UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: September 30, 2006
[ ] 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 of (IRS Employer
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
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 [ ] No [X]
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.:
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 3, 2006
----- -------------------------------
Common Stock, no par value per share 71,748,630 shares
1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three and nine
month periods ended September 30, 2006 and
October 1, 2005........................................... Page 3
Consolidated Balance Sheets as of September 30, 2006 and
December 31, 2005......................................... Page 4
Consolidated Statements of Shareowners' Equity as of
September 30, 2006 and October 1, 2005.................... Page 5
Consolidated Statements of Cash Flows for the three and nine
month periods ended September 30, 2006 and
October 1, 2005........................................... Page 6
Notes to Consolidated Financial Statements .................. Page 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................ Page 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk .. Page 31
Item 4. Controls and Procedures ..................................... Page 32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................................... Page 33
Item 1A. Risk Factors ................................................ Page 33
Item 5. Other Information ........................................... Page 33
Item 6. Financial Statement Schedules and Exhibits .................. Page 34
Signatures ........................................................... Page 36
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COTT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions of U.S. dollars, except per share amounts)
Unaudited
For the three months ended For the nine months ended
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
REVENUE $475.5 $469.9 $1,371.7 $1,358.1
Cost of sales 413.5 404.5 1,184.7 1,156.0
------ ------ -------- --------
GROSS PROFIT 62.0 65.4 187.0 202.1
Selling, general and administrative
expenses 40.8 34.2 129.4 106.6
Gain on disposal of property, plant and
equipment -- -- -- (0.2)
Unusual items - note 2
Restructuring 9.4 2.0 11.2 2.0
Asset (recovery) impairments (0.1) 23.7 1.2 23.5
Other -- -- 2.6 --
------ ------ -------- --------
OPERATING INCOME 11.9 5.5 42.6 70.2
Other income, net (0.2) (0.4) (0.4) (0.4)
Interest expense, net 7.8 7.7 23.5 20.8
Minority interest 0.9 1.1 3.0 3.4
------ ------ -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 3.4 (2.9) 16.5 46.4
Income tax (recovery) expense - note 4 (3.2) (1.1) 4.4 14.9
------ ------ -------- --------
NET INCOME (LOSS) - note 5 $ 6.6 $ (1.8) $ 12.1 $ 31.5
====== ====== ======== ========
PER SHARE DATA - note 6
INCOME (LOSS) PER COMMON SHARE
Basic $ 0.09 $(0.03) $ 0.17 $ 0.44
Diluted $ 0.09 $(0.03) $ 0.17 $ 0.44
The accompanying notes are an integral part of these consolidated financial
statements.
3
COTT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars)
Unaudited
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- ------------
ASSETS
CURRENT ASSETS
Cash $ 29.7 $ 21.7
Accounts receivable 192.4 191.1
Inventories - note 7 157.8 144.2
Prepaid expenses and other assets - note 8 14.6 9.5
Deferred income taxes 8.3 7.3
-------- --------
402.8 373.8
PROPERTY, PLANT AND EQUIPMENT - note 9 378.2 394.2
GOODWILL 156.3 150.3
INTANGIBLES AND OTHER ASSETS - note 10 251.1 260.4
DEFERRED INCOME TAXES -- 0.4
-------- --------
$1,188.4 $1,179.1
======== ========
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings - note 11 $ 125.4 $ 157.9
Current maturities of long-term debt 1.0 0.8
Accounts payable and accrued liabilities 191.0 182.5
Deferred income taxes -- 0.2
-------- --------
317.4 341.4
LONG-TERM DEBT 272.1 272.3
DEFERRED INCOME TAXES 64.0 61.0
-------- --------
653.5 674.7
-------- --------
MINORITY INTEREST 21.9 22.5
SHAREOWNERS' EQUITY
CAPITAL STOCK
Common shares - 71,738,630 shares issued
(December 31, 2005 - 71,711,630 shares) 273.3 273.0
RESTRICTED SHARES - note 13 (0.8) --
ADDITIONAL PAID-IN-CAPITAL 25.8 18.4
RETAINED EARNINGS 198.3 186.2
ACCUMULATED OTHER COMPREHENSIVE INCOME 16.4 4.3
-------- --------
513.0 481.9
-------- --------
$1,188.4 $1,179.1
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
COTT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(in millions of U.S. dollars)
Unaudited
NUMBER OF
COMMON ACCUMULATED
SHARES ADDITIONAL OTHER
(in COMMON RESTRICTED PAID-IN- RETAINED COMPREHENSIVE TOTAL
thousands) SHARES SHARES CAPITAL EARNINGS INCOME EQUITY
---------------------------------------------------------------------------------
Balance at January 1, 2005 71,440 $269.4 $ -- $17.6 $161.6 $ 8.7 $457.3
Options exercised, including tax
benefit of $0.9 million 270 3.5 -- 0.9 -- -- 4.4
Comprehensive income - note 5
Currency translation adjustment -- -- -- -- -- (2.7) (2.7)
Unrealized gains on cash flow
hedges - note 8 -- -- -- -- -- 0.2 0.2
Net income -- -- -- -- 31.5 -- 31.5
-------------------------------------------------------------------------------
Balance at October 1, 2005 71,710 $272.9 $ -- $18.5 $193.1 $ 6.2 $490.7
===============================================================================
Balance at December 31, 2005 71,712 $273.0 $ -- $18.4 $186.2 $ 4.3 $481.9
Options exercised, including tax
benefit 27 0.3 -- -- -- -- 0.3
Restricted shares - note 13 -- -- (0.8) -- -- -- (0.8)
Share based compensation -- -- -- 7.4 -- -- 7.4
Comprehensive income - note 5
Currency translation adjustment -- -- -- -- -- 11.8 11.8
Unrealized gains on cash flow
hedges - note 8 -- -- -- -- -- 0.3 0.3
Net income -- -- -- -- 12.1 -- 12.1
-------------------------------------------------------------------------------
Balance at September 30, 2006 71,739 $273.3 $(0.8) $25.8 $198.3 $16.4 $513.0
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
5
COTT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
Unaudited
For the three months ended For the nine months ended
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
OPERATING ACTIVITIES
Net income (loss) $ 6.6 $ (1.8) $ 12.1 $ 31.5
Depreciation and amortization 19.0 18.3 57.4 51.0
Amortization of financing fees 0.3 0.2 0.8 0.5
Share based compensation - note 13 2.8 -- 7.4 --
Deferred income taxes (3.4) -- 3.2 3.3
Minority interest 0.9 1.1 3.0 3.4
Gain on disposal of property, plant and
equipment -- -- -- (0.2)
Asset (recovery) impairments (0.1) 23.7 1.2 23.5
Other non-cash items 6.2 0.3 6.7 1.2
Net change in non-cash working capital -
note 12 23.3 13.9 (8.1) (3.6)
------ ------- ------ -------
Cash provided by operating activities 55.6 55.7 83.7 110.6
------ ------- ------ -------
INVESTING ACTIVITIES
Additions to property, plant and equipment (6.8) (14.1) (23.5) (68.9)
Proceeds from disposition of property,
plant and equipment 0.4 0.1 1.9 2.1
Business acquisitions -- (135.1) -- (135.1)
Other investing activities (1.3) (2.1) (7.0) (6.2)
------ ------- ------ -------
Cash used in investing activities (7.7) (151.2) (28.6) (208.1)
------ ------- ------ -------
FINANCING ACTIVITIES
Payments of long-term debt (0.3) (0.3) (0.8) (0.7)
Short-term borrowings (26.3) 91.0 (43.0) 85.5
Distributions to subsidiary minority
shareowner (1.8) (2.0) (3.6) (3.9)
Issue of common shares 0.3 1.1 0.3 3.5
Financing costs -- (1.2) -- (3.8)
Other financing activities -- (0.1) (0.1) (0.3)
------ ------- ------ -------
Cash (used in) provided by financing
activities (28.1) 88.5 (47.2) 80.3
------ ------- ------ -------
Effect of exchange rate changes on cash 0.1 (0.1) 0.1 (0.6)
------ ------- ------ -------
NET INCREASE (DECREASE) IN CASH 19.9 (7.1) 8.0 (17.8)
CASH, BEGINNING OF PERIOD 9.8 15.9 21.7 26.6
------ ------- ------ -------
CASH, END OF PERIOD $ 29.7 $ 8.8 $ 29.7 $ 8.8
====== ======= ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1
Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The interim consolidated financial statements have been prepared in accordance
with United States ("U.S.") generally accepted accounting principles ("GAAP")
for interim financial information. Accordingly, they do not include all
information and notes presented in the annual consolidated financial statements
in conformity with U.S. GAAP. In our opinion, the financial statements reflect
all adjustments that are necessary for a fair presentation of the results for
the interim periods presented. All such adjustments are of a normal recurring
nature. These financial statements should be read in conjunction with the most
recent annual consolidated financial statements. The accounting policies used in
these interim consolidated financial statements are consistent with those used
in the annual consolidated financial statements, except for the share based
compensation as outlined below.
The presentation of these interim consolidated financial statements in
conformity with U.S. 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 an impairment has occurred requires various
estimates and assumptions including evaluating the lowest level of cash flows
associated with groups of assets as well as estimates of cash flows that are
directly related to the potentially impaired asset or groups of assets, 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 also based on
estimates of future cash flows. These estimates could change in the near term
and any such changes could be material.
Material recognition, measurement, and presentation differences between U.S.
GAAP and Canadian GAAP are disclosed in note 16.
Share Based Compensation
Effective January 1, 2006, we adopted Statement of Financial Accounting Standard
("SFAS") 123R, Share-Based Payments, using the modified prospective approach and
therefore have not restated results for prior periods. Under this prospective
approach, share based compensation expense for the nine months ended September
30, 2006 includes compensation expense for all share based compensation awards
granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provision of SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Share based
compensation expense for all share based compensation awards granted after
January 1, 2006 is based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R. We recognize these compensation costs net of a
forfeiture rate on a straight-line basis over the requisite service period of
the award, which is generally the option vesting term of three years. We
estimated the forfeiture rate for the first nine months of fiscal 2006 based on
our historical experience with forfeitures during the preceding three fiscal
years. For the nine month period ended September 30, 2006, net income includes
compensation expense of $7.4 million, or $5.6 million net of tax recovery of
$1.8 million. As reported for the nine month period ended October 1, 2005 under
FAS123, income before taxes was $39.0 million, income tax expense was $13.0
million and net income was $26.0 million or $0.36 per basic and diluted share as
described in note 13.
Inventory Costs
Effective January 1, 2006, we also adopted 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. There was no material impact from the adoption of this standard.
7
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Income Taxes
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes".
FIN 48 is an interpretation of FASB Statement No. 109 "Accounting for Income
Taxes" and must be adopted by us no later than December 31, 2006. FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting, and
disclosing in the financial statements uncertain tax positions that we have
taken or expect to take in our tax returns. We are evaluating the impact of
adopting FIN 48, and it may result in differences between Canadian and United
States accounting standards on uncertain income tax positions. Adjustments, if
necessary will be recorded in retained earnings.
NOTE 2
Unusual Items
For the three months ended For the nine months ended
----------------------------- -----------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
(in millions of U.S. dollars) (in millions of U.S. dollars)
Restructuring $ 9.4 $ 2.0 $11.2 $ 2.0
Asset (recovery) impairments (0.1) 23.7 1.2 23.5
Other -- -- 2.6 --
----- ----- ----- -----
$ 9.3 $25.7 $15.0 $25.5
===== ===== ===== =====
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 underperforming assets and increase our focus on high
potential accounts. In conjunction with this plan, we closed our Lachine, Quebec
juice plant in February 2006 and in March 2006 we closed our Columbus, Ohio soft
drink plant to bring production capacity in line with the needs of our
customers. In addition, on October 26, 2006, we announced the closures of our
manufacturing plant in Elizabethtown, Kentucky and our manufacturing plant and
warehousing in Wyomissing, Pennsylvania. We intend to cease production at both
plants by December 31, 2006, and reallocate production volume to other
manufacturing sites in North America.
