United States
Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission file number 000-19914
COTT CORPORATION
(Exact name of registrant as specified in its charter)
CANADA NONE
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
207 QUEEN'S QUAY WEST, SUITE 340,
TORONTO, ONTARIO M5J 1A7
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (416) 203-3898
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ----------------------
COMMON SHARES WITHOUT NOMINAL OR PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark if the registrant is a shell company (as defined in Rule
12b-12 of the Act). Yes [ ] No [X]
The aggregate market value of the common equity held by non-affiliates of the
registrant as of July 2, 2005 (based on the closing sale price of the
registrant's common stock as reported on the New York Stock Exchange on July 1,
2005) was $1,546,902,683.
(Reference is made to the last paragraph of Part II, Item 5 for a statement of
assumptions upon which the calculation is made.)
The number of shares outstanding of the registrant's common stock as of February
28, 2006 was 71,711,630.
TABLE OF CONTENTS
PAGE
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PART I
Item 1 Business....................................................... 17
Item 1A Risk factors................................................... 21
Item 1B Unresolved staff comments...................................... 24
Item 2 Properties..................................................... 24
Item 3 Legal proceedings.............................................. 24
Item 4 Submission of matters to a vote of security holders............ 25
Supplemental Item Part I - Executive officers of Cott.......... 26
PART II
Item 5 Market for the registrant's common equity and related
shareowner matters ......................................... 27
Item 6 Selected financial data ....................................... 28
Item 7 Management's discussion and analysis of financial condition and
results of operations ...................................... 29
Item 7A Quantitative and qualitative disclosures about market risk .... 38
Item 8 Financial statements and supplementary data
Report of management........................................ 40
Report of independent registered public accounting firm..... 41
Consolidated Statements of Income for fiscal years ended
2005, 2004 and 2003...................................... 43
Consolidated Balance Sheets as of the fiscal years ended
2005 and 2004............................................ 44
Consolidated Statements of Shareowners' Equity for the
fiscal years ended 2005, 2004 and 2003................... 45
Consolidated Statements of Cash Flows for the fiscal years
ended 2005, 2004 and 2003................................ 46
Notes to the Consolidated Financial Statements for the
fiscal years ended 2005, 2004 and 2003................... 47
Quarterly Financial Information............................. 61
Item 9 Changes in and disagreements with accountants on accounting and
financial disclosure........................................ 62
Item 9A Controls and procedures........................................ 62
PART III
Item 10 Directors and executive officers............................... 63
Item 11 Executive compensation......................................... 63
Item 12 Security ownership of certain beneficial owners and
management and related shareowner matters................... 63
Item 13 Certain relationships and related transactions................. 63
Item 14 Principal accountant fees and services ........................ 63
PART IV
Item 15 Exhibits and financial statement schedules .................... 64
Our consolidated financial statements are prepared in accordance with United
States ("U.S.") generally accepted accounting principles ("GAAP") in U.S.
dollars. Unless otherwise indicated, all amounts in this report are in U.S.
dollars and U.S. GAAP.
Any reference to 2005, 2004 and 2003 corresponds to the year-end dates
December 31, 2005, January 1, 2005, and January 3, 2004 respectively.
14
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive proxy statement for the 2006 Annual and Special
Meeting of Shareowners, to be filed within 120 days of December 31, 2005, are
incorporated by reference in Part III.
Such proxy statement, except for the parts therein which have been
specifically incorporated by reference, shall not be deemed "filed" for the
purposes of this report on Form 10-K.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report and the reports and documents
incorporated by reference in this report contain statements relating to future
events and our future results. These statements are "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995 and include, but
are not limited to, statements that relate to projections of sales, earnings,
earnings per share, cash flows, capital expenditures or other financial items,
discussions of estimated future revenue enhancements and cost savings. These
statements also relate to our business strategy, goals and expectations
concerning our market position, future operations, margins, profitability,
liquidity and capital resources. Generally, words such as "anticipate",
"believe", "continue", "could", "estimate", "expect", "intend", "may", "plan",
"predict", "project", "should" and similar terms and phrases are used to
identify forward-looking statements in this report and in the documents
incorporated in this report by reference. These forward-looking statements are
made as of the date of this report.
Although we believe the assumptions underlying these forward-looking
statements are reasonable, any of these assumptions could prove to be inaccurate
and, as a result, the forward-looking statements based on those assumptions
could be incorrect. Our operations involve risks and uncertainties, many of
which are outside of our control, and any one or any combination of these risks
and uncertainties could also affect whether the forward-looking statements
ultimately prove to be correct.
The following are some of the factors that could affect our financial
performance, including but not limited to sales, earnings and cash flows, or
could cause actual results to differ materially from estimates contained in or
underlying the forward-looking statements:
- loss of key customers, particularly Wal-Mart, and the commitment of
retailer brand beverage customers to their own retailer brand beverage
programs;
- increases in competitor consolidations and other market-place competition,
particularly among branded beverage products;
- our ability to identify acquisition and alliance candidates and to
integrate into our operations the businesses and product lines that we
acquire or become allied with;
- our ability to secure additional production capacity either through
acquisitions, or third party manufacturing arrangements;
- increase in interest rates;
- our ability to restore plant efficiencies and lower logistics costs;
- fluctuations in the cost and availability of beverage ingredients and
packaging supplies, and our ability to maintain favorable arrangements and
relationships with our suppliers;
- our ability to pass on increased costs to our customers;
- unseasonably cold or wet weather, which could reduce demand for our
beverages;
- our ability to protect the intellectual property inherent in new and
existing products;
- adverse rulings, judgments or settlements in our existing litigation and
regulatory reviews, and the possibility that additional litigation or
regulatory reviews will be brought against us;
- product recalls or changes in or increased enforcement of the laws and
regulations that affect our business;
- currency fluctuations that adversely affect the exchange between the U.S.
dollar on one hand and the pound sterling, the Canadian dollar and other
currencies on the other;
- changes in tax laws and interpretations of tax laws;
- changes in consumer tastes and preferences and market demand for new and
existing products;
- interruption in transportation systems, labor strikes, work stoppages and
other interruptions or difficulties in the employment of labor or
transportation in our markets; and
- changes in general economic and business conditions.
Many of these factors are described in greater detail in this report and in
other filings that we make with the U.S. Securities and Exchange Commission
("SEC") and Canadian securities regulatory authorities. We undertake no
obligation to update any information contained in this report or to publicly
release the results of any revisions to forward-looking statements to reflect
events or circumstances of which we may become aware of after the date of this
report. Undue reliance should not be placed on forward-looking statements.
All future written and oral forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by the
foregoing.
15
NON-GAAP FINANCIAL MEASURES
In this Annual Report on Form 10-K and in our Annual Report to Shareowners for
the year ended December 31, 2005 we use certain non-GAAP measures to provide
additional information with regards to our financial performance and liquidity
including earnings before interest, taxes, depreciation and amortization
("EBITDA") and cash flow from operations after capital expenditures. EBITDA is
defined as earnings from continuing operations before interest, income taxes,
depreciation and amortization. Cash flow from operations after capital
expenditures is defined as cash from operating activities less additions to
property, plant and equipment.
We use operating income as our primary measure of performance and cash flow
from operations as our primary measure of liquidity. Nevertheless, we present
EBITDA in our filings for several reasons. First, we use multiples of EBITDA and
discounted cash flows in determining the value of our operations. In addition,
we use "cash return on assets," which is a financial measure calculated by
dividing our annualized EBITDA by our aggregate operating assets, for the
purposes of calculating performance-related bonus compensation for our
management employees, because that measure reflects the ability of management to
generate cash while preserving assets. Finally, we include EBITDA in our filings
because we believe that our current and potential investors use multiples of
EBITDA to make investment decisions about us. Investors should not consider
EBITDA an alternative to net income, nor to cash provided by operating
activities nor any other indicator of performance or liquidity, which have been
determined in accordance with U.S. or Canadian GAAP. Our method of calculating
EBITDA may differ from the methods used by other companies and, accordingly, our
EBITDA may not be comparable to similarly titled measures used by other
companies.
In addition, we use cash flow from operations after capital expenditures as
a measure of cash we are able to generate after considering the investments
required to maintain or expand our capital base.
16
PART I
ITEM 1.
BUSINESS
OUR COMPANY
We operate in North America through our indirect wholly owned subsidiary, Cott
Beverages Inc., in the United States, and through our Cott Beverages Canada
division in Canada, in the U.K. and Europe through our indirect wholly owned
subsidiary, Cott Beverages Ltd., and in Mexico through an indirect 90% owned
subsidiary, Cott Embotelladores de Mexico, S.A. de C.V. References throughout
this report to North America or our North American business mean, unless
otherwise indicated, Canada and the United States.
We incorporated in 1955 and are governed by the Canada Business
Corporations Act. Our registered Canadian office is located at 333 Avro Avenue,
Pointe-Claire, Quebec, Canada H9R 5W3 and our principal executive office is
located at 207 Queen's Quay West, Suite 340, Toronto, Ontario, Canada M5J 1A7.
PRINCIPAL MARKETS AND PRODUCTS
We are one of the world's largest suppliers of retailer brand beverages. Based
on industry information, we estimate that we produce (either directly or through
third party manufacturers with whom we have co-packing agreements) approximately
74% of all retailer brand carbonated soft drinks sold in North America. We
produce 44% of those sold in the U.K. In addition to carbonated soft drinks, our
product lines include clear, sparkling flavored beverages, juice-based products,
bottled water, energy drinks and iced teas. During the year ended December 31,
2005, approximately 94% of all of the beverages we sell in 8-ounce equivalent
cases, in North America and the U.K. are under customer controlled retailer
brands, and the remainder are sold under brand names that we either own or
license from others. 8-ounce equivalent cases is a standard industry measure and
does not equate to physical cases. Sales of carbonated soft drinks including
flavored sparkling waters and energy drinks represented approximately 85% of our
sales volume in 8-ounce equivalent cases. Sales of bottled water represented 8%
of our sales volume in 8-ounce equivalent cases.
In recent years, we expanded our business through acquisitions and growth
with key customers. We believe that opportunities exist to increase sales of
beverages in our markets by leveraging existing customer relationships,
obtaining new customers, exploring new channels of distribution and introducing
new products.
During the past five years, we expanded and strengthened our production and
distribution capabilities in North America, the U.K. and Mexico through a series
of acquisitions totaling $377.7 million.
RECENT ACQUISITIONS
In August 2005 we acquired 100% of the shares of Macaw (Holdings) Limited, the
parent company of Macaw (Soft Drinks) Limited ("Macaw"), which at the time was
the largest privately owned manufacturer of retailer brand carbonated soft
drinks in the U.K. (the "Macaw Acquisition"). The Macaw Acquisition represents a
significant strategic investment in our U.K. business. We expect that the
additional production capacity and manufacturing capabilities in the
fast-growing aseptic beverage segment will enable us to expand the variety of
products and packages we offer and enhance the service we provide to our
customers.
Subsequent to the completion of the Macaw Acquisition, the U.K. Office of
Fair Trading ("OFT") decided to review the transaction. Under applicable U.K.
law, we were not required to seek pre-clearance of the Macaw Acquisition by the
OFT in the U.K. The OFT has referred the transaction to the Competition
Commission for further investigation. The Competition Commission ruling is
expected in May 2006. Until this regulatory review is complete and a ruling is
made, the OFT and Competition Commission have required us to refrain from
further integrating the Macaw business into the Cott business in the U.K.
CAPACITY ADDITIONS
In June 2005 we began shipping from our new manufacturing facility in Fort
Worth, Texas. As the largest plant in our global operations, Fort Worth is
currently expected to produce about 32.0 million physical cases in 2006.
NORTH AMERICAN REALIGNMENT
In September 2005 we announced a plan to realign the management of our Canadian
and U.S. businesses to a North American basis to leverage management strengths,
improve supply chain efficiencies and position our North American business to
become more profitable and responsive to customer needs. The plan includes
organizational changes as well as rationalization of product offerings,
elimination of underperforming assets and increased focus on high potential
accounts. As part of this realignment we closed our juice plant in Lachine,
Quebec effective February 2006 and we plan to close our manufacturing plant in
Columbus, Ohio effective March 2006.
17
FINANCIAL INFORMATION ABOUT SEGMENTS
For financial information about segments and geographic areas, see note 23 to
the consolidated financial statements, found on pages 58 to 59 of this Annual
Report on Form 10-K.
MANUFACTURING AND DISTRIBUTION
Approximately 86% of our beverages produced in North America were manufactured
in facilities that we, or third party manufacturers with whom we have long-term
co-packing agreements, either own or lease. We manufacture virtually all of our
U.K. and Mexican beverages in facilities that we either own or lease. We rely on
third parties to produce and distribute products in areas or markets where we do
not have our own production facilities, such as continental Europe, or when
additional production capacity is required.
Our products are either picked up by customers at our facilities or
delivered by us, a common carrier, or third party distributors to either the
customer's distribution centers or directly to retail locations.
We may be liable if the consumption of any of our products causes injury,
illness or death. We also may be required to recall some of our products if they
become contaminated or are damaged or mislabeled. A significant unfavorable
product liability judgment or a widespread product recall could have a material
adverse effect on our results of operations or cash flows. We are insured
against product liability claims and product recalls. We believe that our
insurance coverage is adequate. Our insurers are comfortable with our
deductibles given our operational risk profile, our claims history and our
financial stability.
INGREDIENTS AND PACKAGING SUPPLIES
The principal raw materials required to produce our products are polyethylene
terephthalate ("PET") bottles, caps and PET preforms, cans and ends, labels,
cartons and trays, concentrates, sweeteners and carbon dioxide.
We typically enter into annual supply arrangements rather than long-term
contracts with our suppliers, which means that our suppliers are obligated to
continue to supply us with materials for one-year periods, at the end of which
we must either renegotiate the contracts with our incumbent suppliers or find
alternative sources.
With respect to some of our key packaging supplies, such as aluminum cans
and ends, and some of our key ingredients, such as artificial sweeteners, we
have entered into long-term supply agreements, the terms of which range from 1
to 6 years. Crown Cork & Seal USA, Inc. ("CCS") supplies aluminum cans and ends
under a contract that expires on December 31, 2011. The contract provides that
CCS will supply all of our aluminum can and end requirements worldwide, subject
to certain exceptions. The contract contains a pricing mechanism for certain
materials, standard representations, warranties, indemnities and termination
events, including termination events related to bankruptcy or insolvency of
either party. As with our annual supply contracts, we must either renegotiate
these long-term supply agreements with the incumbent suppliers when they expire
or find alternative sources.
We rely upon our ongoing relationships with key suppliers to support our
operations. We believe that we will be able to either renegotiate contracts with
these suppliers when they expire or replace them. We could, however, incur
higher ingredient and packaging costs in renegotiating contracts with existing
suppliers or replacing those suppliers or we could experience temporary
disruptions in our ability to deliver products to our customers, either of which
could have a material adverse effect on our results of operations.
We believe there is adequate supply of the ingredients and packaging
materials used to produce or package our products. However, the supply of
specific ingredients and packaging materials could be adversely affected by
economic factors such as industry consolidation, energy shortages, governmental
controls, labor disputes, natural disasters, acts of war or terrorism and other
factors.
The majority of our ingredient and packaging supply contracts allow our
suppliers to alter the amounts they charge us based on changes in the costs of
the underlying commodities. Aluminum for cans, resin for PET bottles and high
fructose corn syrup for sweeteners are examples of these underlying commodities.
In addition, the contracts for certain of our ingredients and packaging
materials permit our suppliers to increase the costs they charge us based on
increases in their cost of converting the underlying commodities into the
materials we purchase. In certain cases those increases are subject to
negotiated limits. Changes in the prices we pay for ingredients and packaging
materials occur at times that vary by product and supplier, but are principally
on semi-annual or annual bases.
Accordingly, we bear the risk of increases in the costs of these
ingredients and packaging materials, including the underlying costs of the
commodities that comprise them and, to some extent, the costs of converting
those commodities into finished products. We do not use derivatives to manage
this risk. If the cost of these ingredients or packaging materials increases, we
may be unable to pass these costs along to our customers through adjustments to
the prices we charge. If we cannot pass on these increases to our customers on a
timely basis, they could have a material adverse effect on our results of
operations.
18
TRADE SECRETS, TRADEMARKS AND LICENSES
We sell the majority of our beverages under retailer brands to customers who own
the trademarks associated with those products. We are the registered owner of
various trademarks that are important to our worldwide business, including
Cott(R) in Canada and the U.S., as well as Stars & Stripes(R), Vess(R),
Vintage(R), Top Pop(R), City Club(R) and Lotsa(R) in the U.S., Red Rooster(R)
and Benshaws(R) in the U.K. and RC(R) in more than 100 countries outside of
North America. We are licensed to use certain trademarks, including Chubby(R) in
Canada and the U.S. and RC(R) in certain regions of Canada, Carters(R) in the
U.K. and Jarritos(R) in Mexico. Trademarks are generally of indefinite duration
and the licenses to which we are a party are of varying terms, certain of which
are perpetual.
Our success depends in part on our intellectual property, which includes
trade secrets in the form of concentrate formulas for our beverages and
trademarks for the names of the beverages we sell. We either own the trademarks
for the products that we sell or license them from our retailer brand customers
and other third parties. To protect this intellectual property, we rely
principally on registration of trademarks, contractual responsibilities and
restrictions in agreements (such as indemnification, nondisclosure and
confidentiality agreements) with employees, consultants and customers, and on
the common law and statutory protections afforded to trademarks, trade secrets
and proprietary "know-how." We also emphasize correct use of our trademarks and
vigorously pursue any party that infringes on our trademarks, using all
available legal remedies.
We may not be successful in protecting our intellectual property for a
number of reasons, including:
- competitors may independently develop intellectual property that is similar
to or better than ours;
- employees, consultants or customers may not abide by their contractual
agreements and the cost of enforcing those agreements may be prohibitive,
or those agreements may prove to be unenforceable or more limited than
anticipated;
- foreign intellectual property laws may not adequately protect our
intellectual property rights; and
- our intellectual property rights may be challenged, invalidated or
circumvented.
If we are unable to protect our intellectual property, it would weaken our
competitive position, and we could face significant expense to protect or
enforce our intellectual property rights.
If we are found to infringe on the intellectual property rights of others,
we could incur significant damages, be enjoined from continuing to manufacture,
market or use the affected product, or be required to obtain a license to
continue manufacturing or using the affected product. A license could be very
expensive to obtain or may not be available at all. Similarly, changing products
or processes to avoid infringing the rights of others may be costly or
impracticable.
Occasionally, third parties may assert that we are, or may be, infringing
on or misappropriating their intellectual property rights. In these cases, we
intend to defend against claims or negotiate licenses when we consider these
actions appropriate. Intellectual property cases are uncertain and involve
complex legal and factual questions. If we become involved in this type of
litigation, it could consume significant resources and divert our attention from
business operations.
SEASONALITY OF SALES
Sales of our beverages are seasonal, with the highest sales volumes generally
occurring in the second and third fiscal quarters, which correspond to the
warmer months of the year in our major markets.
CUSTOMERS
A significant portion of our sales is concentrated in a small number of
customers. Our customers include many large national and regional grocery,
mass-merchandise, drugstore, wholesale and convenience store chains in our core
markets of North America and the U.K. and Europe. For the year ended December
31, 2005, sales to Wal-Mart Stores, Inc. and its affiliates (collectively,
"Wal-Mart") accounted for approximately 40% of total sales. Wal-Mart was the
only customer that accounted for more that 10% of our total sales in that
period. For the same period, our top ten customers accounted for approximately
65% of total sales. We expect that sales of our products to a limited number of
customers will continue to account for a high percentage of sales for the
foreseeable future. The loss of Wal-Mart, or customers which in the aggregate
represent a significant portion of our sales, would have a material adverse
effect on our operating results and cash flows.
COMPETITION
The carbonated soft drink category is highly competitive in each region in which
we compete and competition for incremental volume is intense. The brands owned
by the three major national soft drink companies, Coca-Cola, Pepsi and Cadbury
Schweppes, control approximately 82% of the aggregate take-home volume of soft
drink sales in the combined North American and U.K. markets. Those companies
have significant financial resources and spend heavily on promotional programs.
They also have direct store delivery systems which enable their personnel to
visit retailers frequently to sell new items, stock shelves and build displays.
19
In addition, we face competition in the U.S. and U.K. from regional soft
drink manufacturers who sell aggressively priced brands and, in many cases, also
supply retailer brand products. A few larger U.S. retailers also
self-manufacture products for their own needs and consistently approach other
retailers seeking additional business.
Generally, carbonated soft drinks compete against all forms of liquid
beverages, including water, teas, coffees and juice-based beverages, for
consumers' shopping preferences.
The competitive pressures in the carbonated soft drink industry are
significant. However, we seek to differentiate ourselves by offering our
customers efficient distribution methods, high-quality products, category
management strategies, packaging and marketing strategies and superior service.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Our operations and properties are subject to various federal, state, provincial,
local and foreign laws and regulations.
As a producer of beverages, we must comply with production, packaging,
quality, labeling and distribution standards in each of the countries where we
operate, including, in the U.S., those of the federal Food, Drug and Cosmetic
Act. We are also subject to various federal, state, provincial, local and
foreign environmental laws and workplace regulations. These laws and regulations
include, in the U.S., the Occupational Safety and Health Act, the Unfair Labor
Standards Act, the Clean Air Act, the Clean Water Act and laws relating to the
maintenance of fuel storage tanks.
We do not expect to make any material expenditure in connection with
environmental remediation and compliance. However, compliance with, or violation
of, future laws or regulations could require material expenditures by us or
otherwise have a material adverse effect on our business, financial condition
and results of operations.
THE ONTARIO ENVIRONMENTAL PROTECTION ACT ("EPA")
EPA regulations provide that a minimum percentage of a bottler's soft drink
sales within specified areas in Ontario must be made in refillable containers.
The penalty for non-compliance is a fine, which for companies ranges from
$50,000 per day on which the offense occurs or continues for the first
conviction to $100,000 per day for each subsequent conviction, although such
fines may be increased to equal the amount of monetary benefit acquired by the
offender as a result of the commission of the offense.
We, and we believe other industry participants, are currently not in
compliance with the requirements of the EPA. To comply with these requirements
we, and we believe many other industry participants, would have to significantly
increase sales in refillable containers to a minimum refillable sales ratio of
30%. We are not in compliance with these regulations and do not expect to be in
the foreseeable future. Ontario is not enforcing the EPA at this time, despite
the fact that it is still in effect and not amended, but if it chooses to
enforce it in the future, we could incur fines for non-compliance and the
possible prohibition of sales of soft drinks in non-refillable containers in
Ontario. We estimate that approximately 4% of our sales would be affected by the
possible limitation of sales of soft drinks in non-refillable containers in
Ontario if the Ontario Ministry of the Environment initiated an action to
enforce the provisions of the EPA against us. Moreover, the Ontario Ministry of
the Environment released a report in 1997 stating that these EPA regulations are
"outdated and unworkable". However, despite the "unworkable" nature of the EPA
regulations, they have not yet been revoked.
We believe that the magnitude of the potential fines that we could incur if
the Ontario Ministry of the Environment chose to enforce these regulations is
such that the costs to us of non-compliance could be, although are not
contemplated to be, significant. However, our management believes that such
enforcement is very remote and, in any event, these regulations are expected to
be revoked in the future given the more recent regulatory activity in this area
as described below.
In December of 2003, the Ontario Ministry of the Environment approved the
Blue Box Program, which included provisions regarding industry responsibility
for 50% of the net cost of the Program. Generally, the company that owns the
intellectual property rights to the brand of a product, or is the licensee of
those rights, and that manufactures, packages or distributes a product for sale
in Ontario or causes such manufacturing, packaging or distributing of a product
in Ontario, will be liable for the costs under the Program. We generally do not
own the intellectual property rights to the brands of our products. Rather, we
generally manufacture, package and distribute products for and on behalf of
Ontario-based third party customers who are the brand owners and we do not
believe that any costs for which we might be ultimately responsible would have a
material adverse effect on our results of operations; however we cannot
guarantee this outcome.
