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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 3, 2004
[ ] 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 Identification No.)
Incorporation or Organization)
207 Queen's Quay West, Suite 340
Toronto, Ontario M5J 1A7
- ------------------------------------ ----------------------------------
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (416) 203-3898
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares without nominal or par value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the common equity held by non-affiliates of
the registrant as of June 28, 2003 (based on the closing sale price of the
registrant's common stock as reported on the New York Stock Exchange on such
date) was $968,473,417.
(Reference is made to the last paragraph of Part II, Item 5 for a statement of
assumptions upon which the calculation is made.) The number of shares
outstanding of the registrant's common stock as of February 29, 2004 was
70,396,981
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2004 Annual
and Special Meeting of Shareowners, to be filed within 120 days of January 3,
2004, are incorporated by reference in Part III.
Such reports, except for the parts therein which have been specifically
incorporated by reference, shall not be deemed "filed" for the purposes of this
report on Form 10-K.
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TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business........................................................................................ 34
Item 2 Properties...................................................................................... 39
Item 3 Legal Proceedings............................................................................... 40
Item 4 Submission of Matters to a Vote of Security Holders............................................. 40
Supplemental Item Part I - Executive Officers of Cott.......................................... 41
PART II
Item 5 Market for the Registrant's Common Equity and Related Shareowner Matters ....................... 42
Item 6 Selected Financial Data ........................................................................ 43
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 45
Item 7A Quantitative and Qualitative Disclosures about Market Risk ..................................... 59
Item 8 Financial Statements and Supplementary Data
Report of Management...................................................................... 60
Report of Independent Auditors............................................................ 61
Consolidated Statements of Income for the years ended January 3, 2004, December 28, 2002
and December 29, 2001................................................................... 62
Consolidated Balance Sheets as of January 3, 2004 and December 28, 2002................... 63
Consolidated Statements of Shareowners' Equity for the years ended January 3, 2004,
December 28, 2002 and December 29, 2001................................................. 64
Consolidated Statements of Cash Flows for the years ended January 3, 2004, December 28,
2002 and December 29, 2001.............................................................. 65
Notes to the Consolidated Financial Statements............................................ 66
Quarterly Financial Information........................................................... 89
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 90
Item 9A Controls and Procedures......................................................................... 90
PART III
Item 10 Directors and Executive Officers................................................................ 91
Item 11 Executive Compensation.......................................................................... 91
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Shareowner Matters.................................................... 91
Item 13 Certain Relationships and Related Transactions.................................................. 92
Item 14 Principal Accountant Fees and Services ......................................................... 92
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 93
- ----------------------------------------------------
Cott's consolidated financial statements are prepared in accordance with
United States generally accepted accounting principles ("GAAP") in U.S. dollars.
Unless otherwise indicated, all amounts in this report are in U.S. dollars and
U.S. GAAP.
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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 Cott's future results. These statements are
"forward-looking" within the meaning of the Private Securities Litigation Reform
Act of 1995 and include, but are not limited to, statements that relate to
projections of sales, earnings, earnings per share, cash flows, capital
expenditures or other financial items, discussions of estimated future revenue
enhancements and cost savings. These statements also relate to Cott's business
strategy, goals and expectations concerning its 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 Cott believes 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. Cott's operations involve risks and uncertainties, many of
which are outside of its 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 Cott's financial
performance, including but not limited to sales, earnings and cash flows, or
could cause actual results to differ materially from estimates contained in or
underlying the forward-looking statements:
- loss of key customers, particularly Wal-Mart, and the commitment of
retailer brand beverage customers to their own retailer brand beverage
programs;
- increases in competitor consolidations and other market-place
competition, particularly among branded beverage products;
- Cott's ability to identify acquisition and alliance candidates and to
integrate into its operations the businesses and product lines that
are acquired or allied with;
- Cott's ability to secure additional production capacity either through
acquisitions, or third party manufacturing arrangements;
- fluctuations in the cost and availability of beverage ingredients and
packaging supplies, and Cott's ability to maintain favorable
arrangements and relationships with its suppliers;
- unseasonably cold or wet weather, which could reduce demand for Cott's
beverages;
- Cott's ability to protect the intellectual property inherent in new
and existing products;
- adverse rulings, judgments or settlements in Cott's existing
litigation, and the possibility that additional litigation will be
brought against Cott;
- product recalls or changes in or increased enforcement of the laws and
regulations that affect Cott's business;
- currency fluctuations that adversely affect the exchange between the
U.S. dollar on the one hand and the pound sterling, the Canadian
dollar and other currencies on the other;
- changes in interest rates;
- changes in tax laws and interpretations of tax laws;
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- changes in consumer tastes and preferences and market demand for new
and existing products;
- interruption in transportation systems, labor strikes, work stoppages
or other interruptions or difficulties in the employment of labor or
transportation in Cott's markets; and
- changes in general economic and business conditions.
Many of these factors are described in greater detail in this report and in
Cott's other filings with the SEC. Cott undertakes 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 that
Cott 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 Cott
or persons acting on Cott's behalf are expressly qualified in their entirety by
the foregoing.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Cott Corporation operates in the United States through an indirect wholly
owned subsidiary, Cott Beverages Inc., in Canada through the Cott Beverages
Canada division, in the United Kingdom through an indirect wholly owned
subsidiary, Cott Beverages Ltd, and in Mexico through an indirect 90% owned
subsidiary Cott Embotelladores de Mexico S.A. de C.V.
Cott Corporation was incorporated in 1955 and is governed by the Canada
Business Corporations Act. Cott's registered Canadian office is located at 333
Avro Avenue, Pointe-Claire, Quebec, Canada H9R 5W3 and its principal executive
offices are located at 207 Queen's Quay West, Suite 340, Toronto, Ontario,
Canada M5J 1A7.
PRINCIPAL MARKETS AND PRODUCTS
Cott Corporation is the leading supplier of premium quality retailer brand
carbonated soft drinks in the United States, Canada and the United Kingdom.
Based on industry information, Cott estimates that it produces (either directly
or through third party manufacturers with whom Cott has co-packing agreements)
approximately 67% of all private label carbonated soft drinks sold in the United
States, 40% of those sold in the United Kingdom and 95% of those sold in Canada.
In addition to carbonated soft drinks, Cott's product lines include clear,
sparkling flavored beverages, juices and juice-based products, bottled water,
energy drinks and iced teas. Approximately, 92% of all beverages sold by Cott,
excluding concentrates, in the United States, Canada and the United Kingdom are
under customer controlled retailer brands, and the remainder are sold under
brand names that Cott either owns or licenses from others.
In recent years, Cott has expanded its business through acquisition and
growth with key customers. Cott believes that opportunities exist to increase
sales of beverages in its markets by leveraging existing customer relationships,
obtaining new customers, exploring new channels of distribution and introducing
new products.
During the past five years, Cott has expanded and strengthened its
production and distribution capabilities in the United States, Canada, United
Kingdom and Mexico through a series of acquisitions and investments. The
acquisitions and investments were purchased for the aggregate amount of $281.4
million.
RECENT ACQUISITIONS
In December 2003, Cott acquired the retailer brand beverage business of
North Carolina's Quality Beverage Brands, L.L.C. ("QBB"). In conjunction with
that acquisition, Cott also entered into long-term manufacturing agreements at
market rates with Independent Beverage Corporation, an affiliate of QBB. The
acquisition is expected to enhance Cott's capabilities and expand its customer
base in the Mid-Atlantic region of the United States and as a result Cott
expects to add approximately $45 million a year to its sales in the United
States, some of which will include sales to new customers.
FINANCIAL INFORMATION ABOUT SEGMENTS
For financial information about segments and geographic areas, see note 23
to the consolidated financial statements, found on pages 86 to 88 of this annual
report on Form 10-K.
MANUFACTURING AND DISTRIBUTION
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During 2003, approximately 80% of Cott's beverages produced in the United
States were manufactured in facilities that are either owned or leased by Cott
or by third party manufacturers with whom Cott has long-term co-packing
agreements. Cott manufactures virtually all of its Canadian and United Kingdom
beverages in facilities that it either owns or leases. Cott relies on third
parties to produce and distribute products in areas or markets where it does not
have its own production facilities, such as continental Europe, or when
additional production capacity is required.
Cott's products are either picked up by customers at Cott's facilities or
delivered by Cott, a common carrier, or third party distributors to either the
customer's distribution centers or directly to retail locations.
Cott may be liable if the consumption of any of its products causes
injury, illness or death. Cott also may be required to recall some of its
products if they become contaminated or are damaged or mislabeled. A significant
unfavorable product liability judgment or a widespread product recall could have
a material adverse effect on the results of operations or cash flows. As of
February 29, 2004, Cott was insured against product liability claims with a
limitation of $65 million and a $0.2 million deductible per occurrence with an
annual aggregate of $0.2 million. Cott is also insured against product recalls
with a limitation of $10 million, a $2 million deductible, and a 20% coinsurance
provision. Cott believes that its insurance coverage is adequate.
INGREDIENTS AND PACKAGING SUPPLIES
The principal ingredients required to produce Cott's products are
concentrate, sweeteners and carbon dioxide. Cott purchases its primary packaging
supplies, including polyethylene terephthalate ("PET") bottles, caps and PET
preforms, cans and lids, labels, cartons and trays, from outside vendors.
Cott typically enters into annual supply arrangements rather than long-term
contracts with its suppliers, which means that Cott's suppliers are obligated to
continue to supply it with materials for one-year periods, at the end of which
the contracts must either be renegotiated with the incumbent suppliers or Cott
would be required to find an alternative source for supply. With respect to some
of Cott's key packaging supplies, such as aluminum cans and lids and PET
bottles, and some of its key ingredients, such as artificial sweeteners, Cott
has entered into long-term supply agreements, the terms of which range from 1 to
5 years, and therefore Cott is assured of a supply of those key packaging
supplies and ingredients for a longer period of time. Crown Cork & Seal Company,
Inc. ("CCS") supplies Cott with aluminum cans and ends under a five-year
contract that expires on December 31, 2006. The contract provides that CCS will
supply all of Cott's aluminum can and end requirements worldwide, subject to
certain exceptions. The contract contains standard representations, warranties,
indemnities and termination events, including termination events related to
bankruptcy or insolvency of either party. As with Cott's annual supply
contracts, Cott must either renegotiate these long-term supply agreements with
the incumbent suppliers when they expire or find alternative sources for supply.
Cott relies upon its ongoing relationships with its key suppliers to
support its operations. Cott believes that it will be able to either renegotiate
contracts with these suppliers when they expire or, alternatively, if Cott is
unable to renegotiate contracts with its key suppliers, Cott believes that it
could replace them. However, Cott could incur higher ingredient and packaging
supply costs in renegotiating contracts with existing suppliers or replacing
those suppliers or Cott could experience temporary dislocations in its ability
to deliver products to its customers, either of which could have a material
adverse effect on its results of operations.
Cott does not believe that any of the ingredients or packaging supplies
that are used to produce or package Cott's products are currently in short
supply, although the supply of specific ingredients and packaging supplies could
be adversely affected by economic factors such as industry consolidation, energy
shortages, governmental controls, labor disputes, weather conditions and other
factors.
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The majority of Cott's ingredient and packaging supply contracts allow its
suppliers to alter the costs they charge Cott for those ingredients and
packaging supplies based on changes in the costs of the underlying commodities
that are used to produce those ingredients and packaging supplies. Examples of
these underlying commodities include resin for PET bottles and preforms and high
fructose corn syrup for sweeteners. In addition, the contracts for certain of
Cott's ingredients and packaging supplies permit its suppliers to increase the
costs they charge Cott based on increases in their cost of converting those
underlying commodities into the finished ingredients and packaging supplies that
Cott purchases. In certain cases those increases are subject to negotiated
limits and in other cases, they are not. These changes in the prices that Cott
pays for ingredients and packaging supplies occur at predetermined times that
vary by product and supplier, but are principally on semi-annual and annual
bases. Accordingly, Cott bears the risk of increases in the costs of these
ingredients and packaging supplies, including the underlying costs of the
commodities that comprise these ingredients and packaging supplies and, to some
extent, the costs of converting those commodities into finished products. Cott
does not use derivatives to manage this risk. If the cost of these ingredients
or packaging supplies increase, Cott may be unable to pass these costs along to
its customers through corresponding or contemporaneous adjustments to the prices
it charges. If Cott cannot pass on these costs to its customers, the increases
could have a material adverse effect on its results of operations.
TRADE SECRETS, TRADEMARKS AND LICENSES
Cott sells the majority of its beverages to retailer brand customers who
own the trademarks associated with those products. Cott is the registered owner
of various trademarks which are valuable assets and important to its worldwide
business, including Cott(TM) in North America, as well as Stars & Stripes(TM),
Vess(TM), Vintage(TM), Top Pop(TM), Clear Choice(TM) and City Club(TM) in the
United States and Edge(TM) and Red Rooster(TM) in the U.K. and RC(TM) in more
than 100 countries outside of North America. Cott is licensed to use certain
trademarks, including Chubby(TM) in Canada and the United States and RC(TM) in
certain regions of Canada, and Benshaws(TM) and Carters(TM) in the United
Kingdom. Trademarks are generally of indefinite duration and the licenses to
which Cott is a party are of varying terms, certain of which are perpetual.
Cott's success depends in part on its intellectual property. Intellectual
property includes trade secrets in the form of concentrate formulae for Cott's
beverages and trademarks for the names of the beverages Cott sells. Cott either
owns the trademarks for the products that it sells or licenses these trademarks
from its retailer brand customers and other third parties. To protect this
intellectual property, Cott relies principally on contractual restrictions in
agreements (such as nondisclosure and confidentiality agreements) with
employees, consultants and customers, and on the common law of trade secrets and
proprietary "know-how". Cott also emphasizes correct use of its trademarks and
will vigorously pursue any party that infringes on its trademarks, using all
available legal remedies.
Cott may not be successful in protecting its intellectual property for a
number of reasons, including:
- competitors may independently develop intellectual property that is
similar to or better than Cott's;
- employees, consultants and customers may not abide by their
contractual agreements and the cost of enforcing those agreements may
be prohibitive, or those agreements may prove to be unenforceable or
more limited than anticipated;
- foreign intellectual property laws may not adequately protect Cott's
intellectual property rights; and
- trademarks may be challenged, invalidated or circumvented.
If Cott is unable to protect its intellectual property, it would weaken
Cott's competitive position, and it could face significant expense to protect or
enforce intellectual property rights.
If Cott is found to infringe on the intellectual property rights of others,
it could incur significant damages, be enjoined
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from continuing to manufacture, market or use the affected product, or be
required to obtain a license to continue manufacturing or using the affected
product. A license could be very expensive to obtain or may not be available at
all. Similarly, changing products or processes to avoid infringing the rights of
others may be costly or impracticable.
Occasionally, third parties may assert that Cott is, or may be, infringing
on or misappropriating their intellectual property rights. In these cases, Cott
intends to defend against claims or negotiate licenses where it considers these
actions appropriate. Intellectual property cases are uncertain and involve
complex legal and factual questions. If Cott becomes involved in this type of
litigation, it could consume significant resources and divert its attention from
business operations.
SEASONALITY OF SALES
Sales of beverages are seasonal, with the highest sales volumes generally
occurring in the second and third fiscal quarters, which correspond to the
warmer months of the year in Cott's major markets. However, taken as a whole,
Cott does not believe that seasonality has a material impact on its business.
CUSTOMERS
A significant portion of Cott's sales are concentrated in a small number of
customers. Cott's customers include many large national and regional grocery,
mass-merchandise, drugstore, wholesale and convenience store chains in Cott's
core markets of the United States, Canada and the United Kingdom. For the year
ended January 3, 2004, sales to Wal-Mart Stores, Inc. and its affiliates
(collectively, "Wal-Mart") accounted for approximately 42% of total sales.
Wal-Mart was the only customer that accounted for more than 10% of Cott's total
sales in that period. For the same period, Cott's top ten customers accounted
for approximately 71% of its total sales. Cott expects that sales of its
products to a limited number of customers will continue to account for a high
percentage of sales for the foreseeable future. The loss of Wal-Mart or
customers which in the aggregate represent a significant portion of Cott's
sales, would have a material adverse effect on Cott's operating results and cash
flows.
COMPETITION
The carbonated soft drink category is highly competitive in each region in
which Cott competes. The brands owned by the three major national soft drink
companies control approximately 81% of the aggregate take-home volume of soft
drink sales in the combined U.S., U.K. and Canadian markets. Those companies
have significant financial resources, direct store delivery systems, and spend
heavily on promotional programs. These factors enable their personnel to visit
retailers frequently to sell new items, stock shelves and build displays. In a
market that is growing on the order of 1% to 2% on an annual basis, competition
for incremental volume is intense.
In addition, Cott faces competition in the U.S. and U.K. from regional soft
drink manufacturers who sell aggressively priced brands and, in many cases, also
supply private label products. In addition, a number of larger U.S. retailers
self-manufacture products for their own needs and consistently approach other
retailers seeking additional business.
Generally, carbonated soft drinks compete against all forms of liquid
beverages including water, teas, coffees and juice-based beverages for
consumers' shopping preferences.
The competitive pressures in the carbonated soft drink industry are
significant. However Cott seeks to differentiate itself by offering its
customers efficient distribution methods, high quality products, category
management strategies, strategies for packaging and marketing and superior
service.
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RESEARCH AND DEVELOPMENT
Cott maintains a research and development facility in Columbus, Georgia
where new beverages are developed and customized. Cott believes that the
provision of these services and the expansion of its product lines are key to
innovation, and are an important part of its business strategy. During 2003,
Cott spent approximately $2.4 million on product research and development, as
compared with $2.8 million in 2002 and $1.9 million in 2001. The increase in
2002 resulted primarily from the acquisition in July 2001 of certain assets from
Royal Crown Company Inc. ("Royal Crown"). The purchased assets included
intellectual property, licenses and permits, equipment, working capital, and the
manufacturing facility used by Royal Crown in the production of concentrate.
Cott uses the concentrate assets to produce all of its concentrate requirements
previously produced for Cott by Royal Crown.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Cott's operations and properties are subject to various federal, state,
local and foreign laws and regulations.
As a producer of beverages, Cott must comply with production, packaging,
quality, labeling and distribution standards in each of the countries where it
operates, including, in the United States, those of the federal Food, Drug and
Cosmetic Act. Cott is also subject to various federal, state, local and foreign
environmental laws and workplace regulations. These laws and regulations
include, in the United States, the Occupational Safety and Health Act, the
Unfair Labor Standards Act, the Clean Air Act, the Clean Water Act and laws
relating to the maintenance of fuel storage tanks.
Cott does not expect any material expenditure in connection with
environmental remediation and compliance. However, compliance with, or violation
of, future laws or regulations could require material expenditures by Cott or
otherwise have a material adverse effect on Cott's business, financial condition
and results of operations.
THE ONTARIO ENVIRONMENTAL PROTECTION ACT ("EPA")
EPA regulations provide that a minimum percentage of a bottler's soft drink
sales within specified areas in Ontario must be made in refillable containers.
To comply with these requirements, Cott and many other industry participants
would have to significantly increase sales in refillable containers to a minimum
refillable sales ratio of 30%. Cott is not in compliance with these regulations
and does not expect to be in the foreseeable future. The regulations have not
been actively enforced since 1991 despite the fact that they are still in effect
and not amended. Moreover, the Ontario Ministry of the Environment released a
report in 1997 stating that these EPA regulations are "outdated and unworkable".
However, despite the unworkable nature of the EPA regulations, they have not yet
been revoked.
Cott believes that the magnitude of the potential fines that Cott could
incur if the Ontario Ministry of the Environment chose to enforce these
regulations is such that the costs to Cott of non-compliance could be, although
are not contemplated to be, significant. However, management of Cott believes
that such enforcement is very remote and, in any event, these regulations are
expected to be revoked in the near future given the more recent regulatory
activity in this area as described below.