Restructuring
We recorded restructuring charges of $11.2 million including $5.8 million for
severance and contract termination costs relating to the closures of our
Columbus, Ohio soft drink plant and our Lachine, Quebec juice plant, $0.9
million of other severance costs relating to sales and marketing employees and
$3.8 million for severance relating to organizational streamlining. The
remaining restructuring cost of $0.7 million relates to consulting fees incurred
in connection with restructuring activities.
The following table is a summary of our restructuring charges for the nine
months ended September 30, 2006 and the year ended December 31, 2005:
8
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Charged to Costs Payments
Balance at and Expenses made during Balance at
January 1, 2006 during the period the period September 30, 2006
--------------- ----------------- ----------- ------------------
Cash
Employees Severance $1.0 $ 5.6 $(5.8) $0.8
Contract Settlement -- 4.9 (0.5) 4.4
Other 0.5 0.7 (1.2) --
---- ----- ----- ----
Total $1.5 $11.2 $(7.5) $5.2
==== ===== ===== ====
Payments
Balance at Charged to Costs made during Balance at
January 2, 2005 and Expenses the year December 31, 2005
--------------- ----------------- ----------- ------------------
Cash
Employees Severance $-- $2.6 $(1.6) $1.0
Contract Settlement -- 0.6 (0.6) --
Other -- 0.8 (0.3) 0.5
--- ---- ----- ----
Total $-- $4.0 $(2.5) $1.5
=== ==== ===== ====
Asset impairments
We recorded an impairment loss of $1.2 million, which is comprised of charges of
$1.6 million for the writedown of property, plant and equipment, customer list
and information technology software related to the closure of our Columbus, Ohio
soft drink plant and $0.1 million for the writedown of property, plant and
equipment relating to our Lachine, Quebec juice plant, net of a $0.5 million
recovery from the sale of other assets.
Other
Other unusual items are primarily legal and other fees relating to the United
Kingdom ("U.K.") Competition Commission review of our acquisition of 100% of the
shares of Macaw (Holdings) Limited (now known as Cott Nelson (Holdings)
Limited), the parent company of Macaw (Soft Drinks) Limited (now known as Cott
(Nelson) Limited) (the "Macaw Acquisition") in the U.K.
We are currently evaluating various actions to reduce costs and are developing
detailed plans which may result in additional exit and other costs being
incurred. In the near term, we expect to incur additional charges relating to
contract termination costs associated with the closure of our Columbus, Ohio
soft drink plant, our manufacturing plant in Elizabethtown, Kentucky and our
manufacturing plant and warehousing in Wyomissing, Pennsylvania. Since September
29, 2005 through the end of the third quarter of 2006, we have recorded pre-tax
charges of $49.3 million relating to our previously announced North American
realignment plan and other asset impairments, of which $20 million was recorded
in 2005 relating to customer relationship impairment. In connection with the
plant and warehouse closures announced on October 26, 2006, we expect to record
approximately $40 to $45 million in pre-tax charges, of which $23 million
relates to accelerated depreciation and amortization and impairment charges
relating to property, plant and equipment and intangible assets, and the
remainder relates to contract termination costs and severance costs for the
termination of approximately 350 employees. These charges are expected to be
taken in the fourth quarter of 2006 and the first half of 2007. These amounts
are part of the estimated $115 to $125 million in charges for cost reduction
programs including additional plant closures, office consolidation and
organizational streamlining. This range has been revised from the previously
announced $60 to $80 million in charges associated with the North American
realignment plan and other asset impairments.
9
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
The breakdown of the charges discussed above is as follows:
UNUSUAL ITEMS
-------------------------------------------------
For the nine months ended September 30, 2006
-------------------------------------------------
North America International Corporate Total
------------- ------------- --------- -----
(in millions of U.S. dollars)
Restructuring $6.7 $0.5 $4.0 $11.2
Asset impairments 1.1 -- 0.1 1.2
Other -- 2.6 -- 2.6
---- ---- ---- -----
$7.8 $3.1 $4.1 $15.0
==== ==== ==== =====
UNUSUAL ITEMS
-------------------------------------------------
For the year ended December 31, 2005
-------------------------------------------------
North America International Corporate Total
------------- ------------- --------- -----
(in millions of U.S. dollars)
Restructuring $ 3.0 $ -- $ 0.2 $ 3.2
Asset impairments 33.0 (0.2) 0.7 33.5
Other -- 0.8 -- 0.8
----- ----- ----- -----
$36.0 $ 0.6 $ 0.9 $37.5
===== ===== ===== =====
Restructuring charges for the year ended December 31, 2005 are comprised of
severance and contract termination costs in connection with the closure of our
Lachine, Quebec juice plant and our Columbus, Ohio soft drink plant and
severances relating to the North American realignment plan.
Asset impairments for the year ended December 31, 2005 are comprised of
writedown of customer relationship of $20 million and writedown of property,
plant and equipment of $7.1 million and goodwill of $5.9 million in connection
with the closure of our Lachine, Quebec juice plant and our Columbus, Ohio soft
drink plant.
We may also rationalize products and production capacity further but have not
yet completed our analysis nor have we completed our detailed plans.
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 or 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.
NOTE 3
Business Seasonality
Our net income for the three and nine month periods ended September 30, 2006 is
not necessarily indicative of the results that may be expected for the full year
due to business seasonality. Operating results are impacted by business
seasonality, which normally leads to higher sales in the second and third
quarters versus the first and fourth quarters of the year. Conversely, fixed
costs such as depreciation, amortization and interest, are not impacted by
seasonal trends.
10
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 4
Income Taxes
The following table reconciles income taxes calculated at the basic Canadian
corporate rates with the income tax provision:
For the three months ended For the nine months ended
----------------------------- -----------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
(in millions of U.S. dollars) (in millions of U.S. dollars)
Income tax provision (recovery) based
on Canadian statutory rates $ 1.1 $(1.0) $ 5.6 $16.0
Foreign tax rate differential (1.6) (1.6) (4.0) (2.5)
Non-deductible expenses and other
items 0.6 1.5 6.2 1.4
Decrease in valuation allowance (3.3) -- (3.4) --
----- ----- ----- -----
$(3.2) $(1.1) $ 4.4 $14.9
===== ===== ===== =====
NOTE 5
Comprehensive Income
For the three months ended For the nine months ended
----------------------------- -----------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
(in millions of U.S. dollars) (in millions of U.S. dollars)
Net income (loss) $6.6 $(1.8) $12.1 $31.5
Foreign currency translation 1.7 5.1 11.8 (2.7)
Unrealized gains (losses) on cash flow
hedges - note 8 0.1 (0.5) 0.3 0.2
---- ----- ----- -----
$8.4 $ 2.8 $24.2 $29.0
==== ===== ===== =====
11
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 6
Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) 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 three months ended For the nine months ended
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
(in thousands) (in thousands)
Weighted average number of shares
outstanding - basic 71,731 71,703 71,719 71,600
Dilutive effect of stock options 51 -- 47 341
------ ------ ------ ------
Adjusted weighted average number
of shares outstanding - diluted 71,782 71,703 71,766 71,941
====== ====== ====== ======
At September 30, 2006, options to purchase 2,485,664 shares (3,693,650 - October
1, 2005) of common shares at a weighted average exercise price of C$31.84 per
share (C$33.94 - October 1, 2005) 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 our common shares during the
period.
As of September 30, 2006, we had 71,738,630 common shares and 2,858,955 common
share options outstanding. Of our common share options outstanding, 2,081,154
options were exercisable as of September 30, 2006.
During the nine months ended September 30, 2006, no common share options were
issued and 27,000 common share options were exercised at a weighted average
exercise price of C$15.99.
NOTE 7
Inventories
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- -------------
(in millions of U.S. dollars)
Raw materials $ 66.3 $ 63.9
Finished goods 71.8 62.9
Other 19.7 17.4
------ ------
$157.8 $144.2
====== ======
12
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 8
Derivative Financial Instruments
We enter into cash flow hedges to mitigate exposure to declines in the value of
the Canadian dollar attributable to certain forecasted U.S. dollar raw material
purchases of the Canadian business. 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. In fiscal 2005, we also
entered into cash flow hedges to mitigate exposure to declines in the value of
pound sterling attributable to certain forecasted U.S. dollar raw material
purchases of the U.K. and European business segments. The fair market value of
the foreign exchange options is included in prepaid expenses and other assets.
At September 30, 2006, the hedges consisted of foreign exchange options to buy
U.S. dollars at fixed rates per Canadian dollar at a cost of $0.1 million
(October 1, 2005 - $0.7 million). The fair value of the options of nil ($0.7
million - October 1, 2005) has been included in prepaid expenses and other
assets and the change in the unrealized gain of $0.1 million for the third
quarter ended September 30, 2006 ($0.5 million unrealized loss - October 1,
2005) and $0.3 million for the nine months ended September 30, 2006 ($0.2
million unrealized gain - October 1, 2005) was recorded in other comprehensive
income, reflecting a $0.3 million ($0.2 million - October 1, 2005) change in the
unrealized gain in comprehensive income for the period ending September 30,
2006.
NOTE 9
Property, Plant and Equipment
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- -------------
(in millions of U.S. dollars)
Cost $702.3 $680.8
Accumulated depreciation (324.1) (286.6)
------ ------
$378.2 $394.2
====== ======
In connection with the closures of our manufacturing plant in Elizabethtown,
Kentucky and our manufacturing plant and warehousing in Wyomissing,
Pennsylvania, we expect to record $20.6 million relating to accelerated
depreciation and impairment charges relating to property, plant and equipment.
These charges are expected to be taken in the fourth quarter of 2006 and the
first half of 2007.
13
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 10
Intangibles and Other Assets
SEPTEMBER 30, 2006 DECEMBER 31, 2005
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET
------ ------------ ------ ------ ------------ ------
(in millions of U.S. dollars) (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 168.6 48.8 119.8 166.7 40.1 126.6
Trademarks 29.3 10.9 18.4 29.0 9.3 19.7
Information technology 55.1 30.7 24.4 49.1 24.1 25.0
Other 3.6 1.2 2.4 3.6 1.0 2.6
------ ----- ------ ------ ----- ------
256.6 91.6 165.0 248.4 74.5 173.9
------ ----- ------ ------ ----- ------
337.0 91.6 245.4 328.8 74.5 254.3
------ ----- ------ ------ ----- ------
OTHER ASSETS
Financing costs 4.7 2.0 2.7 4.6 1.2 3.4
Other 6.5 3.5 3.0 5.4 2.7 2.7
------ ----- ------ ------ ----- ------
11.2 5.5 5.7 10.0 3.9 6.1
------ ----- ------ ------ ----- ------
$348.2 $97.1 $251.1 $338.8 $78.4 $260.4
====== ===== ====== ====== ===== ======
Amortization expense of intangible assets was $5.8 million for the third quarter
ended September 30, 2006 ($5.6 million - October 1, 2005). Amortization expense
of intangible assets was $17.4 million for the nine months ended September 30,
2006 ($16.1 million - October 1, 2005).
In connection with the closures of our manufacturing plant in Elizabethtown,
Kentucky and our manufacturing plant and warehousing in Wyomissing,
Pennsylvania, we expect to record $2.4 million relating to accelerated
amortization and impairment charges relating to customer relationships. These
charges are expected to be taken in the fourth quarter of 2006 and the first
half of 2007.
NOTE 11
Short-Term Borrowings
Short-term borrowings include bank overdrafts, and borrowings under our credit
facilities and receivables securitization facility.
The credit 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 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 September 30, 2006, credit of $94.4 million was available after borrowings
of $125.4 million and standby letters of credit of $5.2 million. The weighted
average interest rate was 6.38% on these facilities as of September 30, 2006.
The amount of funds available under the receivables securitization 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
14
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
facility bears interest at a variable rate, based on the cost of borrowing of an
unaffiliated entity, Park Avenue Receivables Company, LLC and certain other
financial institutions (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 September 30, 2006,
$63.5 million of eligible receivables, net of reserves, were available for
purchase under this facility with no balance outstanding.