EMPLOYEES
As of December 31, 2005, we had approximately 3,484 employees, of whom an
estimated 2,507 were located in North America, 723 were located in U.K. and 254
were located in Mexico. We have entered into numerous collective bargaining
agreements that we believe contain terms that are typical in the beverage
industry. As these agreements expire, we believe they can be renegotiated on
20
terms satisfactory to us. We consider our relations with employees to be good.
AVAILABILITY OF INFORMATION AND OTHER MATTERS
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to reports filed or furnished pursuant to Sections
13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are
available free of charge from our website at www.cott.com, when such reports are
available on the Securities and Exchange Commissions' website, www.sec.gov. The
information found on our website is not part of this or any other report that we
file with, or furnish to, the Securities and Exchange Commission or to Canadian
securities regulators.
Our chief executive officer is required by the rules of the New York Stock
Exchange (the "NYSE") to certify annually to the NYSE that he is not aware of
any violation by us of our corporate governance listing standards. Our chief
executive officer made such certification to the NYSE as of May 12, 2005.
We are responsible for establishing and maintaining adequate internal
control over financial reporting as required by the U.S. Securities and Exchange
Commission. See Management's Report on Internal Control over Financial Reporting
on page 62.
ITEM 1A.
RISK FACTORS
We face a number of risks and uncertainties, including the following:
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE BEVERAGE
CATEGORY.
The markets for our products are extremely competitive. In comparison to the
major national brand beverage manufacturers, we are a relatively small
participant in the industry. We face competition from the national brand
beverage manufacturers in all of our markets and from other retailer brand
beverage manufacturers in the U.S. and the U.K. If our competitors reduce their
selling prices or increase the frequency of their promotional activities in our
core markets or if our customers do not allocate adequate shelf space for the
beverages we supply, we could experience a decline in our volumes or be forced
to reduce pricing or increase capital and other expenditures, any of which could
adversely affect our profitability.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR
SALES, THE LOSS OF ANY SIGNIFICANT CUSTOMER COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
A significant portion of our sales is concentrated in a small number of
customers. Our customers include many large national and regional grocery,
mass-merchandise, drugstore, wholesale and convenience store chains in our core
markets of North America and the U.K. and Europe. Sales to our top customer in
2005 and 2004 accounted for 40% of our total sales, and sales to the top ten
customers in 2005 and 2004 were 65% and 68%, respectively. We expect that sales
of our products to a limited number of customers will continue to account for a
high percentage of our sales in the foreseeable future. The loss of any
significant customer, or customers which in the aggregate represent a
significant portion of our sales, could have a material adverse effect on our
operating results and cash flows. At December 31, 2005, we have $126.6 million
of customer relationships recorded as an intangible asset. The permanent loss of
any customer included in the intangible asset will result in impairment in the
value of the intangible asset.
IF WE ARE UNABLE TO MAINTAIN RELATIONSHIPS WITH OUR RAW MATERIAL SUPPLIERS, WE
MAY INCUR HIGHER SUPPLY COSTS OR BE UNABLE TO DELIVER PRODUCTS TO OUR CUSTOMERS.
The principal raw materials required to produce our products are PET bottles,
caps and PET preforms, cans and ends, labels, cartons and trays, concentrates,
sweeteners and carbon dioxide.
We typically enter into annual supply arrangements rather than long-term
contracts with our suppliers, which means that our suppliers are obligated to
continue to supply us with materials for one-year periods, at the end of which
we must either renegotiate the contracts with our incumbent suppliers or we
would be required to find an alternative source for supply. With respect to some
of our key packaging supplies, such as aluminum cans and ends, and some of our
key ingredients, such as artificial sweeteners, we have entered into long-term
supply agreements, the terms of which range from 1 to 6 years, and therefore we
are assured of a supply of those key packaging supplies and ingredients for a
longer period of time. During 2004, we extended our supply contract with CCS
from its original expiration date of December 31, 2006 to December 31, 2011. The
contract provides that CCS will supply all of our aluminum can and end
requirements worldwide, subject to certain exceptions. The contract contains a
pricing mechanism for certain materials, standard representations, warranties,
indemnities and termination events, including termination events related to
bankruptcy or insolvency of either party. As with our annual supply contracts,
we must either renegotiate these long-term supply agreements with the incumbent
suppliers when they expire or find alternative sources for supply.
21
We rely upon our ongoing relationships with our key suppliers to support
our operations. We believe that we will be able to either renegotiate contracts
with these suppliers when they expire or, alternatively, if we are unable to
renegotiate contracts with our key suppliers, we believe that we could replace
them. We could, however, incur higher ingredient and packaging supply costs in
renegotiating contracts with existing suppliers or replacing those suppliers or
we could experience temporary dislocations in our ability to deliver products to
our customers, either of which could have a material adverse effect on our
results of operations.
OUR INGREDIENTS AND PACKAGING SUPPLIES ARE SUBJECT TO PRICE INCREASES AND WE MAY
BE UNABLE TO EFFECTIVELY PASS RISING COSTS ON TO OUR CUSTOMERS.
We bear the risk of increasing prices on the ingredients and packaging in our
products. The majority of our ingredient and packaging supply contracts allow
our suppliers to alter the costs they charge us based on changes in the costs of
the underlying commodities that are used to produce them. Aluminum for cans,
resin for PET bottles and high fructose corn syrup for sweeteners are examples
of these underlying commodities. In addition, the contracts for certain of our
ingredients and packaging materials permit our suppliers to increase the costs
they charge us based on increases in their cost of converting those underlying
commodities into the materials that we purchase. In certain cases those
increases are subject to negotiated limits and, in other cases, they are not.
These changes in the prices that we pay for ingredients and packaging materials
occur at times that vary by product and supplier, but are principally on
semi-annual and annual bases. Accordingly, we bear the risk of increases in the
costs of these ingredients and packaging materials, including the underlying
costs of the commodities that comprise them and, to some extent, the costs of
converting those commodities into finished products. We do not use derivatives
to manage this risk. If the cost of these ingredients or packaging materials
increases, we may be unable to pass these costs along to our customers through
adjustments to the prices we charge. If we cannot pass on these increases to our
customers on a timely basis, they could have a material adverse effect on our
results of operations.
IF WE FAIL TO MANAGE OUR EXPANDING OPERATIONS SUCCESSFULLY, OUR BUSINESS AND
FINANCIAL RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our success depends, in part, on our ability to manage new acquisitions. In
recent years, we have grown our business and beverage offerings primarily
through acquisition of other companies, new product lines and growth with key
customers. A part of our strategy is to continue to expand our business through
acquisitions and alliances. To succeed with this strategy, we must identify
appropriate acquisition or strategic alliance candidates. The success of this
strategy also depends on our ability to manage and integrate acquisitions and
alliances at a pace consistent with the growth of our business. We cannot
provide assurance that acquisition opportunities will be available, that we will
continue to acquire businesses and product lines or that any of the businesses
or product lines that we acquire or align with will be integrated successfully
into our business or prove profitable.
IF THE COMPETITION COMMISSION IN THE U.K. DOES NOT APPROVE THE MACAW
ACQUISITION, WE MIGHT BE REQUIRED TO SELL ALL OR PART OF THIS BUSINESS AND MAY
NOT RECOVER OUR FULL COST.
When we completed the Macaw Acquisition, our valuation of this business was
based on market conditions at the time of the acquisition and included synergies
we expect to be able to achieve once it is integrated into our existing U.K.
business. Our total cost of the Macaw Acquisition was $135.1 million, including
goodwill of $69.4 million. The Competition Commission in the U.K. is currently
investigating the Macaw Acquisition. Should the Competition Commission rule
against us, we could be required to divest ourselves of all or a part of this
business. Were a divestiture required, we would probably need the consent of our
lenders under the terms of our credit agreement. Moreover, market conditions may
deteriorate or the purchaser may not be able to achieve the synergies that we
would expect to achieve. As a result, we may not be able to recover our full
cost.
OUR SUCCESS DEPENDS, IN PART, ON OUR INTELLECTUAL PROPERTY, WHICH WE MAY BE
UNABLE TO PROTECT.
We possess certain intellectual property that is important to our business. This
intellectual property includes trade secrets, in the form of the concentrate
formulas for most of the beverages that we produce, and trademarks for the names
of the beverages that we sell, which are trademarks that we either own or
license from our retailer brand customers and others. Our success depends, in
part, on our ability to protect our intellectual property.
To protect this intellectual property, we rely principally on registration
of trademarks, contractual responsibilities and restrictions in agreements (such
as indemnification, nondisclosure and confidentiality agreements) with
employees, consultants and customers, and on common law and statutory
protections afforded to trademarks, trade secrets and proprietary "know-how". In
addition, we vigorously pursue any person who infringes on our intellectual
property using any and all legal remedies available. Notwithstanding our
efforts, we may not be successful in protecting our intellectual property for a
number of reasons, including:
- our competitors may independently develop intellectual property that is
similar to or better than ours;
22
- employees, consultants or customers may not abide by their contractual
agreements and the cost of enforcing those agreements may be prohibitive,
or those agreements may prove to be unenforceable or more limited than
anticipated;
- foreign intellectual property laws may not adequately protect our
intellectual property rights; and
- our intellectual property rights may be successfully challenged,
invalidated or circumvented.
If we are unable to protect our intellectual property, it would weaken our
competitive position and we could face significant expense to protect or enforce
our intellectual property rights. At December 31, 2005, we had $80.4 million of
rights recorded as an intangible asset.
OUR GEOGRAPHIC DIVERSITY SUBJECTS US TO THE RISK OF CURRENCY FLUCTUATIONS.
We are exposed to changes in foreign currency exchange rates, including those
between the U.S. dollar, on the one hand, and the Canadian dollar and the pound
sterling, on the other hand. Our operations outside of the U.S. accounted for
approximately 29% of our 2005 sales. Accordingly, currency fluctuations in
respect of our outstanding non-U.S. dollar denominated net asset balances may
affect our reported results and competitive position.
A PORTION OF OUR INDEBTEDNESS IS VARIABLE RATE DEBT, AND CHANGES IN INTEREST
RATES COULD ADVERSELY AFFECT US BY CAUSING US TO INCUR HIGHER INTEREST COSTS
WITH RESPECT TO SUCH VARIABLE RATE DEBT.
Our credit and securitization facilities subject us to interest rate risk. We
have a secured revolving credit facility, under which we borrow from time to
time for various purposes, including to fund our day-to-day operations and to
finance acquisitions. The maximum amount that we may borrow under these
facilities was increased from $100.0 million to $225.0 million on August 10,
2005. We obtain funding under the securitization facility for our day-to-day
operations. The maximum amount that we may borrow under this facility is $75.0
million, based on eligible receivables and various reserves required in the
facility. As of December 31, 2005, total borrowings under these facilities were
$151.3 million.
The interest rate applicable to our revolving credit facility is variable,
meaning that the rate at which we pay interest on amounts borrowed under the
facility fluctuates with changes in interest rates and our leverage. The
interest rate applicable to our securitization facility is also variable, based
on the cost of borrowing of Park Avenue Receivables Company, LLC and certain
other financial institutions, as required (the "Purchasers").
Accordingly, with respect to any amounts from time to time outstanding
under this facility, we are exposed to changes in interest rates. We do not
currently use derivative instruments to hedge interest rate exposure. However,
we do regularly review the structure of our indebtedness and consider changes to
the proportion of variable versus fixed rate debt through refinancing, interest
rate swaps or other measures in response to the changing economic environment.
We cannot assure that we will be able to continue to refinance our indebtedness
on terms that are favorable to us. If we are unable to refinance our
indebtedness or otherwise adequately manage our debt structure in response to
changes in the market, our interest expense could increase, which would
negatively impact our financial condition and results of operations.
IF WE BREACH THE COVENANTS AND CONDITIONS SET OUT IN OUR SENIOR SECURED CREDIT
FACILITIES OR SECURITIZATION FACILITY, THE LENDERS COULD TERMINATE THE
FACILITIES OR WE WOULD HAVE TO RENEGOTIATE THESE AGREEMENTS AND MAY INCUR HIGHER
FEES AND INTEREST COSTS.
Our senior secured credit facilities allow for revolving credit borrowings of up
to $225.0 million provided we are in compliance with the covenants and
conditions of the agreement. Our securitization facility allows for borrowings
of up to $75.0 million, depending on eligible receivables balances and
calculations of reserves. Both facilities contain cross default provisions. If
we are in default under one facility, default is triggered under the other
facility. As of December 31, 2005, total borrowings under these facilities were
$151.3 million. If we breach the covenants, or an event occurs that would have a
material adverse effect on us, we would be required to renegotiate the
agreements with higher fees and interest rates, provided the lenders wish to
renegotiate. The lenders could choose to terminate the facilities in which case
we believe we could replace them. We could however incur higher fees and
interest expense which would negatively impact our financial condition and
results of operations.
The senior unsecured notes include covenants that limit new borrowings with
certain exceptions, including borrowings based on receivables and inventory,
unless certain conditions are met.
WE ARE NOT IN COMPLIANCE WITH THE REQUIREMENTS OF THE ONTARIO ENVIRONMENTAL
PROTECTION ACT ("EPA") AND, IF THE ONTARIO GOVERNMENT SEEKS TO ENFORCE THOSE
REQUIREMENTS OR IMPLEMENTS MODIFICATIONS TO THEM, WE COULD BE ADVERSELY
AFFECTED.
Certain regulations under the EPA provide that a minimum percentage of a
bottler's soft drink sales within specified areas in Ontario must be made in
refillable containers. The penalty for non-compliance is a fine, which for
companies ranges from $50,000 per day on which the offense occurs or
23
continues for the first conviction to $100,000 per day for each subsequent
conviction, although such fines may be increased to equal the amount of monetary
benefit acquired by the offender as a result of the commission of the offense.
We, and we believe other industry participants, are currently not in compliance
with the requirements of the EPA. Ontario is not enforcing the EPA at this time,
but if it chose to enforce the EPA in the future, we could incur fines for
non-compliance and the possible prohibition of sales of soft drinks in
non-refillable containers in Ontario.
We estimate that approximately 4% of our sales would be affected by the
possible limitation on sales of soft drinks in non-refillable containers in
Ontario if the Ontario Ministry of the Environment initiated an action to
enforce the provisions of the EPA against us.
In April 2003, the Ontario Ministry of the Environment proposed to revoke
these regulations in favor of new mechanisms under the Ontario Waste Diversion
Act to enhance diversion from disposal of carbonated soft drink containers. On
December 22, 2003, the Ontario provincial government approved the implementation
of the Blue Box Program plan under the Ministry of Environment Waste Diversion
Act. The Program requires those parties who are brand owners or licensees of
rights to brands which are manufactured, packaged or distributed for sale in
Ontario to contribute to the net cost of the Blue Box Program. We generally
manufacture, package and distribute products for and on behalf of third party
customers. Therefore, we do not believe that we will be responsible for direct
costs of the Program. However, our customers may attempt to pass these costs, or
a portion of them, onto us. We do not believe that the costs for which we may
ultimately be responsible under this Program will have a material adverse effect
on our results of operations; however, we cannot guarantee this outcome. The
Blue Box Program does not revoke any of the regulations mentioned above under
the EPA regarding refillable containers, although the industry anticipates that
they will be reversed in the future.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
As of the end of 2005, we operated 19 beverage production facilities in North
America, 12 of which we owned and seven of which we leased. We also operate our
global concentrate manufacturing facility in Columbus, Georgia, which we own. In
connection with our North American realignment plan, we closed our Lachine,
Quebec juice plant in February 2006 and we plan to cease operations at our
Columbus, Ohio manufacturing plant in March 2006, reducing the number of leased
properties to five. In the U.K., we own and operate four beverage production
facilities. We lease and operate one beverage production facility in Mexico.
Total square footage of our production facilities is approximately
2,589,776 in the U.S., excluding the Columbus, Ohio facility and including the
concentrate facility; 931,050 in Canada excluding the Lachine, Quebec facility;
1,010,848 in the U.K.; and 111,278 in Mexico. Lease terms for non-owned beverage
production facilities, excluding the Columbus, Ohio and Lachine, Quebec leases
that we expect to terminate, expire between 2007 and 2017.
ITEM 3.
LEGAL PROCEEDINGS
In August 1999, we were named as a defendant in an action styled North American
Container, Inc. ("NAC") v. Plastipak Packaging Inc., et al., filed in the United
States District Court for the Northern District of Texas, Dallas Division. The
plaintiff, NAC, sued over 40 defendants, alleging, among other things,
infringement on their U.S. patent relating to plastic containers. The
defendants, including us, were successful in the Motions for Summary Judgment of
Invalidity and Non-Infringement, which were predominantly affirmed on appeal,
with remand back on one issue. Subsequently, the Plaintiffs have stipulated to
completely dismiss the case. The order dismissing the claim was entered on
November 30, 2005, and accordingly, the action is no longer pending.
In January 2005, we were named as one of many defendants in an action
styled The Consumers' Association of Canada and Bruce Cran v. Coca-Cola Bottling
Ltd. et al., filed in the Supreme Court of British Columbia (Canada). This claim
has been brought under the British Columbia Class Proceedings Act as a class
action, but it has not to date been certified as a class action.
The plaintiffs are suing over 30 defendants, consisting of beverage
manufacturers, retailers and Encorp Pacific (Canada), the government-approved
steward of British Columbia's container deposit program, alleging the improper
use and collection by the defendants of deposits and container recycling fees
pursuant to the British Columbia container recycling program.
The relief sought by the plaintiffs includes a declaration that C$70
million in container deposits were unlawfully converted by the defendants and
are held on constructive trust for consumers and the repayment of C$60 million
collected as container recycling fees.
24
The defendants, including us, brought and argued a summary trial
application in January 2006. Judgment in the summary trial application has not
yet been rendered, and it is too early to assess the chances of success of that
application.
In February 2005, similar class action claims, styled Kruger et al. v.
Pepsi-Cola Beverage Ltd. et al., were filed in the Superior Courts of a number
of other Canadian provinces, naming essentially the same defendants, including
us, plus the other regional stewardship agencies.
Subsequent to the completion of the Macaw Acquisition, the OFT decided to
review the transaction. Under applicable U.K. law, we were not required to seek
pre-clearance of the Macaw Acquisition by the OFT in the U.K. The OFT has
referred the transaction to the Competition Commission for further
investigation. The Competition Commission ruling is expected in May 2006. We
expect that the transaction will be approved, but we cannot guarantee this
outcome. If the Competition Commission rules against us, we may be required to
divest ourselves of all or a part of this business.
We are investigating these matters; however, legal proceedings are subject
to uncertainties, and the outcomes are difficult to predict. Since the
litigation is at a very preliminary stage, sufficient information regarding the
merits of these claims is not yet available to us.
We are engaged in various litigation matters in the ordinary course of our
business. While we cannot predict with certainty the outcome of these matters,
we believe that the resolution of these matters will not have a material adverse
effect on our financial condition and results of operations.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareowners during the fourth quarter of
2005.
25
SUPPLEMENTAL ITEM PART I.
EXECUTIVE OFFICERS OF COTT CORPORATION
The following is a list of names and ages of all of our executive officers as of
February 28, 2006, and the positions and offices that each of them holds.
NAME AND MUNICIPALITY PERIOD SERVED
OF RESIDENCE OFFICE AGE AS OFFICER
--------------------- ------ --- -------------
JOHN K. SHEPPARD President & Chief Executive Officer 48 2002 to present
Tampa, Florida
MARK BENADIBA Executive Vice President, 52 1990 to present
Toronto, Ontario North American Operations
B. CLYDE PRESLAR Executive Vice President & 51 2005 to present
Tampa, Florida Chief Financial Officer
MARK R. HALPERIN Senior Vice President, 48 1995 to present
Toronto, Ontario General Counsel & Secretary
ANDREW J. MURFIN Senior Vice President & 45 2005 to present
West Yorkshire, England Managing Director U.K./Europe
COLIN D. WALKER Senior Vice President, 48 1998 to present
London, Ontario Corporate Resources
CATHERINE M. BRENNAN Vice President, Treasurer 48 1999 to present
Toronto, Ontario
TINA DELL'AQUILA Vice President, Controller & 43 1998 to present
Toronto, Ontario Assistant Secretary
JOHN DENNEHY Vice President, North American 44 2005 to present
Weston, Massachusetts Sales & Marketing
JASON NICHOL Vice President, 34 2005 to present
Bentonville, Arkansas Business Development Wal-Mart
P. EDMUND O'KEEFFE Vice President, Investor Relations 41 1999 to present
Toronto, Ontario & Corporate Development
CSABA REIDER Vice President, Global Sourcing 49 2005 to present
Markham, Ontario
PREM VIRMANI Vice President, Technical Services 60 1991 to present
Columbus, Georgia
LEN WATSON Vice President, 57 2004 to present
Toronto, Ontario Chief Information Officer
During the last five years, the above persons have been engaged in their
principal occupations or in other executive capacities with us except as
follows:
- prior to January 2002, John K. Sheppard was President and Chief Executive
Officer of ServiceCentral Technologies, Inc., a software development
company that specializes in field service management;
- prior to August 2005, B. Clyde Preslar was Chief Financial Officer of
Lance, Inc., a manufacturer of branded and retail branded snack foods;
- prior to April 2003, Andrew J. Murfin was CEO of Parallel Brands Limited
(an acquisition vehicle) and before that he was managing director of
Princes Soft Drinks Limited (a soft drinks manufacturer);
- prior to October 2003, Jason Nichol was Director of Sales & Marketing of
Cott Beverages Inc.; and
- prior to September 2004, Len Watson was Senior Vice President, Consulting
Services responsible for the Greater Toronto Area business unit of CGI
Group Inc.
26
PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS
Our common shares are listed on the Toronto Stock Exchange (the "TSX") under the
ticker symbol "BCB," and on the New York Stock Exchange (the "NYSE") under the
ticker symbol "COT."
The tables below show the high and low reported per share sales prices of
common shares on the TSX (in Canadian dollars) and the NYSE (in U.S. dollars)
for the indicated periods of the years ended December 31, 2005 and January 1,
2005.
TORONTO STOCK EXCHANGE (C$)
2005 2004
------------- -------------
High Low High Low
----- ----- ----- -----
January 1-March 31 31.41 28.79 40.05 35.21
April 1-June 30 30.09 26.50 45.59 38.55
July 1-September 30 31.45 20.31 43.41 33.18
October 1-December 31 20.51 16.10 37.06 29.04
NEW YORK STOCK EXCHANGE (U.S.$)
2005 2004
------------- -------------
High Low High Low
----- ----- ----- -----
January 1-March 31 25.26 23.55 30.35 27.37
April 1-June 30 24.26 21.12 33.36 28.91
July 1-September 30 25.93 17.40 32.89 25.75
October 1-December 31 17.51 13.58 29.19 23.77
As of February 28, 2006, we had 712 shareowners of record. This number was
determined from records maintained by our transfer agent and it does not include
beneficial owners of securities whose securities are held in the names of
various dealers or clearing agencies. The closing sale price of our common
shares on February 28, 2006 was C$13.90 on the TSX and $12.32 on the NYSE.
We have not paid cash dividends since June 1998. There are certain
restrictions on the payment of dividends under our senior secured credit
facility and the indenture governing the 8% senior subordinated notes maturing
in 2011. The most restrictive is the quarterly limitation on dividends based on
the prior quarter's earnings.
If we were to pay dividends to shareowners that are U.S. residents, those
dividends would generally be subject to Canadian withholding tax. Under current
Canadian tax law, dividends paid by a Canadian corporation to a nonresident
shareowner are generally subject to Canadian withholding tax at a 25% rate.