THE BLUE BOX PROGRAM
In December of 2003, the Ontario Ministry of the Environment approved the
Blue Box Program, which included provisions regarding industry responsibility
for 50% of the net cost of the Program. Generally, the company that owns the
intellectual property rights to the brand of a product, or is the licensee of
those rights, and that manufactures, packages or distributes a product for sale
in Ontario or causes such manufacturing, packaging or distributing of a product
in Ontario,
38
will be liable for the costs under the Program. Cott is not generally the owner
of the intellectual property rights to the brands of its products. Rather, Cott
generally manufactures, packages and distributes products for and on behalf of
third party customers who are the brand owners and Cott does not believe that
any costs for which it might be ultimately responsible for would have a material
adverse effect on its results of operations.
EMPLOYEES
As of January 3, 2004, Cott had approximately 2,804 employees, of whom an
estimated 1,431 were located in the United States, 795 were located in Canada,
361 were located in the United Kingdom and 217 were located elsewhere. Cott has
entered into numerous collective bargaining agreements that management believes
contain terms that are typical in the beverage industry. As these agreements
expire, management believes that they can be renegotiated on terms satisfactory
to Cott. Cott considers its relations with employees to be good.
AVAILABLE INFORMATION
Cott's annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to reports filed or furnished pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are
available free of charge from Cott's website at www.cott.com, when such reports
are available on the Securities and Exchange Commission website, www.sec.gov.
ITEM 2. PROPERTIES
Cott operates eight beverage production facilities in the United States,
five of which it owns and three of which it leases, as well as the global
concentrate manufacturing facility in Columbus, Georgia, which it owns. Cott
operates seven beverage production facilities in Canada; five of which it owns
and two of which it leases. In the United Kingdom, Cott owns and operates two
beverage production facilities. Cott leases and operates one beverage production
facility in Mexico. Total square footage of the production facilities operated
by Cott is approximately 1,639,690 in the United States, including the
concentrate facility; 1,030,467 in Canada; 556,000 in the United Kingdom; and
111,278 in Mexico. Lease terms for non-owned beverage production facilities
expire between 2008 and 2017. Cott believes that additional capital spending
will be required to meet the increasing sales volume to its customer base and
this spending could include production equipment or new facilities if Cott is
unable to secure additional production capacity either through acquisitions, or
third party manufacturing arrangements.
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ITEM 3. LEGAL PROCEEDINGS
In August 1999, Cott was named as a defendant in an action styled North
American Container, Inc. v. Plastipak Packaging Inc., et al., filed in the
United States District Court for the Northern District of Texas, Dallas
Division. The plaintiff, North American Container, Inc., has sued over forty
defendants, alleging, among other things, that Cott has infringed on their
United States patent relating to plastic containers. The complaint subsequently
was amended to include a Reissue Patent based on the original patent in suit.
Cott believes, based on the current facts and circumstances of the case, that
North American Container's likelihood of success is remote. In addition, Cott is
entitled to indemnification for more than 95% of any damages incurred by it in
connection with this suit and Cott believes that the party obligated to provide
such indemnification has the resources necessary to satisfy such indemnification
obligation should damages be awarded against Cott. For these reasons, management
believes that the probability that the outcome of this litigation will have a
material adverse effect on Cott is remote.
During the last week of February 2004, the district court in which this
suit was pending dismissed all of the plaintiff's claims against all of the
defendants, including Cott. The district court's decision to dismiss the suit is
consistent with Cott's previous determination that the plaintiff's likelihood of
success was remote. Although the plaintiff is expected to appeal, given the
judgment of the district court, Cott does not believe that the plaintiff will
ultimately be successful in this suit.
Cott is engaged in various litigation matters in the ordinary course of its
business. Cott believes that the resolution of these matters will not have a
material adverse effect on its financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareowners during the fourth
quarter of 2003.
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SUPPLEMENTAL ITEM PART I - EXECUTIVE OFFICERS OF COTT
The following is a list of names and ages of all of Cott's executive
officers as of February 29, 2004, and the positions and offices that each of
them holds.
PERIOD SERVED
NAME AND MUNICIPALITY OF RESIDENCE OFFICE AGE AS OFFICER
- ---------------------------------- ------ --- ----------
Frank E. Weise III................ Chairman & Chief Executive Officer 59 1998 to present
Vero Beach, Florida
John K. Sheppard.................. President, Chief Operating Officer & Director 46 2002 to present
Hillsborough County, Florida
Paul R. Richardson................ Executive Vice-President 47 1994 to present
Sarasota, Florida President, U.S. Operations
Mark Benadiba..................... Executive Vice-President Canada & International 50 1990 to present
Toronto, Ontario
Raymond P. Silcock................ Executive Vice-President 53 1998 to present
Loveladies, New Jersey Chief Financial Officer
Mark R. Halperin.................. Senior Vice-President, General Counsel & Secretary 46 1995 to present
Toronto, Ontario
Colin D. Walker................... Senior Vice-President, Corporate Resources 46 1998 to present
London, Ontario
Catherine M. Brennan.............. Vice-President, Treasurer 46 1999 to present
Toronto, Ontario
Tina Dell'Aquila.................. Vice-President, Controller & Assistant Secretary 41 1998 to present
Toronto, Ontario
Ivano R. Grimaldi................. Vice-President, Global Procurement 46 2000 to present
Rosemere, Quebec
Edmund P. O'Keeffe................ Vice-President, Investor Relations & Corporate 39 1999 to present
Toronto, Ontario Development
Prem Virmani...................... Vice-President, Technical Services 58 1991 to present
Columbus, Georgia
During the last five years, the above persons have been engaged in their
principal occupations or in other executive capacities with Cott except as
follows:
- prior to January 2002, John K. Sheppard was President and Chief
Executive Officer of Service Central Technologies, Inc. and prior to
February 2000 was Vice-President, President NW European division and
Vice-President, President Central European division of the Coca-Cola
Company;
- prior to February 2000, Ivano R. Grimaldi was Cott's Vice-President,
Purchasing.
41
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS
Cott's common shares are listed on the Toronto Stock Exchange under the
ticker symbol "BCB", and on the New York Stock Exchange under the ticker symbol
"COT". Cott's common shares were first listed on the New York Stock Exchange on
July 30, 2002. Prior to July 30, 2002, Cott's common shares had traded on the
Nasdaq National Market System under the ticker symbol "COTT".
The tables below show the high and low reported per share sales prices of
common shares on the Toronto Stock Exchange (in Canadian dollars) and on the
Nasdaq National Market System or the New York Stock Exchange (in U.S. dollars)
for the indicated periods of the years ended January 3, 2004 and December 28,
2002.
TORONTO STOCK EXCHANGE (C$)
2003 2002
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
January 1--March 31 ......................... 29.45 22.79 30.60 23.15
April 1--June 30............................. 29.62 23.70 33.50 26.37
July 1--September 30......................... 33.00 27.15 29.00 22.20
October 1--December 31....................... 37.10 31.52 30.00 24.25
NASDAQ NATIONAL MARKET SYSTEM/NEW YORK STOCK EXCHANGE (US$)
2003 2002
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
January 1--March 31.......................... 19.10* 15.53* 18.89+ 14.54+
April 1--June 30............................. 21.52* 16.33* 21.13+ 17.32+
July 1--September 30......................... 23.61* 19.93* 18.27+ 14.06*
October 1--December 31....................... 28.32* 23.41* 19.15* 15.28*
+ denotes reported per share sales prices on Nasdaq National Market System
* denotes reported per share sales prices on the New York Stock Exchange
As of February 29, 2004, Cott had 801 shareowners of record. This number
was determined from records maintained by Cott's transfer agent and it does not
include beneficial owners of securities whose securities are held in the names
of various dealers or clearing agencies. The closing sale price of Cott's common
shares on February 27, 2004 was C$39.52 on the Toronto Stock Exchange and $29.51
on the New York Stock Exchange.
Cott has not paid cash dividends since June 1998 and it is unlikely that
Cott will do so in 2004. There are certain restrictions on the payment of
dividends under the credit facility and the indenture governing the 8% senior
subordinated notes maturing in 2011. The most restrictive is the quarterly
limitation on dividends based on the prior quarter's earnings. Cott currently
can pay dividends subject to these limitations but does not intend to do so.
If Cott were to pay dividends to shareowners who are United States persons,
those dividends would generally be subject to Canadian withholding tax. Under
current Canadian tax law, dividends paid by a Canadian corporation to a
nonresident shareowner are generally subject to Canadian withholding tax at a
25% rate. Under the current tax treaty between Canada and the United States,
United States residents are eligible for a reduction in this withholding tax
rate to 15% (and to 5% for a shareowner who is the beneficial owner of at least
10% of Cott's voting stock). Accordingly, under current tax law, United States
resident shareowners of Cott would generally be subject to a Canadian
withholding tax at a
42
15% rate on dividends paid by Cott, provided that they had complied with
applicable procedural requirements to claim the benefit of the reduced rate
under the tax treaty.
CALCULATION OF AGGREGATE MARKET VALUE OF NON AFFILIATE SHARES
For purposes of calculating the aggregate market value of common shares
held by non-affiliates as shown on the cover page of this report, it was assumed
that all of the outstanding shares were held by non-affiliates except for
outstanding shares held or controlled by the THL Group and Cott's directors and
executive officers. This should not be deemed to constitute an admission that
any of these parties are, in fact, affiliates of Cott, or that there are not
other persons who may be deemed to be affiliates. For further information
concerning shareholdings of officers, directors and principal stockholders see
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Shareowner Matters.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data reflects the results of operations.
This information should be read in conjunction with, and is qualified by
reference to "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this report. The financial information presented
may not be indicative of future performance.
43
JANUARY 3, DECEMBER 28, DECEMBER 29, DECEMBER 30, JANUARY 1,
(in millions of U.S. dollars, except per share 2004(1) 2002(2) 2001(3) 2000(4) 2000(5)
amounts) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
----------- ------------ ------------ ------------ -----------
SALES $ 1,417.8 $ 1,198.6 $ 1,090.1 $ 990.6 $ 993.7
Cost of sales 1,141.0 965.7 902.7 825.5 847.9
Selling, general and administrative 126.1 110.2 94.1 91.3 100.8
Unusual items 1.8 - - (2.1) (1.2)
----------- ------------ ------------ ------------ -----------
OPERATING INCOME 148.9 122.7 93.3 75.9 46.2
----------- ------------ ------------ ------------ -----------
Income from continuing operations 77.4 48.7 39.9 25.4 21.4
Cumulative effect of changes in accounting
principles - (44.8) - - (2.1)
Discontinued operations - - - - (0.8)
----------- ------------ ------------ ------------ -----------
NET INCOME $ 77.4 $ 3.9 $ 39.9 $ 25.4 $ 18.5
=========== ============ ============ ============ ===========
INCOME PER SHARE - BASIC
Income from continuing operations $ 1.12 $ 0.75 $ 0.66 $ 0.42 $ 0.35
Cumulative effect of changes in
accounting principles $ - $ (0.69) $ - $ - $ (0.03)
Discontinued operations $ - $ - $ - $ - $ (0.01)
Net income $ 1.12 $ 0.06 $ 0.66 $ 0.42 $ 0.31
=========== ============ ============ ============ ===========
INCOME PER SHARE - DILUTED
Income from continuing operations $ 1.09 $ 0.69 $ 0.58 $ 0.38 $ 0.32
Cumulative effect of changes in
accounting principles $ - $ (0.64) $ - $ - $ (0.03)
Discontinued operations $ - $ - $ - $ - $ (0.01)
Net income $ 1.09 $ 0.06 $ 0.58 $ 0.38 $ 0.28
=========== ============ ============ ============ ===========
Total assets $ 908.8 $ 785.4 $ 1,065.4 $ 621.6 $ 589.6
Current maturities of long-term debt 3.3 16.5 281.8 1.6 1.6
Long-term debt 275.7 339.3 359.5 279.6 322.0
Shareowners' equity 345.1 218.2 197.7 158.5 142.3
Under the 1986 Common Share Option Plan as amended on April 18, 2001, Cott has
reserved 12 million shares for future issuance.
- ------------------
(1) During the year Cott acquired the retailer brand business of North
Carolina's Quality Beverage Brands, L.L.C.
(2) During the year, Cott acquired Premium Beverage Packers, Inc. and formed a
new business in Mexico, Cott Embotelladores de Mexico, S.A. de C.V. During
the year Cott adopted SFAS 142, Goodwill and Other Intangible Assets. This
change in method of valuing goodwill resulted in a $44.8 million non-cash
write down of the U.K. business. The 2002 results have been revised to
reflect the implementation of SFAS 145, which no longer allows early debt
redemption costs to be recorded as extraordinary items. For additional
information about the revision, see note 3 to the consolidated financial
statements, found on page 69 of this annual report on Form 10-K.
(3) During the year, Cott acquired certain assets of the Royal Crown Company
Inc. and formed a new business with Polar Corp. Current maturities of
long-term debt include the 2005 & 2007 Notes repaid on January 22, 2002
from cash held in trust.
(4) During the year, Cott acquired the assets of the private label beverage and
the VintageR brand seltzer water businesses of Concord Beverage Company and
completed the divestiture of its polyethylene terephthalate preform
blow-molding operations. The 2000 results have been revised to reflect the
implementation of SFAS 145, which no longer allows early debt redemption
costs to be recorded as extraordinary items.
(5) During the year, Cott completed a series of planned divestitures of
non-core businesses.
44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Cott Corporation is the leading supplier of premium quality retailer brand
carbonated soft drinks in the United States, Canada and the United Kingdom. In
2003, Cott reported strong results with a second consecutive year of record
sales and earnings and its fifth consecutive year of profitable performance.
Cott expanded its business through acquisitions and growth with key customers
while continuing to drive margins and cash flow.
Cott's fiscal year ends on the Saturday closest to December 31 each year and, as
a result, a 53rd week is included in Cott's fiscal year every five or six years.
Cott's 2003 fiscal year, which ended January 3, 2004, consisted of 53 weeks. For
the purpose of the discussion below, the year ended January 3, 2004 is referred
to as 2003.
Income from continuing operations in 2003 was $77.4 million or $1.09 per diluted
share, compared with reported income from continuing operations of $58.3 million
or $0.83 per diluted share in 2002. 2002 results were revised to $48.7 million
or $0.69 per diluted share to reflect the implementation of SFAS 145, which no
longer allows early debt redemption costs to be recorded as extraordinary items.
In 2003, net income was the same as income from continuing operations, $77.4
million or $1.09 per diluted share. In 2002, net income of $3.9 million or $0.06
per diluted share included the impact of the change in the method of valuing
goodwill, due to the adoption of SFAS 142. As a result of this change, a charge
of $44.8 million or $0.64 per diluted share was incurred in writing down of the
goodwill of Cott's U.K. business.
The aggregate cost of Cott's acquisitions and investments in 2003 was $49.8
million. The most significant transaction was the acquisition of the retailer
brand beverage business of North Carolina's Quality Beverage Brands, L.L.C.
45
2003 VERSUS 2002
RESULTS OF OPERATIONS
SALES -Sales in 2003 were $1,417.8 million, an increase of 18% from $1,198.6
million in 2002. Excluding the impact of foreign exchange rates and the 2002
acquisitions of Premium Beverage Packers, Inc. ("Wyomissing") and Cott
Embotelladores de Mexico, S.A. de C.V.("CEMSA"), sales increased 13%. The
additional week in 2003 added $20 million dollars in sales. When the extra week
of sales is also excluded, sales were up 11% in 2003 as described in detail by
business segment below. Total 8oz case equivalent volume was 1,012.5 million
cases in 2003. Excluding the impact of acquisitions and concentrate sales,
volume was 759.1 million equivalent cases, up 12% compared to the prior year.
In the U.S., sales were $1,016.6 million in 2003, an increase of 17% from 2002.
The Wyomissing acquisition occurred in June 2002 and added $20.7 million to
sales for the first half of 2003. Excluding this acquisition, sales were up 14%.
The growth was driven by increased volume with existing customers and the
introduction of new products.
In Canada, sales were $191.0 million in 2003, an increase of 12% in 2003 from
$171.2 million in 2002. However, when the impact of foreign exchange rates is
excluded, sales in Canada were down 1%. This decrease reflected the difficult
competitive environment in the carbonated soft drink industry in Canada.
In the U.K. and Europe, sales were $166.6 million in 2003, an increase of 24%
from $134.3 million in 2002. Excluding the impact of the strengthened U.K.
pound, sales increased 14% in 2003. New business accounted for about half of the
increase and the remaining increase was due to improved service levels with
existing customers and warmer than normal summer temperatures.
The International segment includes the Mexican operations, the Royal Crown
International division and the business in Asia. Sales by this segment were
$42.1 million in 2003, an increase of 107% when compared with sales of $20.3
million in 2002. Excluding the carry-over impact of the acquisitions made in
2002, sales were up 62%. Sales for the Mexican operation were $24.4 million, an
increase of $16.5 million when compared to 2002 and accounted for 76% of the
increase in International sales. The remainder of the increase was due to
increased promotional activities by Royal Crown International.
GROSS PROFIT - Gross profit was 19.5% of sales for 2003 compared with 19.4% in
2002. Higher margins resulted primarily from improved productivity and larger
economies of scale, particularly in the U.K. This margin improvement was
partially offset by approximately $8.0 million of additional distribution costs
incurred in the U.S. during the busy summer season.
Variable costs represented 89% of total cost of sales in 2003. Major elements of
these variable costs included ingredients and packaging costs, fees paid to
third party manufacturers, distribution costs. About 84% of Cott's beverage
products are manufactured in facilities it owns or leases or by third party
manufacturers with whom Cott has long-term co-packing agreements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") - SG&A was $126.1 million
in 2003, up 14% from $110.2 million for 2002. Approximately one third of the
increase was due to foreign exchange rate impacts in the U.K. and Canadian
business segments, 15% of the increase was due to costs associated with the
Wyomissing (U.S.) and Mexico acquisitions and the remaining amount was due to an
increase in the number of employees necessary to meet the needs of Cott's
growing business. As a percentage of sales, SG&A declined to 8.9% in 2003 from
9.2% in 2002.
UNUSUAL ITEMS - The unusual items of $1.8 million in 2003 includes a provision
for a note due from an equity investee.
46
OTHER EXPENSE (INCOME), NET - Other expense in 2003 was $0.5 million compared to
$14.0 million in 2002. This decrease was primarily due to a $14.1 million charge
recorded in the first quarter of 2002 relating to the early extinguishment of
the 2004 and 2007 notes redeemed in January 2002. Additionally, a gain of $1.3
million on the sale of Cott's remaining interest in Menu Foods Limited was
recorded in the second quarter of 2002.
INTEREST EXPENSE - Net interest expense was $27.5 million in 2003, down from
$32.9 million in 2002. This decrease was primarily due to lower average debt
levels during the year. In addition, in January 2002 Cott paid interest on both
the newly issued 2011 notes and on the 2005 and 2007 notes redeemed on January
22, 2002. This double interest payment resulted in an additional charge of $1.4
million.
INCOME TAXES - Cott recorded an income tax provision of $40.1 million in 2003
reflecting an effective tax rate of 34.1%. This compares with $24.4 million, or
an effective rate of 33.1%, in 2002. The effective tax rate in 2002 was
favorably impacted by a $1.8 million tax recovery from realizing the benefit of
a capital loss. In 2003, a rise in Canadian tax rates increased Cott's effective
tax rate.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION - Cash provided by operating activities in 2003 was $93.6
million, after capital expenditures of $49.1 million, as compared to 2002 in
which cash provided by operating activities was $49.4 million, after capital
expenditures of $41.2 million. Cash from operations was used in 2003 to repay
the entire $86.6 million balance of Cott's term loan and $3.6 million of other
long term debt to take advantage of lower interest rates available on Cott's
revolving credit facility.
INVESTING ACTIVITIES - In December 2003, Cott acquired the retailer brand
beverage business of North Carolina's Quality Beverage Brands, L.L.C. ("QBB").
In conjunction with that acquisition, Cott also entered into long-term
manufacturing agreements at market rates with Independent Beverage Corporation,
an affiliate of QBB. The acquisition and related agreements are expected to
enhance Cott's capabilities and to expand its customer base in the Mid-Atlantic
region of the United States, and as a result Cott expects to add approximately
$45 million a year to its sales in the United States, some of which will include
sales to new customers.