NOTE 12
Net Change in Non-Cash Working Capital
The changes in non-cash working capital components, net of effects of unrealized
foreign exchange gains and losses, are as follows:
For the three months ended For the nine months ended
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
(in millions of (in millions of
U.S. dollars) U.S. dollars)
Increase (decrease) in accounts
receivable $48.6 $23.4 $ 8.3 $(24.1)
Increase (decrease) in inventories 3.5 6.8 (10.6) (10.6)
Increase (decrease) in prepaid and
other expenses 3.5 (1.4) (4.2) (3.7)
(Decrease) increase in accounts
payable and accrued liabilities (32.3) (14.9) (1.6) 34.8
----- ----- ----- -----
$23.3 $13.9 $(8.1) $(3.6)
===== ===== ===== =====
NOTE 13
Share Based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of
SFAS 123R, using the modified prospective approach and therefore have not
restated prior periods' results. Under this prospective approach, share based
compensation expense for the nine months ended September 30, 2006 includes
compensation expense for all share based compensation awards granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provision of SFAS 123. Share based
compensation expense for all share based compensation awards granted after
January 1, 2006 is based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R. We recognize these compensation costs net of a
forfeiture rate on a straight-line basis over the requisite service period of
the award, which is generally the option vesting term of three years. We
estimated the forfeiture rate for the first nine months of fiscal 2006 based on
our historical experience with forfeitures during the preceding three fiscal
years. For the interim period ending September 30, 2006, net income includes
compensation expense of $7.4 million, or $5.6 million net of tax recovery of
$1.8 million.
The pro forma table below reflects net earnings and basic and diluted net
earnings per share for fiscal 2005, had we applied the fair value recognition
provisions of SFAS 123, as follows:
15
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
For the three months ended For the nine months ended
---------------------------- ----------------------------
OCTOBER 1, 2005 OCTOBER 1, 2005
---------------------------- ----------------------------
(in millions of U.S dollars, (in millions of U.S dollars,
except per share amounts) except per share amounts)
NET (LOSS) INCOME
As reported $ (1.8) $31.5
Compensation expense (2.0) (5.5)
------ -----
Pro forma $ (3.8) $26.0
====== =====
NET (LOSS) INCOME PER SHARE - BASIC
As reported $(0.03) $0.44
Pro forma $(0.05) $0.36
NET (LOSS) INCOME PER SHARE - DILUTED
As reported $(0.03) $0.44
Pro forma $(0.05) $0.36
The pro forma compensation expense has been tax effected to the extent it
relates to stock options granted in jurisdictions where the related benefits are
deductible for income tax purposes.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
OCTOBER 1, 2005
----------------
Risk-free interest rate 3.3% - 3.7%
Average expected life (years) 4
Expected volatility 40.0%
Expected dividend yield --
There were no options granted during the first nine months of fiscal 2006.
16
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Option activity was as follows:
WEIGHTED WEIGHTED AVERAGE
SHARES AVERAGE EXERCISE REMAINING CONTRACTUAL
SUBJECT TO OPTIONS PRICE (C$) TERM (IN YEARS)
------------------ ---------------- ---------------------
Balance at January 1, 2005 4,205,965 $30.90
Granted 1,174,250 29.08
Exercised (269,610) 15.71
Forfeited (562,800) 33.30
---------- ------ ---
Outstanding at October 1, 2005 4,547,805 31.05 5.0
========== ====== ===
Exercisable at October 1, 2005 2,349,294 28.10
========== ======
Balance at December 31, 2005 4,604,655 $30.69
Granted -- --
Exercised (27,000) 15.99
Forfeited (1,718,700) 17.55
---------- ------ ---
Outstanding at September 30, 2006 2,858,955 29.57 3.9
========== ====== ===
Exercisable at September 30, 2006 2,081,154 28.58
========== ======
Outstanding options at September 30, 2006 are as follows:
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Weighted
Remaining Average
Number Contractual Life Weighted Average Number Exercise
Range of Exercise Prices (C$) Outstanding (Years) Exercise Price (C$) Exercisable Price (C$)
----------------------------- ----------- ---------------- ------------------- ----------- ----------
$7.70 - $16.10 123,291 1.4 $ 9.87 123,291 $ 9.87
$16.68 - $24.25 496,914 2.5 $18.08 416,388 $17.77
$26.00 - $33.30 1,566,000 4.3 $29.90 1,133,625 $30.15
$35.21 - $43.64 672,750 4.6 $40.90 407,850 $40.91
--------- --- ------ --------- ------
2,858,955 3.9 $29.57 2,081,154 $28.58
========= === ====== ========= ======
Total compensation expense related to non-vested options not yet recognized is
expected to be $8.0 million. The weighted average period over which this is
expected to be recognized is 14 months.
During the second quarter of 2006, Brent Willis, our President and Chief
Executive Officer, received a net cash award of $0.9 million at commencement of
employment to purchase common shares of the Company. As of September 30, 2006,
Mr. Willis purchased a total of 62,484 common shares of the Company with the net
cash award received. The purchased shares must be held for a minimum of three
years and must be transferred to the Company (or as the Company may otherwise
direct) for no additional consideration on a prorated basis if the service
condition of three years is not met. This award is recognized as compensation
expense over the vesting period. As of September 30, 2006, $0.1 million was
expensed as compensation expense and the remaining balance is classified as
restricted shares which is a reduction in shareowners' equity. In addition,
204,000 common shares with a fair value of $3.2 million, which vest over three
years, have been granted to Mr. Willis. Compensation costs of $0.4 million were
recognized in selling, general and administrative expenses in the period ended
September 30, 2006. As of September 30, 2006 there was $2.8 million of unearned
compensation relating to the grant that is expected to be recognized on a
straight-line basis over a period of three years.
17
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NEW LONG-TERM INCENTIVE PLANS
During the second quarter of 2006, our shareowners approved and adopted two new
long-term incentive plans for 2006 and future periods, the Performance Share
Unit Plan ("PSU Plan") and the Share Appreciation Rights Plan ("SAR Plan").
PSU Plan
Under the PSU Plan, performance share units ("PSUs") may be granted to employees
of our Company and its subsidiaries. The value of an employee's award under our
PSU Plan will depend on (i) our performance over a three-year performance cycle;
and (ii) the market price of our common shares at the time of vesting.
Performance targets will be established annually by the Human Resources and
Compensation Committee of the Board of Directors. PSUs granted will vest over a
term not to exceed three fiscal years.
At the start of each performance cycle, we will establish three tiers of
performance goals for our Company to achieve over the three-year period: a
minimum threshold level, a target level and an outstanding performance level. A
target number of PSUs for each participant will be established at the beginning
of each three-year performance cycle. Each PSU represents the right, on vesting,
to receive one Company common share. If performance over the three-year
performance cycle falls below the threshold level, no PSUs will vest.
Throughout the performance cycle, there are no dividends paid to participants on
the PSUs, and holders do not have the right to vote the common shares
represented by their PSUs. Following the vesting of a participant's PSUs, we
will contribute cash to an independent trust to be used for the purpose of
purchasing an equivalent number of our common shares on the New York Stock
Exchange at the prevailing market price. The common shares purchased by the
trustee will then be registered in the name of the participant and delivered to
the participant upon his or her request.
No shares are issued from treasury and the PSU Plan is not dilutive to our
shareowners.
SAR Plan
Under the SAR Plan, share appreciation rights ("SARs") may be granted to
employees and directors of our Company and its subsidiaries. SARs will typically
vest on the third anniversary of the grant date. On vesting, each SAR will
represent the right to be paid the difference, if any, between the price of our
common shares on the date of grant and their price on the SAR's vesting date.
Payments in respect of vested in-the-money SARs will be made in the form of our
common shares purchased on the open market by an independent trust with cash
contributed by us. If our share price on the date of vesting is lower than on
the date of grant, no payment will be made in respect of those vested SARs.
Prior to vesting, there are no dividends paid on the share appreciation rights,
and holders do not have the right to vote the common shares represented by their
SARs.
No shares are issued from treasury and the SAR Plan is not dilutive to our
shareowners.
We recognize the compensation cost of the PSUs and SARs based on the fair value
of the grant. We recognize these compensation costs net of a forfeiture rate on
a straight-line basis over the requisite service period of the award, which is
generally the vesting term of three years. Compensation cost of the PSUs may
vary depending on management's estimates of the probability of the performance
measures being achieved and the number of PSUs expected to vest.
During the period ended September 30, 2006, the PSUs granted were as follows:
GRANT DATE NUMBER OF PSUS GRANTED TARGET VALUE PER PSU (C$) TOTAL VALUE (C$)
---------- ---------------------- ------------------------ ----------------
August 1, 2006 37,740 $14.98 $ 565,345
July 26, 2006 437,576 14.21 6,217,949
May 16, 2006 97,469 17.05 1,661,846
------- ----------
Total 572,785 $8,445,140
======= ==========
18
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
The number of PSUs granted and target values per PSU noted above are based on an
assumption that our performance target will be achieved. The number of units and
target values can vary from 0 to 150% of the respective target values noted
above depending on the level of performance achieved relative to the performance
target. Subject to the terms of the PSU plan, the vesting date for the above
PSUs granted will be December 27, 2008. The target value per PSU noted above was
determined based on the closing market price of our common shares on the Toronto
Stock Exchange on the last trading day prior to the grant date. Compensation
costs of $0.6 million were recognized in selling, general and administrative
expenses in the period ended September 30, 2006. As of September 30, 2006 there
was approximately $7.0 million of unearned compensation relating to the grant
that is expected to be recognized on a straight-line basis over a period of 29
months.
On July 26, 2006, we granted 458,050 units of SARs at a fair value of $1,658,127
to our employees. Subject to the terms of the SAR plan, the vesting date for
these units will be July 26, 2009. Compensation costs of $0.1 million were
recognized in selling, general and administrative expenses in the period ended
September 30, 2006. As of September 30, 2006 there was $1.6 million of unearned
compensation relating to the grant that is expected to be recognized on a
straight-line basis over a period of three years.
The fair value of the SARs grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
SEPTEMBER 30, 2006
------------------
Risk-free interest rate 5.05%
Average expected life (years) 3
Expected volatility 33.9%
Expected dividend yield --
NOTE 14
Contingencies
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 customers. On June 2, 2006, the British Columbia
Supreme Court granted the summary trial application, which resulted in the
dismissal of the plaintiffs' action against us and the other defendants. The
plaintiffs appealed the dismissal, and we and the other defendants are defending
the appeal, which we expect to be heard in the next eight to twelve months. It
is too early to assess the chances of success of the appeal. 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 these cases have
not been determined. However, we recently received notice that the plaintiffs in
the class action in Quebec have moved for the litigation to be discontinued,
which motion will be heard on November 20, 2006.
NOTE 15
Segment Reporting
We produce, package and distribute retailer brand and branded bottled and canned
beverages to regional and national grocery, mass-merchandise and wholesale
chains in our North America and International business segments. The
International segment includes our United Kingdom business, our Europe business,
our Mexican business, our Royal Crown International business and our business in
Asia. The Other in the Corporate & Other segment represents the concentrate
manufacturing plant assets, sales and related expenses. For comparative
purposes, segmented information has been restated to conform to the way we
manage our beverage business.