Under the current tax treaty between Canada and the U.S., U.S. residents are
eligible for a reduction in this withholding tax rate to 15% (and to 5% for a
company shareowner who is the beneficial owner of at least 10% of our voting
stock). Accordingly, under current tax law, our U.S. resident shareowners would
generally be subject to a Canadian withholding tax at a 15% rate on dividends
paid by us, provided that they had complied with applicable procedural
requirements to claim the benefit of the reduced rate under the tax treaty.
CALCULATION OF AGGREGATE MARKET VALUE OF NON-AFFILIATE SHARES
For purposes of calculating the aggregate market value of common shares held by
non-affiliates as shown on the cover page of this report, it was assumed that
all of the outstanding shares were held by non-affiliates except for outstanding
shares held or controlled by our directors and executive officers. This should
not be deemed to constitute an admission that any of these parties are, in fact,
affiliates of us, or that there are not other persons who may be deemed to be
affiliates. For further information concerning shareholdings of officers,
directors and principal stockholders see Item 12: Security Ownership of Certain
Beneficial Owners and Management and Related Shareowner Matters.
27
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data reflects the results of operations. This
information should be read in conjunction with, and is qualified by reference to
"Management's discussion and analysis of financial condition and results of
operations" and the consolidated financial statements and notes thereto included
elsewhere in this report. The financial information presented may not be
indicative of future performance.
DECEMBER 31, January 1, January 3, December 28, December 29,
2005 (1) 2005 (2) 2004 (3) 2002 (4) 2001 (5)
(52 WEEKS) (52 weeks) (53 weeks) (52 weeks) (52 weeks)
------------ ---------- ---------- ------------ ------------
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
SALES $1,755.3 $1,646.3 $1,417.8 $1,198.6 $1,090.1
Cost of sales 1,505.8 1,362.6 1,141.0 965.7 902.7
Selling, general and administrative 138.6 138.1 126.1 110.2 94.1
Unusual items
Restructuring 3.2 -- -- -- --
Asset impairments 33.5 0.9 1.8 -- --
Other 0.8 -- -- -- --
-------- -------- -------- -------- --------
OPERATING INCOME 73.4 144.7 148.9 122.7 93.3
-------- -------- -------- -------- --------
Income from continuing operations 24.6 78.3 77.4 48.7 39.9
Cumulative effect of change in accounting principle -- -- -- (44.8) --
-------- -------- -------- -------- --------
NET INCOME $ 24.6 $ 78.3 $ 77.4 $ 3.9 $ 39.9
======== ======== ======== ======== ========
INCOME PER SHARE - BASIC
Income from continuing operations $ 0.34 $ 1.10 $ 1.12 $ 0.75 $ 0.66
Cumulative effect of change in accounting principle $ -- $ -- $ -- $ (0.69) $ --
Net income $ 0.34 $ 1.10 $ 1.12 $ 0.06 $ 0.66
======== ======== ======== ======== ========
INCOME PER SHARE - DILUTED
Income from continuing operations $ 0.34 $ 1.09 $ 1.09 $ 0.69 $ 0.58
Cumulative effect of change in accounting principle $ -- $ -- $ -- $ (0.64) $ --
Net income $ 0.34 $ 1.09 $ 1.09 $ 0.06 $ 0.58
======== ======== ======== ======== ========
Total assets $1,171.4 $1,022.0 $ 908.8 $ 785.4 $1,065.4
Current maturities of long-term debt 0.8 0.8 3.3 16.5 281.8
Long-term debt 272.3 272.5 275.7 339.3 359.5
Shareowners' equity 481.9 457.3 345.1 218.2 197.7
Under the 1986 Common Share Option Plan, as amended, we have reserved 14 million
shares for future issuance.
(1) During the year we acquired 100% of the shares of Macaw (Holdings) Limited,
the parent company of Macaw (Soft Drinks) Limited. We also recorded asset
impairment charges of $33.5 million as described in Note 2 to the
Consolidated Financial Statements on page 49.
(2) During the year we acquired certain of the assets of The Cardinal Companies
of Elizabethtown, LLC and certain of the assets of Metro Beverage Co.
(3) During the year we acquired the retailer brand business of Quality Beverage
Brands, L.L.C.
(4) During the year, we acquired Premium Beverage Packers, Inc. and formed a
new business in Mexico, Cott Embotelladores de Mexico, S.A. de C.V. During
the year we adopted SFAS 142, Goodwill and Other Intangible Assets. This
change in method of valuing goodwill resulted in a $44.8 million non-cash
write down of the U.K. business.
(5) During the year, we acquired certain assets of the Royal Crown Company,
Inc., and formed a new business with Polar Corp. Current maturities of
long-term debt include the 2005 and 2007 Notes repaid on January 22, 2002
from cash held in trust.
28
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We are one of the world's largest suppliers of retailer brand beverages.
2005 was a challenging year for us and our industry as we faced
unprecedented commodity cost increases and a consumer shift toward
non-carbonated beverages. Accordingly we undertook actions to increase financial
performance by improving our operating performance, enhancing our sales focus
and realigning our organization.
In September 2005 we announced a plan to realign the management of our
Canadian and U.S. businesses to a North American basis. The realignment is
designed to leverage management strengths, improve supply chain efficiencies and
position the North American business to become more profitable and responsive to
customer needs. Additional key elements of our plan include rationalizing
product offerings, eliminating under-performing assets and increasing focus on
high potential accounts.
In 2005, we recorded $37.5 million in pre-tax unusual items ($0.35 per
diluted share after tax), including restructuring charges of $3.2 million,
customer relationships impairment of $20.0 million and other asset impairment of
$13.5 million. As part of the North American realignment we closed our juice
plant in Lachine, Quebec effective February 2006 and we plan to close our
manufacturing plant in Columbus, Ohio effective March 2006. Severance and lease
cancellation costs relating to the closure of these plants are expected to be
approximately $2.7 million.
We completed the Macaw Acquisition in August 2005 for a purchase price of
$135.1 million (75.4 million pounds sterling). At the time of the Macaw
Acquisition, Macaw was the largest privately owned manufacturer of retailer
brand carbonated soft drinks in the U.K. with six production lines in two
production facilities including aseptic capabilities.
In June 2005 we began shipping from our new manufacturing facility in Fort
Worth, Texas. As the largest plant in our global operations, Fort Worth is
currently expected to produce about 32.0 million physical cases for 2006. The
total cost of this new plant is $50.6 million, including $30.7 million spent in
2005.
Our net income in 2005 was $24.6 million or $0.34 per diluted share,
compared with $78.3 million or $1.09 per diluted share in 2004. The decrease
resulted from:
- asset impairment, restructuring and other unusual charges;
- higher packaging and raw materials costs that were only partially offset by
increased prices;
- higher fixed costs from recently-added production capacity, including the
start-up of our new Fort Worth, Texas plant;
- changes in product mix toward lower margin bottled water in North America;
- the highly competitive environment in the North American carbonated soft
drinks ("CSD") industry; and
- a higher effective tax rate.
2005 VERSUS 2004
RESULTS OF OPERATIONS
2005 2004
------------------ ------------------
MILLIONS PERCENT MILLIONS PERCENT
OF OF OF OF
DOLLARS SALES DOLLARS SALES
-------- ------- -------- -------
Sales $1,755.3 100.0% $1,646.3 100.0%
Cost of sales 1,505.8 85.8% 1,362.6 82.8%
-------- ----- -------- -----
Gross margin 249.5 14.2% 283.7 17.2%
SG&A 138.6 7.9% 138.1 8.4%
Unusual items 37.5 2.1% 0.9 --
-------- ----- -------- -----
Operating income 73.4 4.2% 144.7 8.8%
Other expense 0.8 -- (0.1) --
Interest expense 28.8 1.7% 26.0 1.6%
Minority interest 4.5 0.3% 4.0 0.2%
Income taxes 14.7 0.8% 35.8 2.2%
Equity loss -- -- 0.7 --
-------- ----- -------- -----
Net income $ 24.6 1.4% $ 78.3 4.8%
======== ===== ======== =====
Depreciation &
amortization 70.2 4.0% 60.0 3.6%
SALES
Sales in 2005 were $1,755.3 million, an increase of 7% from $1,646.3 million in
2004. The August 2005 Macaw Acquisition, the March 2004 acquisition of certain
assets of The Cardinal Companies of Elizabethtown, LLC ("Cardinal") and the
October 2004 acquisition of certain of the assets of Metro Beverage Co.
("Metro") added $55.5 million or 3%, in the aggregate, to sales in 2005 as
compared with 2004. As shown in the following table, sales increased 2% when the
impact of these acquisitions and foreign exchange are excluded. Total case
volume in 8-ounce equivalents for 2005 was 1,201 million, up 5% from 1,148
million in 2004. Excluding the impact of acquisitions, sales volume was up 1%.
29
NORTH UK & INTER-
COTT AMERICA EUROPE NATIONAL
------ ------- ------ --------
Change in sales $109.0 $39.5 $57.6 $10.4
Impact of acquisitions 55.5 17.7 37.8 --
Impact of foreign exchange 14.0 13.8 (1.5) 1.7
------ ----- ----- -----
Change excluding
acquisitions & exchange $ 39.5 $ 8.0 $21.3 $ 8.7
====== ===== ===== =====
Percentage change excluding
acquisitions & exchange 2% 1% 11% 14%
In North America, our sales were $1,428.0 million in 2005, an increase of 3%
from 2004. Excluding acquisitions and the impact of foreign exchange, sales
increased by almost 1% from 2004. Case volume in 8-ounce equivalents decreased
by almost 2% in 2005, down 3% excluding the impact of acquisitions. The volume
decrease was driven by weakness in the North American CSD market and was offset
by selling price increases implemented in response to higher raw material costs.
In the U.K. and Europe, our sales were $251.9 million in 2005, an increase
of 30% from $194.3 million in 2004. Excluding the impact of the Macaw
Acquisition and the weakened pound sterling, sales increased 11% in 2005
reflecting higher volume. Case volume in 8-ounce equivalents was up 40% from
2004, an increase of 10% excluding the Macaw Acquisition. Volume increased as
customers expanded their retailer brand product offerings and we grew our
contract packing business.
The international segment includes Mexico, Royal Crown International and
Asia. Sales by this segment were $71.6 million in 2005, an increase of 17% when
compared with sales of $61.2 million in 2004. Excluding foreign exchange, sales
increased 14%. Sales in Mexico continue to expand, reaching $50.9 million for an
increase of 25% over 2004.
COST OF SALES
Cost of sales was $1,505.8 million or 85.8% of sales, a 3 percentage point
increase from $1,362.6 million or 82.8% of sales in 2004. Variable costs
represented 89% of total cost of sales in 2005, down from 90% in 2004 as a
result of recent capacity additions. Major elements of these variable costs
included ingredient and packaging costs, fees paid to third party manufacturers
and distribution costs.
The increase in total cost of sales as a percent of sales reflects an
increase in raw material costs as well as higher fixed costs. Raw material costs
have increased primarily for packaging materials, including PET bottles and
cans. Higher fixed costs result from recently added production capacity.
Variable cost savings from the increase in the proportion of our North American
production manufactured in our own facilities partially offset these increases.
GROSS PROFIT
Gross profit was 14.2% of sales for 2005, down from 17.2% in 2004 as realized
selling price increases were more than offset by higher packaging and raw
material prices. The change in product mix toward lower margined bottled water
and the fixed cost of additional plant capacities also contributed to lower
margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A was $138.6 million in 2005, up slightly from $138.1 million in 2004. As a
percentage of sales, SG&A declined to 7.9% for 2005, down from 8.4% in 2004.
Excluding the impact of acquisitions and foreign exchange, SG&A was down $5.0
million from 2004 primarily due to lower incentive compensation and lower bad
debt expense. A $3.1 million provision was recorded against a North American
export receivable in 2004.
UNUSUAL ITEMS
In 2005, we recorded charges for unusual items of $37.5 million on a pre-tax
basis or $0.35 per diluted share after tax. Unusual items were $0.9 million
before tax in 2004 and were primarily related to the writedown of an investment
in an equity investee.
NORTH AMERICA - In 2005, we recorded asset impairment and restructuring charges
of $36.0 million relating to our North American operations.
In September 2005 we announced a plan to realign the management of our
Canadian and U.S. businesses to a North American basis. We recorded
restructuring charges of $3.0 million, including $2.6 million for severance
payments and $0.4 million for contract termination payments as part of this
plan. We anticipate additional charges of $2.7 million including $0.7 million
for severance and $2.0 million for contract terminations, relating to the
closures of the Columbus, Ohio plant and the Lachine, Quebec juice plant will be
recognized during 2006.
Asset impairment charges relating to the realignment included $9.3 million
for the closure of the Columbus, Ohio plant announced in December 2005,
including property, plant and equipment of $3.4 million and goodwill of $5.9
million; and $3.7 million reflecting the write down of certain equipment and our
remaining investment in an equity investee.
We also recorded an impairment loss of $20.0 million with respect to
customer relationships. As a result of declining sales and margins relating to
certain customers we reviewed related long-lived assets for impairment. This
review indicated that the customer relationship assets were impaired and as a
result the carrying value was written down to its estimated fair value.
30
OTHER - Other unusual items of $1.5 million in 2005 relate primarily to the $0.8
million in legal fees for the OFT and Competition Commission reviews of the
Macaw Acquisition in the U.K. and $0.7 million in other asset impairments in the
Corporate and Other segment.
OPERATING INCOME
Operating income was $73.4 million in 2005 including unusual items of $37.5
million, as compared with $144.7 million in 2004 which included unusual items of
$0.9 million.
INTEREST EXPENSE
Net interest expense was $28.8 million in 2005, up 11% from $26.0 million in
2004. The increase was primarily due to higher borrowings on our credit
facilities during the year to finance the Macaw Acquisition.
INCOME TAXES
We recorded an income tax provision of $14.7 million in 2005 reflecting an
effective tax rate of 37.4% as compared with $35.8 million, or an effective rate
of 31.2%, in 2004. The effective tax rate increase is largely due to our
inability to recognize the tax benefit of our losses in Canada. A reduction in
reserves of $19.3 million partially offset the $21.0 million valuation allowance
recorded for Canadian tax losses.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash provided by operating activities in 2005 was $53.3 million, after capital
expenditures of $75.8 million, as compared to 2004 in which cash provided by
operating activities was $52.4 million after capital expenditures of $50.3
million. We use cash flow from operating activities after capital expenditures
to measure cash we are able to generate after considering the investments
required to maintain or expand our capital base. It is defined as follows:
2005 2004
------ ------
Cash provided by operating $129.1 $102.7
activities
Additions to property, plant &
equipment (75.8) (50.3)
------ ------
Cash flow from operations after $ 53.3 $ 52.4
capital expenditures ====== ======
Cash flow from operations after capital expenditures increased slightly in 2005
despite a $25.5 million increase in capital spending as net working capital
increased by $1.0 million in 2005 compared with the $52.4 million increase in
2004. At the end of 2004, accounts receivable were high as a result of supplier
rebates not collected until January 2005 and inventories were adversely impacted
by plant inefficiencies, poor forecasting and inventory build up for January
2005 promotions. In 2005, increases in accounts receivable and inventory are
more reflective of the changes in sales and costs. Accounts payable levels are
higher in 2005 primarily as a result of the capacity additions in North America.
INVESTING ACTIVITIES
CAPITAL EXPENDITURES - Our capital expenditures were $75.8 million in 2005 as
compared with $50.3 million in 2004. Major capital expenditures include $62.5
million on leasehold improvements and manufacturing equipment, primarily in the
North America, as we added capacity to support future growth. We completed
construction on a new beverage manufacturing facility in Fort Worth, Texas and
began shipping from this location in June 2005. The total cost of the Fort Worth
plant was $50.6 million, including $30.7 million spent in 2005.
ACQUISITIONS - We completed the Macaw Acquisition in August 2005. The purchase
price of the acquisition was $135.1 million (75.4 million pounds sterling)
including acquisition costs of $2.4 million (1.3 million pounds sterling). The
acquisition was financed under our global credit facilities, which were
increased from $100.0 million to $225.0 million in connection with this
transaction.
In March 2004, we acquired certain of the assets of Cardinal. The
acquisition added carbonated soft drink sales and manufacturing capacity in
North America. The total purchase price was $17.8 million and was funded from
cash flow from operations and short-term borrowings.
In October 2004, we purchased certain of the assets of Metro. The total
purchase price was $16.8 million and was funded from cash flow from operations
and short-term borrowings.
The total cost of these acquisitions in 2004 was $34.6 million including
acquisition costs of $0.8 million.
CAPACITY ADDITIONS - In October 2004, we purchased the plant and equipment of
Elan Waters in Blairsville, Georgia for $3.8 million to add to our production
capacity in North America. The purchase was funded from short-term borrowings.
OTHER INVESTING ACTIVITIES - Other investing activities relate primarily to
additions to information technology assets included in intangibles and other
assets. We made progress in implementing our standardized information system
during 2005 and expect to complete the roll out in 2006.
31
CAPITAL RESOURCES AND DEBT
Our sources of capital include operating cash flows, short-term borrowings under
current credit facilities, issuance of public debt and issuance of equity
securities. Management believes we have adequate financial resources to meet our
ongoing cash requirements for operations and capital expenditures, as well as
our other financial obligations based on our operating cash flows and current
available credit.
SENIOR SECURED CREDIT FACILITY - On March 31, 2005 we entered into a committed
senior secured credit facility for financing in North America, the U.K. and
Mexico. The facilities replaced our former committed senior secured credit
facility in North America and our demand bank credit facility in the U.K. The
facilities terminate, and the debt under the senior secured credit agreement is
due, on March 31, 2010. These multicurrency facilities were amended on August
10, 2005 to increase the facilities to $225.0 million from $100.0 million to add
Macaw (Soft Drinks) Limited as a co-borrower, to consent to the Macaw
Acquisition and to increase the Maximum Facility Amount to $350.0 million.
The amended facilities allow for revolving credit borrowings in a principal
amount of up to $225.0 million, provided we are in compliance with the covenants
and conditions of the agreements, and are comprised of two separate facilities:
(1) a $220.0 million multicurrency facility made by certain lenders to us and
our indirect wholly-owned subsidiaries, Cott Beverages Inc., Macaw (Soft
Drinks) Limited and Cott Beverages Limited as co-borrowers, and
(2) a $5.0 million Mexican facility made by the lender to our indirect 90%
owned subsidiary Cott Embotelladores de Mexico, S.A. de C.V. ("CEMSA").
Each facility includes subfacilities for swingline loans and letters of
credit. The $225.0 million facility can be increased up to an additional $125.0
million at our option if the lenders agree to increase their commitments or new
lenders join the facility and we satisfy certain conditions. Within the $125.0
million of extra availability, and subject to certain limitations, we can
establish additional revolving credit facilities in an aggregate amount not to
exceed $30.0 million to be provided in various currencies as agreed upon for
additional subsidiaries designated by us. Wachovia Bank, National Associations
acts as administrative agent and security trustee under the facilities.
The facilities are collateralized by substantially all our personal
property with certain exceptions including the receivables sold as part of our
receivables securitization facility discussed below.
In general, borrowings under these facilities bear interest at either a
floating or fixed rate for the applicable currency plus a margin based on our
consolidated total leverage ratio. A facility fee of between 0.15% and 0.375%
per annum is payable on the entire line of credit. The level of the facility fee
is dependent on financial covenants. As of December 31, 2005 credit of $78.8
million was available after borrowings of $141.3 million, comprised of $6.0
million and 78.1 million pounds sterling, and standby letters of credit of $4.9
million. The weighted average interest rate was 5.83% on these facilities as of
December 31, 2005.
SECURITIZATIONS - In April 2005 our principal U.S. operating subsidiaries
entered into a receivables securitization facility under which they agreed to
sell substantially all of their receivables generated from their ordinary course
operations, as well as certain related assets, to a new special purpose indirect
subsidiary, Cott USA Receivables Corporation, which in turn sells and assigns
undivided interests in the receivables and related assets to an unaffiliated
entity, Park Avenue Receivables Company, LLC and certain other financial
institutions in exchange for cash in amounts determined by the parties, subject
to specified conditions. The transfers to the Purchasers are treated as a
financing for purposes of our consolidated financial statements; however, the
presentation of consolidated financial statements does not itself imply that the
assets of any consolidated entity, including any special-purpose entity formed
for a particular project, are available to pay the liabilities of any other
consolidated entity, or that the liabilities of any consolidated entity,
including any special-purpose entity formed for a particular project, are
obligations of any other consolidated entity. The transfers of the receivables
and related assets to the Purchasers are governed by a Receivables Purchase
Agreement, dated April 1, 2005, by and among Cott USA Receivables Corporation,
Cott Beverages Inc., the Purchasers and JPMorgan Chase Bank, N.A., acting for
itself and the Purchasers. The agreement contains representations, warranties,
covenants, and indemnities customary for facilities of this type. The facility
does not contain any covenants that we view as materially constraining our
activities or, except for Cott USA Receivables Corporation, the activities of
our subsidiaries.
The amount of funds available under the receivables facility is based upon
the amount of eligible receivables and various reserves required by the
facility. Accordingly, availability may fluctuate over time given changes in
eligible receivables balances and calculation of reserves, but will not exceed
the $75.0 million program limit. This facility bears interest at a variable
rate, based on the cost of borrowing of the Purchasers. A fee of between 0.20%
and 0.40% per annum is payable on the unused portion of the facility. The level
of the facility fee is dependent on financial covenants. As of December 31,
2005, $39.6 million of eligible receivables, net of reserves, were available for
purchase and $10.0 million was outstanding
32
under this facility at a weighted average interest rate of 5.08%.
SENIOR SUBORDINATED NOTES - We also have outstanding 8% senior subordinated
notes, which are due in 2011. As of December 31, 2005, the principal amount of
those notes was $275.0 million. The issuer of the notes is Cott Beverages Inc.,
but we and most of our U.S., Canadian and U.K. subsidiaries guarantee the notes.
LONG-TERM DEBT - Long-term debt as of December 31, 2005 was $273.1 million,
compared with $273.3 million at the end of 2004. Long-term debt in 2005 and 2004
consisted of 8% senior subordinated notes with a stated face value of $275.0
million and capital leases of $2.6 million.
DEBT COVENANTS - Our senior secured credit facility and the indenture respecting
the 2011 notes contain a number of business and financial covenants and events
of default that apply to the borrowers and the restricted subsidiaries. The
restricted subsidiaries are, in general, the guarantor subsidiaries organized in
Canada, the U.S., the U.K. and Mexico. Among other events of default or triggers
for prepayment in our credit facilities and indenture are: a change of control
of us in certain circumstances; cross default or cross acceleration to other
indebtedness in excess of $15.0 million; unsatisfied judgments in excess of
$15.0 million; our insolvency or that of the restricted subsidiaries; and
covenant default under the indenture or credit facilities. Some of the more
material business and financial covenants are discussed below.
Our senior secured credit facility restricts additional indebtedness for
subsidiaries to the existing debt and credit facilities, certain intercompany
debt, $50.0 million of purchase money indebtedness and capital lease
obligations, $25.0 million of guarantee obligations and a $25.0 million basket
of other additional indebtedness. The senior secured credit facility contains
restrictions on investments, including investments in subsidiaries outside of
the U.S., Canada or the U.K., and acquisitions. In general, individual
acquisitions are permitted up to $100.0 million with the aggregate expenditure
for all acquisitions limited to $150.0 million in any fiscal year.
There is also a restriction on disposition of assets having a fair market
value exceeding $40.0 million in a fiscal year with certain specified
exemptions. Dividends are currently limited to 25% of consolidated net income
for the immediately preceding fiscal quarter but that amount increases to 50% of
consolidated net income for the immediately preceding fiscal quarter if the
leverage ratio is below 2.0 to 1.0. Capital stock purchases are limited to $50.0
million during the term of this credit facility.
There are further restrictions in several of the covenants, such as a
complete prohibition on paying any dividends, if we are in default under the
senior secured credit agreement. In addition, many of the covenants effectively
limit transactions with our unrestricted subsidiaries or non-guarantor entities.