Cott believes that there are substantial growth opportunities in Mexico. For
that reason, it acquired 90% interest in CEMSA, a Mexican soft drink
manufacturer, in 2002. In May 2003, CEMSA acquired a soft drink distribution
business from Embotelladora de Puebla, S.A. de C.V. ("EPSA") to expand its
business and improve its profitability in Mexico.
In January 2003, Cott acquired the remaining 51% interest in Iroquois West
Bottling Ltd. ("Iroquois West"), to strengthen its position in the spring water
segment across Canada. Iroquois West is now known as Cott Revelstoke Ltd.
The total cost of these acquisitions and investments in 2003 was $49.8 million.
The acquisitions were funded from cash and borrowings on Cott's revolving credit
facility.
CAPITAL EXPENDITURES - Capital expenditures were $49.1 million in 2003 as
compared with $41.2 million in 2002. Major expenditures in 2003 included $6.1
million for improvements to the Mexico plant and information technology
improvements of $11.5 million. In 2003, Cott spent $27.7 million on
manufacturing equipment primarily in the U.S. to meet the needs of Cott's
growing business.
CAPITAL RESOURCES AND LONG-TERM DEBT - Cott's sources of capital include
operating cash flows, short term borrowings under current credit facilities,
issuance of public and private debt and issuance of equity securities.
Management believes Cott has adequate financial resources to meet its ongoing
cash requirements for operations and capital expenditures, as well as its other
financial obligations based on its operating cash flows and current available
credit.
47
Cott has a committed senior secured credit facility in the United States and
Canada. The credit facility terminates, and the debt under that agreement is
due, on December 31, 2005. That facility allows for revolving credit borrowings
in a principal amount of up to $100,000,000. This amount was increased on
December 23, 2003 from $75,000,000. This facility can be increased by a further
$50 million at Cott's option if lenders agree to increase their commitments. As
of January 3, 2004, the outstanding amount of revolving credit loans was $63.9
million. Cott Corporation and Cott Beverages Inc. are co-borrowers on the
facility, but the debt is guaranteed by most of Cott's U.S. and Canada
subsidiaries. The debt and guarantees are secured by substantially all of the
assets of the borrowers and the guarantors.
Cott also has outstanding 8% senior subordinated notes, which are due in 2011.
As of January 3, 2004, the principal amount of those notes was $275 million. The
issuer of the notes is Cott Beverages Inc., but the notes are guaranteed by Cott
and most of its U.S. and Canada subsidiaries.
Cott also has a credit facility in the U.K. That facility, which replaced a
prior one on February 27, 2003, is a demand facility. This facility is scheduled
to terminate December 31, 2004 although demand for payment may be made at any
time. Under that facility, Cott U.K. may borrow up to 15 million pounds (U.S.
$26.9 million at the January 3, 2004 exchange rate).
Cott's current credit facilities provide maximum credit of $126.9 million. At
January 3, 2004, approximately $33.2 million of the senior secured credit
facility in the U.S. and Canada and $22.0 million of the U.K. credit facility in
the U.K. were available. The weighted average interest rate on outstanding
borrowings under the credit facilities was 3.05% as of January 3, 2004.
Overdraft borrowings under the U.K. credit facility bear interest at the bank's
short term offered rate plus 1.00% except for U.S. dollar borrowings where the
margin is currently 0.20%. Term borrowings under this facility include a margin
of 0.75%.
Long-term debt as of January 3, 2004 was $279.0 million, compared with $355.8
million at the end of 2002. At January 3, 2004, long-term debt consisted of
$269.0 million in 8% senior subordinated notes with a stated face value of $275
million, and $10.0 million of other debt. In 2003, Cott repaid its $86.6 million
term bank loan, which reduced its long-term debt repayments in 2004 and 2005 to
$3.3 million and $1.1 million, respectively.
The senior secured credit facility and the indenture respecting the 2011 notes
contain a number of business and financial covenants and events of default that
apply to the borrowers and the restricted subsidiaries. The restricted
subsidiaries are, in general, the guarantor subsidiaries organized in Canada and
the U.S. Among other events of default or triggers for prepayment in Cott's
credit facilities and indenture are: a change of control of Cott in certain
circumstances; cross default or cross acceleration to other indebtedness in
excess of $10 million; unsatisfied judgments in excess of $10 million;
insolvency of Cott or the restricted subsidiaries; and covenant default under
the indenture or credit facilities. Some of the more material business and
financial covenants are discussed below.
The senior secured credit facility restricts additional indebtedness for
subsidiaries to the existing debt and credit facilities, certain intercompany
debt, $5.0 million of subordinated debt to unrestricted subsidiaries, $25.0
million of purchase money indebtedness and capital lease obligations, $5.0
million of guarantee obligations and a $10.0 million basket of other additional
indebtedness. The senior secured credit facility contains restrictions on
investments (including investments in subsidiaries outside of the U.S. or
Canada) and acquisitions. In general, individual acquisitions are permitted up
to $35.0 million with the aggregate expenditure for all acquisitions limited to
$60.0 million in any fiscal year.
There is also a restriction on disposition of assets having a fair market value
exceeding $10.0 million in a fiscal year with certain specified exemptions.
Restricted payments such as dividends or capital stock purchases are currently
limited to 50% of consolidated net income but that amount drops to 25% of
consolidated net income if the leverage ratio exceeds 2.0
48
to 1.0. Capital expenditures in the U.S. and Canada are limited, in the
aggregate, to $50.0 million plus a 50% carry forward of the unused current
permitted capital expenditures from the prior year.
There are further restrictions in several of the covenants, such as a complete
prohibition on paying any dividends, if Cott is in default under the senior
secured credit agreement. In addition, many of the covenants effectively limit
transactions with Cott's unrestricted subsidiaries or non-guarantor entities.
Finally, there are additional business covenants in Cott's U.K. credit facility,
but the amounts committed for borrowing under those facilities are immaterial in
amount and, therefore, those covenants are not material to Cott's operations.
In addition to business covenants, there are financial covenants in the senior
secured credit facility. Since the fourth quarter of 2003, Cott's leverage ratio
was required to be no more than 2.5 to 1.0 and that requirement is tightened to
2.25 to 1.0 in the third quarter of 2004 and tightens further to 2.0 to 1.0 in
the second quarter of 2005. At the end of 2003, Cott's leverage ratio was 1.74
to 1.0. The senior secured credit facility also has an interest coverage test
and a fixed charge test. At the end of 2003 and during 2004, Cott's interest
coverage ratio must be at least 3.75 to 1.0 and by the fourth quarter of 2005 it
must be at least 4.0 to 1.0. As of January 3, 2004 it was 7.96 to 1.0. Cott's
fixed charge coverage ratio had to be at least 1.05 to 1.00 at the end of 2003.
That required ratio increases each quarter during 2004 until the required ratio
at the end of the year is 1.25 to 1.00. At January 3, 2004, Cott's fixed charge
coverage ratio was 5.88 to 1.0.
The indenture for the 2011 notes also has numerous covenants that are applicable
to Cott Beverages Inc., Cott and the restricted subsidiaries. Cott can only make
restricted payments, such as paying dividends, buying back stock or making
certain investments, if its fixed charge coverage ratio is at least 2.0 to 1.0.
Even then, Cott can only make those restricted payments in an amount that is no
greater than 50% of its consolidated net income subject to certain adjustments.
Certain other investments, like those not exceeding $60 million in the
aggregate, may be made without satisfying the restricted payments test.
Cott can only incur additional debt or issue preferred stock, other than certain
specified debt, if its fixed charge coverage ratio is greater than 2.0 to 1.0.
For purposes of the indenture, Cott's fixed charge coverage ratio was 7.11 to
1.0 as of January 3, 2004. Subject to some exceptions, asset sales may only be
made where the sale price is equal to the fair market value of the asset sold
and Cott receives at least 75% of the proceeds in cash. There are also
limitations on what Cott may do with the sale proceeds such that it may be
required to pay down debt or reinvest the proceeds in enumerated business uses
within a specified period of time. There are further restrictions in several of
the covenants, such as a complete prohibition on paying any dividends, if Cott
is in default under the indenture. Many of the covenants also effectively limit
transactions with Cott's unrestricted subsidiaries or non-guarantor entities.
Several of the terms, like restricted payments, are defined differently in the
indenture and the senior secured credit facility and certain calculations are
made differently in the two agreements.
There are also certain financial covenants in Cott's U.K. facility, but the
amounts committed for borrowing under that facility are immaterial in amount
and, therefore, those financial covenants are not material to Cott's operations.
Cott believes it has sufficient financial flexibility under the terms of its
indebtedness to operate its business as currently planned.
CAPITAL STRUCTURE - In 2003, shareowners' equity increased by $126.9 million
from 2002. The following contributed to this increase: net income of $77.4
million, additional share capital of $19.8 million from the exercise of employee
stock options, including the related tax benefit, and $29.7 million in favorable
foreign currency translation on the net assets of self-sustaining foreign
operations all contributed to the increase. The foreign currency translation
adjustment resulted from the strengthening of the U.K. pound and the Canadian
dollar compared with the U.S. dollar.
49
DIVIDEND PAYMENTS - No dividends were paid in 2003. Cott does not expect to
resume dividend payments to common shareowners in 2004 as it intends to use cash
for future growth or debt repayment.
There are certain restrictions on the payment of dividends under Cott's credit
facility and 2011 notes indenture. The most restrictive provision is the
quarterly limitation of dividends based on the prior quarter's earnings. Cott
currently can pay dividends subject to these limitations but does not intend to
do so.
CONTRACTUAL OBLIGATIONS - The following chart shows the schedule of future
payments under certain contracts, including debt agreements and guarantees, as
of January 3, 2004:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR YEARS 2-3 YEARS 4-5 AFTER 5 YEARS
- ----------------------- ----- ---------------- --------- --------- -------------
(in millions)
2011 notes $275.0 $ - $ - $ - $ 275.0
Operating leases 34.3 10.1 15.4 6.0 2.8
Other 10.0 3.3 2.2 2.2 2.3
------ ------- ----- ----- -------
$319.3 $ 13.4 $17.6 $ 8.2 $ 280.1
------ ------- ----- ----- -------
CRITICAL ACCOUNTING POLICIES
Note 1 to the consolidated financial statements includes a summary of the
significant accounting policies and estimates used in the preparation of Cott's
consolidated financial statements.
Cott's critical accounting policies require management to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and the accompanying notes. These estimates are based on historical
experience, the advice of external experts or on other assumptions management
believes to be reasonable. Where actuals differ from estimates, revisions are
included in the results of the period in which actuals become known.
Historically, differences between estimates and actuals have not had a
significant impact on Cott's consolidated financial statements.
Critical accounting policies and estimates used to prepare the financial
statements are discussed with Cott's Audit Committee as they are implemented and
on an annual basis and include the following:
REVENUE RECOGNITION
Cott reports sales when ownership passes to customers for products manufactured
in its own plants and/or by third parties. Management regularly evaluates the
facts and circumstances in relation to the criteria in the EITF 99-19 and uses
its best judgment to determine whether to report sales on a gross or net basis
for products manufactured by third parties. Currently, the facts and
circumstances surrounding all of Cott's business support the reporting of all
sales on a gross basis.
Cott offers sales incentives to certain customers. Cott accounts for these
incentives as a reduction from sales. Cott follows the guidance under EITF 01-9
in accounting for sales incentives. Where the incentive has been paid in
advance,
50
Cott amortizes the amount based on expected future sales related to the
incentive. Where the incentive is to be paid in arrears, Cott accrues the amount
based on expected future sales related to the incentive.
IMPAIRMENT TESTING OF GOODWILL AND INTANGIBLE ASSETS WITH AN INDEFINITE LIFE
With the implementation of SFAS 142 in 2002, goodwill and intangible assets with
an indefinite life are no longer amortized, but instead are tested annually for
impairment. Any impairment loss is recognized in income. Cott has goodwill of
$81.6 million and rights of $80.4 million on its balance sheet at January 3,
2004.
In accordance with SFAS 142, Cott evaluates goodwill for impairment on a
reporting unit basis. The evaluation of goodwill for each reporting unit is
based upon the following approach. Cott compares the fair value of a reporting
unit to its carrying value. Where the carrying value is greater than the fair
value, the implied fair value of the reporting unit goodwill is determined by
allocating the fair value of the reporting unit to all the assets and
liabilities of the reporting unit with any of the remainder being allocated to
goodwill. The implied fair value of the reporting unit goodwill is then compared
to the carrying value of that goodwill to determine the impairment loss.
Cott measures the fair value of reporting units using discounted future cash
flows. Since the business is assumed to continue in perpetuity, the discounted
future cash flow includes a terminal value. The long-term growth assumptions
incorporated into the discounted cash flow calculation reflect Cott's long-term
view of the market and the discount rate is based on Cott's weighted average
cost of capital. Each year Cott re-evaluates the assumptions used to reflect
changes in the business environment. Based on the evaluation performed this
year, Cott's determined that the fair values of its reporting units exceeded
their carrying value and that as a result the second step of the impairment test
was not required.
Cott's only intangible asset with an indefinite life relates to its 2001
acquisition of intellectual property from Royal Crown Company, Inc. including
the right to manufacture Cott concentrates, with all related inventions,
processes, technologies, technical and manufacturing information and know-how.
There is an indefinite contractual life to Cott's ownership of these rights, and
there are no legal, regulatory, contractual, competitive, economic, or other
factors that limit the useful life. In accordance with SFAS 142, based on the
above factors, the life of the rights is considered to be indefinite and they
are not amortized, but are tested annually for impairment. Impairment of an
intangible asset with an indefinite life, if any, is determined using the same
discounted future cash flow assumptions and model discussed above for goodwill.
Cott compares the carrying value of the rights to their fair value and
recognizes in income any impairment in value.
51
OTHER INTANGIBLE ASSETS
Other intangible assets consist principally of customer relationships that arise
from acquisitions which amounted to $137.1 million at January 3, 2004. Customer
relationships are amortized on a straight-line basis for the period over which
Cott expects to receive economic benefits. Cott periodically compares the
carrying value of customer relationships by customer to the estimated
undiscounted future cash flows of the related business and recognizes any
impairment in its income statement. The expected life and value of these
intangible assets is based on an evaluation of competitive environment, customer
history and future prospects as appropriate.
INCOME TAXES
Cott regularly reviews the recognized and unrecognized deferred income tax
assets to determine whether or not a valuation allowance is required. Management
believes that virtually all deferred tax assets will be realized as a result of
anticipated future taxable income from operations. The loss carry forwards of
$19.1 million relate primarily to Canada and a significant change in the volumes
or profitability of these operations could affect the realization of the
deferred tax assets.
CANADIAN GAAP
Cott makes available to all shareowners consolidated financial statements
prepared in accordance with Canadian GAAP and files these financial statements
with Canadian regulatory authorities. Results reported under Canadian GAAP may
differ from results reported under U.S. GAAP from time to time. Under Canadian
GAAP in 2003, Cott reported net income of $77.2 million and total assets of
$910.1 million compared to net income and total assets reported under U.S. GAAP
of $77.4 million and $908.8 million, respectively. There are no material
U.S./Canadian GAAP differences for 2003.
Under Canadian GAAP in 2002, Cott reported net income of $58.8 million and total
assets of $787.1 million compared to net income and total assets reported under
U.S. GAAP of $3.9 million and $785.4 million, respectively. There were two
primary U.S./Canadian GAAP differences for 2002.
First, under Canadian GAAP, the 2005 and 2007 notes were considered discharged
on December 21, 2001 when the funds to redeem the notes were transferred to an
irrevocable trust. As a result, debt extinguishment costs were recorded in the
fourth quarter of 2001 under Canadian GAAP. Under U.S. GAAP, however, the 2005
and 2007 notes were considered discharged on January 22, 2002, and
extinguishment costs of $14.1 million, which were $9.6 million after deferred
income tax recovery, were recorded in the first quarter of 2002.
Second, under Canadian GAAP, the impairment loss of $44.8 million relating to
the change in the method for valuing goodwill is charged to opening retained
earnings for the first quarter of 2002. Under U.S. GAAP, the change in
accounting principle is recorded as a charge to net income for 2002.
2002 VERSUS 2001
RESULTS OF OPERATIONS
Income from continuing operations in 2002 was reported as $58.3 million or $0.83
per diluted share as compared with $39.9 million or $0.58 per diluted share in
2001. 2002 results were revised to $48.7 million or $0.69 per diluted share to
reflect the implementation of SFAS 145, which no longer allows early debt
redemption costs to be recorded as extraordinary items. Net income for 2002 was
$3.9 million or $0.06 per share after taking into account the change in
accounting principle and related charge of $44.8 million for goodwill relating
to the U.K.
52
SALES -Sales in 2002 were $1,198.6 million compared with $1,090.1 million in
2001. Excluding the impact of the acquisitions discussed below and the K-Mart
bankruptcy, sales were $1,109.2 million for 2002, an increase of 4% from
$1,064.2 million in 2001. Beverage volumes increased in the existing U.S. and
Canadian businesses and were partially offset by lower sales in the U.K.
In the U.S., sales of $872.2 million in 2002 increased 12% from $779.4 million
in 2001. Of the increased sales, $66.7 million was as a result of the Wyomissing
acquisition and NRB business combination. U.S. sales were also impacted by the
K-Mart bankruptcy in 2002 as sales to this customer decreased $17.2 million in
2002 compared with 2001. Excluding the impact of Wyomissing, NRB and K-Mart,
U.S. sales of $796.8 million were up 6% in 2002 compared with 2001, due
principally to increased sales to existing customers.
Sales in Canada of $171.2 million increased 5% from $163.7 million in 2001.
Approximately, one third of the increase was driven by increased promotional
activities with existing customers, one third by new product launches and
retailer brand relaunches and the remainder by expanded spring water business.
Sales in the U.K. & Europe were $134.3 million in 2002, a decrease of 4% from
$140.4 million in 2001. Excluding the impact of foreign exchange due to the
strengthening U.K. pound in relation to the U.S. dollar, sales decreased 9%.
Approximately one quarter of the decrease was due to discontinuing sales of
certain products and relationships with certain customers. The remaining
decrease was due to more emphasis on national brands by some U.K. retailers.
Sales in the International segment were $20.3 million in 2002 compared with $6.1
million in 2001. The CEMSA acquisition in 2002 contributed $7.9 million to the
increase and the remaining increase was due to the Royal Crown acquisition in
2001.
GROSS PROFIT - Gross profit was 19.4% of sales for 2002 compared with 17.2% in
2001. Higher margins resulted primarily from operating efficiency improvements
in the U.K., such as reduced usage of external warehousing, improved yields as
well as the impact of acquiring the Royal Crown assets. The Royal Crown
acquisition had a 1.2 percentage point positive effect on Cott's gross profit
margins by significantly reducing concentrate costs. Cott self-manufactures most
of its concentrate requirements as a result of this acquisition. The margin
improvement from the Royal Crown acquisition was partially offset by the
increased interest expense relating to the acquisition. Gross profit was also
favorably impacted by the continuous cost improvement programs such as
increasing lines speed, ensuring the optimal fill height of bottles, decreasing
change over times and improving suppliers' quality, which contributed to
operating efficiencies across Cott plants.
Cost of sales was 80.6% of sales in 2002, 2.2 percentage points better than
2001. Variable costs represented about 90% of total cost of sales and fixed
costs represented about 10%. Major components of cost of sales included
ingredients and packaging costs, fees paid to third party manufacturers,
logistics and freight costs and depreciation and amortization. In 2002, about
85% of Cott's beverage products were manufactured in facilities it owns or
leases or by third party manufacturers with whom Cott has long-term co-packing
agreements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") - SG&A was $110.2 million
in 2002, up $16.1 million from $94.1 million for 2001. SG&A increased as a
percent of sales from 8.6% to 9.2%. Excluding the impact of acquisitions and
2001 goodwill amortization, of $8.7 million and $3.7 million, respectively, SG&A
was $101.4 million, an increase of $11.1 million from 2001. Approximately $2.1
million of the increase is due to one-time reorganization charges in the U.K.
that were recorded in the first quarter. The remaining increase reflects higher
employee costs as headcount was increased to meet current and future growth in
the U.S. business, and $2.3 million of incremental information technology
spending.
