within the Form 8-K, violated the antifraud and periodic reporting requirements of the federal securities laws.

Ms. Addleman commented, "Prior to and during the investigation, Coca-Cola took laudable and substantial steps to enhance and strengthen its disclosure review process to prevent similar failures from occurring in the future."

The Commission acknowledges the substantial assistance of the U.S. Attorney's Office for the Northern District of Georgia, the Atlanta Field Office of the Federal Bureau of Investigation, and the Japanese Financial Services Agency in the investigation of Coca-Cola's conduct.

See Also: Administrative Proceeding

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Persons to Contact:

Katherine S. Addleman, Associate Director of Enforcement (404) 842-7682
Richard P. Murphy, Assistant Director of Enforcement (404) 842-7665


Modified: 04/18/2005