In addition to business covenants, there are financial covenants in our
senior secured credit facility. Since March 31, 2005, our Total Leverage Ratio
was required to be no more than 3.25 to 1.0 and that requirement is tightened to
3.00 to 1.0 from July 1, 2006. At the end of 2005, our leverage ratio was 2.3 to
1.0. The senior secured credit facility also has a Minimum Fixed Charge Coverage
Ratio. From March 31, 2005, our fixed charge coverage ratio was required to be
at least 1.05 to 1.0 and July 1, 2006 it must be at least 1.10 to 1.0 and after
July 1, 2007 it must be at least 1.15 to 1.0. As of December 31, 2005 it was 2.3
to 1.0.
The indenture for the 2011 notes also has numerous covenants that are
applicable to Cott Beverages Inc., the restricted subsidiaries and us. We can
only make restricted payments, such as paying dividends, buying back stock or
making certain investments, if our fixed charge coverage ratio is at least 2.0
to 1.0. Even then, we can only make those restricted payments in an amount that
is no greater than 50% of our consolidated net income subject to certain
adjustments. Certain other investments, like those not exceeding $60.0 million
in the aggregate, may be made without satisfying the restricted payments test.
We can only incur additional debt or issue preferred stock, other than
certain specified debt, if our fixed charge coverage ratio is greater than 2.0
to 1.0. For purposes of the indenture, our fixed charge coverage ratio was 6.2
to 1.0 as of December 31, 2005. Subject to some exceptions, asset sales may only
be made where the sale price is equal to the fair market value of the asset sold
and we receive at least 75% of the proceeds in cash. There are also limitations
on what we may do with the sale proceeds such that we may be required to pay
down debt or reinvest the proceeds in enumerated business uses within a
specified period of time.
There are further restrictions in several of the covenants, such as a
complete prohibition on paying any dividends, if we are in default under the
indenture. Many of the covenants also effectively limit transactions with our
unrestricted subsidiaries or non-guarantor entities.
Several of the terms, such as restricted payments, are defined differently
in the indenture and the senior secured credit facility and certain calculations
are made differently in the two agreements.
We believe that we have sufficient financial flexibility under the terms of
our indebtedness to operate our business as currently planned.
CAPITAL STRUCTURE
In 2005, shareowner's equity increased by $24.6 million from 2004. Shareowners'
equity increased as a result of net
33
income of $24.6 million, additional share capital of $4.4 million from the
exercise of employee stock options, including the related tax benefit, and the
$0.6 million reduction in the unrealized losses on cash flow hedges. These
increases were partially offset by a $5.0 million foreign currency translation
loss on the net assets of self-sustaining foreign operations. The foreign
currency translation adjustment resulted from the net changes in the pound
sterling and the Canadian dollar relative to the U.S. dollar.
DIVIDEND PAYMENTS
No dividends were paid in 2005 and we are not expecting to change this policy in
2006 as we intend to use cash for future growth or debt repayment.
There are certain restrictions on the payment of dividends under our credit
facility and 2011 notes indenture. The most restrictive provision is the
quarterly limitation of dividends based on the prior quarter's earnings.
CONTRACTUAL OBLIGATIONS
The following chart shows the schedule of future payments under certain
contracts, including long-term debt agreements and guarantees as of December 31,
2005:
Payments due by period
--------------------------------------------
Less than Years Years After
Total 1 Year 2-3 4-5 5 years
------ --------- ----- ----- -------
(IN MILLIONS)
2011 notes $275.0 $ -- $ -- $ -- $275.0
Operating leases 95.6 17.8 24.4 17.5 35.9
Capital lease 2.6 0.8 1.5 0.3 --
Purchase
obligations (1) 239.4 55.0 72.6 37.6 74.2
------ ----- ----- ----- ------
$612.6 $73.6 $98.5 $55.4 $385.1
====== ===== ===== ===== ======
(1) Purchase obligations consist of an information technology outsourcing
contract, contracts with certain co-packers and commitments for the
purchase of inventory and capital expenditures. These obligations represent
expected expenditures under the normal course of business, not our minimum
contractual obligations.
CRITICAL ACCOUNTING POLICIES
Note 1 to the consolidated financial statements includes a summary of the
significant accounting policies and estimates used in the preparation of our
consolidated financial statements.
Our critical accounting policies require management to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and the accompanying notes. These estimates are based on historical
experience, the advice of external experts or on other assumptions management
believes to be reasonable. Where actuals differ from estimates, revisions are
included in the results of the period in which actuals become known.
Historically, differences between estimates and actuals have not had a
significant impact on our consolidated financial statements.
Critical accounting policies and estimates used to prepare the financial
statements are discussed with our Audit Committee as they are implemented and on
an annual basis and include the following:
REVENUE RECOGNITION
We report sales when ownership passes to customers for products manufactured in
our own plants and/or by third parties on our behalf. We regularly evaluate the
facts and circumstances in relation to the criteria in the EITF 99-19 and use
our best judgment to determine whether to report sales on a gross or net basis
for products manufactured by third parties. Currently, the facts and
circumstances surrounding all of our business support the reporting of all sales
on a gross basis.
We offer sales incentives to certain customers. We account for these
incentives as a reduction in sales. We follow the guidance under EITF 01-9 in
accounting for sales incentives. Where the incentive has been paid in advance,
we amortize the amount based on expected future sales related to the incentive.
Where the incentive is to be paid in arrears, we accrue the amount based on
expected future sales related to the incentive.
IMPAIRMENT TESTING OF GOODWILL AND INTANGIBLE ASSETS WITH AN INDEFINITE LIFE
With the implementation of Statement of Financial Accounting Standard ("SFAS")
142 in 2002, goodwill and intangible assets with an indefinite life are no
longer amortized, but instead are tested at least annually for impairment. Any
impairment loss is recognized in income. We have goodwill of $150.3 million and
rights of $80.4 million on our balance sheet at December 31, 2005.
In accordance with SFAS 142, we evaluate goodwill for impairment on a
reporting unit basis. Reporting units are operating segments or components of
operating segments for which discrete financial information is available. The
evaluation of goodwill for each reporting unit is based upon the following
approach. We compare the fair value of a reporting unit to its carrying value.
Where the carrying value is greater than the fair value, the implied fair value
of the reporting unit goodwill is determined by allocating the fair value of the
reporting unit to all the assets and liabilities of the reporting unit with any
of the remainder being allocated to goodwill. The implied fair value of the
reporting unit goodwill is then compared to the carrying value of that goodwill
to determine the impairment loss.
34
We measure the fair value of reporting units using discounted future cash
flow. Because the business is assumed to continue in perpetuity, the discounted
future cash flow includes a terminal value. The long-term growth assumptions
incorporated into the discounted cash flow calculation reflect our long-term
view of the market and the discount rate is based on our weighted average cost
of capital. Each year we re-evaluate the assumptions used to reflect changes in
the business environment. Based on the evaluation performed this year, we
determined that the fair values of our reporting units, except for our Columbus,
Ohio plant, exceeded their carrying value and that as a result the second step
of the impairment test was not required. We performed an impairment test on the
value of the goodwill relating to our Columbus, Ohio plant as a result of its
announced closure. The impairment charge of $5.9 million relating to this
goodwill has been included in unusual items.
Our only intangible asset with an indefinite life relates to our 2001
acquisition of intellectual property from Royal Crown Company, Inc. including
the right to manufacture our concentrates, with all related inventions,
processes, technologies, technical and manufacturing information and know-how.
There is an indefinite life to our ownership of these rights, and there are no
legal, regulatory, contractual, competitive, economic, or other factors that
limit the useful life. In accordance with SFAS 142, based on the above factors,
the life of the rights is considered to be indefinite and they are not
amortized, but are tested annually for impairment. Impairment of an intangible
asset with an indefinite life, if any, is determined using the same discounted
future cash flow assumptions and model discussed above for goodwill. We compare
the carrying value of the rights to their fair value and recognize in income any
impairment in value.
OTHER INTANGIBLE ASSETS
Other intangible assets consist principally of customer relationships that arise
from acquisitions, which amounted to $126.6 million at December 31, 2005.
Customer relationships are amortized on a straight-line basis for the period
over which we expect to receive economic benefits.
IMPAIRMENT OF LONG-LIVED ASSETS
We periodically compare the carrying value of long-lived assets, including
customer relationships by customer, to the estimated undiscounted future cash
flows at the lowest level of independent cash flows for the group of long-lived
assets and recognize any impairment in our income statement. The expected life
and value of these long-lived assets is based on an evaluation of the
competitive environment, history and future prospects as appropriate. In 2005,
we recorded impairment losses of $20.0 million relating to customer
relationships and $5.3 million relating to long-lived assets of our Columbus,
Ohio and Lachine, Quebec facilities in unusual items.
INCOME TAXES
We regularly review the recognized and unrecognized deferred income tax assets
to determine whether or not a valuation allowance is required. Management
believes that it is more likely than not that the deferred tax asset in respect
of Canada will not be realized and has recorded a valuation allowance in the
amount of $21.0 million in 2005. A reduction in reserves of $19.3 million
partially offset the increase in the valuation allowance. All other deferred tax
assets will be realized as a result of anticipated future taxable income from
these operations. The remaining deferred tax assets of $5.0 million relate
primarily to the United States. A significant change in the volumes or
profitability of these operations could affect the realization of the deferred
tax assets. We periodically review exposures and make our best estimate of the
reserve amount.
In the ordinary course of business, we enter into transactions where the
ultimate tax determination may be uncertain. These uncertainties require us to
make estimates of the ultimate tax liabilities and, accordingly, the provision
for income taxes. While we believe our estimates are reasonable and appropriate,
additional income tax provisions may result if tax matters are resolved or
settled at amounts different from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004 the Financial Accounting Standard's Board ("FASB") issued SFAS
123R, Share-Based Payments, requiring companies to recognize compensation
expense for all types of stock options. We will adopt this standard using the
modified prospective approach for 2006. As a result of this new standard,
compensation expense for 2005 would have increased by $9.8 million and income
taxes would decrease by $2.5 million. Comparative figures for the year ended
December 31, 2005 would show income before income taxes and equity loss of $29.5
million, income tax expense of $12.2 million and net income of $17.3 million or
$0.24 per basic share and fully diluted share.
In November 2004 FASB issued SFAS 151, Inventory Costs, requiring the
allocation of fixed production overheads to be based on normal capacity of the
production facilities. Unallocated overheads resulting from abnormally low
production and certain other costs are to be recognized as an expense in the
period in which they are incurred. We will adopt this standard for our interim
period ending April 1, 2006. We do not expect this change to have a material
impact on us.
35
CANADIAN GAAP
Results determined under Canadian GAAP may differ from results determined under
U.S. GAAP from time to time. Under Canadian GAAP in 2005, our net income would
be $17.2 million and total assets would be $1,171.9 million compared to net
income and total assets under U.S. GAAP of $24.6 million and $1,171.4 million,
respectively. Under Canadian GAAP in 2004, our net income would be $70.6 million
and total assets would be $1,023.9 million compared to net income and total
assets under U.S. GAAP of $78.3 million and $1,022.0 million, respectively.
There is one material U.S./Canadian GAAP difference in 2005 and 2004. Under
Canadian GAAP, effective January 1, 2004, stock options issued to employees
subsequent to January 1, 2002 are recognized in net income over the vesting
period based on their fair value. As a result, compensation expense of $9.7
million, $7.2 million after tax, was recorded in 2005. Compensation expense of
$10.0 million, $7.5 million after tax, was recorded for 2004. This policy was
adopted on a retroactive basis with no restatement of comparative figures and as
a result $5.6 million was charged to opening retained earnings as at January 3,
2004. Under U.S. GAAP, we have elected not to record compensation expense for
options issued to employees with an exercise price equal to the market value of
the common shares. In 2006, we will adopt SFAS 123R which requires recognition
of compensation expense relating to stock options.
2004 VERSUS 2003
Our fiscal year ends on the Saturday closest to December 31 each year. As a
result, a 53rd week is included in our fiscal year every five or six years. The
fiscal year that ended January 3, 2004 consisted of 53 weeks.
RESULTS OF OPERATIONS
2004 2003
------------------ ------------------
MILLIONS PERCENT MILLIONS PERCENT
OF OF OF OF
DOLLARS SALES DOLLARS SALES
-------- ------- -------- -------
Sales $1,646.3 100.0% $1,417.8 100.0%
Cost of sales 1,362.6 82.8% 1,141.0 80.5%
-------- ----- -------- -----
Gross margin 283.7 17.2% 276.8 19.5%
SG&A 138.1 8.4% 126.1 8.9%
Unusual items 0.9 -- 1.8 0.1%
-------- ----- -------- -----
Operating income 144.7 8.8% 148.9 10.5%
Other expense (0.1) -- 0.5 --
Interest expense 26.0 1.6% 27.5 2.0%
Minority interest 4.0 0.2% 3.2 0.2%
Income taxes 35.8 2.2% 40.1 2.8%
Equity loss 0.7 -- 0.2 --
-------- ----- -------- -----
Net income $ 78.3 4.8% $ 77.4 5.5%
======== ===== ======== =====
Depreciation &
amortization 60.0 3.6% 51.0 3.6%
-------- ----- -------- -----
SALES
Sales in 2004 were $1,646.3 million, an increase of 16% from $1,417.8 million in
2003. The following table shows the change in sales by significant segment from
2003 to 2004 excluding the impact of acquisitions, foreign exchange and the
extra week in 2003:
NORTH UK & INTER-
COTT AMERICA EUROPE NATIONAL
------ ------- ------ --------
Change in sales $228.5 $180.8 $27.7 $19.1
Impact of
acquisitions 62.3 62.3 -- --
Impact of extra
week in 2003 (20.5) (17.8) (1.9) (0.8)
Impact of foreign
exchange 32.6 13.3 20.2 (1.1)
------ ------ ----- -----
Change excluding
acquisitions,
exchange &
extra week $154.1 $123.0 $ 9.4 $21.0
------ ------ ----- -----
Percentage change
excluding
acquisitions,
exchange &
extra week 11% 10% 5% 52%
------ ------ ----- -----
36
Excluding the impact of the extra week in 2003, sales increased 18% in 2004. In
December 2003, we acquired the retailer brand beverage business of Quality
Beverage Brands, L.L.C. located in North Carolina and in 2004, we acquired
certain of the assets of Cardinal and Metro. These acquisitions added $62.3
million or 3.8%, in the aggregate, to sales in 2004. When the impact of these
acquisitions and foreign exchange are also excluded, sales increased 13% and
11%, respectively. Total case volume in 8-ounce equivalents for 2004 was 1,148
million, up from 1,013 million in 2003.
In North America, our sales were $1,388.5 million in 2004, an increase of
15% from 2003 or 17% excluding the extra week in 2003. When also excluding
acquisitions and foreign exchange, sales increased 10% from 2003. The growth was
driven by increased volume with existing customers in the U.S., introduction of
new products and sales to new customers partially offset by overall weak demand
for carbonated soft drinks in Canadian grocery stores.
In the U.K. and Europe, our sales were $194.3 million in 2004, an increase
of 17% from $166.6 million in 2003. Excluding the impact of the strengthened
pound sterling and the extra week in 2003, sales increased 5% in 2004. The
increase was due to continued focus on core products, manufacturing for
non-retailer third parties, partnering with key suppliers, optimizing
manufacturing processes and warehouse logistics and introducing new products.
The international segment includes the Mexican operations, the Royal Crown
International division and our business in Asia. Sales by this segment were
$61.2 million in 2004, an increase of 45% when compared with sales of $42.1
million in 2003. Excluding foreign exchange and the extra week in 2003, sales
increased 52%. The increase in sales is primarily due to sales in Mexico where
sales were $40.7 million, an increase of 67% from $24.4 million in 2003.
COST OF SALES
Cost of sales was $1,362.6 million or 82.8% of sales in 2004 as compared with
$1,141.0 million or 80.5% of sales in 2003. The increase in cost of sales
resulted primarily from reduced plant efficiencies and higher logistics costs as
we struggled to meet increased demand during the first half of 2004. Higher
commodity costs including resin for PET bottles and aluminum for cans.
Variable costs represented 90% of total cost of sales in 2004. Major
elements of these variable costs included ingredient and packaging costs, fees
paid to third party manufacturers and distribution costs.
GROSS PROFIT
Gross profit was 17.2% of sales for 2004 compared with 19.5% in 2003. Lower
margins resulted primarily from reduced plant efficiencies and higher logistics
costs. Higher commodity costs were largely offset by price increases charged to
our customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A was $138.1 million in 2004, an increase of $12.0 million or 10% from $126.1
million in 2003. Increases in SG&A include costs associated with Sarbanes-Oxley
Section 404 compliance, provisions taken during the year to write-off certain
export receivables in North America, adding new employees principally to serve
our growing North American business, and a negative impact from the weakened
U.S. dollar. These increases were partially offset by a decrease in incentive
compensation.
UNUSUAL ITEMS
Unusual items of $0.9 million in 2004 and $1.8 million in 2003 are primarily
related to write downs to our investment in an equity investee.
OPERATING INCOME
Operating income was $144.7 million in 2004 as compared with $148.9 million for
2003.
INTEREST EXPENSE
Net interest expense was $26.0 million in 2004, down 5% from $27.5 million in
2003. This decrease was primarily due to lower average borrowings on our credit
facilities during the year.
INCOME TAXES
We recorded an income tax provision of $35.8 million in 2004 reflecting an
effective tax rate of 31.2%. This decreased from $40.1 million, or an effective
rate of 34.1%, in 2003 primarily due to a change in management's best estimate
of the reserve.
CANADIAN GAAP
Results reported under Canadian GAAP may differ from results reported under U.S.
GAAP from time to time. Under Canadian GAAP in 2003, we reported net income of
$77.2 million and total assets of $910.1 million compared to net income and
total assets reported under U.S. GAAP of $77.4 million and $908.8 million,
respectively. There are no material U.S./Canadian GAAP differences for 2003.
37
OUTLOOK
We expect 2006 to be another challenging year. The carbonated soft drinks
industry is expected to be flat in 2006 compared with 2005 as the decline in
sales of regular CSDs is offset by higher sales of diet CSDs. Strong growth is
expected for bottled water and non-carbonated beverages.
To be successful, we will need to take a more disciplined, strategic
approach to pricing, work to strategically reduce costs, aggressively improve
the efficiency of our overall supply chain including bottled water profitability
and increase our penetration into the non-carbonated beverages category.
We intend to raise prices to recover all 2006 raw material cost increases
and, over the next 18 months, implement incremental pricing to recover the 2005
gap between cost and pricing increases.
We continue to move forward on the North American realignment plan we
announced in September 2005. We are leveraging management strengths across a
broader territory and maximizing opportunities and processes to improve supply
chain efficiencies and financial performance. We have improved asset
efficiencies and made tough decisions to close certain operations and better
align resources with customer needs. To date, we have recorded charges of $16.9
million relating to this plan and $20.0 million for customer relationship
impairment and could incur additional pre-tax charges, including asset
impairments, severance and other costs, of $23.0 to $43.0 million. We have not
completed the detailed plans and the requisite analyses to estimate the
remaining charges to specific categories. As a result, the ultimate amount and
timing of the charges is uncertain.
We continue to strategically realign our asset base to improve our
efficiencies and reduce fixed costs. We are also looking into opportunities such
as expanded in-house PET blow-moulding capabilities and dedicated high-speed
water lines to improve the profitability of bottled water.
Our longer term priority is to position ourselves for growth in the
non-carbonated beverages category. We will evaluate opportunities to increase
our penetration in fast growing segments such as isotonics, enhanced or
fortified drinks, energy and juice-based beverages.
Our business strategy also involves continuing to expand outside of North
America. We continue to view Mexico as a strong long-term growth opportunity and
are working closely with our customers to grow the retailer brand beverage
segment in this market. The U.K. business intends to continue to enhance its
performance through product innovation and a customer-centric focus to identify
opportunities. The Macaw Acquisition has added additional production capacity
and aseptic beverage capabilities to our U.K. business unit. Subsequent to the
completion of the Macaw Acquisition, the OFT in the U.K. decided to review the
transaction. Under applicable U.K. law, we were not required to seek
pre-clearance of the Macaw Acquisition by the OFT. However, the OFT has referred
the transaction to the Competition Commission for further investigation. The
Competition Commission ruling is expected in May 2006. We expect that the
transaction will be approved, but we cannot guarantee this outcome. However,
until a ruling is made, the OFT and Competition Commission have required us to
refrain from further integrating the Macaw business into the Cott business in
the U.K.
We expect 2006 net income to be substantially below the 2005 level as,
along with charges for unusual items and compensation expense for stock options
resulting from the implementation of SFAS 123R, we will have higher depreciation
expense from capacity additions and the Macaw Acquisition, increased interest
expense from the Macaw Acquisition and a higher effective tax rates mainly due
to our inability to record tax benefits on losses in Canada.
The actions we have outlined will take time to implement. We are moving
forward in an urgent yet disciplined way and are working to position Cott for
long term success.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE
We are exposed to changes in foreign currency exchange rates. Operations outside
of the U.S. accounted for approximately 29% of 2005 sales and 26% of 2004 sales,
and are concentrated principally in the U.K. and Canada. Our debt instruments,
excluding debt of $135.3 million (78.1 million pounds sterling) related to the
Macaw Acquisition and the U.K. operations, are denominated in U.S. dollars. We
translate the revenues and expenses of our foreign operations using average
exchange rates prevailing during the period. The effect of a 10% change in
foreign currency exchange rates among the U.S. dollar versus the Canadian dollar
and pound sterling at current levels of foreign debt and operations could be
material to our financial condition and profitability.
In 2005, we entered into cash flow hedges to mitigate exposure to declines
in the value of the Canadian dollar and pound sterling attributable to certain
forecasted U.S. dollar raw material purchases of the Canadian and U.K. and
European business segments. The hedges consist of monthly foreign exchange
options to buy U.S. dollars at fixed rates per Canadian dollar and mature at
various dates through December 28, 2006. The fair market value of the
38
foreign exchange options is included in prepaid expenses and other assets.
The instruments are cash flow hedges under SFAS 133; accordingly, changes
in the fair value of the cash flow hedge instruments are recognized in
accumulated other comprehensive income. Amounts recognized in accumulated other
comprehensive income and prepaid expenses and other assets are recorded in
earnings in the same periods in which the forecasted purchases or payments
affect earnings. At December 31, 2005, the fair value of the options was $0.4
million and we had a $0.4 million unrealized loss in comprehensive income.
DEBT OBLIGATIONS AND INTEREST RATES
We have exposure to interest rate risk from our short-term and long-term debt.
Our long-term debt is fixed and our short-term debt is variable. Our short-term
credit facilities are most vulnerable to fluctuations in the U.K. short-term
base rate and the LIBOR rate. At current debt levels, a hypothetical increase of
10% in either interest rate measure would not be material to our cash flows or
our results of operations. The weighted average interest rate of our debt
outstanding at December 31, 2005 was 5.78%.
We regularly review the structure of our indebtedness and consider changes
to the proportion of floating versus fixed rate debt through refinancing,
interest rate swaps or other measures in response to the changing economic
environment. Historically, we have not used derivative instruments to manage
interest rate risk. If we use and fail to manage these derivative instruments
successfully, or if we are unable to refinance our indebtedness or otherwise
increase our debt capacity in response to changes in the marketplace, the
expense associated with debt service could increase. This would negatively
impact our financial condition and profitability.
The information below summarizes our market risks associated with long-term debt
obligations as of December 31, 2005. The table presents principal cash flows and
related interest rates by year of maturity. Interest rates disclosed represent
the actual weighted average rates as of December 31, 2005.