53
INTEREST EXPENSE - Net interest expense was $32.9 million in 2002 compared with
$32.2 million for 2001. Interest on the term loan to finance the Royal Crown
acquisition and the NRB business combination resulted in an increase of $3.2
million. The December 2001 refinancing of the 2005 and 2007 notes with 8% senior
subordinated notes maturing in 2011 lowered interest expense by $2.2 million.
Interest savings in 2002 would have been higher except that Cott had to pay
interest for most of the month of January on both the 2011 notes and the 2005
and 2007 notes. The 2005 and 2007 notes were repaid from funds held in trust on
January 22, 2002. The refinancing lowered Cott's average interest rate on its
high yield notes by one percentage point.
OTHER EXPENSE (INCOME), NET - Other expense in 2002 was $14.0 million compared
to income of $2.4 million in 2001. The difference is primarily due to debt
extinguishment costs of $14.1 million recorded in the first quarter of 2002
partially offset by a gain on the sale of Cott's remaining interest in Menu
Foods Limited recorded in the second quarter of 2002.
INCOME TAXES - Cott recorded an income tax provision of $24.4 million reflecting
an effective tax rate of 33.1% as compared with $23.2 million for an effective
rate of 36.8% in 2001. The decrease in the effective tax rate in 2002
principally reflects a lower statutory rate in Canada, restructuring of internal
debt in the third quarter of the year and realization of the benefit of a
capital loss in the first quarter. The 2001 effective tax rate was also lowered
as Cott recorded a $4.4 million tax benefit relating to prior period loss
carryforwards by decreasing the valuation allowance. Cott expects to be able to
utilize prior period tax loss carryforwards as a result of acquisitions made in
2001.
CHANGE IN ACCOUNTING PRINCIPLE - In 2002, Cott adopted SFAS 142 for goodwill and
intangibles acquired prior to June 30, 2001. Under this standard, goodwill and
intangible assets with indefinite lives are no longer amortized but are subject
to annual impairment tests based on fair values rather than net recoverable
amount. An impairment test of goodwill was required upon adoption of this
standard. Cott completed the impairment test of its reporting units in the first
quarter under the new rules and as a consequence recorded a non-cash charge of
$44.8 million to write down the entire goodwill of its U.K. business.
CANADIAN GAAP
Under Canadian GAAP in 2002, Cott reported net income of $58.8 million and total
assets of $787.1 million compared to the net income and total assets under U.S.
GAAP of $3.9 million and $785.4 million, respectively. There were two primary
U.S./Canadian GAAP differences for the year ended December 28, 2002 as described
in the 2003 Canadian GAAP analysis. In 2001, the primary difference was the
treatment of the discharge of the 2005 and 2007 notes as described in the 2003
Canadian GAAP analysis. Under Canadian GAAP in 2001, Cott reported net income of
$30.2 million and total assets of $766.6 million compared to net income and
total assets under U.S GAAP of $39.9 million and $1,065.4 million.
OUTLOOK
Cott's ongoing focus is to increase sales, market share and profitability for
Cott and its customers. While the carbonated soft drink industry continues to
experience slow growth, the retailer brand segment is experiencing significant
positive growth, especially in the U.S. However, there is intense price
competition from heavily promoted global and regional brands in the beverage
industry, Cott's major opportunity for growth depends on management's execution
of its strategies and on retailers' continued commitment to their retailer brand
soft drink programs.
In 2004, Cott intends to continue to strive to expand the business through
growing sales with existing customers, the pursuit of new customers and channels
and through new acquisitions and alliances. Cott is not able to accurately
predict the success or timing of such efforts. As of the date of this report,
sales are expected to grow between 10% and 12% for 2004. The majority of this
growth is expected to be through existing businesses. Along with sales growth
from major customers, management also believes there are significant
opportunities for growth in the U.S. market as retailer brand penetration is not
currently as high as in other markets. The Canadian division intends to focus on
innovation and entry
54
into new channels. We believe that the U.K. business has stabilized and
continued efforts are expected to further improve earnings. We also believe that
significant growth opportunities exist in Mexico. Mexico has a population of
approximately 100 million and it is second only to the United States in
per-capita consumption of soft drinks.
As of the date of this report, Cott expects 2004 earnings per share, on a
diluted basis, to rise to between $1.18 and $1.22 and earnings before interest,
taxes, depreciation and amortization ("EBITDA") for 2004 to be the following:
(in millions)
INCOME FROM CONTINUING OPERATIONS $85 - $88
Depreciation and amortization $58
Interest expense, net $30
Income taxes $45 - $46
---------
EBITDA $218 - $222
=========
Total capital expenditures for 2004 are expected to be approximately $55.0
million.
EBITDA is defined as earnings from continuing operations before interest, income
taxes, depreciation and amortization. Cott uses operating income as its primary
measure of performance and cash flow from operations as its primary measure of
liquidity. Nevertheless, Cott presents EBITDA in its filings for several
reasons. First, Cott uses multiples of EBITDA and discounted cash flows in
determining the value of its operations. In addition, Cott uses "cash return on
assets," which is a financial measure calculated by dividing Cott's annualized
EBITDA by its aggregate operating assets, for the purposes of calculating
performance-related bonus compensation for its management employees, because
that measure reflects the ability of management to generate cash while
preserving assets. Finally, Cott includes EBITDA in its filings because it
believes that its current and potential investors use multiples of EBITDA to
make investment decisions about Cott. Investors should not consider EBITDA an
alternative to net income, nor to cash provided by operating activities nor any
other indicator of performance or liquidity, which have been determined in
accordance with U.S. or Canadian GAAP. Cott's method of calculating EBITDA may
differ from the methods used by other companies and, accordingly, Cott's EBITDA
may not be comparable to similarly titled measures used by other companies.
RISKS AND UNCERTAINTIES
We face a number of risks and uncertainties, including the following:
COMPETITIVE ENVIRONMENT - The markets for Cott's products are extremely
competitive. In comparison to the major national-brand beverage manufacturers,
Cott is a relatively small participant in the industry. Cott faces competition
from the national-brand beverage manufacturers in all of its markets and from
other retailer-brand beverage manufacturers in the United States and the United
Kingdom. If Cott's competitors reduce their selling prices or increase the
frequency of their promotional activities in Cott's core markets or if Cott's
customers do not allocate adequate shelf space for beverages supplied by Cott,
Cott could lose market share or be forced to reduce pricing or increase capital
and other expenditures, any of which could adversely affect Cott's
profitability.
RELIANCE ON A SMALL NUMBER OF CUSTOMERS - A significant portion of Cott's sales
are concentrated in a small number of customers. Cott's customers include many
large national and regional grocery, mass-merchandise, drugstore, wholesale and
convenience store chains in Cott's core markets of the United States, Canada and
the United Kingdom. Sales to Cott's top customer in 2003 and 2002 accounted for
42% and 40%, respectively, of the Company's total sales and sales to the top ten
customers were 71% of total sales in 2003 and 2002. Cott expects that sales of
its products to a limited
55
number of customers will continue to account for a high percentage of Cott's
sales in the foreseeable future. The loss of any significant customer, or
customers which in the aggregate represent a significant portion of Cott's
sales, could have a material adverse effect on Cott's operating results and cash
flows. At January 3, 2004, Cott has $137.1 million of customer relationships
recorded as an intangible asset. The permanent loss of any customer included in
the intangible asset will result in an impairment in the value of the intangible
asset.
STABILITY OF PROCUREMENT COSTS - The principal ingredients required to produce
Cott's products are concentrates, sweeteners and carbon dioxide. Cott makes most
of the concentrates it needs using ingredients from third parties and sources
the remaining concentrates and other ingredients from outside vendors. Cott's
purchases its primary packaging supplies, including polyethylene terephthalate
(PET) bottles, caps and PET preforms, cans and lids, labels, cartons and trays,
from outside vendors. Cott has a variety of suppliers for many of its materials,
and Cott maintains long-standing relationships with many of these suppliers.
Cott typically enters into annual supply arrangements rather than long-term
contracts with its suppliers, which means that Cott's suppliers are obligated to
continue to supply it with materials for one-year periods, at the end of which
Cott must either renegotiate the contract with the incumbent supplier or find
alternative sources of supply. With respect to some of Cott's key packaging
supplies, such as aluminum cans and lids and PET bottles, and some of its key
ingredients, such as artificial sweeteners, Cott has entered into long-term
supply agreements, the terms of which range from 1 to 5 years, and therefore
Cott is assured of a supply of those key packaging supplies and ingredients for
a longer period of time. As with Cott's annual supply contracts, Cott must
either renegotiate these long-term supply agreements with the incumbent
suppliers when they expire or find alternative sources for supply.
Cott relies upon its ongoing relationships with its key suppliers to support its
operations. Cott believes that it will be able to either renegotiate contracts
with these suppliers when they expire or alternatively, if Cott is unable to
renegotiate contracts with its key suppliers, Cott believes that it could
replace them. However, Cott could incur higher ingredient and packaging supply
costs in renegotiating contracts with existing suppliers or replacing those
suppliers or Cott could experience temporary dislocations in its ability to
deliver products to its customers, either of which could have a material adverse
effect on its results of operations.
COMMODITY PRICES - Cott bears the risk of increasing prices on the ingredients
and packaging in its products. The majority of Cott's ingredient and packaging
supply contracts allow its suppliers to alter the costs they charge Cott for
those ingredients and packaging supplies based on changes in the costs of the
underlying commodities that are used to produce those ingredients and packaging
supplies, such as resin for PET bottles and high fructose corn syrup. These
increases are based on averages of these price increases over various periods of
time rather than day-to-day price fluctuations. In addition, the contracts for
certain of Cott's ingredients and packaging supplies permit its suppliers to
increase the costs they charge Cott based on increases in their cost of
converting those underlying commodities into the finished ingredients and
packaging supplies that Cott purchases. In certain cases, those increases are
subject to negotiated limits and in other cases, they are not. These changes in
the prices that Cott pays for ingredients and packaging supplies occur at
certain predetermined times that vary by product and supplier, but are
principally on semi-annual and annual bases. Accordingly, Cott bears the risk of
increases in the costs of these ingredients and packaging supplies, including
the underlying costs of the commodities that comprise these ingredients and
packaging supplies and, to some extent, the costs of converting those
commodities into finished products. Cott does not use derivatives to manage this
risk. If the cost of these ingredients or packaging supplies increase, Cott may
be unable to pass these costs along to its customers through corresponding or
contemporaneous adjustments to the prices it charges, which could have a
material adverse effect on its results of operations.
INTEGRATION OF ACQUIRED BUSINESSES - Cott's success depends, in part, on its
ability to manage new acquisitions. In recent years, Cott has grown its business
and beverage offerings primarily through acquisition of other companies, new
product lines and growth with key customers. A part of Cott's strategy is to
continue to expand its business through acquisitions and alliances. To succeed
with this strategy, Cott must identify appropriate acquisition or strategic
alliance
56
candidates. The success of this strategy also depends on Cott's ability to
manage and integrate acquisitions and alliances at a pace consistent with the
growth of its business. Cott cannot provide assurance that acquisition
opportunities will be available, that we will continue to acquire businesses and
product lines or that any of the businesses or product lines that we acquire or
align with will be integrated successfully into Cott's business or prove
profitable.
PROTECTION OF INTELLECTUAL PROPERTY - Cott possesses certain intellectual
property that is important to its business. This intellectual property includes
trade secrets, in the form of the concentrate formulae for most of the beverages
that Cott produces, and trademarks for the names of the beverages that Cott
sells, which are trademarks Cott either owns or licenses from its retailer brand
customers and others. Cott's success depends, in part, on its ability to protect
its intellectual property.
To protect this intellectual property, Cott relies principally on contractual
restrictions in agreements (such as nondisclosure and confidentiality
agreements) with employees, consultants and customers, and on common law
protections afforded to trade secrets and proprietary "know-how" and the
statutory protections afforded to trademarks. In addition, Cott will vigorously
pursue any person who infringes on its intellectual property using any and all
legal remedies available. Notwithstanding Cott's efforts, it may not be
successful in protecting its intellectual property for a number of reasons,
including:
- Cott's competitors may independently develop intellectual property
that is similar to or better than Cott's;
- employees, consultants and customers may not abide by their
contractual agreements and the cost of enforcing those agreements may
be prohibitive, or those agreements may prove to be unenforceable or
more limited than anticipated;
- foreign intellectual property laws may not adequately protect Cott's
intellectual property rights; and
- Cott's intellectual property rights may be successfully challenged,
invalidated or circumvented.
If Cott is unable to protect its intellectual property, it would weaken its
competitive position and Cott could face significant expense to protect or
enforce its intellectual property rights. At January 3, 2004, Cott has $80.4
million of rights recorded as an intangible asset.
FOREIGN EXCHANGE - Cott is exposed to changes in foreign currency exchange
rates. Operations outside of the U.S. account for approximately 27% of 2003
sales and 26% of 2002 sales and are concentrated principally in the U.K. and
Canada.
Cott translates the revenues and expenses of its foreign operations using
average exchange rates prevailing during the period. The effect of foreign
currency fluctuation has not been material to its results of operations. Cott's
debt instruments (excluding the U.K. credit facility) are denominated in U.S.
dollars.
To date, Cott has not entered into foreign exchange contracts to hedge its
exposure to foreign exchange rate fluctuations. However, Cott may enter into
foreign exchange contracts in the future if the rates become less stable
DEBT OBLIGATIONS AND INTEREST RATES - Cott had a net-debt to
net-debt-plus-equity ratio of 49.5% as of January 3, 2004 compared to 63.1% as
of December 28, 2002 and is subject to the risks associated with this level of
debt.
57
Cott is exposed to changes in interest rates. At January 3, 2004, none of its
outstanding long-term debt is subject to interest at variable rates (2002 -
24%). Cott regularly reviews the structure of its indebtedness and considers
changes to its proportion of floating versus fixed rate debt through
refinancing, interest rate swaps or other measures in response to the changing
economic environment. Historically, Cott has not used derivative instruments to
manage interest rate risk. However, in 2004, Cott intends to use derivative
instruments to hedge interest rate exposure to achieve an optimal proportion of
floating versus fixed rate debt. If Cott fails to manage these derivative
instruments successfully, or if Cott is unable to refinance its indebtedness or
otherwise increase its debt capacity in response to changes in the marketplace,
the expense associated with debt service could increase. This would negatively
impact Cott's financial condition.
The information below summarizes Cott's market risks associated with debt
obligations as of January 3, 2004. The table presents principal cash flows and
related interest rates by year of maturity. Interest rates disclosed represent
the actual weighted average rates as of January 3, 2004.
THERE- FAIR
DEBT MATURING IN: 2004 2005 2006 2007 2008 AFTER TOTAL VALUE
- ----------------- ---- ---- ---- ---- ---- ----- ----- -----
(in millions)
DEBT
Fixed rate $ 3.3 $1.1 $1.1 $1.1 $1.1 $277.3 $285.0 $309.8
------ ---- ---- ---- ---- ------ ------ ------
Weighted average
interest rate for
debt maturing 6.3% 5.1% 5.1% 5.1% 5.1% 8.0% 7.9%
------ ---- ---- ---- ---- ------ ------ ------
LEGAL MATTERS - EPA regulations provide that a minimum percentage of a bottler's
soft drink sales within specified areas in Ontario must be made in refillable
containers. To comply with these requirements, Cott and many other industry
participants would have to significantly increase sales in refillable containers
to a minimum refillable ratio of 30%. Cott is not in compliance with these
regulations and does not expect to be in the foreseeable future. The regulations
have not been actively enforced since 1991 despite the fact that they are still
in effect and not amended. Moreover, the Ontario Ministry of the Environment
released a report in 1997 stating that these EPA regulations are "outdated and
unworkable". However, despite the unworkable nature of the EPA regulations, they
have not yet been revoked.
Cott believes that the magnitude of the potential fines that Cott could incur if
the Ontario Ministry of the Environment chose to enforce these regulations is
such that the costs to Cott of non-compliance could be, although are not
contemplated to be, significant. However, management of Cott believes that such
enforcement is very remote and, in any event, these regulations are expected to
be revoked in the near future given the more recent regulatory activity in this
area as described below.
In December of 2003, the Ontario Ministry of the Environment approved the Blue
Box Program, which included provisions regarding industry responsibility for 50%
of the net cost of the Program. Generally, the company that owns the
intellectual property rights to the brand of a product, or is the licensee of
those rights, and that manufactures, packages or distributes a product for sale
in Ontario or causes such manufacturing, packaging or distributing of a product
in Ontario, will be liable for the costs under the Program. Cott is not
generally the owner of the intellectual property rights to the brands of its
products. Rather, Cott generally manufactures, packages and distributes products
for and on behalf of third party customers who are the brand owners and Cott
does not believe that any costs for which it might be ultimately responsible for
would have a material adverse effect on its results of operations.
58
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Foreign exchange" and "Debt obligations and interest rates", on page
58 of Management's Discussion and Analysis in item 7 above.
59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared by the
management of Cott in conformity with generally accepted accounting principles
in the United States to reflect the financial position of Cott and its operating
results. Financial information appearing throughout this Annual Report is
consistent with that in the consolidated financial statements. Management is
responsible for the information and representations in such consolidated
financial statements, including the estimates and judgments required for their
preparation.
In order to meet its responsibility, management maintains a system of internal
controls including policies and procedures designed to provide reasonable
assurance that assets are safeguarded and reliable financial records are
maintained. Cott has contracted with Deloitte and Touche LLP to provide internal
audit services including monitoring and reporting on the adequacy of and
compliance with internal controls. The internal audit function reports regularly
to the Audit Committee of the Board of Directors and Cott takes such actions as
are appropriate to address control deficiencies and other opportunities for
improvement as they are identified.
The report of PricewaterhouseCoopers LLP, Cott's independent auditors, covering
their audit of the consolidated financial statements, is included in this Annual
Report. Their independent audit of Cott's consolidated financial statements
includes a review of internal accounting controls to the extent they consider
necessary as required by generally accepted auditing standards. Cott used
PricewaterhouseCoopers LLP for audit and tax compliance services in 2003 and
plans to engage them only to provide these services in the future.
The Board of Directors annually appoints an Audit Committee, consisting of at
least three outside directors. The Audit Committee meets with management,
internal auditors and the independent auditors to review any significant
accounting and auditing matters and to discuss the results of audit
examinations. The Audit Committee also reviews the consolidated financial
statements, the Report of Independent Auditors and other information in the
Annual Report and recommends their approval to the Board of Directors.
/s/ Frank E. Weise III /s/ Raymond P. Silcock
Frank E. Weise III Raymond P. Silcock
Chairman & Chief Executive Officer Executive Vice President &
March 16, 2004 Chief Financial Officer
March 16, 2004
60
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREOWNERS OF COTT CORPORATION
We have audited the consolidated balance sheets of COTT CORPORATION as of
January 3, 2004 and December 28, 2002 and the consolidated statements of income,
shareowners' equity and cash flows for each of the three years in the period
ended January 3, 2004. These consolidated financial statements are the
responsibility of Cott's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Cott as of January 3, 2004 and
December 28, 2002 and the results of its operations and its cash flows for each
of the three years in the period ended January 3, 2004 in conformity with
generally accepted accounting principles in the United States.
As discussed in notes 3 and 6 to the consolidated financial statements, Cott
adopted Statement of Financial Accounting Standard 145 for reporting of gains
and losses from extinguishment of debt on December 29, 2002 and Statement of
Financial Accounting Standard 142 for goodwill and other intangibles acquired
prior to June 30, 2001 on December 30, 2001.