19
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
BUSINESS SEGMENTS
NORTH CORPORATE
AMERICA INTERNATIONAL & OTHER TOTAL
------- ------------- --------- --------
(in millions of U.S. dollars)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
External revenue $356.3 $118.0 $ 1.2 $ 475.5
Depreciation and amortization 13.2 4.4 1.4 19.0
Operating income (loss) before unusual items 17.7 11.7 (8.2) 21.2
Unusual items - note 2
Restructuring 5.8 0.5 3.1 9.4
Asset recovery -- -- (0.1) (0.1)
Other -- -- -- --
Additions to property, plant and equipment 4.9 1.8 0.1 6.8
AS OF SEPTEMBER 30, 2006
Property, plant and equipment 248.4 122.5 7.3 378.2
Goodwill 75.1 76.0 5.2 156.3
Intangibles and other assets 125.0 27.5 99.4 251.9
Total assets 676.1 409.6 102.7 1,188.4
------ ------ ------ --------
20
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NORTH CORPORATE
AMERICA INTERNATIONAL & OTHER TOTAL
------- ------------- --------- --------
(in millions of U.S. dollars)
FOR THE THREE MONTHS ENDED OCTOBER 1, 2005
External revenue $376.6 $ 92.2 $ 1.1 $ 469.9
Depreciation and amortization 13.8 3.8 0.7 18.3
Operating income (loss) before unusual items 26.8 6.9 (2.5) 31.2
Unusual items - note 2
Restructuring 2.0 -- -- 2.0
Asset impairments 23.7 -- -- 23.7
Other -- -- -- --
Additions to property, plant and equipment 11.8 1.9 0.4 14.1
AS OF DECEMBER 31, 2005
Property, plant and equipment 266.2 119.7 8.3 394.2
Goodwill 74.1 71.1 5.1 150.3
Intangibles and other assets 136.0 27.4 97.0 260.4
Total assets 710.5 390.8 77.8 1,179.1
------ ------ ----- --------
NORTH CORPORATE
AMERICA INTERNATIONAL & OTHER TOTAL
-------- ------------- --------- --------
(in millions of U.S. dollars)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
External revenue $1,049.1 $318.3 $ 4.3 $1,371.7
Depreciation and amortization 40.4 13.2 3.8 57.4
Operating income (loss) before unusual items 59.8 27.6 (29.8) 57.6
Unusual items - note 2
Restructuring 6.7 0.5 4.0 11.2
Asset impairments 1.1 -- 0.1 1.2
Other -- 2.6 -- 2.6
Additions to property, plant and equipment 17.0 5.9 0.6 23.5
-------- ------ ------ --------
21
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NORTH CORPORATE
AMERICA INTERNATIONAL & OTHER TOTAL
-------- ------------- --------- --------
(in millions of U.S. dollars)
FOR THE NINE MONTHS ENDED OCTOBER 1, 2005
External revenue $1,126.1 $229.4 $ 2.6 $1,358.1
Depreciation and amortization 40.1 8.8 2.1 51.0
Operating income (loss) before unusual items 87.9 17.0 (9.2) 95.7
Unusual items - note 2
Restructuring 2.0 -- -- 2.0
Asset impairments (recovery) 23.7 (0.2) -- 23.5
Other -- -- -- --
Additions to property, plant and equipment 57.7 10.2 1.0 68.9
-------- ------ ----- --------
Total assets under the Corporate & Other heading include the elimination of
intersegment receivables and investments.
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.
Revenue attributable to our top customer (Wal-Mart Stores, Inc.) in the first
nine months of 2006 and 2005 accounted for 38% and 41%, respectively, of our
total revenue. Revenue attributable to the top ten customers in the first nine
months of 2006 and 2005 accounted for 61% and 67%, respectively, of our total
revenue. The loss of any significant customer, or customers which in the
aggregate represent a significant portion of our revenue, could have a material
adverse effect on our operating results and cash flows.
Revenues by geographic area are as follows:
For the three months ended For the nine months ended
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
(in millions of (in millions of
U.S. dollars) U.S. dollars)
United States $305.4 $327.5 $ 909.5 $ 988.2
Canada 56.9 56.3 162.2 157.2
United Kingdom 94.8 71.8 248.4 169.5
Other Countries 18.4 14.3 51.6 43.2
------ ------ -------- --------
$475.5 $469.9 $1,371.7 $1,358.1
====== ====== ======== ========
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:
22
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
SEPTEMBER 30, 2006 DECEMBER 31, 2005
------------------ -----------------
(in millions of U.S. dollars)
United States $465.0 $491.7
Canada 98.0 98.2
United Kingdom 210.6 202.3
Other countries 12.0 12.7
------ ------
$785.6 $804.9
------ ------
NOTE 16
Differences Between United States and Canadian Accounting Principles and
Practices
These consolidated financial statements have been prepared in accordance with
U.S. GAAP which differs 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) In fiscal 2005, under U.S. GAAP, we elected not to record compensation
expense for options issued to employees with an exercise price equal to the
market value of the options. Effective January 1, 2006, we adopted SFAS
123R, Share-Based Payments, which requires us to recognize compensation
expense for all types of stock options, using the modified prospective
approach. As a result, there was no difference in compensation expense
recorded for Canadian GAAP in the first nine months of 2006. Compensation
expense of $7.4 million, $5.5 million net of tax of $1.9 million, was
recorded in the first nine months of 2005. We recognize these compensation
costs net of a forfeiture rate on a straight-line basis over the requisite
service period of the award, which is generally the option vesting term of
three years. We estimated the forfeiture rate for the first nine months of
fiscal 2006 based on our historical experience with forfeitures during the
preceding three fiscal years. As a result, compensation expense of $7.4
million ($7.4 million - October 1, 2005), $5.6 million ($5.5 million -
October 1, 2005) net of tax of $1.8 million ($1.9 million - October 1,
2005) was recorded in the first nine months of 2006.
(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 and consolidated
statements of cash flows as follows:
23
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2006 DECEMBER 31, 2005
------------------------- -------------------------
U.S. GAAP CANADIAN GAAP U.S. GAAP CANADIAN GAAP
--------- ------------- --------- -------------
(in millions of (in millions of
U.S. dollars) U.S. dollars)
Deferred income taxes - net (a),(b) 55.7 49.2 53.5 47.0
Total liabilities 653.5 647.0 674.7 668.2
Capital stock (a),(c) 273.3 264.2 273.0 263.9
Additional paid-in-capital (a) 25.8 32.6 18.4 25.2
Retained earnings (a), (b), (c) 198.3 165.2 186.2 153.1
Accumulated other comprehensive
income (c) 16.4 58.8 4.3 46.7
Total shareowners' equity 513.0 520.0 481.9 488.9
RECONCILIATION OF CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the three months ended For the nine months ended
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2006 2005 2006 2005
------------- ---------- ------------- ----------
(in millions of (in millions of
U.S. dollars) U.S. dollars)
Net income (loss) under U.S. GAAP $ 6.6 $ (1.8) $12.1 $31.5
Cost of sales (b) -- (0.1) -- (0.3)
Share base compensation (a) -- (2.2) -- (7.4)
Recovery of income taxes (a),(b) -- 0.6 -- 2.0
----- ------ ----- -----
Net income (loss) under Canadian GAAP $ 6.6 $ (3.5) $12.1 $25.8
===== ====== ===== =====
Net income (loss) per common share,
Canadian GAAP
Basic $0.09 $(0.05) $0.17 $0.36
Diluted $0.09 $(0.05) $0.17 $0.36
24
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
RECONCILIATION OF CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended For the nine months ended
------------------------------------ ------------------------------------
SEPTEMBER 30, 2006 OCTOBER 1, 2005 SEPTEMBER 30, 2006 OCTOBER 1, 2005
------------------ --------------- ------------------ ---------------
(in millions of U.S. dollars) (in millions of U.S. dollars)
Cash provided by operating activities
U.S. GAAP $55.6 $55.7 $83.7 $110.6
Net loss (a),(b) -- (1.7) -- (5.7)
Depreciation & amortization (b) -- 0.1 -- 0.3
Deferred income taxes (a),(b) -- (0.6) -- (2.0)
Share based compensation (a) -- 2.2 -- 7.4
----- ----- ----- ------
Cash provided by operating activities
Canadian GAAP $55.6 $55.7 $83.7 $110.6
===== ===== ===== ======
NOTE 17
Certain of the comparative figures have been reclassified to conform to the
current period's presentation.
NOTE 18
Subsequent Events
On October 26, 2006, we announced the closures of our manufacturing plant in
Elizabethtown, Kentucky and our manufacturing plant and warehousing in
Wyomissing, Pennsylvania. We intend to cease production at both plants by
December 31, 2006, and reallocate production volume to other manufacturing sites
in North America. In connection with the plant and warehouse closures, we expect
to record approximately $40 to $45 million in pre-tax charges, of which
approximately $23 million relates to accelerated depreciation and amortization
and impairment charges relating to property, plant and equipment and intangible
assets, and the remainder to contract termination costs and severance costs for
the termination of approximately 350 employees. These charges are expected to be
taken in the fourth quarter of 2006 and the first half of 2007.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are one of the world's largest non-alcoholic beverage companies and the
world's largest retailer brand soft drink provider.
RESULTS OF OPERATIONS
For the three months ended For the nine months ended
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 2006 OCTOBER 1, 2005 SEPTEMBER 30, 2006 OCTOBER 1, 2005
------------------ ------------------ ------------------ ------------------
Millions Percent Millions Percent Millions Percent Millions Percent
of of of of of of of of
Dollars Revenue Dollars Revenue Dollars Revenue Dollars Revenue
-------- ------- -------- ------- -------- ------- -------- -------
Revenue $475.5 100.0% $469.9 100.0% $1,371.7 100.0% $1,358.1 100.0%
Cost of sales 413.5 87.0% 404.5 86.1% 1,184.7 86.4% 1,156.0 85.1%
------ ----- ------ ----- -------- ----- -------- -----
Gross margin 62.0 13.0% 65.4 13.9% 187.0 13.6% 202.1 14.9%
SG&A 40.8 8.6% 34.2 7.3% 129.4 9.4% 106.6 7.8%
Gain on disposal of property,
plant and equipment -- -- -- -- -- -- (0.2) --
Unusual items 9.3 2.0% 25.7 5.5% 15.0 1.1% 25.5 1.9%
------ ----- ------ ----- -------- ----- -------- -----
Operating income 11.9 2.5% 5.5 1.2% 42.6 3.1% 70.2 5.2%
Other income, net (0.2) -- (0.4) -- (0.4) -- (0.4) --
Interest expense 7.8 1.6% 7.7 1.6% 23.5 1.7% 20.8 1.5%
Minority interest 0.9 0.2% 1.1 0.2% 3.0 0.2% 3.4 0.3%
Income taxes (3.2) 0.7% (1.1) 0.2% 4.4 0.3% 14.9 1.1%
------ ----- ------ ----- -------- ----- -------- -----
Net income (loss) $ 6.6 1.4% $ (1.8) 0.4% $ 12.1 0.9% $ 31.5 2.3%
------ ----- ------ ----- -------- ----- -------- -----
Depreciation & amortization $ 19.0 4.0% $ 18.3 3.9% $ 57.4 4.2% $ 51.0 3.8%
------ ----- ------ ----- -------- ----- -------- -----
We reported a net income of $6.6 million or $0.09 per diluted share for the
third quarter ended September 30, 2006, as compared with a net loss of $1.8
million, or $0.03 per diluted share for the third quarter of 2005. For the first
nine months of 2006, net income decreased 62% to $12.1 million or $0.17 per
diluted share, from $31.5 million or $0.44 per diluted share in the same period
last year. The decrease was primarily due to:
- lower volume;
- higher logistics costs;
- increased selling, general and administrative costs due to executive
transition costs, higher incentive compensation expense and share
based compensation expense; and
- increased interest expense due to our August 2005 acquisition of 100%
of the outstanding shares of Macaw (Holdings) Limited (now known as
Cott Nelson (Holdings) Limited, the parent company of Macaw (Soft
Drinks) Limited (now known as Cott (Nelson) Limited) (the "Macaw
Acquisition").
The decrease in net income was partially offset by a reduction in tax valuation
allowances and a cumulative income tax benefit of $3.3 million that we
recognized in the period ended September 30, 2006 due to a more favorable
geographic mix of earnings.
REVENUE -Revenue in the third quarter of 2006 was $475.5 million, an increase of
1% from $469.9 million in the third quarter of 2005. Revenue decreased 4%
compared to the third quarter of 2005 when excluding the impact of foreign
exchange and the Macaw Acquisition. The impact of foreign exchange on this
decrease was 2%. Total eight-ounce equivalent case volume was 307.6 million
cases in the third quarter of 2006, a decrease of 7% compared to the third
quarter of 2005. The volume decline was due to continued softness in the North
American carbonated soft drink ("CSD") category, the timing of concentrate
shipments, lower bottled water shipments and product and customer
rationalization. These factors were partially offset by strong International
filled beverage volume growth of 30% in the quarter ended September 30, 2006 as
compared to the same period in
26
2005, driven by Mexico. Excluding the impact of the Macaw Acquisition, filled
beverage volume growth for International was 10% in the quarter ended September
30, 2006 as compared to the same period in 2005.