DEBT OBLIGATIONS
------------------------------
WEIGHTED AVERAGE
INTEREST RATE FOR
FIXED RATE DEBT MATURING
---------- -----------------
(IN MILLIONS OF US DOLLARS)
DEBT MATURING IN:
2006 $ 0.8 5.2%
2007 0.8 5.2%
2008 0.7 5.2%
2009 0.3 5.2%
2010 -- --
Thereafter 275.0 8.0%
------ ---
Total $277.6 8.0%
------ ---
Fair Value $285.9
------
39
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared by
management in conformity with generally accepted accounting principles in the
U.S. to reflect our financial position and our operating results. Financial
information appearing throughout this Annual Report is consistent with that in
the consolidated financial statements. Management is responsible for the
information and representations in such consolidated financial statements,
including the estimates and judgments required for their preparation.
In order to meet our responsibility, management maintains a system of
internal controls including policies and procedures designed to provide
reasonable assurance that assets are safeguarded and reliable financial records
are maintained. We have contracted with Deloitte and Touche LLP to provide
internal audit services including monitoring and reporting on the adequacy of
and compliance with internal controls. The internal audit function reports
regularly to the Audit Committee of the Board of Directors and we take such
actions as are appropriate to address control deficiencies and other
opportunities for improvement as they are identified.
The report of PricewaterhouseCoopers LLP, our independent registered public
accounting firm, covering their audit of the consolidated financial statements
and internal control over financial reporting as of December 31, 2005 and
January 1, 2005 and the audit of the January 3, 2004 financial statements, is
included in this Annual Report. We used PricewaterhouseCoopers LLP for audit and
tax compliance services in 2005 and plan to engage them only to provide these
services in the future.
The Board of Directors annually appoints an Audit Committee, consisting of
at least three independent directors. The Audit Committee meets with management,
internal auditors and the independent auditors to review any significant
accounting and auditing matters and to discuss the results of audit
examinations. The Audit Committee also reviews the consolidated financial
statements, the Report of Independent Registered Public Accounting Firm and
other information in the Annual Report and recommends their approval to the
Board of Directors.
/s/ John K. Sheppard
----------------------------------------
John K. Sheppard
President & Chief Executive Officer
February 22, 2006
/s/ B. Clyde Preslar
----------------------------------------
B. Clyde Preslar
Executive Vice President & Chief
Financial Officer
February 22, 2006
40
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREOWNERS OF COTT CORPORATION:
We have completed an integrated audit of Cott Corporation's December 31, 2005
and January 1, 2005 consolidated financial statements and of its internal
control over financial reporting as of December 31, 2005 and an audit of its
January 3, 2004 consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Our
opinions on Cott Corporation's December 31, 2005, January 1, 2005 and January 3,
2004 financial statements and on its' internal control over financial reporting
as at December 31, 2005 based on our audits are presented below.
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
In our opinion, the consolidated financial statements appearing under Item 8 of
Form 10-K present fairly, in all material respects, the financial position of
Cott Corporation and its subsidiaries at December 31, 2005 and January 1, 2005
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedules appearing under Item 15 of Form 10-K present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control over Financial Reporting appearing in Item 9A of Form 10-K,
that the Company maintained effective internal control over financial reporting
as of December 31, 2005 based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control --
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal-control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
41
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
February 22, 2006
42
COTT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
SALES $1,755.3 $1,646.3 $1,417.8
Cost of sales 1,505.8 1,362.6 1,141.0
-------- -------- --------
GROSS PROFIT 249.5 283.7 276.8
Selling, general and administrative expenses 138.6 138.1 126.1
Unusual items - note 2
Restructuring 3.2 -- --
Asset impairments 33.5 0.9 1.8
Other 0.8 -- --
-------- -------- --------
OPERATING INCOME 73.4 144.7 148.9
Other expense (income), net - note 3 0.8 (0.1) 0.5
Interest expense, net - note 4 28.8 26.0 27.5
Minority interest 4.5 4.0 3.2
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EQUITY LOSS 39.3 114.8 117.7
Income taxes - note 5 (14.7) (35.8) (40.1)
Equity loss -- (0.7) (0.2)
-------- -------- --------
NET INCOME - note 6 $ 24.6 78.3 $ 77.4
======== ======== ========
PER SHARE DATA - note 7
NET INCOME PER COMMON SHARE
Basic $ 0.34 $ 1.10 $ 1.12
Diluted $ 0.34 $ 1.09 $ 1.09
The accompanying notes are an integral part of these consolidated financial
statements.
43
COTT CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, January 1,
2005 2005
------------ ----------
(IN MILLIONS OF U.S. DOLLARS)
ASSETS
CURRENT ASSETS
Cash $ 21.7 $ 26.6
Accounts receivable - note 8 191.1 184.3
Inventories - note 9 144.2 122.8
Prepaid expenses and other assets 9.5 9.7
-------- --------
366.5 343.4
PROPERTY, PLANT AND EQUIPMENT - note 11 394.2 313.7
GOODWILL - note 12 150.3 88.8
INTANGIBLES AND OTHER ASSETS - note 13 260.4 276.1
-------- --------
$1,171.4 $1,022.0
======== ========
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings - note 14 $ 157.9 $ 71.4
Current maturities of long-term debt - note 15 0.8 0.8
Accounts payable and accrued liabilities - note 16 182.5 145.2
-------- --------
341.2 217.4
LONG-TERM DEBT - note 15 272.3 272.5
DEFERRED INCOME TAXES - note 5 53.5 51.0
-------- --------
667.0 540.9
-------- --------
MINORITY INTEREST 22.5 23.8
SHAREOWNERS' EQUITY
CAPITAL STOCK - note 17
Common shares - 71,711,630 (2004 - 71,440,020) shares issued 291.4 287.0
RETAINED EARNINGS 186.2 161.6
ACCUMULATED OTHER COMPREHENSIVE INCOME 4.3 8.7
-------- --------
481.9 457.3
-------- --------
$1,171.4 $1,022.0
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
Approved by the Board of Directors
/s/ Serge Gouin /s/ Philip B. Livingston
------------------------------------- ----------------------------------------
Director Director
44
COTT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Accumulated
Number of Other
Common Common Retained Comprehensive Total
Shares Shares Earnings Income Equity
-------------- ------ -------- ------------- ------
(IN MILLIONS OF U.S. DOLLARS) (IN THOUSANDS)
Balance at December 28, 2002 68,559 $248.1 $ 5.9 $(35.8) $218.2
Options exercised, including tax
benefit of $7.5 million - note 18 1,700 19.8 -- -- 19.8
Comprehensive income - note 6
Currency translation adjustment -- -- -- 29.7 29.7
Net income -- -- 77.4 -- 77.4
------ ------ ------ ------ ------
Balance at January 3, 2004 70,259 267.9 83.3 (6.1) 345.1
Options exercised, including tax
benefit of $4.8 million - note 18 1,181 19.1 -- -- 19.1
Comprehensive income - note 6
Currency translation adjustment -- -- -- 15.8 15.8
Unrealized losses on cash flow
hedges - note 10 -- -- -- (1.0) (1.0)
Net income -- -- 78.3 -- 78.3
------ ------ ------ ------ ------
Balance at January 1, 2005 71,440 287.0 161.6 8.7 457.3
Options exercised, including tax
benefit of $0.8 million - note 18 272 4.4 -- -- 4.4
Comprehensive income - note 6
Currency translation adjustment -- -- -- (5.0) (5.0)
Change in unrealized loss on cash
flow hedges - note 10 -- -- -- 0.6 0.6
Net income -- -- 24.6 -- 24.6
------ ------ ------ ------ ------
BALANCE AT DECEMBER 31, 2005 71,712 $291.4 $186.2 $ 4.3 $481.9
====== ====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
45
COTT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
OPERATING ACTIVITIES
Net income $ 24.6 $ 78.3 $ 77.4
Depreciation and amortization 70.2 60.0 51.0
Amortization of financing fees 0.8 0.7 1.7
Deferred income taxes - note 5 (6.5) 9.1 9.6
Minority interest 4.5 4.0 3.2
Equity loss -- 0.7 0.2
Asset impairments 33.5 1.5 1.8
Other non-cash items 3.0 0.8 1.6
Net change in non-cash working capital - note 19 (1.0) (52.4) (3.8)
------- ------ -------
Cash provided by operating activities 129.1 102.7 142.7
------- ------ -------
INVESTING ACTIVITIES
Additions to property, plant and equipment (75.8) (50.3) (39.6)
Acquisitions - note 20 (135.1) (34.6) (49.8)
Acquisition of production capacity -- (3.8) --
Notes receivable -- -- (2.5)
Other investing activities (6.8) (4.7) (9.9)
------- ------ -------
Cash used in investing activities (217.7) (93.4) (101.8)
------- ------ -------
FINANCING ACTIVITIES
Payments of long-term debt (0.9) (3.5) (90.2)
Short-term borrowings 91.8 (7.0) 55.8
Distributions to subsidiary minority shareowner (5.8) (5.9) (4.1)
Issue of common shares 3.6 14.3 12.3
Financing costs (3.8) -- --
Other financing activities (0.4) (0.4) (0.4)
------- ------ -------
Cash used in financing activities 84.5 (2.5) (26.6)
------- ------ -------
Effect of exchange rate changes on cash (0.8) 1.4 0.8
------- ------ -------
NET INCREASE (DECREASE) IN CASH (4.9) 8.2 15.1
CASH, BEGINNING OF YEAR 26.6 18.4 3.3
------- ------ -------
CASH, END OF YEAR $ 21.7 $ 26.6 $ 18.4
======= ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
46
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2005, 2004 AND 2003
NOTE 1
Summary of Significant Accounting Policies
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance with
United States ("U.S.") generally accepted accounting principles ("GAAP") using
the U.S. dollar as the reporting currency, as the majority of our business and
the majority of our shareowners are in the U.S.
Comparative amounts in prior years have been reclassified to conform to the
financial statement presentation adopted in the current year.
BASIS OF CONSOLIDATION
The financial statements consolidate our accounts and our wholly owned and
majority-owned subsidiaries where we are exposed to the majority of the expected
losses or returns.
ESTIMATES
The preparation of these consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable.
Determining whether impairment has occurred requires various estimates and
assumptions including estimates of cash flows that are directly related to the
potentially impaired asset, the useful life over which cash flows will occur and
their amounts. The measurement of an impairment loss requires an estimate of
fair value, which is based on cash flow estimates and the application of an
appropriate discount rate.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board issued SFAS 123R,
Share-Based Payments requiring companies to recognize compensation expense for
all types of stock options. On April 14, 2005 the Financial Accounting Standards
Board approved a new rule that deferred the effective date of SFAS 123R. We will
adopt this standard using the modified prospective approach for our interim
period ending April 1, 2006. As discussed in note 18, had compensation expense
for the plans been determined based on the fair value at the grant date
consistent with SFAS 123, compensation expense for 2005 would have increased by
$9.8 million and incomes taxes would decrease by $2.5 million. Comparative
figures for the year ended December 31, 2005 would show income before income
taxes and equity loss of $29.5 million, income tax expense of $12.2 million and
net income of $17.3 million or $0.24 per basic and fully diluted share.
In November 2004, the Financial Accounting Standards Board issued SFAS 151,
Inventory Costs. The Statement requires that the allocation of fixed production
overheads to inventory be based on the normal capacity of the production
facilities; unallocated overheads resulting from abnormally low production and
certain other costs are to be recognized as an expense in the period in which
they are incurred. We will adopt this standard for our interim period ending
April 1, 2006. We do not expect this change to have a material impact on us.
REVENUE RECOGNITION
We recognize sales at the time ownership passes to the customer. This may be
upon shipment of goods or upon delivery to the customer, depending on
contractual terms. Shipping and handling costs paid by the customer to us are
included in revenue.
SALES INCENTIVES
We participate in various incentive programs with our customers including
programs under which incentives can be earned for attaining agreed upon sales
volume targets over time. Sales incentives are deducted in arriving at sales.
Sales incentives based on our customers achieving volume targets are accrued as
the incentive is earned and is based on management's estimate of the total
rebate the customer is expected to earn and claim. We regularly review customer
sales forecasts to ensure volume targets will be met and adjust incentive
accruals accordingly.
COSTS OF SALES
We record shipping and handling and finished goods inventory costs in cost of
sales. Finished goods inventory costs include the cost of direct labor and
materials and the applicable share of overhead expense chargeable to production.
47
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
We record all other expenses not charged to production as general and
administrative expenses.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out method, or net realizable value. Returnable bottles and plastic shells
are valued at the lower of cost, deposit value or net realizable value. Finished
goods and work-in-process include the cost of raw materials, direct labor and
manufacturing overhead costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
Buildings 20 to 40 years
Machinery and equipment 7 to 15 years
Furniture and fixtures 3 to 10 years
Plates and films up to 3 years
Leasehold improvements are amortized over the remaining life of the lease.
GOODWILL
Goodwill represents the excess purchase price of acquired businesses over the
fair value of the net assets acquired. We test the goodwill for impairment at
least annually. We evaluate goodwill for impairment on a reporting unit basis.
Reporting units are operating segments or components of operating segments for
which discrete financial information is available. We compare the fair value of
a reporting unit to its carrying value. If the carrying value is greater than
the fair value, the implied fair value of the reporting unit goodwill is
determined by allocating the fair value of the reporting unit to all the assets
and liabilities of that unit with any of the remainder being allocated to
goodwill. The implied fair value of the reporting unit goodwill is then compared
to the carrying value of that goodwill. Any impairment in value is recognized in
net income.
INTANGIBLES AND OTHER ASSETS
Issuance costs for credit facilities and long-term debt are deferred and
amortized over the term of the credit agreement or related debt, respectively.
Rights to manufacture concentrate formulas, with all the related
inventions, processes and technical expertise, are recorded as intangible assets
at the cost of acquisition. The rights are not amortized because their useful
lives extend indefinitely. We compare the carrying amount of the rights to their
fair value, at least annually, and recognize in net income any impairment in
value.
Customer relationships are amortized over periods of up to 15 years.
Trademarks are recorded at the cost of acquisition and are amortized over 15
years.
Information technology includes computer software and licenses, computer
programs and information systems, which are amortized over a period of 3 to 5
years.
IMPAIRMENT OF LONG-LIVED ASSETS
If events and changes in circumstances indicate that the carrying values of
long-lived assets or, if appropriate, groups of long-lived assets may not be
recoverable, we compare the undiscounted future cash flows from the use and
eventual disposal of the assets to the carrying amounts. If the carrying amounts
exceed these cash flows, we recognize an impairment to the extent that the
carrying amounts exceed the fair values of the assets.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of foreign operations, all of which are
self-sustaining, are translated at the exchange rates in effect at the balance
sheet dates. Revenues and expenses are translated using average exchange rates
prevailing during the period. The resulting gains or losses are accumulated in
the other comprehensive income account in shareowners' equity.
TAXATION
We account for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized based on the differences between the
accounting values of assets and liabilities and their related tax bases using
currently enacted income tax rates. A valuation allowance is established to
reduce deferred income tax assets if, on the basis of available evidence, it is
not more likely than not that all or a portion of any deferred tax assets will
be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for cash,
receivables, payables, short-term borrowings and long-term debt approximate
their respective fair values, except as otherwise indicated.
DERIVATIVE FINANCIAL INSTRUMENTS
We enter into foreign exchange option and forward contracts to mitigate exposure
to declines in the value of the Canadian dollar and pound sterling. We account
for foreign exchange options as cash flow hedges. Changes in the fair value of
the cash flow hedge instruments are recognized in accumulated other
comprehensive income. Amounts recognized in accumulated other comprehensive
income and prepaid
48
expenses and other assets are recorded in earnings in the same periods in which
the forecasted purchases or payments affect earnings.
TRANSFERS OF FINANCIAL ASSETS
We account for accounts receivables sold through our receivable securitization
facility in accordance with SFAS 125 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Debt. The transactions are accounted for
as short-term borrowings as we have not surrendered control of the receivables.
The accounts receivables and related debt have both been recorded in the
consolidated financial statements.
STOCK BASED COMPENSATION
We account for our employee stock option plan under APB opinion No. 25,
Accounting for Stock Issued to Employees. Under this method of accounting,
compensation expense is measured as the excess, if any, of the market value of
our common stock at the award date over the amount the employee must pay for the
stock (exercise price). Our policy is to award stock options with an exercise
price equal to the closing price of our common stock on the Toronto Stock
Exchange on the last trading day immediately before the date of award, and
accordingly, no compensation expense has been recognized for stock options
issued under these plans.
COMPREHENSIVE INCOME
Comprehensive income is comprised of net income adjusted for changes in the
cumulative foreign currency translation adjustment account and unrealized gains
and losses on cash flow hedges.
NOTE 2
Unusual Items
For the years ended
-------------------------------------------------
DECEMBER 31, 2005
----------------------- January 1, January 3,
NORTH 2005 2004
AMERICA OTHER TOTAL Total Total
------- ----- ----- ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
Restructuring $ 3.0 $ 0.2 $ 3.2 $ -- $ --
Asset impairments 33.0 0.5 33.5 0.9 1.8
Other -- 0.8 0.8 -- --
----- ----- ----- ---- ----
$36.0 $ 1.5 $37.5 $0.9 $1.8
===== ===== ===== ==== ====
NORTH AMERICA
In September 2005 we announced our plan to realign the management of our
Canadian and U.S. businesses to a North American basis, rationalize product
offerings, eliminate under performing assets and increase focus on high
potential accounts.
In conjunction with this plan, in December 2005 we announced our intention
to close our Columbus, Ohio manufacturing plant in March 2006 to bring
production capacity in line with the needs of our customers and in February 2006
we closed our juice plant in Lachine, Quebec.
Restructuring - We recorded restructuring charges of $3.0 million including $2.6
million for severance and $0.4 million for contract termination payments
relating to the management realignment. We anticipate additional charges of $2.7
million will be recognized, including $0.7 for severance and $2.0 million for
contract terminations, relating to the closures of Columbus, Ohio plant and the
Lachine, Quebec juice plant in the year ending December 30, 2006.
We are currently evaluating various actions to reduce costs but have not
developed detailed plans to sufficient extent to determine the liabilities.
Asset impairment - As a result of declining sales and margins with certain
customers, we conducted an impairment analysis of our customer relationship
assets by comparing estimated future cash flows at the lowest level of cash
flows that were separately identifiable to the carrying value of the asset. This
analysis showed that the estimated future cash flows were not sufficient to
recover the carrying value on certain customer relationship assets and
accordingly, in 2005 we recorded asset impairment charges of $20.0 million in
order to write down the customer relationship assets to their estimated fair
value. Fair value was determined by discounting estimated future cash flows
related to the customer relationship assets.
We recorded an impairment loss of $9.3 million related to the closure of
our Columbus, Ohio plant, including a $3.4 million writedown to property, plant
and equipment and a $5.9 million writedown of all the goodwill relating to this
component.
The remaining asset impairment loss of $3.7 million in North America
pertains primarily to write downs of certain equipment and our remaining
investment in an equity investee.
We may also rationalize products and additional production capacity but
have not yet completed our analysis nor have we completed our detailed plans and
accordingly, the ultimate amount of any asset impairment charges or change in
useful lives of assets that may result is uncertain. It is reasonably possible
that our estimates of future cash flows, the useful lives, or both related to
certain equipment and intangibles will be significantly reduced in the near
term. As a result, the carrying value of the related assets may also be reduced
materially in the near term.
OTHER
Other unusual items includes primarily legal fees relating to the U.K. Office of
Fair Trading ("OFT") and Competition
49
Commission review of the acquisition of 100% of the shares of Macaw (Holdings)
Limited, the parent company of Macaw (Soft Drinks) Limited (the "Macaw
Acquisition") in the U.K. and other asset impairment charges in the Corporate
and Other segment.
YEARS ENDED JANUARY 1, 2005 AND JANUARY 3, 2004
During the years ended January 1, 2005 and January 3, 2004 unusual items were
$0.9 million and $1.8 million, respectively, including charges of $1.5 million
and $2.1 million, respectively, relating to provisions for a note due to an
equity investee.
NOTE 3
Other Expense (Income), Net
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
Foreign exchange (gain) loss $(0.5) $ 0.7 $ 1.2
Loss (gain) on disposal of
property, plant and
equipment 1.5 (0.3) (0.1)
Other (0.2) (0.5) (0.6)
----- ----- -----
$ 0.8 $(0.1) $ 0.5
===== ===== =====
NOTE 4
Interest Expense, Net
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
Interest on long-term debt $23.1 $23.3 $26.4
Other interest expense 6.2 3.2 1.7
Interest income (0.5) (0.5) (0.6)
----- ----- -----
$28.8 $26.0 $27.5
===== ===== =====
Interest paid during the year was approximately $27.2 million ($25.0 million -
January 1, 2005; $25.9 million - January 3, 2004).
NOTE 5
Income Taxes
Income (loss) before income taxes and equity loss consisted of the following:
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
Canada $(10.2) $ (1.9) $ 3.6
Outside Canada 49.5 116.7 114.1
------ ------ ------
$ 39.3 $114.8 $117.7
====== ====== ======
Provision for income taxes consisted of the following:
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
CURRENT
Canada $ (0.2) $ (0.1) $ (0.2)
Outside Canada (21.0) (26.6) (30.3)
------ ------ ------
$(21.2) $(26.7) $(30.5)
------ ------ ------
DEFERRED
Canada $ (0.8) $ 1.5 $ (1.2)
Outside Canada 7.3 (10.6) (8.4)
------ ------ ------
$ 6.5 $ (9.1) $ (9.6)
------ ------ ------
PROVISION FOR INCOME TAXES $(14.7) $(35.8) $(40.1)
====== ====== ======
Income taxes paid during the year were $14.3 million ($27.3 million - January 1,
2005; $21.8 million - January 3, 2004).
The following table reconciles income taxes calculated at the basic
Canadian corporate rates with the income tax provision:
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
Income tax provision based
on Canadian statutory
rates $(13.6) $(39.8) $(42.3)
Foreign tax rate
differential 4.6 1.7 2.6
Manufacturing and
processing deduction -- -- 0.1
Decrease (increase) in
valuation allowance (21.0) 0.6 (0.6)
Adjustment for change in
enacted rates -- -- 1.0
Reduction to reserve 19.3 2.0 --
Non-deductible and other
items (4.0) (0.3) (0.9)
------ ------ ------
Provision for income taxes $(14.7) $(35.8) $(40.1)
====== ====== ======
50
Deferred income tax assets and liabilities were recognized on temporary
differences between the financial and tax bases of existing assets and
liabilities as follows:
DECEMBER 31, January 1,
2005 2005
------------ ----------
DEFERRED TAX ASSETS
Loss carryforwards $ 12.4 $ 19.5
Property, plant and equipment 7.7 --
Liabilities and reserves 4.8 5.5
Other 1.1 2.4
------ ------
26.0 27.4
Valuation allowance (21.0) --
------ ------
5.0 27.4
------ ------
DEFERRED TAX LIABILITIES
Property, plant and equipment 42.8 41.8
Intangible assets 10.7 12.3
Other 5.0 24.3
------ ------
58.5 78.4
------ ------
NET DEFERRED TAX LIABILITY $(53.5) $(51.0)
====== ======
As of December 31, 2005, operating loss carryforwards primarily in Canada, of
$35.6 million are available to reduce future taxable income. These losses expire
as follows:
(IN MILLIONS OF U.S. DOLLARS)
2006 $25.2
2008 7.3
2009 1.4
2010 1.4
2011 0.3
-----
$35.6
=====
NOTE 6
Other Comprehensive Income
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
Net income $24.6 $78.3 $ 77.4
Foreign currency
translation gain (loss) (5.0) 15.8 29.7
Change in unrealized loss
on cash flow hedges 0.6 (1.0) --
----- ----- ------
$20.2 $93.1 $107.1
===== ===== ======
NOTE 7
Income per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is calculated using the weighted average number of common
shares outstanding adjusted to include the effect that would occur if
in-the-money stock options were exercised.