We reported separately in our report dated January 28, 2004, in accordance with
generally accepted auditing standards in Canada, to the shareowners of COTT
CORPORATION on consolidated financial statements for each of the three years in
the period ended January 3, 2004, prepared in accordance with generally accepted
accounting principles in Canada.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
January 28, 2004
61
COTT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in millions of U.S. dollars, except per share amounts)
FOR THE YEARS ENDED
------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
SALES $ 1,417.8 $ 1,198.6 $ 1,090.1
Cost of sales 1,141.0 965.7 902.7
---------- ------------ ------------
GROSS PROFIT 276.8 232.9 187.4
Selling, general and administrative expenses 126.1 110.2 94.1
Unusual items - note 2 1.8 - -
---------- ------------ ------------
OPERATING INCOME 148.9 122.7 93.3
Other expense (income), net - note 3 0.5 14.0 (2.4)
Interest expense, net - note 4 27.5 32.9 32.2
Minority interest 3.2 2.1 0.4
---------- ------------ ------------
INCOME BEFORE INCOME TAXES AND EQUITY LOSS 117.7 73.7 63.1
Income taxes - note 5 (40.1) (24.4) (23.2)
Equity loss (0.2) (0.6) -
---------- ------------ ------------
INCOME FROM CONTINUING OPERATIONS 77.4 48.7 39.9
Cumulative effect of change in accounting principle,
net of tax - note 6 - (44.8) -
---------- ------------ ------------
NET INCOME - note 7 $ 77.4 $ 3.9 $ 39.9
========== ============ ============
PER SHARE DATA - note 8
INCOME PER COMMON SHARE - BASIC
Income from continuing operations $ 1.12 $ 0.75 $ 0.66
Cumulative effect of change in accounting principle $ - $ (0.69) $ -
Net income $ 1.12 $ 0.06 $ 0.66
INCOME PER COMMON SHARE - DILUTED
Income from continuing operations $ 1.09 $ 0.69 $ 0.58
Cumulative effect of change in accounting principle $ - $ (0.64) $ -
Net income $ 1.09 $ 0.06 $ 0.58
The accompanying notes are an integral part of these consolidated
financial statements.
62
COTT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars)
JANUARY 3, DECEMBER 28,
2004 2002
---------- ------------
ASSETS
CURRENT ASSETS
Cash $ 18.4 $ 3.3
Accounts receivable - note 9 148.8 136.2
Inventories - note 10 94.4 78.0
Prepaid expenses 5.5 7.2
---------- -----------
267.1 224.7
PROPERTY, PLANT AND EQUIPMENT - note 11 314.3 273.0
GOODWILL - note 12 81.6 77.0
INTANGIBLES AND OTHER ASSETS - note 13 245.8 210.7
---------- -----------
$ 908.8 $ 785.4
========== ===========
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings - note 14 $ 78.1 $ 21.3
Current maturities of long-term debt - note 15 3.3 16.5
Accounts payable and accrued liabilities - note 16 140.5 130.0
---------- -----------
221.9 167.8
LONG-TERM DEBT - note 15 275.7 339.3
DEFERRED INCOME TAXES - note 5 40.5 33.5
---------- -----------
538.1 540.6
---------- -----------
MINORITY INTEREST 25.6 26.6
SHAREOWNERS' EQUITY
CAPITAL STOCK - note 17
Common shares - 70,258,831 (2002 - 68,559,035) shares issued 267.9 248.1
RETAINED EARNINGS 83.3 5.9
ACCUMULATED OTHER COMPREHENSIVE INCOME (6.1) (35.8)
---------- -----------
345.1 218.2
---------- -----------
$ 908.8 $ 785.4
========== ===========
Approved by the Board of Directors
/s/ Serge Gouin Director /s/ Philip B. Livingston Director
- ---------------- ------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
63
COTT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(in millions of U.S. dollars)
NUMBER OF ACCUMULATED
COMMON RETAINED OTHER
SHARES COMMON PREFERRED EARNINGS/ COMPREHENSIVE TOTAL
(in thousands) SHARES SHARES (DEFICIT) INCOME EQUITY
-------------- ------ ------ --------- ------ ------
Balance at December 30, 2000 59,868 $ 189.1 $ 40.0 $ (37.9) $ (32.7) $ 158.5
Options exercised, including tax
benefit of $2.3 million - note 18 1,452 10.3 - - - 10.3
Comprehensive income - note 7
Currency translation adjustment - - - - (11.0) (11.0)
Net income - - - 39.9 - 39.9
--------- ------- ----------- ----------- ------------ -----------
Balance at December 29, 2001 61,320 199.4 40.0 2.0 (43.7) 197.7
Options exercised, including tax
benefit of $2.9 million - note 18 953 8.7 - - - 8.7
Conversion of preferred shares into
common shares - note 17 6,286 40.0 (40.0) - - -
Comprehensive income - note 7
Currency translation adjustment - - - - 7.9 7.9
Net income - - - 3.9 - 3.9
--------- ------- ----------- ----------- ------------ -----------
Balance at December 28, 2002 68,559 248.1 - 5.9 (35.8) 218.2
Options exercised, including tax
benefit of $7.5 million - note 18 1,700 19.8 - - - 19.8
Comprehensive income - note 7
Currency translation adjustment - - - - 29.7 29.7
Net income - - - 77.4 - 77.4
--------- ------- ----------- ----------- ------------ -----------
Balance at January 3, 2004 70,259 $ 267.9 $ - $ 83.3 $ (6.1) $ 345.1
========= ======= =========== =========== ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
64
COTT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
FOR THE YEARS ENDED
-------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
OPERATING ACTIVITIES
Net income $ 77.4 $ 3.9 $ 39.9
Depreciation and amortization 51.0 44.1 40.2
Amortization of financing fees 1.7 1.7 1.9
Deferred income taxes - note 5 9.6 5.3 9.3
Minority interest 3.2 2.1 0.4
Equity loss 0.2 0.6 -
Non-cash unusual items 1.8 - -
Gain on disposal of investment - (1.3) -
Cumulative effect of accounting change - note 6 - 44.8 -
Other non-cash items 1.6 5.9 (0.7)
Net change in non-cash working capital - note 19 (3.8) (16.5) 2.4
---------- ------------ ------------
Cash provided by operating activities 142.7 90.6 93.4
---------- ------------ ------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (49.1) (41.2) (35.8)
Acquisitions and equity investments - note 20 (49.8) (30.6) (127.6)
Notes receivable (2.5) - -
Proceeds from disposal of businesses - - 3.5
Other (0.4) (0.5) 1.3
---------- ------------ ------------
Cash used in investing activities (101.8) (72.3) (158.6)
---------- ------------ ------------
FINANCING ACTIVITIES
Issue of long-term debt - 1.0 367.4
Decrease (increase) in cash in trust - 297.3 (297.3)
Payments of long-term debt (90.2) (287.2) (7.2)
Payment of deferred consideration on acquisition - (19.5) -
Short-term borrowings 55.8 (12.9) (2.5)
Debt issue costs - - (5.0)
Distributions to subsidiary minority shareowner (4.1) (3.9) (0.7)
Issue of common shares 12.3 5.8 8.0
Other (0.4) (0.2) -
---------- ------------ ------------
Cash provided by (used in) financing activities (26.6) (19.6) 62.7
---------- ------------ ------------
Net cash used in discontinued operations - - (0.6)
Effect of exchange rate changes on cash 0.8 0.7 (0.2)
---------- ------------ ------------
NET INCREASE (DECREASE) IN CASH 15.1 (0.6) (3.3)
CASH, BEGINNING OF YEAR 3.3 3.9 7.2
---------- ------------ ------------
CASH, END OF YEAR $ 18.4 $ 3.3 $ 3.9
========== ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
65
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance with
United States ("U.S.") generally accepted accounting principles ("GAAP") using
the U.S. dollar as the reporting currency, as the majority of Cott's business
and the majority of its shareowners are in the United States. Consolidated
financial statements in accordance with Canadian GAAP, in U.S. dollars, are
available to all shareowners and are filed with various Canadian regulatory
authorities.
Comparative amounts in prior years have been reclassified to conform to the
financial statement presentation adopted in the current year.
BASIS OF CONSOLIDATION
The financial statements consolidate the accounts of Cott and its wholly-owned
and majority-owned subsidiaries where it exercises control over the majority of
the voting rights. All significant inter-company accounts and transactions are
eliminated upon consolidation.
ESTIMATES
The preparation of these consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Management has reviewed the current changes in accounting guidance and does not
expect any of these changes to have a material impact on Cott.
REVENUE RECOGNITION
Cott recognizes sales at the time ownership passes to the customer. This may be
upon shipment of goods or upon delivery to the customer, depending on
contractual terms. Sales incentives are deducted in arriving at sales. Sales
incentives based on future volume commitments are accrued based on management's
best estimates. Shipping and handling costs paid by the customer to Cott are
included in revenue.
COSTS OF SALES
Cott records shipping and handling and finished goods inventory costs in cost of
sales. Finished goods inventory costs include the cost of direct labor and
materials and the applicable share of overhead expense chargeable to production.
66
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SELLING, GENERAL AND ADMINISTRATION EXPENSES
Cott records all other expenses not charged to production as general and
administration expenses.
INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out method, or net realizable value. Returnable bottles and plastic shells
are valued at the lower of cost, deposit value or net realizable value. Finished
goods and work-in-process include the cost of raw materials, direct labor and
manufacturing overhead costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at the lower of cost less accumulated
depreciation or fair value. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets as follows:
Buildings 20 to 40 years
Machinery and equipment 7 to 15 years
Furniture and fixtures 3 to 10 years
Computer hardware and software 3 to 5 years
Plates and films 3 years
Cott periodically compares the carrying value of property, plant and equipment
to the estimated undiscounted future cash flows that may be generated by the
related assets and recognizes in net income any impairment to fair value.
GOODWILL
Goodwill represents the excess purchase price of acquired businesses over the
fair value of the net assets acquired. Starting in 2002, Cott does not amortize
goodwill. Goodwill was previously amortized over periods not exceeding 40 years.
Cott compares the carrying amount of the goodwill to the fair value, at least
annually, and recognizes in net income any impairment in value.
67
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTANGIBLES AND OTHER ASSETS
Issuance costs for credit facilities and long-term debt are deferred and
amortized over the term of the credit agreement or related debt, respectively.
Rights to manufacture concentrate formulas, with all the related inventions,
processes and technical expertise, are recorded as intangible assets at the cost
of acquisition. The rights are not amortized as their useful lives extend
indefinitely. Cott compares the carrying amount of the rights to their fair
value, at least annually, and recognizes in net income any impairment in value.
Customer relationships are amortized over periods up to 15 years. Trademarks are
recorded at the cost of acquisition and are amortized over 15 years. Cott
periodically compares the carrying value of the customer relationships and
trademarks to the estimated undiscounted future cash flows that may be generated
by the related businesses and recognizes in net income any impairment to fair
value.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of foreign operations, all of which are
self-sustaining, are translated at the exchange rates in effect at the balance
sheet dates. Revenues and expenses are translated using average exchange rates
prevailing during the period. The resulting gains or losses are accumulated in
the other comprehensive income account in shareowners' equity.
TAXATION
Cott accounts for income taxes under the asset and liability method. Deferred
tax assets and liabilities are recognized based on the differences between the
accounting values of assets and liabilities and their related tax bases using
currently enacted income tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for cash,
receivables, payables, short-term borrowings and long-term debt approximate
their respective fair values, except as otherwise indicated.
COMPREHENSIVE INCOME
Comprehensive income is comprised of net income adjusted for changes in the
cumulative foreign currency translation adjustment account.
68
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 2 - UNUSUAL ITEMS
During the year ended January 3, 2004, Cott recorded a charge of $1.8 million
primarily relating to a provision for a note due from an equity investee.
NOTE 3 - OTHER EXPENSE (INCOME), NET
FOR THE YEARS ENDED
----------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---- ---- ----
(in millions of U.S. dollars)
Foreign exchange loss (gain) $ 1.2 $ 0.7 $ (2.3)
Costs of extinguishment of debt - 14.1 -
Gain on disposal of investment in Menu Foods Limited - (1.3) -
Other (0.7) 0.5 (0.1)
---------- ------------ -----------
$ 0.5 $ 14.0 $ (2.4)
========== ============ ===========
In 2002, the Company recorded the $14.1 million loss on early extinguishment of
the 2005 and 2007 notes and a related deferred income tax recovery of $4.5
million and classified it as an extraordinary item. In May 2002, the Financial
Accounting Standards Board issued SFAS 145 indicating that certain debt
extinguishment activities do not meet the criteria for classification as
extraordinary items and should no longer be classified as extraordinary items.
Cott adopted the standard retroactively in 2003 and reclassified the debt
extinguishment costs to other expense (income), net and the related tax effect
to income taxes. This restatement lowered income from continuing operations for
the year ended December 28, 2002 by $9.6 million or $0.15 per basic share and
$0.14 per diluted share, to $48.7 million or $0.75 per basic share and $0.69 per
fully diluted share.
NOTE 4 - INTEREST EXPENSE, NET
FOR THE YEARS ENDED
----------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- --------- ------------
(in millions of U.S. dollars)
Interest on long-term debt $ 26.4 $ 31.8 $ 32.5
Other interest expense 1.7 1.7 1.3
Interest income (0.6) (0.6) (1.6)
---------- --------- ------------
$ 27.5 $ 32.9 $ 32.2
---------- --------- ------------
69
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 4 - INTEREST EXPENSE, NET (continued)
Interest paid during the year was approximately $25.9 million ($38.4 million -
December 28, 2002; $30.1 million - December 29, 2001).
NOTE 5 - INCOME TAXES
Income (loss) before income taxes and equity loss consisted of the following:
FOR THE YEARS ENDED
---------------------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
(in millions of U.S. dollars)
Canada $ 3.6 $ (0.5) $ 8.3
Outside Canada 114.1 74.2 54.8
------- ------ ------
$ 117.7 $ 73.7 $ 63.1
======= ====== ======
Provision for income taxes consisted of the following:
FOR THE YEARS ENDED
-------------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
(in millions of U.S. dollars)
CURRENT
Canada $ (0.2) $ (0.2) $ (0.3)
Outside Canada (30.3) (18.9) (13.6)
------- ------- -------
$ (30.5) $ (19.1) $ (13.9)
------- ------- -------
DEFERRED
Canada $ (1.2) $ (1.5) $ (1.3)
Outside Canada (8.4) (3.8) (8.0)
------- ------- -------
$ (9.6) $ (5.3) $ (9.3)
------- ------- -------
PROVISION FOR INCOME TAXES $ (40.1) $ (24.4) $ (23.2)
======= ======= =======
Income taxes paid during the year were $21.8 million ($19.0 million - December
28, 2002; $5.7 million - December 29, 2001).
70
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 5 - INCOME TAXES (continued)
The following table reconciles income taxes calculated at the basic Canadian
corporate rates with the income tax provision:
FOR THE YEARS ENDED
--------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
(in millions of U.S. dollars)
Income tax provision based on Canadian statutory
rates $ (42.3) $ (29.1) $ (26.0)
Foreign tax rate differential 2.6 1.8 1.8
Manufacturing and processing deduction 0.1 0.2 (0.1)
Decrease (increase) in valuation allowance (0.6) - 4.4
Adjustment for change in enacted rates 1.0 0.7 (1.5)
Realization of benefit on carry back of capital loss - 1.8 -
Non-deductible items (1.2) 0.8 (1.4)
Other 0.3 (0.6) (0.4)
------- ------- -------
Provision for income taxes $ (40.1) $ (24.4) $ (23.2)
======= ======= =======
During the year ended December 29, 2001, Cott made acquisitions that made it
likely that it would utilize all of its tax loss carryforwards. As a result, the
valuation allowance was adjusted to recognize the benefit of these loss
carryforwards that had not previously been recognized.
Deferred income tax assets and liabilities were recognized on temporary
differences between the financial and tax bases of existing assets and
liabilities as follows:
JANUARY 3, DECEMBER 28,
2004 2002
---------- ------------
(in millions of U.S. dollars)
DEFERRED TAX ASSETS
Loss carryforwards $ 19.1 $ 19.4
Liabilities and reserves 8.6 5.5
Other 2.5 7.3
------- -------
30.2 32.2
Valuation allowance (0.6) -
------- -------
29.6 32.2
------- -------
DEFERRED TAX LIABILITIES
Property, plant and equipment 35.4 30.5
Intangible assets 8.3 6.1
Other 26.4 29.1
------- -------
70.1 65.7
------- -------
NET DEFERRED TAX LIABILITY $ (40.5) $ (33.5)
======= =======
71
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 5 - INCOME TAXES (continued)
As of January 3, 2004, operating loss carryforwards primarily in Canada and the
United Kingdom, of $57.0 million are available to reduce future taxable income.
These losses expire as follows:
(in millions of U.S. dollars)
2005 $ 13.6
2006 22.7
2008 6.7
No expiry date 14.0
------
$ 57.0
======
NOTE 6 - CHANGES IN ACCOUNTING PRINCIPLES
In the first quarter of 2002, Cott adopted SFAS No. 142, Goodwill and Other
Intangible Assets, for goodwill and other intangibles acquired prior to June 30,
2001. Cott adopted SFAS No. 142 for goodwill and other intangible assets
acquired subsequent to June 30, 2001 in 2001. Under this standard, goodwill and
intangible assets with indefinite lives are no longer amortized but are subject
to an annual impairment test. Other intangible assets continue to be amortized
over their estimated useful lives and are also tested for impairment.
Cott completed a goodwill impairment test as of the adoption date for the
standard and determined that unamortized goodwill of $44.8 million relating to
the United Kingdom and Europe reporting unit was impaired under the new rules.
The impairment write down has been recorded as a change in accounting principle.
No income tax recovery was recorded on the impairment write down.
The goodwill amortization charged in the consolidated statement of income in the
year ended December 29, 2001 was $3.7 million. Excluding amortization of
goodwill, income from continuing operations, net income, basic and fully diluted
income per share for the year ended December 29, 2001 would have been as
follows:
DECEMBER 29, 2001
-----------------------------
(in millions of U.S. dollars,
except per share amounts)
Income from continuing operations $ 42.7
Net income 42.7
Net income per common share - basic 0.71
Net income per common share - diluted 0.62
72
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 7 - OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED
----------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
(in millions of U.S. dollars)
Net income $ 77.4 $ 3.9 $ 39.9
Foreign currency translation including $0.4 million
impact of wind up of foreign subsidiaries
(December 28, 2002 - net of $0.6 million;
December 29, 2001 - net of $1.8 million) 29.7 7.9 (11.0)
------- ------ -------
$ 107.1 $ 11.8 $ 28.9
======= ====== =======
NOTE 8 - INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is calculated using the weighted average number of common
shares outstanding adjusted to include the effect that would occur if
in-the-money stock options were exercised and preferred shares were converted to
common shares.
The following table reconciles the basic weighted average number of shares
outstanding to the diluted weighted average number of shares outstanding:
FOR THE YEARS ENDED
--------------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
(in thousands)
Weighted average number of shares outstanding - basic 69,389 65,262 60,384
Dilutive effect of stock options 1,607 2,202 2,166
Dilutive effect of second preferred shares - 3,074 6,286
------ ------ ------
Adjusted weighted average number of shares outstanding -
diluted 70,996 70,538 68,836
====== ====== ======
At December 28, 2002, options to purchase 1,069,500 shares of common stock at a
weighted average exercise price of $30.81 per share were outstanding, but were
not included in the computation of diluted net income per share because the
options' exercise price was greater than the average market price of the common
stock.
73
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 9 - ACCOUNTS RECEIVABLE
JANUARY 3, DECEMBER 28,
2004 2002
---------- ------------
(in millions of U.S. dollars)
Trade receivables $ 134.6 $ 125.9
Allowance for doubtful accounts (6.8) (3.4)
Other 21.0 13.7
------- -------
$ 148.8 $ 136.2
======= =======
As of January 3, 2004, other receivables include $6.6 million due from an equity
investee ($1.1 million - December 28, 2002) and the allowance for doubtful
accounts include $2.0 million due from an equity investee.
NOTE 10 - INVENTORIES
JANUARY 3, DECEMBER 28,
2004 2002
------ ------
(in millions of U.S. dollars)
Raw materials $ 37.7 $ 26.6
Finished goods 46.8 41.8
Other 9.9 9.6
------ ------
$ 94.4 $ 78.0
====== ======
NOTE 11 - PROPERTY, PLANT AND EQUIPMENT
JANUARY 3, 2004 DECEMBER 28, 2002
-------------------------------- --------------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION NET COST DEPRECIATION NET
------- ------------ ------- ------- ------------ -------
(in millions of U.S. dollars) (in millions of U.S. dollars)
Land $ 19.7 $ - $ 19.7 $ 17.6 $ - $ 17.6
Buildings 98.5 22.8 75.7 83.7 17.3 66.4
Machinery and equipment 353.2 169.2 184.0 297.9 132.7 165.2
Computer hardware and
software 54.2 28.7 25.5 43.3 26.0 17.3
Furniture and fixtures 11.0 8.4 2.6 9.3 6.7 2.6
Plates and film 16.1 9.3 6.8 12.8 8.9 3.9
------- ------- ------- ------- ------- -------
$ 552.7 $ 238.4 $ 314.3 $ 464.6 $ 191.6 $ 273.0
======= ======= ======= ======= ======= =======
74
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 11 - PROPERTY, PLANT AND EQUIPMENT (continued)
During the year ended January 3, 2004, Cott recorded $9.8 million of property,
plant and equipment financed through capital leases.