Revenue for the first nine months of 2006 increased to $1,371.7 million, which
is 1% higher than the same period last year but 5% lower when the impact of
acquisition and foreign exchange are excluded.
Total eight-ounce equivalent case volume was 966.2 million cases for the first
nine months of 2006 compared to 927.6 million cases for the first nine months of
2005. The increase was due to the Macaw Acquisition, U.K. base business growth,
as well as strong growth in Mexico and concentrate sales.
For the three months ended For the nine months ended
-------------------------------- --------------------------------
SEPTEMBER 30, 2006 SEPTEMBER 30, 2006
-------------------------------- --------------------------------
North North
Cott America International Cott America International
------ ------- ------------- ------ ------- -------------
Change in revenue $ 5.6 $(20.3) $ 25.8 $ 13.6 $(77.0) $ 88.9
Impact of acquisitions (16.6) -- (16.6) (65.8) -- (65.8)
Impact of foreign exchange (7.5) (3.9) (3.4) (13.0) (13.2) 0.3
------ ------ ------ ------ ------ ------
Change excluding acquisitions &
foreign exchange $(18.5) $(24.2) $ 5.8 $(65.2) $(90.2) $ 23.4
------ ------ ------ ------ ------ ------
Percentage change excluding acquisitions &
foreign exchange (4%) (6%) 7% (5%) (8%) 11%
------ ------ ------ ------ ------ ------
In North America, revenue was $356.3 million in the third quarter of 2006, a
decrease of 5% from the third quarter of 2005. Excluding the impact of foreign
exchange, revenue decreased by 6%. The decline was due to continued softness in
the CSD category, the timing of concentrate shipments, lower bottled water
shipments and product and customer rationalization. The decrease was also due to
a structural change in our business arrangement with one of our
self-manufacturing customers. The related revenues are now in the form of
concentrates rather than filled beverages, which lowers our revenue but has
minimal earnings impact. In the first nine months of 2006, revenue was $1,049.1
million, a decrease of 7% from the first nine months of 2005. Excluding the
impact of foreign exchange, revenue decreased by 8%.
The International segment includes our U.K. and Europe business, our Mexican
business, our Royal Crown International business and our business in Asia.
Revenue in this segment was $118.0 million in the third quarter of 2006, an
increase of 28% when compared with the third quarter of 2005. The growth was due
to contributions resulting from the Macaw Acquisition, as well as strong base
business growth in the U.K. which was up 11% year-over-year. Mexico also
reported strong growth of 32% in the third quarter as compared to the same
period in 2005, largely as a result of broadening distribution to
non-supermarket channels. Excluding the impact of the Macaw Acquisition, revenue
increased 12%. Excluding the impact of the Macaw Acquisition and foreign
exchange, revenue increased 7%.
GROSS PROFIT - Gross profit for the third quarter of 2006 was $62.0 million, or
13.0% of revenue, down from $65.4 million, or 13.9% of revenue in the third
quarter of 2005, mainly due to the impact of lower volume and higher logistics
costs. Gross profit in the first nine months of 2006 was $187.0 million, or
13.6% of revenue, compared to gross profit of $202.1 million, or 14.9% of
revenue, in the first nine months of 2005. The decline was due primarily to the
impact of lower volume and higher logistics costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") - SG&A was $40.8 million
in the third quarter of 2006, an increase of $6.6 million from the third quarter
of 2005, largely due to $2.8 million of share based compensation, increased
incentive compensation costs of $2.0 million and $1.0 million of foreign
exchange. SG&A was $129.4 million in the first nine months of 2006, an increase
of $22.8 million from the first nine months of 2005, largely due to $7.4 million
of share based compensation $6.6 million of executive transition costs and
increased incentive compensation costs. As a percentage of revenue, SG&A
increased to 8.6% during the third quarter of 2006, up from 7.3% for the same
period last year and to 9.4% for the first nine months of 2006, up from 7.8% for
the same period last year.
27
SHARE BASED COMPENSATION - Effective January 1, 2006, we adopted Statement of
Financial Accounting Standard ("SFAS 123R"), Share-Based Payments, using the
modified prospective approach and therefore have not restated results for prior
periods. Under this prospective approach, share based compensation expense for
the nine months ended September 30, 2006 includes compensation expense for all
share based compensation awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provision of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Share based compensation expense for all share based
compensation awards granted after January 1, 2006 is based on the grant-date
fair value estimated in accordance with the provisions of SFAS 123R. We
recognize these compensation costs net of a forfeiture rate on a straight-line
basis over the requisite service period of the award, which is generally the
option vesting term of three years. We estimated the forfeiture rate for the
first nine months of fiscal 2006 based on our historical experience with
forfeitures during the preceding three fiscal years. For the interim period
ending September 30, 2006, net income includes compensation expense of $7.4
million, or $5.6 million net of tax of $1.8 million. As reported for the nine
month period ended October 1, 2005 under FAS123, income before taxes was $39.0
million, income tax expense was $13.0 million and net income was $26.0 million
or $0.36 per basic and diluted share.
During the second quarter of 2006, our shareowners approved and adopted two new
compensation plans for 2006 and future periods, the Performance Share Unit Plan
and the Share Appreciation Rights Plan. These plans are designed to attract,
maintain and motivate key employees while promoting the long-term financial
success of our business.
During the nine months ended September 30, 2006, a total of 572,785 PSUs at a
fair value of C$8,445,140 were granted to employees of our Company and its
subsidiaries. These are the number of units and value that are expected to be
issued based on an assumption that certain performance targets will be achieved.
The number of units and value can vary from 0 to 150% of the expected numbers
noted above depending on meeting the performance target. Subject to the terms of
the PSU plan, these units will vest on December 27, 2008. Compensation costs of
$0.6 million were recognized in selling, general and administrative expenses in
the period ended September 30, 2006. As of September 30, 2006 there was
approximately $7.0 million of unearned compensation costs relating to the grant
that is expected to be recognized on a straight-line basis over a period of 29
months.
During the nine months ended September 30, 2006, a total of 458,050 SARs at a
fair value of $1,658,127 were granted to employees of our Company and its
subsidiaries. The fair value of the SARs grant is estimated on the date of grant
using the Black-Scholes option pricing model. Subject to the terms of the SAR
plan, these units will vest on July 26, 2009. Compensation costs of $0.1 million
were recognized in selling, general and administrative expenses in the period
ended September 30, 2006. As of September 30, 2006 there was $1.6 million of
unearned compensation costs relating to the grant that is expected to be
recognized on a straight-line basis over a period of three years.
UNUSUAL ITEMS - In the third quarter of 2006, we recorded charges for unusual
items of $9.3 million on a pre-tax basis compared to $25.7 million on a pre-tax
basis for the same period last year. For the first nine months of 2006, we
recorded charges for unusual items of $15.0 million on a pre-tax basis compared
to $25.5 million on a pre-tax basis for the same period last year.
The $9.3 million of unusual items recorded in the third quarter of 2006 consists
of $9.4 million of restructuring charges, partially offset by a $0.1 million
gain related to a recovery from a note receivable. Of the $15.0 million of
unusual items recorded in the first nine months of 2006, $11.2 million relates
to restructuring charges, $1.2 million relates to asset impairments net of a
recovery from the sale of other assets and note receivable and $2.6 million
relates to legal and other fees relating to the U.K Competition Commission
review of the Macaw Acquisition.
Restructuring charges of $9.4 million recorded in the third quarter consist of
$4.9 million for severance and contract termination costs relating to the
closures of our Columbus, Ohio soft drink plant and our Lachine, Quebec juice
plant, $0.9 million of other severance costs relating to sales and marketing
employees and $3.8 million for severance costs relating to the North American
realignment plan, partially offset by a $0.2 million recovery relating to
consulting fees. Restructuring charges of $11.2 million recorded in the first
nine months of 2006 include $5.8 million for severance and contract termination
costs relating to the closures of our Columbus, Ohio soft drink plant and our
Lachine, Quebec juice plant, $0.9 million of other severance costs relating to
sales and marketing employees and $3.8 million for severance costs relating to
organizational streamlining. The remaining restructuring costs of $0.7 million
consist of consulting fees relating to the North American realignment.
Recoveries of $0.1 million recorded in the third quarter of 2006 related to
collections of a previously impaired note receivable. Asset impairments of $1.2
million recorded in the first nine months of 2006 consist of $1.6 million
related to the closure of our Columbus, Ohio soft drink plant (relating to the
writedown of property, plant and equipment, customer list and information
technology software) and $0.1 million related to the closure of our Lachine,
Quebec juice plant (relating to the writedown of
28
property, plant and equipment), partially offset by a recovery of $0.4 million
from the sale of other assets and a recovery of $0.1 million from a note
receivable.
On July 27, 2006, we announced changes to our senior management structure, roles
and responsibilities. In connection with those changes, we recognized a
previously reported estimate of $3.8 million of severance and associated costs
during the three months ended September 30, 2006.
OPERATING INCOME - Operating income was $11.9 million in the third quarter of
2006 including unusual items of $9.3 million, as compared with $5.5 million in
the third quarter of 2005 which included unusual items of $25.7 million.
Operating income was $42.6 million for the first nine months of 2006 including
unusual items of $15.0 million, as compared with $70.2 million in the first nine
months of 2005 which included unusual items of $25.5 million.
INTEREST EXPENSE - Net interest expense was $7.8 million in the third quarter of
2006, up from $7.7 million in the third quarter of 2005. Net interest expense
was $23.5 million in the first nine months of 2006, up from $20.8 million in the
first nine months of 2005, primarily resulting from the Macaw Acquisition.
INCOME TAXES - We recorded an income tax recovery of $3.2 million for the third
quarter related to reduced tax valuation allowances and an income tax provision
of $4.4 million for the first nine months of 2006, as compared with $1.1 million
and $14.9 million, respectively, for the same periods last year.
FINANCIAL CONDITION
OPERATING ACTIVITIES - Cash provided by operating activities in the first nine
months of 2006 was $83.7 million as compared to $110.6 million for the first
nine months of 2005. Capital expenditures for the first nine months of 2006 were
$23.5 million as compared to $68.9 million for the first nine months of 2005.
Cash increased from $21.7 million to $29.7 million in the first nine months of
2006.
CAPITAL RESOURCES AND LONG-TERM DEBT - Our sources of capital include operating
cash flows, short term borrowings under current credit and receivables
securitization facilities, issuance of public and private debt and issuance of
equity securities. We believe 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 currently
available credit.
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. As of September 30, 2006 credit of $94.4 million
was available after borrowings of $125.4 million and standby letters of credit
of $5.2 million. The weighted average interest rate was 6.38% on these
facilities as of September 30, 2006.
Our receivables securitization facility allows for borrowing up to $75.0 million
based on the amount of eligible receivables and various reserves required by the
facility. As of September 30, 2006, $63.5 million of eligible receivables, net
of reserves, were available for purchase under this facility with no balance
outstanding.
As of September 30, 2006, long-term debt including the current portion totaled
$273.1 million, which is consistent with the balance at the end of 2005. At the
end of the first nine months of 2006, long-term debt consisted of $272.0 million
in 8% senior subordinated notes with a face value of $275.0 million and $1.1
million of other debt.
CANADIAN GAAP - There were no material U.S./Canadian GAAP differences in the
first nine months of 2006.
OUTLOOK
We continue to expect the remainder of 2006 to be challenging. Sales of
carbonated soft drinks are expected to remain under pressure in North America in
the near term. We continue to expect strong growth in the bottled water and
non-carbonated beverages segments.