The following table reconciles the basic weighted average number of shares
outstanding to the diluted weighted average number of shares outstanding:
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN THOUSANDS)
Weighted average number of shares
outstanding -- basic 71,628 71,006 69,389
Dilutive effect of stock options 272 1,065 1,607
------ ------ ------
Adjusted weighted average number of
shares outstanding -- diluted 71,900 72,071 70,996
====== ====== ======
At December 31, 2005, options to purchase 4,102,864 (January 1, 2005 --
1,493,000) shares of common stock at a weighted average exercise price of
C$32.60 (January 1, 2005 -- C$40.83) per share were outstanding, but were not
included in the computation of diluted net income per share because the options'
exercise price was greater than the average market price of the common stock.
NOTE 8
Accounts Receivable
DECEMBER 31, January 1,
2005 2005
------------ ----------
(IN MILLIONS OF U.S. DOLLARS)
Trade receivables $178.7 $154.2
Allowance for doubtful accounts (7.8) (12.1)
Other 20.2 42.2
------ ------
$191.1 $184.3
====== ======
We wrote down the remaining balance due from an equity investee in the year
ended December 31, 2005. As of January 1, 2005, other receivables included $7.0
million due from an equity investee and the allowance for doubtful accounts
included $3.9 million due from an equity investee.
NOTE 9
Inventories
DECEMBER 31, January 1,
2005 2005
------------ ----------
(IN MILLIONS OF U.S. DOLLARS)
Raw materials $ 63.9 $ 47.9
Finished goods 62.9 59.9
Other 17.4 15.0
------ ------
$144.2 $122.8
====== ======
51
NOTE 10
Derivative Financial Instruments
In 2005, we entered into cash flow hedges to mitigate exposure to declines in
the value of the Canadian dollar and pound sterling attributable to certain
forecasted U.S. dollar raw material purchases of the Canadian and U.K. and
European business segments. The hedges consist of monthly foreign exchange
options to buy U.S. dollars at fixed rates per Canadian dollar and pound
sterling and mature at various dates through December 28, 2006. The fair market
value of the foreign exchange options is included in prepaid expenses and other
assets.
In addition, in 2004 we entered into one forward foreign exchange contract
to purchase U.S. dollars at a fixed rate per pound sterling. The forward foreign
exchange contract matured in January 2005. The fair market value of the forward
foreign exchange contract is included in prepaid expenses and other assets as of
January 1, 2005.
At December 31, 2005, the hedges consisted of foreign exchange options to
buy U.S. dollars at fixed rates per Canadian dollar at a cost of $0.8 million.
The fair value of the options of $0.4 million has been included in prepaid
expenses and other assets and the unrealized loss of $0.4 million is recorded in
comprehensive income, reflecting a $0.6 million change in the unrealized loss in
comprehensive income in 2005. The fair value of options and forward contract was
$0.9 million at January 1, 2005 and we recorded a $1.0 million unrealized loss
in other comprehensive income.
NOTE 11
Property, Plant and Equipment
DECEMBER 31, 2005 January 1, 2005
------------------------------ ------------------------------
ACCUMULATED Accumulated
COST DEPRECIATION NET Cost Depreciation Net
------ ------------ ------ ------ ------------ ------
(IN MILLIONS OF U.S. DOLLARS)
Land $ 20.6 $ -- $ 20.6 $ 21.4 $ -- $ 21.4
Buildings 119.0 27.7 91.3 101.5 24.0 77.5
Machinery and equipment 484.3 230.0 254.3 402.6 205.4 197.2
Plates and film 23.1 14.0 9.1 23.2 13.7 9.5
Leasehold improvements 21.4 4.7 16.7 9.3 3.9 5.4
Furniture and fixtures 12.4 10.2 2.2 12.3 9.6 2.7
------ ------ ------ ------ ------ ------
$680.8 $286.6 $394.2 $570.3 $256.6 $313.7
====== ====== ====== ====== ====== ======
Depreciation expense for fiscal 2005 was $49.8 million ($41.7 million -- January
1, 2005; $38.4 million -- January 3, 2004).
NOTE 12
Goodwill
DECEMBER 31, January 1,
2005 2005
------------ ----------
(IN MILLIONS OF U.S. DOLLARS)
Balance at beginning of period $ 88.8 $81.6
Acquisitions -- note 20 69.4 5.7
Impairment losses recognized - note 2 (5.9) --
Foreign exchange (2.0) 1.5
------ -----
Balance at end of period $150.3 $88.8
====== =====
52
NOTE 13
Intangibles and Other Assets
DECEMBER 31, 2005 January 1, 2005
------------------------------ ------------------------------
ACCUMULATED Accumulated
COST AMORTIZATION NET Cost Amortization Net
------ ------------ ------ ------ ------------ ------
(IN MILLIONS OF U.S. DOLLARS)
INTANGIBLES
Not subject to amortization
Rights $ 80.4 $ -- $ 80.4 $ 80.4 $ -- $ 80.4
------ ----- ------ ------ ----- ------
Subject to amortization
Customer relationships - note 2 166.7 40.1 126.6 164.7 31.5 133.2
Trademarks 29.0 9.3 19.7 30.0 7.3 22.7
Information technology 49.1 24.1 25.0 40.4 18.4 22.0
Other 3.6 1.0 2.6 3.6 0.6 3.0
------ ----- ------ ------ ----- ------
248.4 74.5 173.9 238.7 57.8 180.9
------ ----- ------ ------ ----- ------
328.8 74.5 254.3 319.1 57.8 261.3
------ ----- ------ ------ ----- ------
OTHER ASSETS
Financing costs 4.6 1.2 3.4 5.6 4.6 1.0
Other 5.4 2.7 2.7 15.5 1.7 13.8
------ ----- ------ ------ ----- ------
10.0 3.9 6.1 21.1 6.3 14.8
------ ----- ------ ------ ----- ------
$338.8 $78.4 $260.4 $340.2 $64.1 $276.1
====== ===== ====== ====== ===== ======
During the year we recorded a $20.0 million impairment loss on customer
relationships as described in note 2.
Amortization expense of intangibles was $20.0 million ($17.8 million - January
1, 2005; $12.5 million - January 3, 2004). Amortization of intangibles includes
$6.4 million ($6.2 million - January 1, 2005; $5.1 million - January 3, 2004)
relating to information technology assets.
The estimated amortization expense for intangibles over the next five years
is:
(IN MILLIONS OF U.S. DOLLARS)
2006 $21.9
2007 21.9
2008 21.4
2009 13.4
2010 13.4
-----
$92.0
=====
NOTE 14
Short-Term Borrowings
Short-term borrowings include bank overdrafts, and borrowings under our credit
facilities and receivables securitization facility.
On March 31, 2005, we entered into committed senior secured credit
facilities that provide for financing in North America, the U.K. and Mexico
expiring on March 31, 2010. The facilities replaced our former committed senior
secured credit facility in the U.S. and Canada and our demand bank credit
facility in the U.K. These multicurrency facilities were amended on August 10,
2005 to increase the facilities to $225.0 from $100.0 million, to add Macaw
(Soft Drinks) Limited as a co-borrower, to consent to the Macaw Acquisition, and
to increase the maximum facility amount to $350.0 million.
The amended facilities allow for revolving credit borrowings in a principal
amount of up to $225.0 million provided we are in compliance with the covenants
and conditions of the agreement. The amended facilities include two separate
facilities:
(1) a $220.0 million multicurrency facility made by certain lenders to us and
our indirect wholly-owned subsidiaries, Cott Beverages Inc., Macaw (Soft
Drinks) Limited and Cott Beverages Limited as co-borrowers, and
(2) a $5.0 million Mexican facility made by certain lenders to our indirect 90%
owned subsidiary Cott Embotelladores de Mexico, S.A. de C.V. ("CEMSA").
Each facility includes subfacilities for swingline loans and letters of
credit. The $225.0 million facilities can be increased up to an additional
$125.0 million at our option if the lenders agree to increase their commitments
or new lenders join the facility and we satisfy certain conditions. Within such
$125.0 million of extra availability, and subject to certain other limitations,
we can establish additional revolving loan facilities in an aggregate amount not
to exceed $30.0 million to be provided in various currencies as agreed upon for
additional subsidiaries designated by us. Wachovia Bank, National Association
acts as administrative agent and security trustee for lenders under these
facilities.
The facilities are collateralized by substantially all our personal
property with certain exceptions including the
53
receivables sold as part of our receivables securitization facility discussed
below.
In general, borrowings under the credit facilities bear interest at either
a floating or fixed rate for the applicable currency plus a margin based on our
consolidated total leverage ratio. A facility fee of between 0.15% and 0.375%
per annum is payable on the entire line of credit. The level of the facility fee
is dependent on financial covenants.
As at December 31, 2005, credit of $78.8 million was available after
borrowings of $141.3 million ($6.0 million and 78.1 million pounds sterling) and
standby letters of credit of $4.9 million. The weighted average interest rate
was 5.83% on these facilities as of December 31, 2005.
The weighted average interest rate on short-term borrowings outstanding as
of January 1, 2005 was 4.19%.
On April 1, 2005, our principal U.S. operating subsidiaries entered into a
receivables securitization facility under which they agreed to sell
substantially all of their receivables generated from their ordinary course
operations, as well as certain related assets, to our new special purpose
indirect subsidiary, Cott USA Receivables Corporation. This subsidiary in turn
sells and assigns undivided interests in the receivables and related assets to
an unaffiliated entity, Park Avenue Receivables Company, LLC and certain other
financial institutions (the "Purchasers") in exchange for cash in amounts
determined by the parties, subject to specified conditions. The transfers to the
Purchasers are treated as financing activities for purposes of our consolidated
financial statements. The agreement contains representations, warranties,
covenants, and indemnities customary for facilities of this type. The facility
does not contain any covenants that we view as materially constraining its
activities or the activities of its subsidiaries, except for Cott USA
Receivables Corporation.
The amount of funds available under the receivables facility is based upon
the amount of eligible receivables and various reserves required by the
facility. Accordingly, availability may fluctuate over time given changes in
eligible receivables balances and calculation of reserves, but will not exceed
the $75.0 million program limit. This facility bears interest at a variable
rate, based on the cost of borrowing of the Purchasers. A fee of between 0.20%
and 0.40% per annum is currently payable on the unused portion of the facility.
The level of the facility fee is dependent on financial covenants. As of
December 31, 2005, $39.6 million of eligible receivables, net of reserves, were
available for purchase and $10.0 million was outstanding, under this facility,
at a weighted average interest rate of 5.08%.
NOTE 15
Long-Term Debt
DECEMBER 31, January 1,
2005 2005
------------ ----------
(IN MILLIONS OF U.S. DOLLARS)
Senior subordinated unsecured
notes at 8% due 2011 (a) $270.5 $269.8
Capital leases 2.6 3.5
------ ------
273.1 273.3
Less current maturities (0.8) (0.8)
------ ------
$272.3 $272.5
====== ======
a) Our 8% senior subordinated unsecured notes were issued at a discount of
2.75% on December 21, 2001. The fair value of the notes as of December 31,
2005 is estimated to be $283.3 million (January 1, 2005 - $299.1 million).
The notes contain a number of financial covenants including limitations on
capital stock repurchases, dividend payments and incurrence of
indebtedness. Penalties exist if we redeem the notes prior to December 15,
2009.
DECEMBER 31, January 1,
2005 2005
------------ ----------
(IN MILLIONS OF U.S. DOLLARS)
Face value $275.0 $275.0
Discount (4.5) (5.2)
------ ------
$270.5 $269.8
====== ======
b) Long-term debt payments required in each of the next five years and
thereafter are as follows:
(IN MILLIONS OF U.S. DOLLARS)
2006 $ 0.8
2007 0.8
2008 0.7
2009 0.3
2010 --
Thereafter 275.0
------
$277.6
======
NOTE 16
Accounts Payable and Accrued Liabilities
DECEMBER 31, January 1,
2005 2005
------------ ----------
(IN MILLIONS OF U.S. DOLLARS)
Trade payables $112.6 $ 79.1
Accrued compensation 14.7 17.5
Accrued promotion and rebates 27.6 24.9
Accrued interest 1.8 1.2
Restructuring 1.5 --
Income, sales and other taxes 8.9 8.8
Other accrued liabilities 15.4 13.7
------ ------
$182.5 $145.2
====== ======
54
NOTE 17
Capital Stock
Our authorized capital stock consists of an unlimited number of common shares.
NOTE 18
Stock Option Plans
Under the 1986 Common Share Option Plan, as amended, we have reserved 14.0
million common shares for future issuance. Options are granted at a price not
less than fair value of the shares on the date of grant.
Options granted on or after April 12, 1996 but before September 1, 1998
expire after 10 years and vest at 25% per annum commencing on the second
anniversary date of the grant. Options granted after September 1, 1998 expire
after 7 years and vest at 30% per annum on the anniversary date of the grant for
the first two years and the balance on the third anniversary date of the grant.
Certain options granted under the plan vest monthly over a period of 24 or 36
months. Options granted after July 17, 2001 to the non-management members of the
Board of Directors vest immediately. All options are non-transferable.
Our policy is to award stock options with an exercise price equal to the
closing price of our common stock on the Toronto Stock Exchange on the last
trading day immediately before the date of award, and accordingly, no
compensation expense has been recognized for stock options issued under these
plans. Had compensation expense for the plans been determined based on the fair
value at the grant date consistent with SFAS 123, our net income and income per
common share would have been as follows:
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
NET INCOME
As reported $ 24.6 $ 78.3 $ 77.4
Compensation expense,
net of tax of $2.5
million (January 1, 2005
- $2.9 million; January
3, 2004 - $1.9 million) (7.3) (8.6) (6.3)
------ ------ ------
Pro forma $ 17.3 $ 69.7 $ 71.1
====== ====== ======
NET INCOME PER SHARE --
BASIC
As reported $ 0.34 $ 1.10 $ 1.12
Pro forma $ 0.24 $ 0.98 $ 1.02
NET INCOME PER SHARE --
DILUTED
As reported $ 0.34 $ 1.09 $ 1.09
Pro forma $ 0.24 $ 0.97 $ 1.00
------ ------ ------
The pro forma compensation expense has been tax effected to the extent it
relates to stock options granted to employees in jurisdictions where the related
benefits are deductible for income tax purposes.
Total compensation cost related to non-vested awards not yet recognized is
$18.8 million. The weighted average period over which this is expected to be
recognized is 1.6 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
Risk-free interest rate 3.3%-3.9% 3.3%-3.9% 3.9%-4.3%
Average expected life
(years) 4 4 4
Expected volatility 40.0% 40.0%-45.0% 45.0%
Expected dividend yield -- -- --
Option activity was as follows:
Weighted
average fair
value of
WEIGHTED options
AVERAGE granted
EXERCISE during the
SHARES PRICE (C$) year
---------- ---------- ------------
Balance at December 28,
2002 4,984,340 $16.90
Granted 929,250 $29.95 $12.24
Exercised (1,699,796) $ 9.51
Forfeited (146,640) $20.10
---------- ------
Balance at January 3,
2004 4,067,154 $22.90
Granted 1,538,750 $40.70 $15.96
Exercised (1,181,189) $16.06
Forfeited (218,750) $31.22
---------- ------
Balance at January 1,
2005 4,205,965 $30.90
Granted 1,309,250 $29.07 $ 9.55
Exercised (271,610) $15.65
Forfeited (638,950) $33.23
---------- ------
Balance at December 31,
2005 (4,604,655) $30.69
========== ======
Outstanding options at December 31, 2005 are as follows:
Options Outstanding Options Exercisable
--------------------------------------- ------------------------
Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices (C$) Outstanding Life (Years) Price (C$) Exercisable Price (C$)
----------- ----------- ------------ ---------- ----------- ----------
$5.95 - $16.10 131,691 2.0 $ 9.91 131,691 $ 9.91
$16.68- $24.25 679,964 2.8 $19.84 674,438 $19.80
$26.00 - $33.30 2,499,350 5.2 $29.77 1,107,190 $30.30
$35.21 - $43.64 1,293,650 5.3 $41.02 404,475 $41.02
--------- --- ------ --------- ------
4,604,655 4.8 $30.69 2,317,794 $28.05
========= === ====== ========= ======
55
NOTE 19
Net Change in Non-Cash Working Capital
The changes in non-cash working capital components, net of effects of
acquisitions and divestitures of businesses and unrealized foreign exchange
gains and losses, are as follows:
For the years ended
--------------------------------------
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
Decrease (increase) in
accounts receivable $(5.0) $(21.3) $ (2.7)
Decrease (increase) in
inventories (15.4) (22.8) (11.0)
Decrease (increase) in
prepaid expenses 0.5 (4.8) (1.0)
Increase (decrease) in
accounts payable and
accrued liabilities 18.9 (3.5) 10.9
----- ------ ------
$(1.0) $(52.4) $ (3.8)
===== ====== ======
NOTE 20
Acquisitions
All acquisitions have been accounted for using the purchase method, and
accordingly, the results of operations are included in our consolidated
statements of income from the effective dates of purchase, except as otherwise
indicated.
The total purchase prices of the acquisitions and equity investments were
allocated as follows based on the fair value of the net assets:
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
Current assets $ 23.2 $ 6.0 $(0.6)
Property, plant and
equipment 50.1 19.3 3.6
Rights -- -- 0.3
Customer relationships 24.9 6.8 49.7
Trademarks -- 0.8 --
Goodwill 69.4 5.7 0.7
Other assets -- -- 0.2
Equity investments -- -- (1.3)
------ ----- -----
167.6 38.6 52.6
------ ----- -----
Current liabilities 22.0 4.0 0.4
Other liabilities -- -- 2.4
Deferred taxes 10.5 -- --
------ ----- -----
PURCHASE PRICE $135.1 $34.6 $49.8
====== ===== =====
Year ended December 31, 2005
Effective August 10, 2005 we acquired 100% of the shares of Macaw (Holdings)
Limited, the parent company of Macaw (Soft Drinks) Limited, the largest
privately owned manufacturer of retailer brand carbonated soft drinks in the
United Kingdom. The Macaw Acquisition represents a significant strategic
investment in our U.K. business with additional production capacity and
manufacturing capabilities in the fast-growing aseptic beverage segment. The
purchase price for the acquisition was $135.1 million (75.4 million pounds
sterling) including acquisition costs of $2.4 million (1.3 million pounds
sterling). The acquisition was financed under our senior secured credit
facility, which was increased from $100.0 million to $225.0 million in
connection with this transaction. The goodwill recognized on the transaction is
not deductible for tax purposes. The value of customer relationships acquired is
being amortized over 15 years.
The following unaudited pro forma information for the year ended December
31, 2005 and January 1, 2005 presents the consolidated results of operations of
the Company as if the acquisition of Macaw had occurred as of January 4, 2004.
Pro forma information does not include the synergies that we anticipate should
result from the acquisition.
DECEMBER 31, January 1,
2005 2005
------------ ----------
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SALES
As reported $1,755.3 $1,646.3
Pro forma 1,813.7 1,755.1
NET INCOME
As reported 24.6 78.3
Pro forma 21.7 75.3
NET INCOME PER SHARE - BASIC
As reported 0.34 1.10
Pro forma 0.30 1.06
NET INCOME PER SHARE - DILUTED
As reported 0.34 1.09
Pro forma 0.30 1.04
---- ----
Year ended January 1, 2005
Effective March 17, 2004, we acquired certain of the assets of The Cardinal
Companies of Elizabethtown, LLC, located in Kentucky. The purchase of $17.8
million was allocated primarily to machinery and equipment. Effective October
19, 2004, we acquired for $16.8 million certain of the assets of Metro Beverage
Co. The purchase price was allocated to customer relationships, goodwill and
machinery and equipment.
The total purchase price for all acquisitions was $34.6 million, including
acquisition costs of $0.8 million. The acquisitions were funded from cash and
borrowings on our revolving credit facility.
56
Year ended January 3, 2004
Effective May 15, 2003, our Mexican subsidiary Cott Embotelladores de Mexico,
S.A. de C.V. ("CEMSA"), acquired a soft drink distribution business from
Embotelladora de Puebla, S.A. de C.V. ("EPSA"). The purchase price was allocated
to license and machinery and equipment.
Effective December 19, 2003, we acquired the retailer brand beverage
business of North Carolina's Quality Beverage Brands, L.L.C. ("QBB"). The assets
acquired include customer relationships and certain machinery and equipment. The
acquisition is expected to enhance our capabilities and expand our customer base
in the Mid-Atlantic region of the U.S.
The total purchase price for all acquisitions was $49.8 million, including
estimated acquisition costs of $0.6 million and the purchase of the remaining
interest in Iroquois West Bottling Ltd. in January 2003. The acquisitions were
funded from cash and borrowings on our revolving credit facility.
NOTE 21
Benefit Plans
Cott primarily maintains defined contribution retirement plans covering
qualifying employees. The total expense with respect to these plans was $5.6
million for the year ended December 31, 2005 ($5.6 million - January 1, 2005;
$4.5 million -- January 3, 2004).
NOTE 22
Commitments and Contingencies
a) We lease buildings, machinery & equipment, computer software and furniture
& fixtures. All contractual increases and rent free periods included in the
lease contract are taken into account when calculating the minimum lease
payment and recognized on a straight line basis over the lease term.
Certain leases have renewal periods and contingent rentals which are not
included in the table below. The minimum annual payments under operating
leases are as follows:
(IN MILLIONS OF U.S. DOLLARS)
2006 $17.8
2007 13.8
2008 10.6
2009 9.2
2010 8.3
Thereafter 35.9
-----
$95.6
=====
Operating lease expenses were:
(IN MILLIONS OF U.S. DOLLARS)
Year ended December 31, 2005 $17.6
Year ended January 1, 2005 $11.9
Year ended January 3, 2004 $13.0
b) As of December 31, 2005, we had commitments for capital expenditures of
approximately $0.7 million and commitments for inventory of approximately
$16.9 million. In addition, we have certain contracts with suppliers and
co-packers which would require us to pay an aggregate of $5.1 million in
order to cancel these contracts.
c) We are subject to various claims and legal proceedings with respect to
matters such as governmental regulations, income taxes, and other actions
arising out of the normal course of business. Management believes that the
resolution of these matters will not have a material adverse effect on our
financial position or results from operations.
In January 2005, we were named as one of many defendants in a class
action suit alleging the unauthorized use by the defendants of container
deposits and the imposition of recycling fees on consumers. In February
2005 similar class action claims were filed in a number of other Canadian
provinces. The litigation is at a very preliminary stage and the merits of
the case have not been determined.
d) We had $4.9 million in standby letters of credit outstanding as of December
31, 2005 ($4.0 million -- January 1, 2005).
e) The Office of Fair Trading in the U.K. has referred the Macaw Acquisition
to the Competition Commission for further investigation. The Competition
Commission ruling is expected in May 2006. We expect that the transaction
will be approved but we cannot guarantee this outcome. However, if the
Competition Commission rules against us, we may be required to divest
ourselves of all or part of this business.
57
NOTE 23
Segment Reporting
We produce, package and distribute retailer brand and branded bottled and canned
soft drinks to regional and national grocery, mass-merchandise and wholesale
chains in North America, the U.K. & Europe and International business segments.
The International segment includes our Mexican business, our Royal Crown
International business and our business in Asia. The concentrate assets, sales
and related expenses have been included in the Corporate & Other segment. For
comparative purposes, segmented information has been restated to conform to the
way we currently manage our beverage business.