Depreciation expense for fiscal 2003 was $41.6 million ($35.0 million - December
28, 2002; $30.5 million - December 29, 2001).
NOTE 12 - GOODWILL
JANUARY 3, DECEMBER 28,
2004 2002
------ -------
(in millions of U.S. dollars)
Balance at beginning of period $ 77.0 $ 114.1
Impairment write down on change in accounting principle - note 6 - (44.8)
------ -------
77.0 69.3
Acquisitions - note 20 0.7 7.7
Foreign exchange 3.9 -
------ -------
Balance at end of period $ 81.6 $ 77.0
====== =======
75
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 13 - INTANGIBLES AND OTHER ASSETS
JANUARY 3, 2004 DECEMBER 28, 2002
------------------------------------ -------------------------------------
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 157.9 20.8 137.1 108.3 13.5 94.8
Trademarks 25.8 5.5 20.3 25.7 3.7 22.0
Other 3.6 0.3 3.3 2.9 0.1 2.8
------- ------ ------- ------- ------ -------
187.3 26.6 160.7 136.9 17.3 119.6
------- ------ ------- ------- ------ -------
267.7 26.6 241.1 217.3 17.3 200.0
------- ------ ------- ------- ------ -------
OTHER ASSETS
Financing costs 5.6 3.9 1.7 5.6 2.3 3.3
Other 3.9 0.9 3.0 7.6 0.2 7.4
------- ------ ------- ------- ------ -------
9.5 4.8 4.7 13.2 2.5 10.7
------- ------ ------- ------- ------ -------
$ 277.2 $ 31.4 $ 245.8 $ 230.5 $ 19.8 $ 210.7
======= ====== ======= ======= ====== =======
For the year ended December 28, 2002, other assets include $1.3 million due from
an equity investee.
Amortization expense of intangibles was $9.3 million ($8.6 million - December
28, 2002; $5.5 million - December 29, 2001). The estimated amortization expense
for intangibles over the next five years is:
(in millions of U.S. dollars)
2004 $ 12.5
2005 12.5
2006 12.5
2007 12.4
2008 12.4
------
$ 62.3
======
76
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 14 - SHORT-TERM BORROWINGS
Short-term borrowings include bank overdrafts and borrowings under Cott's credit
facilities.
At January 3, 2004, Cott has a committed, revolving, senior secured credit
facility of $100.0 million expiring on December 31, 2005. Accounts receivable,
inventories and certain personal property of the U.S. and Canadian operations
have been pledged as collateral for this facility. As of January 3, 2004, credit
of $33.2 million was available. Borrowings under the bank credit facility bear
interest at base rate plus 0.50% per annum or LIBOR plus 1.75% per annum. An
annual facility fee of 0.5% is payable on the entire line of credit. The
weighted average interest rate at January 3, 2004 was 3.2% (5.5% - December 28,
2002) on this short-term credit facility.
Cott also has a $26.9 million ((pound)15.0 million) demand bank credit facility
in the U.K. expiring in 2004 with $22.0 million ((pound)12.3 million) available
as of January 3, 2004. Borrowings under this facility bear interest at prime
plus 1.0% per annum or LIBOR plus 0.75% per annum except for U.S. dollar
borrowings, which currently bear interest at the short term offered rate plus
0.20% per annum. The margin on U.S. dollar borrowings can be changed up to 1.0%
on one months notice. The interest rate at January 3, 2004 was 1.45%.
NOTE 15 - LONG-TERM DEBT
JANUARY 3, DECEMBER 28,
2004 2002
---------- ------------
(in millions of U.S. dollars)
Senior subordinated unsecured notes at 8% due 2011 (a) $ 269.0 $ 268.2
Term bank loan at prime plus 1.75% or LIBOR plus 3% with sinking fund
payments and due 2006 (b) - 86.6
Capital leases 7.9 1.0
Other 2.1 -
------- -------
279.0 355.8
Less current maturities (3.3) (16.5)
------- -------
$ 275.7 $ 339.3
======= =======
77
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 15 - LONG-TERM DEBT (continued)
(a) The 8% senior subordinated unsecured notes were issued at a discount
of 2.75% on December 21, 2001. The fair value of the notes as of
January 3, 2004 is estimated to be $299.8 million (December 28, 2002 -
$290.1 million). The notes contain a number of financial covenants
including limitations on capital stock repurchases, dividend payments
and incurrence of indebtedness. Penalties exist if Cott redeems the
notes prior to December 15, 2009.
JANUARY 3, DECEMBER 28,
2004 2002
---------- ------------
(in millions of U.S. dollars)
Face value $ 275.0 $ 275.0
Discount (6.0) (6.8)
------- -------
$ 269.0 $ 268.2
======= =======
(b) During 2003 Cott repaid the term loan.
(c) Long-term debt payments required in each of the next five years and
thereafter are as follows:
(in millions of U.S. dollars)
2004 $ 3.3
2005 1.1
2006 1.1
2007 1.1
2008 1.1
Thereafter 277.3
-------
$ 285.0
=======
NOTE 16 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
JANUARY 3, DECEMBER 28,
2004 2002
---------- ------------
(in millions of U.S. dollars)
Trade payables $ 64.3 $ 71.5
Accrued compensation 26.6 18.5
Accrued promotion and rebates 24.2 21.6
Accrued interest 1.2 1.4
Income, sales and other taxes 11.5 6.3
Other accrued liabilities 12.7 10.7
------- -------
$ 140.5 $ 130.0
======= =======
78
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 17 - CAPITAL STOCK
The authorized capital stock of Cott consists of an unlimited number of common
shares and an unlimited number of first and second preferred shares, issuable in
series.
PREFERRED SHARES
The Convertible Participating Voting Second Preferred Shares, Series 1 ("second
preferred shares") were convertible into that amount of common shares which is
determined by dividing a conversion factor in effect at the time of conversion
by a conversion value. The initial conversion factor of $10.00 was adjusted
semi-annually at the rate of 2.5% for each six-month period, compounded
semi-annually, with daily accrual, until July 7, 2002. From and after July 7,
2002 the conversion factor was $12.18. The conversion value was $7.75 and was
subject to reduction in certain circumstances. The right of conversion could
have been exercised by the preferred shareowners at any time, and by Cott at any
time after July 7, 2002 or if the common shares had traded at an average closing
price of not less than $13.00 during a consecutive 120 day trading period, prior
to July 7, 2002.
Prior to conversion, these second preferred shares carried a cash dividend equal
to one-half of the common share cash dividend, if any, on an as converted basis.
From and after July 7, 2002, the preferred shareowners would have been entitled
to receive a cumulative preferential non-cash paid-in-kind dividend, payable in
additional second preferred shares, at the rate of 2.5% for each six months,
compounded semi-annually, with daily accrual. The second preferred shares were
also entitled to voting rights together with the common shares on an as
converted basis.
The 4,000,000 second preferred shares were converted to 6,286,452 common shares
on June 27, 2002 using a conversion factor of $12.18 and conversion value of
$7.75.
NOTE 18 - STOCK OPTION PLANS
Under the 1986 Common Share Option Plan as amended on April 18, 2001, Cott has
reserved 12.0 million common shares for future issuance. Options are granted at
a price not less than fair value of the shares on the date of grant.
Options granted prior to April 12, 1996 and all options that were previously
granted to employees with six months of service expire after five years and vest
at 20% per annum over 4.5 years. Options granted on or after April 12, 1996 but
before September 1, 1998 expire after ten years and vest at 25% per annum
commencing on the second anniversary date of the grant. Options granted after
September 1, 1998 expire after 7 years and vest at 30% per annum on the
anniversary date of the grant for the first two years and the balance on the
third anniversary date of the grant. Certain options granted under the plan vest
monthly over a period of 24 or 36 months. Options granted after July 17, 2001 to
the non-management members of the Board of Directors vest immediately. All
options are non-transferable.
79
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 18 - STOCK OPTION PLANS (continued)
Pursuant to the SFAS No. 123, Accounting for Stock-Based Compensation, Cott has
elected to account for its employee stock option plan under APB opinion No. 25,
Accounting for Stock Issued to Employees. Under this method of accounting,
compensation expense is measured as the excess, if any, of the market value of
Cott common stock at the award date over the amount the employee must pay for
the stock (exercise price). Cott's policy is to award stock options with an
exercise price equal to the closing price of Cott's common stock on the Toronto
Stock Exchange on the last trading day immediately before the date of award, and
accordingly, no compensation expense has been recognized for stock options
issued under these plans. Had compensation expense for the plans been determined
based on the fair value at the grant date consistent with SFAS No. 123, Cott's
net income and income per common share would have been as follows:
FOR THE YEARS ENDED
-------------------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
(in millions of U.S. dollars, except per share amounts)
NET INCOME (LOSS)
As reported $ 77.4 $ 3.9 $ 39.9
Compensation expense (6.3) (5.4) (3.6)
------ ------- ------
Pro forma $ 71.1 $ (1.5) $ 36.3
====== ======= ======
NET INCOME (LOSS) PER SHARE - BASIC
As reported $ 1.12 $ 0.06 $ 0.66
Pro forma $ 1.02 $ (0.02) $ 0.60
NET INCOME (LOSS) PER SHARE - DILUTED
As reported $ 1.09 $ 0.06 $ 0.58
Pro forma $ 1.00 $ (0.02) $ 0.53
The pro forma compensation expense has been tax effected to the extent it
relates to stock options granted to employees in jurisdictions where the related
benefits are deductible for income tax purposes.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
FOR THE YEARS ENDED
-----------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
Risk-free interest rate 3.9% - 4.3% 3.8% - 4.7% 4.4% - 5.5%
Average expected life (years) 4 4 4
Expected volatility 45.0% 45.0% 50.0%
Expected dividend yield - - -
80
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 18 - STOCK OPTION PLANS (continued)
Option activity was as follows:
JANUARY 3, 2004 DECEMBER 28, 2002 DECEMBER 29, 2001
------------------------- ---------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE (C$) SHARES PRICE (C$) SHARES PRICE (C$)
------------------------- ---------------------- ------------------------
Balance - at beginning 4,984,340 $16.90 4,752,845 $11.63 5,247,660 $ 9.12
Granted 929,250 $29.95 1,476,000 $28.98 1,346,000 $17.09
Exercised (1,699,796) $ 9.51 (952,776) $ 9.60 (1,451,465) $ 8.57
Cancelled (146,640) $20.10 (291,729) $12.15 (389,350) $ 8.15
---------- --------- ----------
Balance - at end 4,067,154 4,984,340 $16.90 4,752,845 $11.63
---------- --------- ----------
Weighted average fair value of
options granted during the
year $12.24 $11.20 $ 8.46
Outstanding options at January 3, 2004 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE PRICE
PRICES (C$) OUTSTANDING CONTRACTUAL LIFE PRICE (C$) EXERCISABLE (C$)
- ------------------------------------------------------------------- ------------------------------
$ 5.95 - $16.10 695,675 3.3 9.37 682,925 9.30
$16.68 - $20.85 1,098,192 4.5 17.15 733,044 17.08
$23.60 - $29.29 651,237 5.6 25.72 321,057 26.57
$31.17 - $33.15 1,622,050 6.0 31.47 227,150 31.77
------------------------------------------- ------------------------
4,067,154 5.1 22.90 1,964,176 17.63
------------------------------------------- ------------------------
81
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 19 - NET CHANGE IN NON-CASH WORKING CAPITAL
The changes in non-cash working capital components, net of effects of
acquisitions and divestitures of businesses and unrealized foreign exchange
gains and losses, are as follows:
FOR THE YEARS ENDED
------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
(in millions of U.S. dollars)
Decrease (increase) in accounts receivable $ (2.7) $ (5.4) $ (12.7)
Decrease (increase) in inventories (11.0) (3.5) 1.7
Decrease (increase) in prepaid expenses (1.0) 0.2 (1.4)
Increase (decrease) in accounts payable and accrued
liabilities 10.9 (7.8) 14.8
------- ------- -------
$ (3.8) $ (16.5) $ 2.4
======= ======= =======
NOTE 20 - ACQUISITIONS AND EQUITY INVESTMENTS
All acquisitions have been accounted for using the purchase method, and
accordingly, the results of operations are included in Cott's consolidated
statements of income from the effective dates of purchase, except as otherwise
indicated.
The total purchase prices of the acquisitions and equity investments were
allocated as follows based on the fair value of the net assets:
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
----------------------------------------
(in millions of U.S dollars)
Current assets $ (0.6) $ 11.8 $ 14.0
Property, plant & equipment 3.6 14.0 5.0
Rights 0.3 - 80.4
Customer relationships 49.7 4.8 54.1
Trademark - 6.8 -
Goodwill 0.7 7.7 5.2
Other assets 0.2 3.0 -
Equity investments (1.3) 2.8 -
------ ------ -------
52.6 50.9 158.7
------ ------ -------
Current liabilities 0.4 12.8 2.7
Deferred taxes and other liabilities 2.4 7.1 -
Minority interest - 0.4 28.4
------ ------ -------
PURCHASE PRICE $ 49.8 $ 30.6 $127.6
====== ====== ======
82
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 20 - ACQUISITIONS AND EQUITY INVESTMENTS (continued)
YEAR ENDED JANUARY 3, 2004
Effective May 15, 2003, Cott's Mexican subsidiary Cott Embotelladores de Mexico
S.A. de C.V. ("CEMSA"), acquired a soft drink distribution business from
Embotelladora de Puebla, S.A. de C.V. ("EPSA"). The purchase price was allocated
to license and machinery and equipment.
Effective December 19, 2003, Cott acquired the retailer brand beverage business
of North Carolina's Quality Beverage Brands, L.L.C. ("QBB"). The assets acquired
include customer relationships and certain machinery and equipment. The
acquisition is expected to enhance Cott's capabilities and expand its customer
base in the Mid-Atlantic region of the United States.
The total purchase price for all acquisitions was $49.8 million, including
estimated acquisition costs of $0.6 million and the purchase of the remaining
interest in Iroquois West in January 2003. The acquisitions were funded from
cash and borrowings on Cott's revolving credit facility.
YEAR ENDED DECEMBER 28, 2002
Effective June 21, 2002, Cott acquired a new venture in Mexico, CEMSA, with EPSA
in order to establish manufacturing and marketing capabilities in Mexico. Cott
acquired a 90% interest in this new venture. EPSA has the remaining 10%
interest. The purchase price was allocated to working capital, machinery and
equipment and customer relationships.
Effective June 25, 2002, Cott acquired all of the outstanding capital stock of
Premium Beverage Packers, Inc. ("Wyomissing"). Wyomissing's assets included
working capital, machinery and equipment, customer relationships, trademarks and
goodwill. The acquisition is expected to add manufacturing strength to Cott's
growing presence in the Northeast United States.
The total purchase price for both acquisitions was $30.6 million, including
estimated acquisition costs of $1.8 million and an equity investment of $1.0
million for a 35% share of a Mexican distribution company before working capital
adjustments. The acquisitions were funded from borrowings on Cott's short-term
credit facility. The goodwill recognized on the transactions is not deductible
for tax purposes.
In January 2002, Cott made equity investments in two spring water companies,
Iroquois Water and Iroquois West, totalling $1.8 million to strengthen its
position in the spring water segment across Canada.
83
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 20 - ACQUISITIONS AND EQUITY INVESTMENTS (continued)
YEAR ENDED DECEMBER 29, 2001
Effective July 19, 2001, Cott completed an acquisition of certain assets of
Royal Crown Company Inc. ("Royal Crown"). The purchased assets included
intellectual property, licenses and permits, equipment, working capital, and the
manufacturing facility used by Royal Crown in the production of concentrate.
Cott uses the concentrate assets to produce all of its concentrate requirements
previously produced for Cott by Royal Crown. In addition, Cott also acquired the
Royal Crown international business, which encompasses the Royal Crown branded
business outside the United States, Canada, Mexico and certain U.S. territories.
The total purchase price was $97.6 million, including acquisition costs of $2.1
million. Cott funded the acquisition with proceeds from the term loan described
in note 15.
Of the purchase price, $80.4 million was assigned to the rights to manufacture
its concentrates, with all inventions, processes, technologies, technical and
manufacturing information and know how related to the manufacture of
concentrates. These rights are not subject to amortization. The goodwill
recognized on this transaction is expected to be fully deductible for tax
purposes.
Effective September 25, 2001, Cott formed a new business with Polar Corp.
("Polar"), the leading independent retailer-brand beverage supplier in New
England, to enhance its position and customer base in the northeast United
States. Cott invested $30.0 million in cash, including acquisition costs of $0.5
million, in Northeast Retailer Brands LLC ("LLC") through a wholly-owned
subsidiary. Cott has a 51% ownership interest in the LLC, and Polar, together
with its wholly-owned subsidiary, has a 49% interest.
NOTE 21 - BENEFIT PLANS
Cott maintains primarily defined contribution pension plans covering qualifying
employees in the United States, Canada and the United Kingdom. The total expense
with respect to these plans was $4.5 million for the year ended January 3, 2004
($4.2 million - December 28, 2002; $3.3 million - December 29, 2001).
84
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 22 - COMMITMENTS AND CONTINGENCIES
a) Cott leases buildings, machinery & equipment, computer hardware & software
and furniture & fixtures. All contractual increases included in the lease
contract are taken into account when calculating the minimum lease payment
and recognized on a straight line basis over the lease term. The minimum
annual payments under operating leases are as follows:
(in millions of U.S. dollars)
2004 $ 10.1
2005 8.1
2006 7.3
2007 4.6
2008 1.4
Thereafter 2.8
------
$ 34.3
======
Operating lease expenses were:
(in millions of U.S. dollars)
Year ended January 3, 2004 $ 13.0
Year ended December 28, 2002 $ 11.9
Year ended December 29, 2001 $ 9.7
b) As of January 3, 2004, Cott had commitments for capital expenditures of
approximately $10.7 million and commitments for inventory of approximately
$14.2 million.
c) Cott is 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
Cott's financial position or results from operations.
d) Cott has $2.1 million in standby letters of credit outstanding as of
January 3, 2004.