29
Since September 29, 2005 through the end of the third quarter of 2006, we have
recorded pretax charges of $49.3 million relating to unusual items including
impairment and restructuring charges. These amounts are part of our estimated
$115 to $125 million in total charges related to cost reduction. This range has
been revised from the previously announced range of $60 to $80 million, as a
result of additional plant closures, office consolidation and organizational
streamlining. We continue to expect net income, excluding unusual items, share
based compensation expense and charges related to executive transitions, to be
substantially lower in 2006 than in 2005. We also expect fourth quarter of 2006
net income to be below the prior year fourth quarter due to continuing volume
softness, planned curtailment in production to reduce inventories, the inclusion
of share based compensation expense and aggressive actions to position the
Company for improved performance in 2007.
To build long-term success and profitability, we are focused on three key
priorities: 1) reducing costs; 2) becoming the best partner to our retailer
customers; and 3) building and sustaining a pipeline of innovation and new
product development.
Our cost reduction program includes initiatives to optimize assets, reduce fixed
costs and implement world-class efficiencies, the adoption of a sub-zero-based
budgeting system, optimization of selling, general and administrative expenses,
further centralization of procurement and suppliers, and ongoing SKU
rationalization. In addition, we intend to drive top-line growth by focusing on
in-store execution, penetration of new, high-margin beverage segments, expansion
of our business to new, high-margin channels, and expansion to new global
customers and geographies.
To support the Company's long-term growth, we have restructured our organization
under two business units responsible for North America and International. These
two business units are focused on customer management, channel development,
sales and marketing and are supported by four centralized functions: 1) People;
2) Supply/Manufacturing; 3) Finance and 4) Legal / Corporate Development. The
new organizational structure is designed to leverage our strengths in addressing
growth opportunities while driving efficiencies throughout the Company.
Our business strategy also involves continued expansion of our business outside
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 and expand into new channels and product
segments. Our U.K. division intends to continue to enhance its performance
through product innovation and expansion in aseptic products with the
installation of second aseptic production line in our Nelson facility. We also
continue to explore arrangements with bottlers in China to help meet the needs
of major customers expanding in that market.
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 applicable Canadian securities legislation 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:
- changing nature of the North American business;
- our ability to successfully implement our realignment plan;
- our ability to grow business outside of North America, including in
new geographic areas;
- our ability to expand our business to new channels and products;
- our ability to integrate new management and a new management
structure;
30
- 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 and if
successful the impact those increased prices could have on our
volumes;
- 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 and our ability to satisfy them;
- 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Item 7A: Quantitative and Qualitative Disclosures about
Market Risk described in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.
In the first nine months of 2006, we entered into cash flow hedges to mitigate
exposure to declines in the value of the Canadian dollar attributable to certain
forecasted U.S. dollar raw material purchases of the Canadian business segment.
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. In fiscal 2005, we also entered into cash flow hedges to mitigate exposure
to declines in the value of pound sterling attributable to certain forecasted
U.S. dollar raw material purchases of the United Kingdom ("U.K.") and European
business segments. The fair market value of the foreign exchange options is
included in prepaid expenses and other assets.
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 September 30, 2006, the fair value of the
31
options was nil ($0.7 million - October 1, 2005) and we recorded $0.3 million
unrealized gain in comprehensive income in the first nine months of 2006. See
"Note 8 Derivative Financial Instruments."
Our revenues outside the U.S. are concentrated principally in the U.K. and
Canada. We believe that our foreign currency exchange rate risk has been
immaterial given the historic stability of the U.S. dollar with respect to the
foreign currencies to which we have our principal exposure. However, there can
be no assurance that these exchange rates will remain stable or that our
exposure to foreign currency exchange rate risk will not increase in the future.
ITEM 4. 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
control over financial reporting or in other factors during the quarter ended
September 30, 2006 that could materially affect, or are likely to materially
affect, our internal control over financial reporting.
32
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the legal proceedings described in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2005 and to our Quarterly
Reports on Form 10-Q for the three-month periods ended April 1, 2006 and July 1,
2006.
In addition, in reference to the action styled the Consumers' Association of
Canada and Bruce Cran v. Coca-Cola Bottling Ltd. et al., on June 2, 2006, the
British Columbia Supreme Court granted the summary trial application, which
resulted in the dismissal of the plaintiffs' action against us and the other
defendants. On June 26, 2006, the plaintiffs' appealed the dismissal of their
action to the British Columbia Court of Appeal. We, together with the other
defendants, are defending the appeal, which we expect will be heard in the next
eight to twelve months. It is too early to assess the chances of success of the
appeal.
Furthermore, in reference to the action styled Kruger et al. v. Pepsi-Cola
Beverage Ltd., et al. filed in Superior Court in Quebec, District of Hull, we
received notice by letter dated October 13, 2006, that the plaintiffs have moved
for the litigation to be discontinued. The plaintiffs' motion is scheduled to be
heard on November 20, 2006.
ITEM 1A. RISK FACTORS
Reference is made to the detailed description of risk factors our Annual Report
on Form 10-K for the fiscal year ended December 31, 2005. Risks and
uncertainties include national brand pricing strategies, commitment of major
customers to retailer brand programs, stability of procurement costs for items
such as sweetener, packaging materials and other ingredients, the successful
integration of new acquisitions, the ability to protect intellectual property
and fluctuations in interest rates and foreign currencies versus the U.S.
dollar.
The Risk Factors included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2005 have not changed materially other than as set forth
below:
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.
This Risk Factor is no longer applicable as the U.K. Competition Commission
approved the Macaw Acquisition on April 28, 2006.
ITEM 5. OTHER INFORMATION
TERMINATION AGREEMENT WITH ANDREW MURFIN
On August 2, 2006, our subsidiary, Cott Beverages Ltd. ("Cott Beverages")
entered into an agreement with Andrew Murfin (the "Murfin Termination
Agreement") in connection with the termination of Mr. Murfin's employment as
Cott Beverages' Managing Director effective August 1, 2006 (the "Murfin
Termination Date"). Mr. Murfin also resigned as a director, officer, and company
secretary of each of Cott Beverages' direct and indirect affiliates,
subsidiaries and associated companies in which he held such a position,
including as our Senior Vice President & Managing Director U.K./Europe, with
such resignation being effective August 1, 2006.
Pursuant to the Murfin Termination Agreement, Cott Beverages paid Mr.
Murfin (pounds)117,000 as compensation for loss of employment, less applicable
withholdings and deductions, except that the first (pounds)30,000 was paid
without deduction of taxes.
Under the terms of the Murfin Termination Agreement, Mr. Murfin was
afforded 60 days to exercise all of his currently vested stock options in
accordance with our Common Share Option Plan, or such vested stock options would
lapse. Any stock options granted to Mr. Murfin that were not vested at the
Murfin Termination Date automatically lapsed on such date. We also agreed to
accelerate the vesting of certain shares held by Mr. Murfin under our Executive
Incentive Share Purchase Plan.
33
Pursuant to the Murfin Termination Agreement, Mr. Murfin agreed to release
us from any liability arising from or related to his employment with us or the
termination thereof. Mr. Murfin's non-competition and non-solicitation covenants
to us will apply for 12 months following the termination of his employment and
he has agreed to be bound by confidentiality covenants.
EMPLOYMENT AGREEMENT WITH ABILIO GONZALEZ
On July 27, 2006, we announced that we had hired Abilio Gonzalez to serve
as our Chief People Officer. Subsequently, on August 1, 2006, we executed an
Employment Agreement (the "Gonzalez Employment Agreement"), effective
immediately.
Under the Gonzalez Employment Agreement, we will pay Mr. Gonzalez a base
salary of not less than $325,000 per year, reviewed at least annually for
increases at the discretion of our Chief Executive Officer and/or our Board of
Directors. Mr. Gonzalez is also entitled to an annual car allowance of $13,500.
Mr. Gonzalez is entitled to an annual performance-based bonus of an amount equal
to up to 100% of his base salary for achievement of specified target goals, and
up to an additional 100% of his base salary for achievement of performance goals
in excess of the target goals. His bonus for 2006 is guaranteed to be a minimum
of 100% of his base salary prorated for actual employment during 2006, and any
excess bonus earned will also be prorated for actual service during 2006. Mr.
Gonzalez is eligible to participate in all of our benefit plans made available
to our employees and senior executives, including the executive incentive share
purchase and long-term incentive plans.
As an inducement to enter into employment with us, Mr. Gonzalez received a
one-time cash award of $200,000, as well as a grant of performance share units
equal to $200,000. Mr. Gonzalez is also entitled to reimbursement for relocation
expenses and temporary housing.
If we terminate Mr. Gonzalez's employment for cause or he resigns, we will
pay him an amount equal to his accrued base salary and any accrued but unpaid
vacation entitlements. If we terminate him without cause or he resigns for good
reason, he will be entitled to a (i) his accrued base salary through the date of
termination, (ii) his target bonus, prorated through the termination date based
on the achievement of specified target goals to such date, (iii) a lump-sum
payment equal to the sum of (a) his annual base salary at the time of
termination and (b) a target bonus in an amount equal to the average of the
target bonus payments for the two most recently completed fiscal years, and (iv)
continuation of insurance benefits for 12 months or until such benefits are
replaced by a new employer, subject to eligibility under the applicable plans.
All such payments will be made less applicable statutory withholdings and
deductions. Mr. Gonzalez's participation in all bonus plans will terminate
immediately on the date of termination of employment.
Mr. Gonzalez has agreed to be subject to standard confidentiality
undertakings and will also be subject to non-competition, non-solicitation, and
non-disparagement restrictions during the term of employment and for a period of
12 months following termination.
ITEM 6. FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. Financial Statement Schedules
Schedule III - Consolidating Financial Statements
2. Exhibits
34
Number Description
------ -----------
3.1 Articles of Incorporation of Cott (incorporated by reference to Exhibit
3.1 to our Form 10-K dated March 31, 2000).
3.2 By-laws of Cott (incorporated by reference to Exhibit 3.2 to our Form
10-K dated March 8, 2002).
10.1 Termination Letter Agreement between Cott Corporation and Mark Benadiba
dated August 2, 2006 (filed herewith).
10.2 Termination Letter Agreement between Cott Corporation and Andrew J.
Murfin dated August 2, 2006 (filed herewith).
10.3 Termination Letter Agreement between Cott Corporation and Colin Walker
dated August 8, 2006 (filed herewith).
10.4 Employment Agreement between Cott Corporation and Wynn A. Willard dated
August 23, 2006 (filed herewith).
10.5 Employment Agreement between Cott Corporation and John Dennehy dated
September 12, 2006 (filed herewith).
10.6 Employment Offer Letter between Cott Corporation and Rick Dobry dated
September 21, 2006 and modification dated October 24, 2006 (filed
herewith).
10.7 Employment Agreement between Cott Corporation and Abilio Gonzales dated
August 1, 2006 (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 quarterly period
ended September 30, 2006 (filed herewith).
31.2 Certification of the Executive Vice President & Chief Financial Officer
pursuant to section 302 of the Sarbanes-Oxley Act of 2002 for the
quarterly period ended September 30, 2006 (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 quarterly period
ended September 30, 2006 (furnished herewith).
32.2 Certification of the Executive Vice President & Chief Financial Officer
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 for the
quarterly period ended September 30, 2006 (furnished herewith).
In accordance with SEC Release No. 33-8238, Exhibits 32.1 and 32.2 are to be
treated as "accompanying" this report rather than "filed" as part of the report.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COTT CORPORATION
(Registrant)
Date: November 7, 2006 /s/ B. Clyde Preslar
----------------------------------------
B. Clyde Preslar
Executive Vice President &
Chief Financial Officer
(On behalf of the Company)
Date: November 7, 2006 /s/ Tina Dell'Aquila
----------------------------------------
Tina Dell'Aquila
Vice President, Controller & Assistant
Secretary
(Principal accounting officer)
36
SCHEDULE III - CONSOLIDATING FINANCIAL STATEMENTS
Cott Beverages Inc., a wholly owned subsidiary of Cott Corporation, has entered
into financing arrangements that are guaranteed by Cott Corporation and certain
other wholly owned subsidiaries of Cott Corporation (the "Guarantor
Subsidiaries"). Such guarantees are full, unconditional and joint and several.