BUSINESS SEGMENTS
DECEMBER 31, 2005
----------------------------------------------------------------
NORTH UNITED KINGDOM CORPORATE
AMERICA & EUROPE INTERNATIONAL & OTHER TOTAL
-------- -------------- ------------- --------- --------
(IN MILLIONS OF U.S. DOLLARS)
External sales $1,428.0 $251.9 $71.6 $ 3.8 $1,755.3
Depreciation and amortization 54.3 11.5 1.4 3.0 70.2
Unusual items - note 2
Restructuring and other 3.0 -- -- 0.2 3.2
Goodwill impairment 5.9 -- -- -- 5.9
Other asset impairments 27.1 (0.2) -- 0.7 27.6
Other unusual items -- 0.8 -- -- 0.8
Operating income (loss) before unusual items 62.5 13.7 10.8 (13.6) 73.4
Property, plant and equipment 266.2 109.4 10.3 8.3 394.2
Goodwill 74.1 66.6 4.5 5.1 150.3
Intangibles and other assets 136.0 26.3 1.1 97.0 260.4
Total assets 709.4 307.7 83.1 71.2 1,171.4
Additions to property, plant and equipment 62.3 9.7 1.5 2.3 75.8
Goodwill acquired -- 69.4 -- -- 69.4
January 1, 2005
----------------------------------------------------------------
North United Kingdom Corporate
America & Europe International & Other Total
-------- -------------- ------------- --------- --------
(IN MILLIONS OF U.S. DOLLARS)
External sales $1,388.5 $194.3 $61.2 $ 2.3 $1,646.3
Depreciation and amortization 48.5 8.2 1.2 2.1 60.0
Unusual items (1.5) 0.4 -- 0.2 (0.9)
Operating income (loss) before unusual items 130.6 12.7 10.4 (9.0) 144.7
Property, plant and equipment 227.9 68.7 9.6 7.5 313.7
Goodwill 79.1 -- 4.6 5.1 88.8
Intangibles and other assets 182.7 3.9 1.2 88.3 276.1
Total assets 720.4 135.6 84.7 81.3 1,022.0
Additions to property, plant and equipment 41.2 4.9 1.6 2.6 50.3
Acquisition of production capacity 3.8 -- -- -- 3.8
January 3, 2004
----------------------------------------------------------------
North United Kingdom Corporate
America & Europe International & Other Total
-------- -------------- ------------- --------- --------
(IN MILLIONS OF U.S. DOLLARS)
External sales $1,207.7 $166.6 $42.1 $ 1.4 $1,417.8
Depreciation and amortization 41.3 7.3 0.7 1.7 51.0
Unusual Items (1.8) -- -- -- (1.8)
Operating income (loss) 144.3 7.7 5.7 (7.0) 150.7
Property, plant and equipment 210.4 66.7 9.2 7.0 293.3
Goodwill 71.9 -- 4.6 5.1 81.6
Intangibles and other assets 180.1 1.1 1.4 84.2 266.8
Total assets 643.3 126.7 77.6 61.2 908.8
Additions to property, plant and equipment 23.6 7.0 6.1 2.9 39.6
Total assets under the Corporate & Other caption include the elimination of
intersegment receivables and investments.
For the year ended December 31, 2005, sales to Wal-Mart accounted for 40%
(2004 -- 40%, 2003 -- 42%) of our total sales.
58
Credit risk arises from the potential default of a customer in meeting its
financial obligations with us. Concentrations of credit exposure may arise with
a group of customers which have similar economic characteristics or that are
located in the same geographic region. The ability of such customers to meet
obligations would be similarly affected by changing economic, political or other
conditions. We are not currently aware of any facts that would create a material
credit risk.
Revenues by geographic area are as follows:
DECEMBER 31, January 1, January 3,
2005 2005 2004
------------ ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
United States $1,251.3 $1,221.8 $1,035.8
Canada 201.2 189.5 191.0
United Kingdom 244.4 186.9 160.2
Other countries 58.4 48.1 30.8
-------- -------- --------
$1,755.3 $1,646.3 $1,417.8
======== ======== ========
Revenues are attributed to countries based on the location of the plant.
Property, plant and equipment, goodwill, and intangibles and other assets
by geographic area are as follows:
DECEMBER 31, January 1,
2005 2005
------------ ----------
(IN MILLIONS OF U.S. DOLLARS)
United States $491.7 $508.9
Canada 98.2 86.3
United Kingdom 202.3 72.5
Other countries 12.7 10.9
------ ------
$804.9 $678.6
====== ======
NOTE 24
Differences Between United States and Canadian Accounting Principles and
Practices
These consolidated financial statements have been prepared in accordance with
U.S. GAAP, which differ in certain respects from those principles and practices
that we would have followed had our consolidated financial statements been
prepared in accordance with Canadian GAAP.
(a) Under U.S. GAAP, we have elected not to record compensation expense for
options issued to employees with an exercise price equal to the market
value of the options. Under Canadian GAAP, effective January 1, 2004, stock
options issued to employees subsequent to January 1, 2002 are recognized in
net income based on their fair value. As a result, compensation expense of
$7.2 million ($7.5 million - January 1, 2005), $9.7 million ($10.0 million
- January 1, 2005) net of tax of $2.5 million ($2.5 million - January 1,
2005), was recorded in 2005. This policy was adopted on a retroactive basis
with no restatement of comparative figures and as a result $5.6 million was
charged to opening retained earnings as at January 3, 2004. Contributed
surplus of $25.2 ($15.5 million - January 1, 2005) was recorded to reflect
the charge for unexercised options. Share capital of $1.8 million was
recorded to reflect the options exercised for the year ending January 1,
2005. The options exercised during the year ended December 31, 2005 were
granted prior to January 1, 2002.
(b) Under U.S. GAAP, costs of start-up activities and organization costs are
expensed as incurred. Under Canadian GAAP these costs, if they meet certain
criteria, can be capitalized and amortized over the future benefit period.
(c) Under U.S. GAAP, the adoption of the U.S. dollar in 1998 as the
presentation and reporting currency was implemented retroactively, such
that prior period financial statements are translated under the current
rate method using the foreign exchange rates in effect on those dates.
Under Canadian GAAP, the change in presentation and reporting currency was
implemented by translating all prior year financial statement amounts at
the foreign exchange rate on January 31, 1998. As a result, there is a
difference in the share capital, retained earnings and cumulative
translation adjustment amounts under Canadian GAAP as compared to U.S.
GAAP.
Under Canadian GAAP, these differences would have been reported in the
consolidated statements of income, consolidated balance sheets, consolidated
statements of shareowners' equity and consolidated statements of cash flow as
follows:
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 January 1, 2005
------------------- -------------------
U.S. CANADIAN U.S. Canadian
GAAP GAAP GAAP GAAP
-------- -------- -------- --------
(IN MILLIONS OF U.S. DOLLARS)
Property, plant &
equipment (b) $ 394.2 $ 394.2 $ 313.7 $ 314.1
Goodwill (b) 150.3 150.8 88.8 89.3
Total assets 1,171.4 1,171.9 1,022.0 1,023.9
Deferred income taxes
(a),(b) 53.5 47.0 51.0 47.2
Total liabilities 667.0 660.5 540.9 537.1
Capital stock (a),(c) 291.4 263.9 287.0 259.5
Contributed Surplus (a) -- 25.2 -- 15.5
Retained earnings (a),
(b), (c) 186.2 153.1 161.6 135.9
Accumulated other
comprehensive
income (c) 4.3 46.7 8.7 52.1
Total shareowners'
equity 481.9 488.9 457.3 463.0
-------- -------- -------- --------
59
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the years ended
----------------------------
DECEMBER January January
31, 2005 1, 2005 3, 2004
-------- ------- -------
(IN MILLIONS OF U.S. DOLLARS)
Net income under U.S. GAAP $24.6 $ 78.3 $77.4
Cost of sales (b) (0.4) (0.4) (0.4)
Stock compensation expense (a) (9.7) (10.0) --
Recovery of income taxes (a),(b) 2.7 2.7 0.2
----- ------ --
Net income under Canadian GAAP $17.2 $ 70.6 $77.2
===== ====== =====
NET INCOME (LOSS) PER COMMON
SHARE, CANADIAN GAAP
Basic $0.24 $ 0.99 $1.11
Diluted $0.24 $ 0.98 $1.09
===== ====== =====
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
----------------------------
DECEMBER January January
31, 2005 1, 2005 3, 2004
-------- ------- -------
(IN MILLIONS OF U.S. DOLLARS)
Cash provided by operating
activities U.S. GAAP $129.1 $102.7 $142.7
Net income (a), (b) (7.4) (7.7) (0.2)
Depreciation & amortization (b) 0.4 0.4 0.4
Deferred income taxes (a), (b) (2.7) (2.7) (0.2)
Other non-cash items (a) 9.7 10.0 --
------ ------ ------
Cash provided by operating
activities Canadian GAAP $129.1 $102.7 $142.7
====== ====== ======
60
COTT CORPORATION
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
YEAR ENDED DECEMBER 31, 2005
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
--------- ------- ------- ------- --------
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Sales $395.5 $492.7 $469.9 $397.2 $1,755.3
Cost of sales 339.5 412.0 404.5 349.8 1,505.8
------ ------ ------ ------ --------
Gross profit 56.0 80.7 65.4 47.4 249.5
Selling, general and administrative expenses 36.9 35.5 34.2 32.0 138.6
Unusual items
Restructuring -- -- 2.0 1.2 3.2
Asset impairments (0.2) -- 23.7 10.0 33.5
Other -- -- -- 0.8 0.8
------ ------ ------ ------ --------
Operating income 19.3 45.2 5.5 3.4 73.4
------ ------ ------ ------ --------
Net income (loss) $ 8.3 $ 25.0 $ (1.8) $ (6.9) $ 24.6
====== ====== ====== ====== ========
Per share data:
Net income (loss) per common share
Basic $ 0.12 $ 0.35 $(0.03) $(0.10) $ 0.34
Diluted $ 0.12 $ 0.35 $(0.03) $(0.10) $ 0.34
------ ------ ------ ------ --------
YEAR ENDED JANUARY 1, 2005
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
--------- ------- ------- ------- --------
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Sales $370.9 $463.7 $442.4 $369.3 $1,646.3
Cost of sales 300.5 378.2 371.4 312.5 1,362.6
------ ------ ------ ------ --------
Gross profit 70.4 85.5 71.0 56.8 283.7
Selling, general and administrative expenses 38.7 34.1 33.3 32.0 138.1
Unusual items
Asset impairments -- (0.5) (0.2) 1.6 0.9
------ ------ ------ ------ --------
Operating income 31.7 51.9 37.9 23.2 144.7
------ ------ ------ ------ --------
Net income $ 15.4 $ 29.4 $ 22.1 $ 11.4 $ 78.3
====== ====== ====== ====== ========
Per share data:
Net income per common share
Basic $ 0.22 $ 0.41 $ 0.31 $ 0.16 $ 1.10
Diluted $ 0.21 $ 0.41 $ 0.31 $ 0.16 $ 1.09
------ ------ ------ ------ --------
61
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended) are effective,
based on their evaluation of these controls and procedures as of the end of the
period covered by this report. There have been no changes in our internal
controls or in other factors during the quarter ended December 31, 2005 that
could materially affect, or are likely to materially affect, our controls over
financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined
in Rules 13a-15(f) or 15d-(f) promulgated under the Exchange Act as a process
designed by, or under the supervision of, our principal executive and principal
financial officer and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
- pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect our transactions and dispositions of our
assets;
- provide reasonable assurance our transactions are recorded as
necessary to permit preparation of our financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
- provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial
reporting as of December 31, 2005. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") in Internal Control-Integrated Framework.
Based on our assessment, we determined that, as of December 31, 2005, our
internal control over financial reporting is effective based on those criteria.
Our assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report
which appears on pages 41 and 42.
62
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item regarding directors is incorporated by
reference to, and will be contained in, the "Election of Directors" section of
our definitive proxy statement for the 2006 Annual and Special Meeting of
Shareowners, which will be filed within 120 days after December 31, 2005. The
information required by this item regarding audit committee financial expert
disclosure is incorporated by reference to, and will be contained in, the
"Appointment of Auditors" section of our definitive proxy statement for the 2006
Annual and Special Meeting of Shareowners. The information required by this item
regarding executive officers appears as the Supplemental Item in Part I.
The Audit Committee of our Board of Directors is an "audit committee" for
the purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended. The members of the Audit Committee are Philip B. Livingston (Chairman),
W. John Bennett and Andrew Prozes.
We have adopted a Code of Ethics applicable to our Chief Executive Officer,
Chief Financial Officer and principal accounting officer and certain other
employees. We intend to disclose any amendment to, or waiver from, any provision
of the Code by posting such information on our Internet website, www.cott.com.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information required by this item is incorporated by reference to, and will
be contained in, the "Section 16(a) Beneficial Ownership Reporting Compliance"
section of our definitive proxy statement for the 2006 Annual and Special
Meeting of Shareowners, which will be filed within 120 days after December 31,
2005.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to, and will
be contained in, the "Executive Compensation" section of our definitive proxy
statement for the 2006 Annual and Special Meeting of Shareowners, which will be
filed within 120 days after December 31, 2005.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREOWNER MATTERS
The information required by this item is incorporated by reference to, and will
be contained in, the "Principal Shareowners," the "Security Ownership of
Directors and Management" and "Equity Compensation Plan Information" sections of
our definitive proxy statement for the 2006 Annual and Special Meeting of
Shareowners, which will be filed within 120 days after December 31, 2005.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to, and will
be contained in, the "Certain Relationships and Related Transactions" section of
our definitive proxy statement for the 2006 Annual and Special Meeting of
Shareowners, which will be filed within 120 days after December 31, 2005.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to, and will
be contained in, the "Appointment of Auditors" section of our definitive proxy
statement for the 2006 Annual and Special Meeting of Shareowners, which will be
filed within 120 days after December 31, 2005.
63
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. FINANCIAL STATEMENTS:
The consolidated financial statements are included in Item 8 of this Annual
Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts
Schedule III -- Consolidating Financial Statements
All other schedules called for by the applicable SEC accounting regulations are
not required under the related instructions or are inapplicable and, therefore,
have been omitted.
64
3. EXHIBITS:
NUMBER DESCRIPTION
------ -----------
2.1 Agreement Relating to the Sale and Purchase of the Whole of the
Issued Share Capital of Macaw (Holdings) Limited, dated August 10,
2005, between Andrew Cawthray and Others and Martyn Rose and Cott
Beverages Limited (incorporated by reference to Exhibit 2.1 to our
Form 8-K dated August 16, 2005).
3.1 Articles of Incorporation of Cott Corporation (incorporated by
reference to Exhibit 3.1 to our Form 10-K filed March 31, 2000).
3.2 By-laws of Cott Corporation (incorporated by reference to Exhibit
3.2 to our Form 10-K filed March 8, 2002).
4.1 Subscription Agreement dated as of June 12, 1998 for Cott
Corporation's (as issuer) Convertible Participating Voting Second
Preferred Shares, Series 1 (incorporated by reference to Exhibit 4.2
to our Form 10-K filed March 31, 2000).
4.2 Letter Agreement dated as of November 3, 1999, regarding standstill
provisions between Cott Corporation and the Thomas H. Lee Company
(incorporated by reference to Exhibit 4.3 to our Form 10-K filed
March 31, 2000).
4.3 Indenture dated as of December 21, 2001, between Cott Beverages Inc.
(as issuer) and HSBC Bank USA (as trustee) (incorporated by
reference to Exhibit 4.3 to our Form 10-K filed March 8, 2002).
4.4 Registration Rights Agreement dated as of December 21, 2001, among
Cott Beverages Inc., the Guarantors named therein and Lehman
Brothers Inc., BMO Nesbitt Burns Corp. and CIBC World Markets Corp.
(incorporated by reference to Exhibit 4.4 to our Form 10-K filed
March 8, 2002).
10.1 (1) Supply Agreement, dated December 21,1998, between Wal-Mart Stores,
Inc. and Cott Beverages USA, Inc. (now "Cott Beverages Inc.")
(incorporated by reference to Exhibit 10.3 to our Form 10-K filed
March 31, 2000).
10.2 (2) Employment Agreement of Mark Benadiba dated September 28, 2005
(filed herewith).
10.3 (2) Employment Agreement of B. Clyde Preslar dated July 22, 2005
(incorporated by reference to Exhibit 10.2 to our Form 10-Q filed
November 10, 2005).
10.4 (2) Employment Agreement of John K. Sheppard dated March 11, 2004
(incorporated by reference to Exhibit 10.4 to our Form S-3/A filed
on June 18, 2004).
10.5 (2) Amended 1999 Executive Incentive Share Compensation Plan effective
January 3,1999 (incorporated by reference to Exhibit 10.9 to our
Form 10-K filed March 20, 2001).
10.6 (2) 2000 Executive Incentive Share Compensation Plan effective January
2, 2001 (incorporated by reference to Exhibit 10.10 to our Form 10-K
filed March 20, 2001).
10.7 (2) 2001 Executive Incentive Share Compensation Plan effective January
2, 2002 (incorporated by reference to Exhibit 10.10 to our Form 10-K
filed March 8, 2002).
10.8 (2) 2002 Executive Incentive Share Compensation Plan effective January
2, 2003 (incorporated by reference to Exhibit 10.11 to our Form 10-K
filed March 17, 2003).
10.9 (2) Second Canadian Employee Share Purchase Plan effective January 2,
2001 (incorporated by reference to Exhibit 10.11 to our Form 10-K
filed March 20, 2001).
10.10 (1) Supply Agreement executed November 11, 2003, effective January 1,
2002 between Crown Cork & Seal Company, Inc. and Cott Corporation
(incorporated by reference to Exhibit 10.14 to our Form 10-Q/A filed
August 5, 2004).
10.11 (2) Share Purchase Plan for Non-employee Directors effective November 1,
2003 (incorporated by reference to Exhibit 10.15 to our Form 10-K
filed March 18, 2004).
10.12 (2) Cott Corporation Executive Investment Share Purchase Plan
(incorporated by reference to Exhibit 10.14 to our Form 10-K filed
March 16, 2005).
10.13 (2) Restated 1986 Common Share Option Plan of Cott
Corporation/Corporation Cott as amended through October 20, 2004
(incorporated by reference to Exhibit 10.15 to our Form 10-K filed
March 16, 2005).
65
NUMBER DESCRIPTION
------ -----------
10.14 (2) Letter Agreement with Frank E. Weise III, dated April 28, 2004
(incorporated by reference to Exhibit 10.5 to our Form S-3/A filed
on June 18, 2004).
10.15 (1) Amendment to Supply Agreement between Crown Cork & Seal USA, Inc.
(successor to Crown Cork & Seal Company, Inc.) and Cott Corporation,
dated December 23, 2004 (incorporated by reference to Exhibit 10.17
to our Form 10-K filed March 16, 2005).
10.16 (2) Employment Agreement of Mark R. Halperin dated July 14, 2000
(incorporated by reference to Exhibit 10.7 to our Form 10-K filed
March 8, 2002) (including Confidentiality & Restrictive Covenants
(incorporated by reference to Exhibit 10.19 to our Form 10-K filed
March 16, 2005)).
10.17 (2) Employment Agreement of Colin Walker, dated August 20, 1998
(incorporated by reference to Exhibit 10.20 to our Form 10-K filed
March 16, 2005).
10.18 (1) Credit Agreement, dated as of March 31, 2005, by and among Cott
Corporation, Cott Beverages Inc., Cott Beverages Limited, and Cott
Embotelladores de Mexico, S.A. de C.V., as Borrowers, the Lenders
referred to herein, Wachovia Bank, National Association, as
Administrative Agent and Security Trustee, Bank of Montreal, as
Syndication Agent, and HSBC Bank Canada, Cooperatieve Centrale
Raiffeisen-BoerenleenBank B.A., "Rabobank International", New York
Branch, each as a Documentation Agent, Wachovia Capital Markets, LLC
as a Lead Arranger and the Sole Book Manager, BMO Nesbitt Burns, as
a Lead Arranger (incorporated by reference to Exhibit 10.1 to our
Form 10-Q filed May 12, 2005).
10.19 (1) Receivables Purchase Agreement, dated as of April 1, 2005, among
Cott USA Receivables Corporation, Cott Beverages Inc., Park Avenue
Receivables Company, LLC, the financial institutions from time to
time parties to the agreement, and JPMorgan Chase Bank, N.A.
(incorporated by reference to Exhibit 10.1 to our Form 10-Q filed
May 12, 2005).
10.20 First Amendment, Consent and Joinder Agreement, dated August 10,
2005, by and among Cott Corporation, Cott Beverages Inc., Cott
Beverages Limited, Macaw (Soft Drinks) Limited, Cott Embotelladores
de Mexico, S.A. de C.V., certain Cott Corporation subsidiaries, the
Lenders specified therein and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.1 to our Form 8-K dated
August 16, 2005).
10.21 (2) Employment Agreement of Tina Dell'Aquila dated May 25, 2005 and
confidentiality undertaking dated October 27, 1998 (filed herewith).
13.1 Annual Report to Shareowners for the year ended December 31, 2005
(filed herewith).
14.1 Code of Business Conduct and Ethics (filed herewith).
14.2 Code of Ethics for Senior Officers (filed herewith).
21.1 List of Subsidiaries of Cott Corporation (filed herewith).
23.1 Consent of Independent Registered Public Accounting Firm (filed
herewith).
31.1 Certification of the President and Chief Executive Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002 for the year ended
December 31, 2005 (filed herewith).
31.2 Certification of the Executive Vice President and Chief Financial
Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
for the year ended December 31, 2005 (filed herewith).
32.1 Certification of the President and Chief Executive Officer pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 for the year ended
December 31, 2005.
32.2 Certification of the Executive Vice President and Chief Financial
Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
for the year ended December 31, 2005.
(1) Document is subject to request for confidential treatment.
(2) Indicates a management contract or compensatory plan.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Cott Corporation
/s/ John K. Sheppard
-------------------------------------
John K. Sheppard
President & Chief Executive Officer
Date: March 6, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
/s/ John K. Sheppard Date: March 6, 2006
-------------------------------------
John K. Sheppard
President & Chief Executive Officer
/s/ B. Clyde Preslar Date: March 6, 2006
-------------------------------------
B. Clyde Preslar
Executive Vice President & Chief
Financial Officer
(Principal Financial Officer)
/s/ Tina Dell'Aquila Date: March 6, 2006
-------------------------------------
Tina Dell'Aquila
Vice President, Controller &
Assistant Secretary
(Principal Accounting Officer)
/s/ Colin J. Adair Date: March 6, 2006
-------------------------------------
Colin J. Adair
Director
/s/ W. John Bennett Date: March 6, 2006
-------------------------------------
W. John Bennett
Director
/s/ Serge Gouin Date: March 6, 2006
-------------------------------------
Serge Gouin
Director
/s/ Stephen H. Halperin Date: March 6, 2006
-------------------------------------
Stephen H. Halperin
Director
/s/ Betty Jane Hess Date: March 6, 2006
-------------------------------------
Betty Jane Hess
Director
/s/ Philip B. Livingston Date: March 6, 2006
-------------------------------------
Philip B. Livingston
Director
/s/ Christine A. Magee Date: March 6, 2006
-------------------------------------
Christine A. Magee
Director
/s/ Andrew Prozes Date: March 6, 2006
-------------------------------------
Andrew Prozes
Director
/s/ Donald G. Watt Date: March 6, 2006
-------------------------------------
Donald G. Watt
Director
/s/ Frank E. Weise Date: March 6, 2006
-------------------------------------
Frank E. Weise
Chairman, Director
67
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 2005
---------------------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
Description BEGINNING OF YEAR COSTS AND EXPENSES OTHER ACCOUNTS DEDUCTION END OF YEAR
----------- ----------------- ------------------ -------------- --------- -----------
RESERVES DEDUCTED IN THE BALANCE SHEET FROM
THE ASSETS TO WHICH THEY APPLY
Allowances for losses on:
Accounts receivables $(12.1) $ (0.5) $(0.1) $4.9 $ (7.8)
Inventories (6.8) (1.0) (0.5) 0.7 (7.6)
Intangibles and other assets (0.4) -- -- 0.4 --
Deferred income tax assets -- (21.0) -- -- (21.0)
------ ------ ----- ---- ------
$(19.3) $(22.5) $(0.6) $6.0 $(36.4)
====== ====== ===== ==== ======
Year ended January 1, 2005
---------------------------------------------------------------------------------
Balance at Charged to Charged to Balance at
Description Beginning of Year Costs and Expenses Other Accounts Deduction End of Year
----------- ----------------- ------------------ -------------- --------- -----------
RESERVES DEDUCTED IN THE BALANCE SHEET FROM
THE ASSETS TO WHICH THEY APPLY
Allowances for losses on:
Accounts receivables $ (6.8) $(6.5) $ -- $1.2 $(12.1)
Inventories (7.2) 0.1 (0.2) 0.5 (6.8)
Intangibles and other assets (0.6) 0.2 -- -- (0.4)
------ ----- ----- ---- ------
$(14.6) $(6.2) $(0.2) $1.7 $(19.3)
====== ===== ===== ==== ======
Year ended January 3, 2004
---------------------------------------------------------------------------------
Balance at Charged to Charged to Balance at
Description Beginning of Year Costs and Expenses Other Accounts Deduction End of Year
----------- ----------------- ------------------ -------------- --------- -----------
RESERVES DEDUCTED IN THE BALANCE SHEET FROM
THE ASSETS TO WHICH THEY APPLY
Allowances for losses on:
Accounts receivables $ (3.4) $(3.6) $(0.7) $0.9 $ (6.8)
Inventories (6.7) (0.6) (1.3) 1.4 (7.2)
Intangibles and other assets (1.1) -- 0.5 -- (0.6)
------ ----- ----- ---- ------
$(11.2) $(4.2) $(1.5) $2.3 $(14.6)
====== ===== ===== ==== ======
68
SCHEDULE III -- CONSOLIDATING FINANCIAL STATEMENTS
Cott Beverages Inc., our wholly owned subsidiary, has entered into financing
arrangements that are guaranteed by Cott Corporation and certain other wholly
owned subsidiaries (the "Guarantor Subsidiaries"). Such guarantees are full,
unconditional and joint and several.