85
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 23 - SEGMENT REPORTING
Cott produces, packages and distributes retailer brand and branded bottled and
canned soft drinks to regional and national grocery, mass-merchandise and
wholesale chains in the United States, Canada, the United Kingdom & Europe and
International. The International segment includes the 2002 Mexican acquisitions
and the Royal Crown International business. The concentrate assets and related
expenses have been included in the Corporate & Other segment for comparative
purposes. The segmented information for prior periods has been restated to
conform to the way Cott currently manages its beverage business by geographic
segments as described below:
BUSINESS SEGMENTS
UNITED
FOR THE YEAR ENDED UNITED KINGDOM CORPORATE &
JANUARY 3, 2004 STATES CANADA & EUROPE INTERNATIONAL OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------
(in millions of U.S. dollars)
External sales $1,016.6 $191.0 $ 166.6 $42.1 $ 1.5 $1,417.8
Intersegment sales - 40.8 - - (40.8) -
Depreciation and
amortization 33.2 8.1 7.3 0.7 1.7 51.0
Operating income
(loss) before
unusual items 124.6 19.8 7.7 5.7 (7.1) 150.7
Unusual items 0.2 (2.0) - - - (1.8)
Property, plant and
equipment 169.3 59.1 67.8 9.5 8.6 314.3
Goodwill 49.9 22.0 - 4.6 5.1 81.6
Intangibles and other
assets 163.2 (1.0) - 1.0 82.6 245.8
Total assets 514.9 130.3 126.7 77.6 59.3 908.8
Additions to property,
plant and equipment 20.0 4.8 7.4 6.3 10.6 49.1
86
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 23 - SEGMENT REPORTING (continued)
UNITED
FOR THE YEAR ENDED UNITED KINGDOM CORPORATE &
DECEMBER 28, 2002 STATES CANADA & EUROPE INTERNATIONAL OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------
(in millions of U.S. dollars)
External sales $ 872.2 $171.2 $ 134.3 $ 20.3 $ 0.6 $ 1,198.6
Intersegment sales 0.8 27.6 0.1 - (28.5) -
Depreciation and
amortization 29.4 6.3 6.7 0.3 1.4 44.1
Operating income (loss) 110.2 17.9 1.8 1.1 (8.3) 122.7
Property, plant and
equipment 155.4 43.8 60.7 0.4 12.7 273.0
Goodwill 49.9 17.4 - 4.6 5.1 77.0
Intangibles and other
assets 120.9 2.6 0.6 0.9 85.7 210.7
Total assets 452.8 107.9 101.6 61.7 61.4 785.4
Additions to property,
plant and equipment 22.8 3.6 2.6 3.4 8.8 41.2
UNITED
FOR THE YEAR ENDED UNITED KINGDOM CORPORATE &
DECEMBER 29, 2001 STATES CANADA & EUROPE INTERNATIONAL OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------
(in millions of U.S. dollars)
External sales $ 779.4 $163.7 $ 140.4 $ 6.1 $ 0.5 $ 1,090.1
Intersegment sales 1.7 16.1 0.6 - (18.4) -
Depreciation and
amortization 25.0 6.6 7.7 - 0.9 40.2
Operating income (loss) 89.7 17.6 (4.3) 1.0 (10.7) 93.3
Property, plant and
equipment 131.7 44.9 59.0 - 11.3 246.9
Goodwill 41.5 17.2 45.1 5.2 5.1 114.1
Intangibles and other
assets 117.2 - 1.3 - 91.1 209.6
Total assets 520.0 97.3 145.0 56.3 246.8 1,065.4
Additions to property,
plant and equipment 21.9 4.3 4.1 - 5.5 35.8
87
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2003, 2002 AND 2001
NOTE 23 - SEGMENT REPORTING (continued)
Intersegment sales and total assets under the Corporate & Other caption include
the elimination of intersegment sales, receivables and investments.
For the year ended January 3, 2004, sales to a major customer accounted for 42%
(2002 - 40%) of Cott's total sales. Sales to two major customers accounted for
39% and 11%, respectively, of Cott's total sales for the year ended December 29,
2001.
Credit risk arises from the potential default of a customer in meeting its
financial obligations with Cott. 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.
Revenues by geographic area are as follows:
JANUARY 3, DECEMBER 28, DECEMBER 29,
2004 2002 2001
---------- ------------ ------------
(in millions of U.S. dollars)
United States $1,035.8 $ 885.3 $ 785.9
Canada 191.0 171.2 163.7
United Kingdom 160.2 125.6 130.9
Other countries 30.8 16.5 9.6
-------- -------- --------
$1,417.8 $1,198.6 $1,090.1
======== ======== ========
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:
JANUARY 3, DECEMBER 28,
2004 2002
---------- ------------
(in millions of U.S. dollars)
United States $ 481.4 $ 426.9
Canada 81.9 71.3
United Kingdom 67.8 61.3
Other countries 10.6 1.2
------- -------
$ 641.7 $ 560.7
======= =======
88
COTT CORPORATION
QUARTERLY FINANCIAL INFORMATION
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ----------- ------------- -----------
YEAR ENDED JANUARY 3, 2004
Sales $ 295.3 $ 388.1 $ 389.8 $ 344.6 $ 1,417.8
Cost of sales 238.9 311.2 314.7 276.2 1,141.0
Selling, general and administrative expenses 31.6 32.5 29.1 32.9 126.1
Unusual items - (0.8) - 2.6 1.8
----------- ----------- ----------- ------------- -----------
Operating income 24.8 45.2 46.0 32.9 148.9
----------- ----------- ----------- ------------- -----------
Net income $ 10.5 $ 24.6 $ 25.7 $ 16.6 $ 77.4
=========== =========== =========== ============= ===========
Per share data:
Income per common share - basic
Net income $ 0.15 $ 0.36 $ 0.37 $ 0.24 $ 1.12
Income per common share - diluted
Net income $ 0.15 $ 0.35 $ 0.36 $ 0.23 $ 1.09
=========== =========== =========== ============= ===========
YEAR ENDED DECEMBER 28, 2002(1)
Sales $ 250.0 $ 329.5 $ 338.8 $ 280.3 $ 1,198.6
Cost of sales 203.9 262.4 272.1 227.3 965.7
Selling, general and administrative expenses 27.7 28.3 27.6 26.6 110.2
----------- ----------- ----------- ------------- -----------
Operating income 18.4 38.8 39.1 26.4 122.7
----------- ----------- ----------- ------------- -----------
Income (loss) from continuing operations (2.0) 19.2 19.8 11.7 48.7
----------- ----------- ----------- ------------- -----------
Cumulative effect of change in accounting
principle (44.8) - - - (44.8)
----------- ----------- ----------- ------------- -----------
Net income (loss) $ (46.8) $ 19.2 $ 19.8 $ 11.7 $ 3.9
=========== =========== =========== ============= ===========
Per share data:
Income (loss) per common share - basic
Income (loss) from continuing operations $ (0.03) $ 0.31 $ 0.29 $ 0.17 $ 0.75
Net income (loss) $ (0.76) $ 0.31 $ 0.29 $ 0.17 $ 0.06
Income (loss) per common share - diluted
Income (loss) from continuing operations $ (0.03) $ 0.27 $ 0.28 $ 0.17 $ 0.69
Net income (loss) $ (0.76) $ 0.27 $ 0.28 $ 0.17 $ 0.06
=========== =========== =========== ============= ===========
- ----------------------
(1) In the first quarter of 2002 Cott adopted SFAS 142, Goodwill and Other
Intangible Assets. This change in method of valuing goodwill resulted in a $44.8
million non-cash write down of the U.K. business in 2002. For additional
information on the write down see note 6 to the consolidated financial
statements, found on page 72 of this annual report on Form 10-K. The 2002
results have also been revised to reflect the implementation of SFAS 145, which
no longer allows early debt redemption costs to be recorded as extraordinary
items. For additional information about the revision, see note 3 to the
consolidated financial statements, found on page 69 of this annual report on
Form 10-K.
89
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Cott's Chief Executive Officer and Chief Financial Officer have
concluded that its disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14(c) and 15d - 14(c)) 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 significant changes in Cott's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
90
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item regarding directors is
incorporated by reference to, and will be contained in, the "Proposal No. 1 -
Nominees for Election to the Board of Directors" section of the definitive proxy
statement for the 2004 Annual and Special Meeting of Shareowners, which will be
filed within 120 days after January 3, 2004. The information required by this
item regarding audit committee financial expert disclosure is incorporated by
reference to, and will be contained in, the "Proposal No. 2 - Appointment of
Auditors" section of the definitive proxy statement for the 2004 Annual and
Special Meeting of Shareowners. The information required by this item regarding
executive officers appears as the Supplementary Item in Part I.
The audit committee of Cott's board of directors is an "audit
committee" for the purposes of Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended. The members of the audit committee are Philip B.
Livingston (Chairman), W. John Bennett and Serge Gouin.
Cott has adopted a Code of Ethics applicable to its chief executive
officer, chief financial officer and principal accounting officer and certain
other employees. Cott intends to disclose any amendment to, or waiver from, any
provision of the code by posting such information on its Internet website,
www.cott.com.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information required by this item is incorporated by reference to,
and will be contained in, the "Section 16(a) Beneficial Ownership Reporting
Compliance" section of the definitive proxy statement for the 2004 Annual and
Special Meeting of Shareowners, which will be filed within 120 days after
January 3, 2004.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to,
and will be contained in, the "Executive Compensation" section of the definitive
proxy statement for the 2004 Annual and Special Meeting of Shareowners, which
will be filed within 120 days after January 3, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREOWNER MATTERS
The information required by this item is incorporated by reference to,
and will be contained in, the " Principal Shareowners," the "Security Ownership
of Directors and Officers" and "Executive Compensation - Equity Compensation
Plan Information" sections of the definitive proxy statement for the 2004 Annual
and Special Meeting of Shareowners, which will be filed within 120 days after
January 3, 2004.
91
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to,
and will be contained in, the "Proposal No.1 - Nominees for Election to the
Board of Directors - Certain Relationships and Related Transactions" section of
the definitive proxy statement for the 2004 Annual and Special Meeting of
Shareowners, which will be filed within 120 days after January 3, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to,
and will be contained in, the "Proposal No. 2 - Appointment of Auditors" section
of the definitive proxy statement for the 2004 Annual and Special Meeting of
Shareowners.
92
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS:
The consolidated financial statements are included in Item 8 of this
annual report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES:
Report of Independent Auditors
Schedule II -- Valuation and Qualifying Accounts
Schedule III -- Consolidating Financial Statements
All other schedules called for by the applicable SEC accounting
regulations are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
3. EXHIBITS:
NUMBER DESCRIPTION
- ------ -----------
2.1+ Asset Purchase Agreement by and between Concord Beverage
Company and Concord Beverage LP, dated as of October 18, 2000
(incorporated by reference to Exhibit 2.1 to Cott's Form 8-K
dated as of October 18, 2000).
2.2+ Agreement of Sale by and between Concord Beverage Company and
Concord Beverage LP, dated as of October 18, 2000
(incorporated by reference to Exhibit 2.2 to Cott's Form 8-K
dated as of October 18, 2000).
2.3 Acquisition Agreement, dated November 20, 1997, among Cott UK
Limited, Cott Corporation and the several persons listed in
Schedule 1 to the Agreement relating to the acquisition of
Hero Drinks Group (U.K.) Limited (incorporated by reference to
Exhibit 10.2 to Cott's Form 10-K dated March 31, 2000).
2.4 (*) Asset Acquisition and Facility Use Agreement, dated April
13, 2000, between BCB USA Corp. (since renamed "Cott Beverages
Inc.") and Schmalbach-Lubeca Plastic Containers USA, Inc.
relating to the sale of the PET preform blow molding operation
(incorporated by reference to Exhibit 10.1 to Cott's Form 10-Q
dated May 16, 2000).
2.5+ (*) Asset Purchase Agreement by and among Royal Crown Company,
Inc., Cott Corporation and BCB USA Corp. (since renamed "Cott
Beverages Inc.") dated as of June 13, 2001 (incorporated by
reference to Exhibit 2.1 to Cott's Form 8-K dated July 19,
2001).
3.1 Articles of Incorporation of Cott (incorporated by reference
to Exhibit 3.1 to Cott's Form 10-K dated March 31, 2000).
3.2 By-laws of Cott (incorporated by reference to Exhibit 3.2 to
Cott's Form 10-K dated March 8, 2002).
93
NUMBER DESCRIPTION
- ------ -----------
4.1 Subscription Agreement dated as of June 12, 1998 for Cott's
(as issuer) Convertible Participating Voting Second Preferred
Shares, Series 1 (incorporated by reference to Exhibit 4.2 to
Cott's Form 10-K dated March 31, 2000).
4.2 Letter Agreement dated as of November 3, 1999, regarding
standstill provisions between Cott and the Thomas H. Lee
Company (incorporated by reference to Exhibit 4.3 to Cott's
Form 10-K dated March 31, 2000).
4.3 Indenture dated as of December 21, 2001, between Cott (as
issuer) and HSBC Bank USA (as trustee) (incorporated by
reference to Exhibit 4.3 to Cott's Form 10-K dated March 8,
2002).
4.4 Registration Rights Agreement dated as of December 21, 2001,
among Cott Beverages Inc., the Guarantors named therein and
Lehman Brothers Inc., BMO Nesbitt Burns Corp. and CIBC World
Markets Corp. (incorporated by reference to Exhibit 4.4 to
Cott's Form 10-K dated March 8, 2002).
10.1 (*) Termination Agreement, dated November 1, 1999, between
Cott Beverages USA, Inc. (now "Cott Beverages Inc.") and
Premium Beverages Packers, Inc, (incorporated by reference to
Exhibit 10.1 to Cott's Form 10-K dated March 31, 2000).
10.2 (*) Supply Agreement, dated December 21, 1998, between
Wal-Mart Stores, Inc. and Cott Beverages USA, Inc. (now "Cott
Beverages Inc.") (incorporated by reference to Exhibit 10.3 to
Cott's Form 10-K dated March 31, 2000).
10.3 (**) Employment Agreement of Frank E. Weise III dated June 11,
1998 (incorporated by reference to Exhibit 10.5 to Cott's Form
10-K dated March 31, 2000), as amended July 3, 2001
(incorporated by reference to Exhibit 10.2 of Cott's Form 10-Q
for the period ended June 30, 2001), as amended and restated
as of December 10, 2002 (incorporated by reference to Exhibit
10.3 to Cott's Form 10-K dated March 5, 2003).
10.4 (**) Employment Agreement of Mark Benadiba dated October 15,
2003 (incorporated by reference to Exhibit 10.1 to Cott's Form
S-3 filed on January 22, 2004).
10.5 (**) Employment Agreement of Paul R. Richardson dated August
23, 1999 (incorporated by reference to Exhibit 10. 8 to Cott's
Form 10-K dated March 31, 2000), as amended February 18, 2002
(incorporated by reference to Exhibit 10.5 to Cott's Form 10-K
dated March 8, 2002); as amended effective July 18, 2003
(incorporated by reference to Exhibit 10.2 of Cott's Form S-3
filed on January 22, 2004).
10.6 (**) Employment Agreement of Raymond P. Silcock dated August
17, 1998 (incorporated by reference to Exhibit 10.9 to Cott's
Form 10-K dated March 31, 2000).
10.7 (**) Employment Agreement of John K. Sheppard dated December
21, 2001 (incorporated by reference to Exhibit 10.7 to Cott's
Form 10-K dated March 5, 2003) as amended effective July 18,
2003 (incorporated by reference to Exhibit 10.3 of Cott's Form
S-3 filed on January 22, 2004).
94
NUMBER DESCRIPTION
- ------ -----------
10.8 (**) Amended 1999 Executive Incentive Share Compensation Plan
effective January 3, 1999 (incorporated by reference to
Exhibit 10.6 to Cott's Form 10-K dated March 7, 2001).
10.9 (**) 2000 Executive Incentive Share Compensation Plan
Effective January 2, 2001 (incorporated by reference to
Exhibit 10.6 to Cott's Form 10-K dated March 7, 2001).
10.10 (**) 2001 Executive Incentive Share Compensation Plan
Effective January 2, 2002 (incorporated by reference to
Exhibit 10.10 to Cott's Form 10-K dated March 8, 2002).
10.11 (**) 2002 Executive Incentive Share Compensation Plan
effective January 2, 2003 (incorporated by reference to
Exhibit 10.11 to Cott's Form 10-K dated March 17, 2003).
10.12 (**) Second Canadian Employee Share Purchase Plan effective
January 2, 2001 (incorporated by reference to Exhibit 10.6 to
Cott's Form 10-K dated March 7, 2001).
10.13 (*) Credit Agreement dated as of July 19, 2001 between BCB USA
Corp. (since renamed "Cott Beverages Inc."), Cott Corporation
and the several lenders, Lehman Brothers Inc., First Union
National Bank, Bank of Montreal and Lehman Commercial Paper,
Inc. (incorporated by reference to Exhibit 10.1 to Cott's Form
8-K dated July 19, 2001), as amended December 13, 2001 and
December 19, 2001 (incorporated by reference to Exhibit 10.13
to Cott's Form 10-K dated March 8, 2002).
10.14 (*) Supply Agreement executed November 11, 2003, effective
January 1, 2002 between Crown Cork & Seal Company, Inc. and
Cott Corporation (incorporated by reference to Exhibit 14.1 to
Cott's Form 10-Q for the quarter ended September 27, 2003).
10.15 (**) Share Purchase Plan for Non-employee Directors effective
November 1, 2003 (filed herewith).
13.1 Annual Report to Shareowners for the year ended January 3,
2004 (filed herewith).
14.1 Code of ethics (filed herewith).
21.1 List of Subsidiaries of Cott (filed herewith).
23.1 Consent of Independent Auditors (filed herewith).
31.1 Certification of the chairman, and chief executive officer
pursuant to section 302 of the Sarbanes-Oxley Act of 2002 for
the year ended January 3, 2004.
31.2 Certification of the executive vice-president and chief
financial officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 for the year ended January 3, 2004.
32.1 Certification of the chairman, and chief executive officer
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 for
the year ended January 3, 2004.
32.2 Certification of the executive vice-president and chief
financial officer pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 for the year ended January 3, 2004.
95
- ----------
+ In accordance with Item 601(b)(2) of Regulation S-K, the exhibits to this
Exhibit have been omitted and a list briefly describing those exhibits is
contained in the Exhibit. The Registrant will furnish a copy of any omitted
exhibit to the Commission upon request.
(*) Document is subject to request for confidential treatment.
(**) Indicates a management contract or compensatory plan.
4. REPORTS ON FORM 8-K
Cott filed a Current Report on Form 8-K, dated October 16, 2003,
furnishing a press release announcing its financial results for the three and
nine month periods ending September 27, 2003.
Cott filed a Current Report on Form 8-K, dated January 29, 2004,
furnishing a press release that announced its financial results for the year
ended January 3, 2004.
96
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
COTT CORPORATION
Our audits of the consolidated financial statements referred to in our
report dated January 28, 2004 appearing on page 61 of this annual report on Form
10-K also included an audit of the financial statement schedules listed in Item
15(2) of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
January 28, 2004
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COTT CORPORATION
/s/ Frank E. Weise III
Frank E. Weise III
Chairman and Chief Executive Officer
Date: March 16, 2004
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Frank E. Weise III Chairman and Chief Executive Officer Date: March 16, 2004
(Principal Executive Officer)
- -------------------------------------------
Frank E. Weise III
/s/ John K. Sheppard President, Chief Operating Officer and Date: March 16, 2004
Director
- -------------------------------------------
John K. Sheppard
Executive Vice President and Chief Date: March 16, 2004
/s/ Raymond P. Silcock Financial Officer
(Principal Financial Officer)
- -------------------------------------------
Raymond P. Silcock
Vice President, Controller and Date: March 16, 2004
/s/ Tina Dell'Aquila Assistant Secretary
(Principal Accounting Officer)
- -------------------------------------------
Tina Dell'Aquila
/s/ Serge Gouin Director Date: March 15, 2004
- -------------------------------------------
Serge Gouin
98
'
/s/ Colin J. Adair Director Date: March 15, 2004
- -------------------------------------------
Colin J. Adair
/s/ John Bennett Director Date: March 15, 2004
- -------------------------------------------
W. John Bennett
Director Date: March 15, 2004
/s/ Hunter Boll
- -------------------------------------------
C. Hunter Boll
Director Date: March 16, 2004
/s/ Thomas Hagerty
- -------------------------------------------
Thomas M. Hagerty
Director Date: March 15, 2004
/s/ Stephen H. Halper
- -------------------------------------------
Stephen H. Halperin
Director Date: March 15, 2004
/s/ David V. Harkins
- -------------------------------------------
David V. Harkins
/s/ Philip B. Livingston Director Date: March 15, 2004
- -------------------------------------------
Philip B. Livingston
/s/ Christine A. Magee Director Date: March 15, 2004
- -------------------------------------------
Christine A. Magee
/s/ Donald G. Watt Director Date: March 15, 2004
- -------------------------------------------
Donald G. Watt
99
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JANUARY 3, 2004
--------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT COSTS AND CHARGED TO OTHER BALANCE AT END
DESCRIPTION BEGINNING OF YEAR EXPENSES ACCOUNTS DEDUCTION OF YEAR
- --------------------------------------- ----------------- ---------- ----------------- --------- ---------------
RESERVES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY
Allowances for losses on:
Accounts receivables.................... $ (3.4) $ (3.6) $ (0.7) $ 0.9 $ (6.8)
Inventories............................. (6.7) (0.6) (1.3) 1.4 (7.2)
Intangibles and other assets............ (1.1) - 0.5 - (0.6)
------- ------ ------ ----- -------
$ (11.2) $ (4.2) $ (1.5) $ 2.3 $ (14.6)
======= ====== ====== ===== =======
YEAR ENDED DECEMBER 28, 2002
--------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT COSTS AND CHARGED TO OTHER BALANCE AT END
DESCRIPTION BEGINNING OF YEAR EXPENSES ACCOUNTS DEDUCTION OF YEAR
- --------------------------------------- ----------------- ---------- ----------------- --------- ---------------
RESERVES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY
Allowances for losses on:
Accounts receivables.................... $ (5.1) $ (1.6) $ 1.3 $ 2.0 $ (3.4)
Inventories............................. (6.1) (1.5) - 0.9 (6.7)
Intangibles and other assets............ (1.1) - - - (1.1)
------- ------ ----- ----- -------
$ (12.3) $ (3.1) $ 1.3 $ 2.9 $ (11.2)
======= ====== ===== ===== =======
YEAR ENDED DECEMBER 29, 2001
--------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT COSTS AND CHARGED TO OTHER BALANCE AT END
DESCRIPTION BEGINNING OF YEAR EXPENSES ACCOUNTS* DEDUCTION OF YEAR
- --------------------------------------- ----------------- ---------- ----------------- --------- ---------------
RESERVES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY
Allowances for losses on:
Accounts receivables.................... $ (3.3) $ (0.2) $ (2.6) $ 1.0 $ (5.1)
Inventories............................. (5.1) (1.9) - 0.9 (6.1)
Intangibles and other assets............ (1.1) - - - (1.1)
Deferred income taxes................... (10.1) 5.3 - 4.8 -
------- ------ ------- ------ ------
$ (19.6) $ 3.2 $ (2.6) $ 6.7 $(12.3)
======= ====== ======= ====== ======
* includes $(2.9) million from acquisitions
100
SCHEDULE III -- CONSOLIDATING FINANCIAL STATEMENTS
Cott Beverages Inc., a wholly owned subsidiary of Cott, has entered
into financing arrangements that are guaranteed by Cott and certain other wholly
owned subsidiaries (the "Guarantor Subsidiaries"). Such guarantees are full,
unconditional and joint and several.