The following supplemental financial information sets forth on an unconsolidated
basis, balance sheets, statements of income and cash flows for Cott Corporation,
Cott Beverages Inc., Guarantor Subsidiaries and Cott Corporation's other
subsidiaries (the "Non-guarantor Subsidiaries"). The supplemental financial
information reflects the investments of Cott Corporation and Cott Beverages Inc.
in their respective subsidiaries using the equity method of accounting.
COTT CORPORATION
CONSOLIDATING STATEMENTS OF INCOME (LOSS)
(in millions of U.S. dollars, unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ----------- ------------
REVENUE $63.7 $286.4 $111.4 $33.9 $(19.9) $475.5
Cost of sales 52.2 257.0 94.9 29.3 (19.9) 413.5
----- ------ ------ ----- ------ ------
GROSS PROFIT 11.5 29.4 16.5 4.6 -- 62.0
Selling, general and
administrative expenses 1.4 23.8 12.1 3.5 -- 40.8
Unusual items
Restructuring 1.4 6.3 1.5 0.2 9.4
Asset (recovery) impairments (0.3) 0.2 -- -- -- (0.1)
----- ------ ------ ----- ------ ------
OPERATING INCOME (LOSS) 9.0 (0.9) 2.9 0.9 -- 11.9
Other (income) expense, net (0.2) 2.6 (1.0) (2.7) 1.1 (0.2)
Interest expense, net -- 7.7 0.1 -- -- 7.8
Minority interest -- -- -- 0.9 -- 0.9
----- ------ ------ ----- ------ ------
INCOME (LOSS) BEFORE INCOME TAXES
AND EQUITY INCOME (LOSS) 9.2 (11.2) 3.8 2.7 (1.1) 3.4
Income taxes (recovery) -- (4.2) 0.9 0.1 -- (3.2)
Equity (loss) income (2.6) 0.4 (4.8) -- 7.0 --
----- ------ ------ ----- ------ ------
NET INCOME (LOSS) $ 6.6 $ (6.6) $ (1.9) $ 2.6 $ 5.9 $ 6.6
===== ====== ====== ===== ====== ======
37
COTT CORPORATION
CONSOLIDATING STATEMENTS OF INCOME (LOSS)
(in millions of U.S. dollars, unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ----------- ------------
REVENUE $177.6 $857.8 $296.8 $96.3 $(56.8) $1,371.7
Cost of sales 145.6 756.1 257.6 82.2 (56.8) 1,184.7
------ ------ ------ ----- ------ --------
GROSS PROFIT 32.0 101.7 39.2 14.1 -- 187.0
Selling, general and
administrative expenses 23.9 69.6 28.5 7.4 -- 129.4
(Gain) loss on disposal of
property, plant and equipment (0.5) 0.5 -- -- -- --
Unusual items
Restructuring 1.6 7.9 1.5 0.2 -- 11.2
Asset (recovery) impairments (0.4) 1.6 -- -- -- 1.2
Other -- -- 2.6 -- -- 2.6
------ ------ ------ ----- ------ --------
OPERATING INCOME 7.4 22.1 6.6 6.5 -- 42.6
Other (income) expense, net (0.3) 7.2 (1.8) (3.6) (1.9) (0.4)
Interest (income) expense, net (0.1) 23.7 0.2 (0.3) -- 23.5
Minority interest -- -- -- 3.0 -- 3.0
------ ------ ------ ----- ------ --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EQUITY INCOME (LOSS) 7.8 (8.8) 8.2 7.4 1.9 16.5
Income taxes (recovery) 0.1 (3.1) 2.8 4.6 -- 4.4
Equity income (loss) 4.4 0.1 2.8 -- (7.3) --
------ ------ ------ ----- ------ --------
NET INCOME (LOSS) $ 12.1 $ (5.6) $ 8.2 $ 2.8 $ (5.4) $ 12.1
====== ====== ====== ===== ====== ========
38
COTT CORPORATION
CONSOLIDATING BALANCE SHEETS
(in millions of U.S. dollars, unaudited)
AS OF SEPTEMBER 30, 2006
----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ----------- ------------
ASSETS
Current assets
Cash $ 2.7 $ 20.3 $ 3.0 $ 3.7 $ -- $ 29.7
Accounts receivable 45.3 30.1 79.0 92.2 (54.2) 192.4
Inventories 22.4 85.4 43.8 6.2 -- 157.8
Prepaid expenses and other
assets 1.6 3.2 6.9 2.9 -- 14.6
Deferred income taxes -- 7.5 0.7 0.1 -- 8.3
------ ------- ------- ------ --------- --------
72.0 146.5 133.4 105.1 (54.2) 402.8
Property, plant and equipment 51.8 179.7 136.5 10.2 -- 378.2
Goodwill 24.6 46.0 85.7 -- -- 156.3
Intangibles and other assets 16.3 159.8 37.4 37.6 -- 251.1
Due from affiliates 72.5 47.8 177.6 41.9 (339.8) --
Investments in subsidiaries 405.6 70.5 65.5 143.8 (685.4) --
------ ------- ------- ------ --------- --------
$642.8 $ 650.3 $ 636.1 $338.6 $(1,079.4) $1,188.4
====== ======= ======= ====== ========= ========
LIABILITIES
Current liabilities
Short-term borrowings $ -- $ -- $ 125.4 $ -- $ -- $ 125.4
Current maturities of long-term
debt -- 1.0 -- -- -- 1.0
Accounts payable and accrued
liabilities 32.7 119.8 73.7 20.9 (56.1) 191.0
------ ------- ------- ------ --------- --------
32.7 120.8 199.1 20.9 (56.1) 317.4
Long-term debt -- 272.1 -- -- -- 272.1
Due to affiliates 97.1 122.5 70.0 50.2 (339.8) --
Deferred income taxes -- 35.3 19.5 9.2 -- 64.0
------ ------- ------- ------ --------- --------
129.8 550.7 288.6 80.3 (395.9) 653.5
------ ------- ------- ------ --------- --------
Minority interest -- -- -- 21.9 -- 21.9
SHAREOWNERS' EQUITY
Capital stock
Common shares 273.3 275.8 623.0 175.0 (1,073.8) 273.3
Restricted shares (0.8) -- -- -- -- (0.8)
Additional paid-in-capital 25.8 -- -- -- -- 25.8
Retained earnings (deficit) 198.3 (176.2) (173.2) (4.1) 353.5 198.3
Accumulated other comprehensive
income (loss) 16.4 -- (102.3) 65.5 36.8 16.4
------ ------- ------- ------ --------- --------
513.0 99.6 347.5 236.4 (683.5) 513.0
------ ------- ------- ------ --------- --------
$642.8 $ 650.3 $ 636.1 $338.6 $(1,079.4) $1,188.4
====== ======= ======= ====== ========= ========
39
COTT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars, unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ----------- ------------
OPERATING ACTIVITIES
Net income (loss) $ 6.6 $(6.6) $(1.9) $ 2.6 $ 5.9 $ 6.6
Depreciation and amortization 3.1 9.1 5.5 1.3 -- 19.0
Amortization of financing fees -- 0.1 0.2 -- -- 0.3
Share based compensation 2.8 -- -- -- -- 2.8
Deferred income taxes -- (3.5) -- 0.1 -- (3.4)
Minority interest -- -- -- 0.9 -- 0.9
Equity income (loss), net of
distributions 2.6 1.5 4.8 -- (8.9) --
(Gain) loss on disposal of
property, plant and
equipment (0.1) 0.1 -- -- -- --
Asset recovery (0.1) -- -- -- -- (0.1)
Other non-cash items -- 5.8 0.4 -- -- 6.2
Net change in non-cash
working capital (7.6) 24.8 7.9 (2.9) 1.1 23.3
----- ----- ----- ----- ----- -----
Cash provided by (used in)
operating activities 7.3 31.3 16.9 2.0 (1.9) 55.6
----- ----- ----- ----- ----- -----
INVESTING ACTIVITIES
Additions to property, plant
and equipment (0.7) (3.3) (2.1) (0.7) -- (6.8)
Proceeds from disposal of
property, plant and
equipment -- 0.4 -- -- -- 0.4
Advances to affiliates (6.6) -- (2.2) -- 8.8 --
Other investing activities (1.6) 0.3 -- -- -- (1.3)
----- ----- ----- ----- ----- -----
Cash (used in) provided by
investing activities (8.9) (2.6) (4.3) (0.7) 8.8 (7.7)
----- ----- ----- ----- ----- -----
FINANCING ACTIVITIES
Payments of long-term debt -- (0.3) -- -- -- (0.3)
Short-term borrowings -- (10.6) (15.7) -- -- (26.3)
Advances from affiliates -- 2.4 6.5 (0.1) (8.8) --
Distributions to subsidiary
minority shareowner -- -- -- (1.8) -- (1.8)
Issue of common shares 0.3 -- -- -- -- 0.3
Dividends paid -- -- -- (1.9) 1.9 --
Other 0.1 -- (0.1) -- -- --
----- ----- ----- ----- ----- -----
Cash provided by (used in)
financing activities 0.4 (8.5) (9.3) (3.8) (6.9) (28.1)
----- ----- ----- ----- ----- -----
Effect of exchange rate
changes on cash 0.1 -- -- -- -- 0.1
----- ----- ----- ----- ----- -----
NET (DECREASE) INCREASE IN
CASH (1.1) 20.2 3.3 (2.5) -- 19.9
CASH, BEGINNING OF PERIOD 3.8 0.1 (0.3) 6.2 -- 9.8
----- ----- ----- ----- ----- -----
CASH, END OF PERIOD $ 2.7 $20.3 $ 3.0 $ 3.7 $ -- $29.7
===== ===== ===== ===== ===== =====
40
COTT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars, unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ----------- ------------
OPERATING ACTIVITIES
Net income (loss) $ 12.1 $ (5.6) $ 8.2 $ 2.8 $ (5.4) $ 12.1
Depreciation and amortization 9.1 27.8 16.6 3.9 -- 57.4
Amortization of financing fees -- 0.2 0.4 0.2 -- 0.8
Share based compensation 7.4 -- -- -- -- 7.4
Deferred income taxes -- (0.8) -- 4.0 -- 3.2
Minority interest -- -- -- 3.0 -- 3.0
Equity (loss) income, net of
distributions (4.4) 3.6 (2.8) -- 3.6 --
(Gain) loss on disposal of
property, plant and
equipment (0.5) 0.6 (0.1) -- -- --
Asset (recovery) impairments (0.2) 1.4 -- -- -- 1.2
Other non-cash items (0.1) 6.4 0.4 -- -- 6.7
Net change in non-cash
working capital (16.7) 7.2 1.8 1.5 (1.9) (8.1)
------ ------ ------ ------ ------ ------
Cash provided by (used in)
operating activities 6.7 40.8 24.5 15.4 (3.7) 83.7
------ ------ ------ ------ ------ ------
INVESTING ACTIVITIES
Additions to property, plant
and equipment (2.0) (13.5) (7.2) (0.8) -- (23.5)
Proceeds from disposal of
property, plant and
equipment 1.0 0.6 0.3 -- -- 1.9
Advances to affiliates (8.4) 0.1 (6.5) -- 14.8 --
Other investing activities (4.0) (3.0) -- -- -- (7.0)
------ ------ ------ ------ ------ ------
Cash (used in) provided by
investing activities (13.4) (15.8) (13.4) (0.8) 14.8 (28.6)
------ ------ ------ ------ ------ ------
FINANCING ACTIVITIES
Payments of long-term debt -- (0.8) -- -- -- (0.8)
Short-term borrowings -- (10.4) (22.6) (10.0) -- (43.0)
Advances from affiliates -- 6.6 8.3 (0.1) (14.8) --
Distributions to subsidiary
minority shareowner -- -- -- (3.6) -- (3.6)
Issue of common shares 0.3 -- -- -- -- 0.3
Dividends paid -- -- -- (3.7) 3.7 --
Other financing activities 0.1 (0.1) (0.1) -- -- (0.1)
------ ------ ------ ------ ------ ------
Cash provided by (used in)
financing activities 0.4 (4.7) (14.4) (17.4) (11.1) (47.2)