The following supplemental financial information sets forth on an
unconsolidated basis, our balance sheets, statements of income and cash flows
for Cott Corporation, Cott Beverages Inc., Guarantor Subsidiaries and our other
subsidiaries (the "Non-guarantor Subsidiaries"). The balance sheets, statements
of income and cash flows for Cott Beverages Inc. have been adjusted
retroactively to include Concord Beverage Company, Concord Holdings GP and
Concord Holdings LP that were amalgamated with Cott Beverages Inc. on December
29, 2001. The supplemental financial information reflects our investments and
those of Cott Beverages Inc. in their respective subsidiaries using the equity
method of accounting.
CONSOLIDATING STATEMENTS OF INCOME
For the year ended December 31, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------- ----------- ------------
(IN MILLIONS OF U.S. DOLLARS)
SALES $214.3 $1,140.4 $310.4 $119.6 $(29.4) $1,755.3
Cost of sales 183.3 979.8 271.5 100.6 (29.4) 1,505.8
------ -------- ------ ------ ------ --------
GROSS PROFIT 31.0 160.6 38.9 19.0 -- 249.5
Selling, general and administrative
expenses 35.5 73.9 21.1 8.1 -- 138.6
Unusual items 4.8 31.9 0.8 -- -- 37.5
------ -------- ------ ------ ------ --------
OPERATING INCOME (LOSS) (9.3) 54.8 17.0 10.9 -- 73.4
Other expense (income), net (0.3) 10.7 (1.6) (8.0) -- 0.8
Interest expense (income), net (0.1) 32.6 (5.1) 1.4 -- 28.8
Minority interest -- -- -- 4.5 -- 4.5
------ -------- ------ ------ ------ --------
INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY INCOME (LOSS) (8.9) 11.5 23.7 13.0 -- 39.3
Income taxes (0.8) (8.6) (4.3) (1.0) -- (14.7)
Equity income (loss) 34.3 8.5 13.8 -- (56.6) --
------ -------- ------ ------ ------ --------
NET INCOME $ 24.6 $ 11.4 $ 33.2 $ 12.0 $(56.6) $ 24.6
====== ======== ====== ====== ====== ========
69
CONSOLIDATING BALANCE SHEETS
As of December 31, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------- ----------- ------------
(IN MILLIONS OF U.S. DOLLARS)
ASSETS
CURRENT ASSETS
Cash $ 8.8 $ -- $ 6.3 $ 6.6 $ -- $ 21.7
Accounts receivable 35.6 26.5 70.2 103.2 (44.4) 191.1
Inventories 18.8 76.6 43.6 5.2 -- 144.2
Prepaid expenses and other assets 1.3 2.2 4.7 1.3 -- 9.5
------ ------- ------- ------ --------- --------
64.5 105.3 124.8 116.3 (44.4) 366.5
Property, plant and equipment 53.0 195.6 135.1 10.5 -- 394.2
Goodwill 23.5 46.0 80.8 -- -- 150.3
Intangibles and other assets 17.0 164.1 38.4 40.9 -- 260.4
Due from affiliates 60.8 60.0 168.8 41.9 (331.5) --
Investments in subsidiaries 395.2 75.4 62.6 137.8 (671.0) --
------ ------- ------- ------ --------- --------
$614.0 $ 646.4 $ 610.5 $347.4 $(1,046.9) $1,171.4
====== ======= ======= ====== ========= ========
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings $ -- $ 10.4 $ 137.5 $ 10.0 $ -- $ 157.9
Current maturities of long-term debt -- 0.8 -- -- -- 0.8
Accounts payable and accrued
liabilities 36.7 109.6 63.6 17.0 (44.4) 182.5
------ ------- ------- ------ --------- --------
36.7 120.8 201.1 27.0 (44.4) 341.2
Long-term debt -- 272.3 -- -- -- 272.3
Due to affiliates 95.4 115.8 58.1 62.2 (331.5) --
Deferred income taxes 31.0 17.4 5.1 -- 53.5
------ ------- ------- ------ --------- --------
132.1 539.9 276.6 94.3 (375.9) 667.0
------ ------- ------- ------ --------- --------
Minority interest -- -- -- 22.5 -- 22.5
SHAREOWNERS' EQUITY
Capital stock
Common shares 291.4 275.8 599.5 175.0 (1,050.3) 291.4
Retained earnings (deficit) 186.2 (169.3) (181.4) (3.4) 354.1 186.2
Accumulated other comprehensive income
(loss) 4.3 -- (84.2) 59.0 25.2 4.3
------ ------- ------- ------ --------- --------
481.9 106.5 333.9 230.6 (671.0) 481.9
------ ------- ------- ------ --------- --------
$614.0 $ 646.4 $ 610.5 $347.4 $(1,046.9) $1,171.4
====== ======= ======= ====== ========= ========
70
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended December 31, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------- ----------- ------------
(IN MILLIONS OF U.S. DOLLARS)
OPERATING ACTIVITIES
Net income $ 24.6 $ 11.4 $ 33.2 $ 12.0 $(56.6) $ 24.6
Depreciation and amortization 11.6 35.9 17.6 5.1 -- 70.2
Amortization of financing fees -- 0.3 0.2 0.3 -- 0.8
Deferred income taxes 0.5 (7.3) 0.4 (0.1) -- (6.5)
Minority interest -- -- -- 4.5 -- 4.5
Equity loss, net of distributions (34.3) (2.2) (0.6) -- 37.1 --
Asset impairments 4.4 29.3 (0.2) -- -- 33.5
Other non-cash items 0.4 3.4 (0.9) 0.1 -- 3.0
Net change in non-cash working capital 48.1 42.7 (54.5) (37.3) -- (1.0)
------ ------ ------- ------ ------ -------
Cash provided by (used in) operating
activities 55.3 113.5 (4.8) (15.4) (19.5) 129.1
------ ------ ------- ------ ------ -------
INVESTING ACTIVITIES
Additions to property, plant and
equipment (11.8) (47.0) (15.4) (1.6) -- (75.8)
Acquisitions -- -- (135.1) -- -- (135.1)
Advances to affiliates (14.9) 0.1 9.9 -- 4.9 --
Investment in subsidiaries (15.0) -- (15.0) -- 30.0 --
Other investing activities (9.8) 4.3 (0.3) (1.0) -- (6.8)
------ ------ ------- ------ ------ -------
Cash used in investing activities (51.5) (42.6) (155.9) (2.6) 34.9 (217.7)
------ ------ ------- ------ ------ -------
FINANCING ACTIVITIES
Payments of long-term debt -- (0.9) -- -- -- (0.9)
Short-term borrowings (0.1) (56.1) 138.0 10.0 -- 91.8
Advances from affiliates (13.2) 3.2 15.0 (0.1) (4.9) --
Distributions to subsidiary minority
shareowner -- -- -- (5.8) -- (5.8)
Issue of common shares 3.6 -- 15.0 15.0 (30.0) 3.6
Financing costs -- (3.8) -- -- -- (3.8)
Dividends paid -- (13.2) -- (6.3) 19.5 --
Other financing activities 0.1 (0.1) (0.4) -- -- (0.4)
------ ------ ------- ------ ------ -------
Cash provided by (used in) financing
activities (9.6) (70.9) 167.6 12.8 (15.4) 84.5
------ ------ ------- ------ ------ -------
Effect of exchange rate changes on cash (0.1) -- (0.6) (0.1) -- (0.8)
------ ------ ------- ------ ------ -------
NET INCREASE (DECREASE) IN CASH (5.9) -- 6.3 (5.3) -- (4.9)
CASH, BEGINNING OF YEAR 14.7 -- -- 11.9 -- 26.6
------ ------ ------- ------ ------ -------
CASH, END OF YEAR $ 8.8 $ -- $ 6.3 $ 6.6 $ -- $ 21.7
====== ====== ======= ====== ====== =======
71
CONSOLIDATING STATEMENTS OF INCOME
For the year ended January 1, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------- ----------- ------------
(IN MILLIONS OF U.S. DOLLARS)
SALES $208.3 $1,113.5 $250.7 $107.2 $ (33.4) $1,646.3
Cost of sales 172.9 919.0 214.9 89.2 (33.4) 1,362.6
------ -------- ------ ------ ------- --------
GROSS PROFIT 35.4 194.5 35.8 18.0 -- 283.7
Selling, general and administrative
expenses 35.8 75.4 19.1 7.8 -- 138.1
Unusual items 1.3 -- (0.4) -- -- 0.9
------ -------- ------ ------ ------- --------
OPERATING INCOME (LOSS) (1.7) 119.1 17.1 10.2 -- 144.7
Other expense (income), net 0.5 1.1 (1.9) 0.2 -- (0.1)
Interest expense (income), net (0.2) 32.9 (6.6) (0.1) -- 26.0
Minority interest -- -- -- 4.0 -- 4.0
------ -------- ------ ------ ------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY INCOME (LOSS) (2.0) 85.1 25.6 6.1 -- 114.8
Income taxes 2.7 (34.1) (3.8) (0.6) -- (35.8)
Equity income (loss) 77.6 9.3 55.1 -- (142.7) (0.7)
------ -------- ------ ------ ------- --------
NET INCOME $ 78.3 $ 60.3 $ 76.9 $ 5.5 $(142.7) $ 78.3
====== ======== ====== ====== ======= ========
72
CONSOLIDATING BALANCE SHEETS
As of January 1, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------- ----------- ------------
(IN MILLIONS OF U.S. DOLLARS)
ASSETS
CURRENT ASSETS
Cash $ 14.7 $ -- $ -- $ 11.9 $ -- $ 26.6
Accounts receivable 52.2 109.3 49.4 12.9 (39.5) 184.3
Inventories 20.9 72.4 24.6 4.9 -- 122.8
Prepaid expenses and other assets 3.0 3.3 3.0 0.4 -- 9.7
------ ------- ------- ------ --------- --------
90.8 185.0 77.0 30.1 (39.5) 343.4
Property, plant and equipment 48.3 162.0 93.6 9.8 -- 313.7
Goodwill 22.8 51.8 14.2 -- -- 88.8
Intangibles and other assets 11.6 203.7 16.8 44.0 -- 276.1
Due from affiliates 47.0 4.7 151.1 41.9 (244.7) --
Investments in subsidiaries 354.0 74.2 47.1 133.3 (608.6) --
------ ------- ------- ------ --------- --------
$574.5 $ 681.4 $ 399.8 $259.1 $ (892.8) $1,022.0
====== ======= ======= ====== ========= ========
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings $ -- $ 66.5 $ 4.9 $ -- $ -- $ 71.4
Current maturities of long-term debt -- 0.8 -- -- -- 0.8
Accounts payable and accrued
liabilities 31.7 82.5 52.4 18.1 (39.5) 145.2
------ ------- ------- ------ --------- --------
31.7 149.8 57.3 18.1 (39.5) 217.4
Long-term debt -- 272.5 -- -- -- 272.5
Due to affiliates 80.4 112.6 44.7 7.0 (244.7) --
Deferred income taxes 5.1 38.1 7.6 0.2 -- 51.0
------ ------- ------- ------ --------- --------
117.2 573.0 109.6 25.3 (284.2) 540.9
------ ------- ------- ------ --------- --------
Minority interest -- -- -- 23.8 -- 23.8
SHAREOWNERS' EQUITY
Capital stock
Common shares 287.0 275.8 587.2 147.6 (1,010.6) 287.0
Retained earnings (deficit) 161.6 (167.4) (214.6) (4.2) 386.2 161.6
Accumulated other comprehensive income
(loss) 8.7 -- (82.4) 66.6 15.8 8.7
------ ------- ------- ------ --------- --------
457.3 108.4 290.2 210.0 (608.6) 457.3
------ ------- ------- ------ --------- --------
$574.5 $ 681.4 $ 399.8 $259.1 $ (892.8) $1,022.0
====== ======= ======= ====== ========= ========
73
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended January 1, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------- ----------- ------------
(IN MILLIONS OF U.S. DOLLARS)
OPERATING ACTIVITIES
Net income $ 78.3 $ 60.3 $ 76.9 $ 5.5 $(142.7) $ 78.3
Depreciation and amortization 9.5 31.2 14.3 5.0 -- 60.0
Amortization of financing fees -- 0.7 -- -- -- 0.7
Deferred income taxes (0.8) 8.9 2.8 (1.8) -- 9.1
Minority interest -- -- -- 4.0 -- 4.0
Equity income, net of distributions (68.7) (3.3) (50.6) -- 123.3 0.7
Non-cash unusual items 1.5 -- -- -- -- 1.5
Other non-cash items 1.2 (1.2) 0.7 0.1 -- 0.8
Net change in non-cash working capital (36.8) (27.2) 0.5 11.1 -- (52.4)
------ ------ ------ ------ ------- ------
Cash provided by (used in) operating
activities (15.8) 69.4 44.6 23.9 (19.4) 102.7
------ ------ ------ ------ ------- ------
INVESTING ACTIVITIES
Additions to property, plant and
equipment (4.8) (34.4) (9.0) (2.1) -- (50.3)
Acquisitions -- (34.6) -- -- -- (34.6)
Acquisition of production capacity -- (3.8) -- -- -- (3.8)
Advances to affiliates 13.9 0.1 (21.1) -- 7.1 --
Investment in subsidiaries (15.0) -- -- -- 15.0 --
Other investing activities (4.8) 2.6 (2.9) 0.4 -- (4.7)
------ ------ ------ ------ ------- ------
Cash used in investing activities (10.7) (70.1) (33.0) (1.7) 22.1 (93.4)
------ ------ ------ ------ ------- ------
FINANCING ACTIVITIES
Payments of long-term debt -- (1.3) (1.9) (0.3) -- (3.5)
Short-term borrowings -- (5.6) (1.4) -- -- (7.0)
Advances from affiliates 12.8 21.5 (27.1) (0.1) (7.1) --
Distributions to subsidiary minority
shareowner -- -- -- (5.9) -- (5.9)
Issue of common shares 14.3 -- 15.0 -- (15.0) 14.3
Dividends paid -- (13.3) -- (6.1) 19.4 --
Other financing activities -- -- (0.4) -- -- (0.4)
------ ------ ------ ------ ------- ------
Cash provided by (used in) financing
activities 27.1 1.3 (15.8) (12.4) (2.7) (2.5)
------ ------ ------ ------ ------- ------
Effect of exchange rate changes on cash 0.7 -- 0.7 -- -- 1.4
------ ------ ------ ------ ------- ------
NET INCREASE (DECREASE) IN CASH 1.3 0.6 (3.5) 9.8 -- 8.2
CASH, BEGINNING OF YEAR 13.4 (0.6) 3.5 2.1 -- 18.4
------ ------ ------ ------ ------- ------
CASH, END OF YEAR $ 14.7 $ -- $ -- $ 11.9 $ -- $ 26.6
====== ====== ====== ====== ======= ======
74
CONSOLIDATING STATEMENTS OF INCOME
For the year ended January 3, 2004
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------- ----------- ------------
(IN MILLIONS OF U.S. DOLLARS)
SALES $231.6 $937.6 $216.0 $84.6 $ (52.0) $1,417.8
Cost of sales 189.2 744.8 188.4 70.6 (52.0) 1,141.0
------ ------ ------ ----- ------- --------
GROSS PROFIT 42.4 192.8 27.6 14.0 -- 276.8
Selling, general and administrative
expenses 35.2 63.5 20.5 6.9 -- 126.1
Unusual items 2.0 (0.2) -- -- -- 1.8
------ ------ ------ ----- ------- --------
OPERATING INCOME (LOSS) 5.2 129.5 7.1 7.1 -- 148.9
Other expense (income), net 0.7 4.5 (5.3) 0.6 -- 0.5
Interest expense (income), net (0.2) 32.7 (5.0) -- -- 27.5
Minority interest -- -- -- 3.2 -- 3.2
------ ------ ------ ----- ------- --------
INCOME BEFORE INCOME TAXES AND EQUITY
INCOME (LOSS) 4.7 92.3 17.4 3.3 -- 117.7
Income taxes (1.4) (36.0) (2.7) -- -- (40.1)
Equity income (loss) 74.1 8.7 59.5 -- (142.5) (0.2)
------ ------ ------ ----- ------- --------
NET INCOME $ 77.4 $ 65.0 $ 74.2 $ 3.3 $(142.5) $ 77.4
====== ====== ====== ===== ======= ========
75
CONSOLIDATING BALANCE SHEETS
As of January 3, 2004
-----------------------------------------------------------------------------------
Cott
Cott Beverages Guarantor Non-guarantor Elimination
Corporation Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- --------- ------------ ------------- ----------- ------------
(IN MILLIONS OF U.S. DOLLARS)
ASSETS
CURRENT ASSETS
Cash $ 13.4 $ (0.6) $ 3.5 $ 2.1 $ -- $ 18.4
Accounts receivable 46.6 89.2 40.1 13.5 (40.6) 148.8
Inventories 16.3 54.1 20.1 3.9 -- 94.4
Prepaid expenses 1.9 1.2 1.8 0.6 -- 5.5
------ ------ ------ ------ ------- ------
78.2 143.9 65.5 20.1 (40.6) 267.1
Property, plant and equipment 50.7 140.4 92.8 9.4 -- 293.3
Goodwill 21.2 46.1 14.3 -- -- 81.6
Intangibles and other assets 7.6 195.7 15.7 47.8 -- 266.8
Due from affiliates 57.5 4.8 115.0 41.9 (219.2) --
Investments in subsidiaries 252.2 76.0 5.0 124.5 (457.7) --
------ ------ ------ ------ ------- ------
$467.4 $606.9 $308.3 $243.7 $(717.5) $908.8
====== ====== ====== ====== ======= ======
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings $ -- $ 72.2 $ 5.9 $ -- $ -- $ 78.1
Current maturities of long-term debt -- 1.1 1.9 0.3 -- 3.3
Accounts payable and accrued
liabilities 47.0 80.9 44.3 8.9 (40.6) 140.5
------ ------ ------ ------ ------- ------
47.0 154.2 52.1 9.2 (40.6) 221.9
Long-term debt -- 275.7 -- -- -- 275.7
Due to affiliates 65.9 91.1 55.0 7.2 (219.2) --
Deferred income taxes 9.4 24.4 6.7 -- -- 40.5
------ ------ ------ ------ ------- ------
122.3 545.4 113.8 16.4 (259.8) 538.1
------ ------ ------ ------ ------- ------
Minority interest -- -- -- 25.6 -- 25.6
SHAREOWNERS' EQUITY
Capital stock
Common shares 267.9 275.8 543.3 167.7 (986.8) 267.9
Retained earnings (deficit) 83.3 (214.3) (291.6) (3.6) 509.5 83.3
Accumulated other comprehensive income (6.1) -- (57.2) 37.6 19.6 (6.1)
------ ------ ------ ------ ------- ------
345.1 61.5 194.5 201.7 (457.7) 345.1
------ ------ ------ ------ ------- ------
$467.4 $606.9 $308.3 $243.7 $(717.5) $908.8
====== ====== ====== ====== ======= ======
76
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended January 3, 2004
-----------------------------------------------------------------------------------
Cott
Cott Beverages Guarantor Non-guarantor Elimination
Corporation Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- --------- ------------ ------------- ----------- ------------
(IN MILLIONS OF U.S. DOLLARS)
OPERATING ACTIVITIES
Net income $ 77.4 $ 65.0 $ 74.2 $ 3.3 $(142.5) $ 77.4
Depreciation and amortization 8.4 24.7 13.5 4.4 -- 51.0
Amortization of financing fees -- 1.7 -- -- -- 1.7
Deferred income taxes 1.2 5.8 2.6 -- -- 9.6
Minority interest -- -- -- 3.2 -- 3.2
Equity income, net of distributions (74.1) (4.1) (46.5) -- 124.9 0.2
Other non-cash items 2.8 (1.3) 0.5 1.4 -- 3.4
Net change in non-cash working capital 4.2 8.2 (18.6) 2.4 -- (3.8)
------ ------ ------ ----- ------- -------
Cash provided by operating activities 19.9 100.0 25.7 14.7 (17.6) 142.7
------ ------ ------ ----- ------- -------
INVESTING ACTIVITIES
Additions to property, plant and
equipment (8.7) (17.4) (8.4) (5.1) -- (39.6)
Acquisitions and equity investments -- (50.0) 0.4 (0.2) -- (49.8)
Notes receivable (2.5) -- -- -- -- (2.5)
Advances to affiliates (5.2) (0.1) (25.5) -- 30.8 --
Investment in subsidiaries (18.0) -- -- -- 18.0 --
Other investing activities 4.2 (10.6) (2.2) (1.3) -- (9.9)
------ ------ ------ ----- ------- -------
Cash used in investing activities (30.2) (78.1) (35.7) (6.6) 48.8 (101.8)
------ ------ ------ ----- ------- -------
FINANCING ACTIVITIES
Payments of long-term debt -- (89.5) (0.5) (0.2) -- (90.2)
Short-term borrowings (2.6) 55.6 2.8 -- -- 55.8
Advances from affiliates 13.7 24.5 (7.4) -- (30.8) --
Distributions to subsidiary minority
shareowner -- -- -- (4.1) -- (4.1)
Issue of common shares 12.3 -- 18.0 -- (18.0) 12.3
Dividends paid -- (13.1) -- (4.5) 17.6 --
Other financing activities -- -- (0.4) -- -- (0.4)
------ ------ ------ ----- ------- -------
Cash provided by (used in) financing
activities 23.4 (22.5) 12.5 (8.8) (31.2) (26.6)
------ ------ ------ ----- ------- -------
Effect of exchange rate changes on cash 0.3 -- 0.5 -- -- 0.8
------ ------ ------ ----- ------- -------
NET INCREASE (DECREASE) IN CASH 13.4 (0.6) 3.0 (0.7) -- 15.1
CASH, BEGINNING OF YEAR -- -- 0.5 2.8 -- 3.3
------ ------ ------ ----- ------- -------
CASH, END OF YEAR $ 13.4 $ (0.6) $ 3.5 $ 2.1 $ -- $ 18.4
====== ====== ====== ===== ======= =======
77