------ ------ ------ ------ ------ ------
Effect of exchange rate
changes on cash 0.2 -- -- (0.1) -- 0.1
------ ------ ------ ------ ------ ------
NET (DECREASE) INCREASE IN
CASH (6.1) 20.3 (3.3) (2.9) -- 8.0
CASH, BEGINNING OF PERIOD 8.8 -- 6.3 6.6 -- 21.7
------ ------ ------ ------ ------ ------
CASH, END OF PERIOD $ 2.7 $ 20.3 $ 3.0 $ 3.7 $ -- $ 29.7
====== ====== ====== ====== ====== ======
41
COTT CORPORATION
CONSOLIDATING STATEMENTS OF INCOME
(in millions of U.S. dollars, unaudited)
FOR THE THREE MONTHS ENDED OCTOBER 1, 2005
----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ----------- ------------
REVENUE $60.4 $293.8 $94.9 $29.9 $ (9.1) $469.9
Cost of sales 51.7 252.8 83.5 25.6 (9.1) 404.5
----- ------ ----- ----- ------ ------
GROSS PROFIT 8.7 41.0 11.4 4.3 -- 65.4
Selling, general and
administrative expenses 9.6 17.3 5.2 2.1 -- 34.2
Unusual items
Restructuring 0.2 1.8 -- -- -- 2.0
Asset impairments 3.7 20.0 -- -- -- 23.7
----- ------ ----- ----- ------ ------
OPERATING (LOSS) INCOME (4.8) 1.9 6.2 2.2 -- 5.5
Other (income) expense, net (0.2) (6.9) (0.9) 6.8 0.8 (0.4)
Interest expense (income), net -- 8.1 (1.1) 0.7 -- 7.7
Minority interest -- -- -- 1.1 -- 1.1
----- ------ ----- ----- ------ ------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY INCOME
(LOSS) (4.6) 0.7 8.2 (6.4) (0.8) (2.9)
Income tax expense (recovery) 0.6 1.7 (0.8) (0.4) -- (1.1)
Equity income (loss) 2.4 (1.3) 24.9 -- (26.0) --
----- ------ ----- ----- ------ ------
NET (LOSS) INCOME $(1.6) $ 1.1 $32.3 $(6.8) $(26.8) $ (1.8)
===== ====== ===== ===== ====== ======
FOR THE NINE MONTHS ENDED OCTOBER 1, 2005
----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ----------- ------------
REVENUE $167.3 $900.3 $221.7 $ 91.3 $(22.5) $1,358.1
Cost of sales 141.9 765.8 193.2 77.6 (22.5) 1,156.0
------ ------ ------ ------ ------ --------
GROSS PROFIT 25.4 134.5 28.5 13.7 -- 202.1
Selling, general and
administrative expenses 28.9 56.2 15.9 5.6 -- 106.6
Loss (gain) on disposal of
property, plant and equipment -- 0.7 (0.9) -- -- (0.2)
Unusual items
Restructuring 0.2 1.8 -- -- -- 2.0
Asset impairments
(recovery) 3.7 20.0 (0.2) -- -- 23.5
------ ------ ------ ------ ------ --------
OPERATING (LOSS) INCOME (7.4) 55.8 13.7 8.1 -- 70.2
Other (income) expense, net (0.3) (26.0) (0.4) 28.5 (2.2) (0.4)
Interest (income) expense, net (0.1) 24.7 (5.0) 1.2 -- 20.8
Minority interest -- -- -- 3.4 -- 3.4
------ ------ ------ ------ ------ --------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY INCOME
(LOSS) (7.0) 57.1 19.1 (25.0) 2.2 46.4
Income tax (recovery) expense (1.1) 12.8 2.5 0.7 -- 14.9
Equity income (loss) 37.5 3.4 51.7 -- (92.6) --
------ ------ ------ ------ ------ --------
NET INCOME $ 31.6 $ 47.7 $ 68.3 $(25.7) $(90.4) $ 31.5
====== ====== ====== ====== ====== ========
42
COTT CORPORATION
CONSOLIDATING BALANCE SHEETS
(in millions of U.S. dollars)
AS OF DECEMBER 31, 2005
----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ----------- ------------
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 1.3 2.2 4.7 1.3 -- 9.5
Deferred income taxes -- 7.2 0.1 -- -- 7.3
------ ------- ------- ------ --------- --------
64.5 112.5 124.9 116.3 (44.4) 373.8
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) --
Deferred income taxes -- -- 0.4 -- -- 0.4
------ ------- ------- ------ --------- --------
$614.0 $ 653.6 $ 611.0 $347.4 $(1,046.9) $1,179.1
====== ======= ======= ====== ========= ========
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
Deferred income taxes -- -- 0.2 -- -- 0.2
------ ------- ------- ------ --------- --------
36.7 120.8 201.3 27.0 (44.4) 341.4
Long-term debt -- 272.3 -- -- -- 272.3
Due to affiliates 95.4 115.8 58.1 62.2 (331.5) --
Deferred income taxes -- 38.2 17.7 5.1 -- 61.0
------ ------- ------- ------ --------- --------
132.1 547.1 277.1 94.3 (375.9) 674.7
------ ------- ------- ------ --------- --------
Minority interest -- -- -- 22.5 -- 22.5
SHAREOWNERS' EQUITY
Capital stock
Common shares 273.0 275.8 599.5 175.0 (1,050.3) 273.0
Additional paid-in-capital 18.4 -- -- -- -- 18.4
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 $ 653.6 $ 611.0 $347.4 $(1,046.9) $1,179.1
====== ======= ======= ====== ========= ========
43
COTT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars, unaudited)
FOR THE THREE MONTHS ENDED OCTOBER 1, 2005
----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ----------- ------------
OPERATING ACTIVITIES
Net (loss) income $(1.6) $ 1.1 $ 32.3 $ (6.8) $(26.8) $ (1.8)
Depreciation and amortization 2.7 10.0 4.3 1.3 -- 18.3
Amortization of financing fees -- -- 0.1 0.1 -- 0.2
Deferred income taxes (0.6) 1.6 (0.4) (0.6) -- --
Minority interest -- -- -- 1.1 -- 1.1
Equity (loss) income, net of
distributions (2.4) 3.5 (24.9) -- 23.8 --
Asset impairments 3.7 20.0 -- -- -- 23.7
Other non-cash items (0.2) 0.7 (1.2) 1.0 -- 0.3
Net change in non-cash
working capital 1.6 (54.4) 25.7 40.2 0.8 13.9
----- ------ ------- ------ ------ -------
Cash provided by (used in)
operating activities 3.2 (17.5) 35.9 36.3 (2.2) 55.7
----- ------ ------- ------ ------ -------
INVESTING ACTIVITIES
Additions to property, plant
and equipment (1.3) (9.5) (3.3) -- -- (14.1)
Acquisitions -- -- (135.1) -- -- (135.1)
Proceeds from disposal of
property, plant and
equipment 0.1 -- -- -- -- 0.1
Advances to affiliates (2.1) 5.1 2.8 -- (5.8) --
Other investing activities (2.1) 30.8 (30.7) (0.1) -- (2.1)
----- ------ ------- ------ ------ -------
Cash (used in) provided by
investing activities (5.4) 26.4 (166.3) (0.1) (5.8) (151.2)
----- ------ ------- ------ ------ -------
FINANCING ACTIVITIES
Payments of long-term debt -- (0.3) -- -- -- (0.3)
Short-term borrowings (0.5) (4.4) 130.6 (34.7) -- 91.0
Advances from affiliates -- (2.8) (2.9) (0.1) 5.8 --
Distributions to subsidiary
minority shareowner -- -- -- (2.0) -- (2.0)
Issue of common shares 1.1 -- -- -- -- 1.1
Financing costs -- (1.2) -- -- -- (1.2)
Dividends paid -- -- -- (2.2) 2.2 --
Other financing activities -- -- (0.1) -- -- (0.1)
----- ------ ------- ------ ------ -------
Cash provided by (used in)
financing activities 0.6 (8.7) 127.6 (39.0) 8.0 88.5
----- ------ ------- ------ ------ -------
Effect of exchange rate
changes on cash 0.2 -- (0.3) -- -- (0.1)
----- ------ ------- ------ ------ -------
NET (DECREASE) INCREASE IN
CASH (1.4) 0.2 (3.1) (2.8) -- (7.1)
CASH, BEGINNING OF PERIOD 5.5 (0.4) 6.7 4.1 -- 15.9
----- ------ ------- ------ ------ -------
CASH, END OF PERIOD $ 4.1 $ (0.2) $ 3.6 $ 1.3 $ -- $ 8.8
===== ====== ======= ====== ====== =======
44
COTT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars, unaudited)
FOR THE NINE MONTHS ENDED OCTOBER 1, 2005
----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ----------- ------------
OPERATING ACTIVITIES
Net income (loss) $ 31.6 $ 47.7 $ 68.3 $(25.7) $(90.4) $ 31.5
Depreciation and amortization 8.8 28.1 10.2 3.9 -- 51.0
Amortization of financing fees -- 0.2 0.1 0.2 -- 0.5
Deferred income taxes (1.2) 5.3 (0.4) (0.4) -- 3.3
Minority interest -- -- -- 3.4 -- 3.4
Equity (loss) income, net of
distributions (37.5) 1.0 (51.7) -- 88.2 --
Loss (gain) on disposal of
property, plant and
equipment -- 0.7 (0.9) -- -- (0.2)
Asset impairments (recovery) 3.7 20.0 (0.2) -- -- 23.5
Other non-cash items (0.2) 1.3 (1.0) 1.1 -- 1.2
Net change in non-cash
working capital 18.7 (4.7) (12.1) (3.3) (2.2) (3.6)
------ ------ ------- ------ ------ -------
Cash provided by (used in)
operating activities 23.9 99.6 12.3 (20.8) (4.4) 110.6
------ ------ ------- ------ ------ -------
INVESTING ACTIVITIES
Additions to property, plant
and equipment (8.4) (47.1) (12.8) (0.6) -- (68.9)
Acquisitions -- -- (135.1) -- -- (135.1)
Proceeds from disposal of
property, plant and
equipment 0.1 0.7 1.3 -- -- 2.1
Advances to affiliates (11.9) 0.1 (1.2) -- 13.0 --
Investment in subsidiary (15.0) -- (15.0) -- 30.0 --
Other investing activities (6.2) 0.7 0.2 (0.9) -- (6.2)
------ ------ ------- ------ ------ -------
Cash (used in) provided by
investing activities (41.4) (45.6) (162.6) (1.5) 43.0 (208.1)
------ ------ ------- ------ ------ -------
FINANCING ACTIVITIES
Payments of long-term debt -- (0.7) -- -- -- (0.7)
Short-term borrowings 3.3 (52.7) 129.7 5.2 -- 85.5
Advances from affiliates -- 1.2 11.9 (0.1) (13.0) --
Distributions to subsidiary
minority shareowner -- -- -- (3.9) -- (3.9)
Issue of common shares 3.5 -- 15.0 15.0 (30.0) 3.5
Financing costs -- (3.8) -- -- -- (3.8)
Dividends paid -- -- -- (4.4) 4.4 --
Other financing activities -- 1.8 (2.1) -- -- (0.3)
------ ------ ------- ------ ------ -------
Cash provided by (used in)
financing activities 6.8 (54.2) 154.5 11.8 (38.6) 80.3
------ ------ ------- ------ ------ -------
Effect of exchange rate
changes on cash 0.1 -- (0.6) (0.1) -- (0.6)
------ ------ ------- ------ ------ -------
NET (DECREASE) INCREASE IN
CASH (10.6) (0.2) 3.6 (10.6) -- (17.8)
CASH, BEGINNING OF PERIOD 14.7 -- -- 11.9 -- 26.6
------ ------ ------- ------ ------ -------
CASH, END OF PERIOD $ 4.1 $ (0.2) $ 3.6 $ 1.3 $ -- $ 8.8
====== ====== ======= ====== ====== =======
45