The following supplemental financial information sets forth on an
unconsolidated basis, balance sheets, statements of income and cash flows for
Cott Corporation, Cott Beverages Inc., Guarantor Subsidiaries and Cott's other
subsidiaries (the "Non-guarantor Subsidiaries"). The balance sheets, statements
of income and cash flows for Cott Beverages Inc. have been adjusted
retroactively to include Concord Beverage Company, Concord Holdings GP and
Concord Holdings LP that were amalgamated with Cott Beverages Inc. on December
29, 2001. The supplemental financial information reflects the investments of
Cott and Cott Beverages Inc. in their respective subsidiaries using the equity
method of accounting.
COTT CORPORATION
CONSOLIDATING STATEMENTS OF INCOME
(in millions of U.S. dollars)
FOR THE YEAR ENDED JANUARY 3, 2004
----------------------------------------------------------------------------------------
COTT COTT BEVERAGES GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ------------ ------------
SALES $ 231.6 $ 937.6 $ 42.4 $ 255.8 $ (49.6) $ 1,417.8
Cost of sales 189.2 744.8 37.3 219.3 (49.6) 1,141.0
----------- ------------ ------------ ----------- --------- ------------
GROSS PROFIT 42.4 192.8 5.1 36.5 - 276.8
Selling, general and
administrative expenses 35.2 63.5 5.2 22.2 - 126.1
Unusual item 2.0 (0.2) - - - 1.8
----------- ------------ ------------ ----------- --------- ------------
OPERATING INCOME (LOSS) 5.2 129.5 (0.1) 14.3 - 148.9
Other expense (income), net 0.7 4.5 (5.4) 0.7 - 0.5
Interest expense (income), net (0.2) 32.7 (4.9) (0.1) - 27.5
Minority interest - - - 3.2 - 3.2
----------- ------------ ------------ ----------- --------- ------------
INCOME BEFORE INCOME TAXES
AND EQUITY INCOME 4.7 92.3 10.2 10.5 - 117.7
Income taxes (1.4) (36.0) - (2.7) - (40.1)
Equity income (loss) 74.1 8.7 59.5 - (142.5) (0.2)
----------- ------------ ------------ ----------- --------- ------------
NET INCOME $ 77.4 $ 65.0 $ 69.7 $ 7.8 $ (142.5) $ 77.4
=========== ============ ============ =========== ========= ============
101
COTT CORPORATION
CONSOLIDATING BALANCE SHEETS
(in millions of U.S. dollars
AS OF JANUARY 3, 2004
---------------------------------------------------------------------------------------
COTT COTT BEVERAGES GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ------------ ------------
ASSETS
Current assets
Cash $ 13.4 $ (0.6) $ 0.1 $ 5.5 $ - $ 18.4
Accounts receivable 46.6 89.2 11.6 41.5 (40.1) 148.8
Inventories 16.3 54.1 4.3 19.7 - 94.4
Prepaid expenses 1.9 1.2 0.8 1.6 - 5.5
----------- ------------ ------------ ----------- --------- ------------
78.2 143.9 16.8 68.3 (40.1) 267.1
Property, plant and equipment 56.1 154.7 21.2 82.3 - 314.3
Goodwill 21.2 46.1 13.5 0.8 - 81.6
Intangibles and other assets 2.2 181.4 12.6 49.6 - 245.8
Due from affiliates 57.5 4.8 87.9 275.4 (425.6) -
Investments in subsidiaries 252.2 76.0 4.8 - (333.0) -
----------- ------------ ------------ ----------- --------- ------------
$ 467.4 $ 606.9 $ 156.8 $ 476.4 $ (798.7) $ 908.8
=========== ============ ============ =========== ========= ============
LIABILITIES
Current liabilities
Short-term borrowings $ - $ 72.2 $ 1.0 $ 4.9 $ - $ 78.1
Current maturities of
long-term debt - 1.1 - 2.2 - 3.3
Accounts payable and
accrued liabilities 47.0 80.9 6.4 46.3 (40.1) 140.5
----------- ------------ ------------ ----------- --------- ------------
47.0 154.2 7.4 53.4 (40.1) 221.9
Long-term debt - 275.7 - - - 275.7
Due to affiliates 65.9 91.1 210.5 58.1 (425.6) -
Deferred income taxes 9.4 24.4 2.4 4.3 - 40.5
----------- ------------ ------------ ----------- --------- ------------
122.3 545.4 220.3 115.8 (465.7) 538.1
----------- ------------ ------------ ----------- --------- ------------
Minority interest - - - 25.6 - 25.6
SHAREOWNERS' EQUITY
Capital stock
Common shares 267.9 275.8 137.7 451.4 (864.9) 267.9
Retained earnings (deficit) 83.3 (214.3) (201.2) (94.1) 509.6 83.3
Accumulated other
comprehensive income (6.1) - - (22.3) 22.3 (6.1)
----------- ------------ ------------ ----------- --------- ------------
345.1 61.5 (63.5) 335.0 (333.0) 345.1
----------- ------------ ------------ ----------- --------- ------------
$ 467.4 $ 606.9 $ 156.8 $ 476.4 $ (798.7) $ 908.8
=========== ============ ============ =========== ========= ============
102
COTT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
FOR THE YEAR ENDED JANUARY 3, 2004
---------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ------------ ------------
OPERATING ACTIVITIES
Net income $ 77.4 $ 65.0 $ 69.7 $ 7.8 $ (142.5) $ 77.4
Depreciation and amortization 8.4 24.7 5.8 12.1 - 51.0
Amortization of financing fees - 1.7 - - - 1.7
Deferred income taxes 1.2 5.8 - 2.6 - 9.6
Minority interest - - - 3.2 - 3.2
Equity income, net of
distributions (74.1) (4.1) (46.5) - 124.9 0.2
Other non-cash items 2.8 (1.3) - 1.5 0.4 3.4
Net change in non-cash
working capital 4.2 8.2 (9.1) (6.7) (0.4) (3.8)
----------- ------------ ----------- ----------- ---------- ------------
Cash provided by operating
activities 19.9 100.0 19.9 20.5 (17.6) 142.7
----------- ------------ ----------- ----------- ---------- ------------
INVESTING ACTIVITIES
Additions to property, plant
and equipment (10.8) (21.5) (2.5) (14.3) - (49.1)
Acquisitions - (50.0) (0.3) 0.5 - (49.8)
Notes receivable (2.5) - - - - (2.5)
Advances to affiliates (5.2) (0.1) (19.7) (5.8) 30.8 -
Investment in subsidiaries (18.0) - - - 18.0 -
Other 6.3 (6.5) 0.2 (0.4) - (0.4)
----------- ------------ ----------- ----------- ---------- ------------
Cash used in investing
activities (30.2) (78.1) (22.3) (20.0) 48.8 (101.8)
----------- ------------ ----------- ----------- ---------- ------------
FINANCING ACTIVITIES
Payments of long-term debt - (89.5) - (0.7) - (90.2)
Short-term borrowings (2.6) 55.6 1.0 1.8 - 55.8
Advances from affiliates 13.7 24.5 (13.2) 5.8 (30.8) -
Distributions to subsidiary
minority shareowner - - - (4.1) - (4.1)
Issue of common shares 12.3 - 15.0 3.0 (18.0) 12.3
Dividends paid - (13.1) - (4.5) 17.6 -
Other - - (0.4) - - (0.4)
----------- ------------ ----------- ----------- ---------- ------------
Cash provided by (used in)
financing activities 23.4 (22.5) 2.4 1.3 (31.2) (26.6)
----------- ------------ ----------- ----------- ---------- ------------
Effect of exchange rate
changes on cash 0.3 - - 0.5 - 0.8
----------- ------------ ----------- ----------- ---------- ------------
NET INCREASE (DECREASE) IN
CASH 13.4 (0.6) - 2.3 - 15.1
CASH, BEGINNING OF YEAR - - 0.1 3.2 - 3.3
----------- ------------ ----------- ----------- ---------- ------------
CASH, END OF YEAR $ 13.4 $ (0.6) $ 0.1 $ 5.5 $ - $ 18.4
=========== ============ =========== =========== ========== ============
103
COTT CORPORATION
CONSOLIDATING STATEMENTS OF INCOME
(in millions of U.S. dollars)
FOR THE YEAR ENDED DECEMBER 28, 2002
--------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ------------ ------------
SALES $ 198.8 $ 808.1 $ 52.1 $ 201.2 $ (61.6) $ 1,198.6
Cost of sales 161.4 639.6 49.5 177.2 (62.0) 965.7
----------- ------------ ------------ ----------- --------- ------------
GROSS PROFIT 37.4 168.5 2.6 24.0 0.4 232.9
Selling, general and
administrative expenses 29.6 56.5 4.0 20.1 - 110.2
----------- ------------ ------------ ----------- --------- ------------
OPERATING INCOME (LOSS) 7.8 112.0 (1.4) 3.9 0.4 122.7
Other expense (income), net 24.1 - 65.9 (9.3) (66.7) 14.0
Interest expense (income), net (1.9) 32.8 1.2 0.8 - 32.9
Minority interest - - - 2.1 - 2.1
----------- ------------ ------------ ----------- --------- ------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY INCOME
(LOSS) (14.4) 79.2 (68.5) 10.3 67.1 73.7
Income taxes 4.0 (25.4) - (0.1) (2.9) (24.4)
Equity income (loss) 59.1 0.9 55.9 - (116.5) (0.6)
----------- ------------ ------------ ----------- --------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 48.7 54.7 (12.6) 10.2 (52.3) 48.7
Cumulative effect of change
in accounting principle - - - (44.8) - (44.8)
Equity loss on cumulative
effect of change in
accounting principle (44.8) - - - 44.8 -
----------- ------------ ------------ ----------- --------- ------------
NET INCOME (LOSS) $ 3.9 $ 54.7 $ (12.6) $ (34.6) $ (7.5) $ 3.9
=========== ============ ============ =========== ========= ============
104
COTT CORPORATION
CONSOLIDATING BALANCE SHEETS
(in millions of U.S. dollars)
AS OF DECEMBER 28, 2002
--------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ------------ ------------
ASSETS
Current assets
Cash $ - $ - $ 0.1 $ 3.2 $ - $ 3.3
Accounts receivable 36.7 84.3 4.4 32.7 (21.9) 136.2
Inventories 15.1 43.9 5.7 13.3 - 78.0
Prepaid expenses 1.4 1.3 0.7 3.8 - 7.2
----------- ------------ ------------ ----------- --------- ------------
53.2 129.5 10.9 53.0 (21.9) 224.7
Property, plant and equipment 49.7 138.3 23.7 61.3 - 273.0
Goodwill 17.5 46.0 13.5 - - 77.0
Intangibles and other assets 7.4 134.8 13.0 55.5 - 210.7
Due from affiliates 46.1 0.5 68.2 268.1 (382.9) -
Investments in subsidiaries 148.4 79.2 (41.6) - (186.0) -
----------- ------------ ------------ ----------- --------- ------------
$ 322.3 $ 528.3 $ 87.7 $ 437.9 $ (590.8) $ 785.4
=========== ============ ============ =========== ========= ============
LIABILITIES
Current liabilities
Short-term borrowings $ 2.3 $ 16.5 $ - $ 2.5 $ - $ 21.3
Current maturities of
long-term debt - 16.5 - - - 16.5
Accounts payable and
accrued liabilities 40.0 65.7 9.4 36.8 (21.9) 130.0
----------- ------------ ------------ ----------- --------- ------------
42.3 98.7 9.4 39.3 (21.9) 167.8
Long-term debt - 339.3 - - - 339.3
Due to affiliates 50.6 66.6 219.6 46.1 (382.9) -
Deferred income taxes 11.2 14.0 6.9 1.4 - 33.5
----------- ------------ ------------ ----------- --------- ------------
104.1 518.6 235.9 86.8 (404.8) 540.6
----------- ------------ ------------ ----------- --------- ------------
Minority interest - - - 26.6 - 26.6
SHAREOWNERS' EQUITY
Capital stock
Common shares 248.1 275.8 122.7 448.4 (846.9) 248.1
Retained earnings (deficit) 5.9 (266.1) (270.9) (97.4) 634.4 5.9
Accumulated other
comprehensive income (35.8) - - (26.5) 26.5 (35.8)
----------- ------------ ------------ ----------- --------- ------------
218.2 9.7 (148.2) 324.5 (186.0) 218.2
----------- ------------ ------------ ----------- --------- ------------
$ 322.3 $ 528.3 $ 87.7 $ 437.9 $ (590.8) $ 785.4
=========== ============ ============ =========== ========= ============
105
COTT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
FOR THE YEAR ENDED DECEMBER 28, 2002
--------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ------------ ------------
OPERATING ACTIVITIES
Net Income (loss) $ 3.9 $ 54.7 $ (12.6) $ (34.6) $ (7.5) $ 3.9
Depreciation and amortization 6.7 21.9 4.7 10.8 - 44.1
Amortization of financing fees - 1.7 - - - 1.7
Deferred income taxes (4.2) 9.3 - 0.2 - 5.3
Minority interest - - - 2.1 - 2.1
Equity income, net of
distributions (58.6) 3.2 6.4 - 49.6 0.6
Gain on disposal of investment (1.3) - - - - (1.3)
Cumulative effect of
accounting change 44.8 - - 44.8 (44.8) 44.8
Other non-cash items 15.7 (1.2) 66.0 (8.6) (66.0) 5.9
Net change in non-cash
working capital (17.2) (15.3) 3.5 10.7 1.8 (16.5)
----------- ------------ ------------ ----------- ---------- ------------
Cash provided by (used in)
operating activities (10.2) 74.3 68.0 25.4 (66.9) 90.6
----------- ------------ ------------ ----------- ---------- ------------
INVESTING ACTIVITIES
Additions to property, plant
and equipment (11.5) (21.4) (2.0) (6.3) - (41.2)
Acquisitions (1.8) - (26.8) (2.0) - (30.6)
Advances to affiliates (5.4) (0.5) (54.3) - 60.2 -
Investment in subsidiaries (7.9) (27.0) (10.0) - 44.9 -
Other 2.1 (2.2) 0.3 (0.7) - (0.5)
----------- ------------ ------------ ----------- ---------- ------------
Cash used in investing
activities (24.5) (51.1) (92.8) (9.0) 105.1 (72.3)
----------- ------------ ------------ ----------- ---------- ------------
FINANCING ACTIVITIES
Payments of long-term debt (276.4) (10.8) - - - (287.2)
Payments of deferred
consideration of
acquisition - - - (19.5) - (19.5)
Short-term borrowings 0.7 (16.0) - 2.4 - (12.9)
Increase in long-term debt - 1.0 - - - 1.0
Decrease in cash in trust 297.3 - - - - 297.3
Advances from affiliates 6.9 54.3 (1.5) 0.5 (60.2) -
Distributions to subsidiary
minority shareowner - - - (3.9) - (3.9)
Issue of common shares 5.8 10.0 27.0 7.9 (44.9) 5.8
Dividends paid - (62.4) (0.4) (4.1) 66.9 -
Other - - (0.2) - - (0.2)
----------- ------------ ----------- ----------- ---------- ------------
Cash provided by (used in)
financing activities 34.3 (23.9) 24.9 (16.7) (38.2) (19.6)
----------- ------------ ----------- ----------- ---------- ------------
Effect of exchange rate
changes on cash 0.4 - - 0.3 - 0.7
----------- ------------ ----------- ----------- ---------- ------------
NET INCREASE (DECREASE) IN
CASH - (0.7) 0.1 - - (0.6)
CASH, BEGINNING OF YEAR - 0.7 - 3.2 - 3.9
----------- ------------ ----------- ----------- ---------- ------------
CASH, END OF YEAR $ - $ - $ 0.1 $ 3.2 $ - $ 3.3
=========== ============ =========== =========== ========== ============
106
COTT CORPORATION
CONSOLIDATING STATEMENTS OF INCOME
(in millions of U.S. dollars)
FOR THE YEAR ENDED DECEMBER 29, 2001
--------------------------------------------------------------------------------------
COTT COTT BEVERAGES GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ------------ ------------
SALES $ 197.8 $ 775.4 $ - $ 153.0 $ (36.1) $ 1,090.1
Cost of sales 162.1 638.7 - 139.0 (37.1) 902.7
----------- ------------ ------------ ----------- ---------- -----------
GROSS PROFIT 35.7 136.7 - 14.0 1.0 187.4
Selling, general and
administrative expenses 22.3 54.9 0.2 16.7 - 94.1
Unusual items (0.1) - - 0.1 - -
----------- ------------ ------------ ----------- ---------- -----------
OPERATING INCOME (LOSS) 13.5 81.8 (0.2) (2.8) 1.0 93.3
Other income, net (0.2) (0.1) - (2.1) - (2.4)
Interest expense, net 5.4 5.1 20.4 1.3 - 32.2
Minority interest - - - 0.4 - 0.4
----------- ------------ ------------ ----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY INCOME 8.3 76.8 (20.6) (2.4) 1.0 63.1
Income taxes (1.0) (22.7) - 2.2 (1.7) (23.2)
Equity income 32.6 0.4 54.5 - (87.5) -
----------- ------------ ------------ ----------- ---------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 39.9 54.5 33.9 (0.2) (88.2) 39.9
Extraordinary item - - - - - -
----------- ------------ ------------ ----------- ---------- -----------
NET INCOME (LOSS) $ 39.9 $ 54.5 $ 33.9 $ (0.2) $ (88.2) $ 39.9
=========== ============ =========== =========== ========== ===========
107
COTT CORPORATION
CONSOLIDATING BALANCE SHEETS
(in millions of U.S. dollars)
AS OF DECEMBER 29, 2001
---------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ------------ ------------
ASSETS
Current assets
Cash $ - $ 0.7 $ - $ 3.2 $ - $ 3.9
Cash in trust 297.3 - - - - 297.3
Accounts receivable 28.7 75.1 0.4 27.4 (9.6) 122.0
Inventories 11.7 46.0 - 10.8 (0.3) 68.2
Prepaid expenses 1.4 1.4 - 0.6 - 3.4
----------- ----------- ----------- ---------- -------- -----------
339.1 123.2 0.4 42.0 (9.9) 494.8
Property, plant and equipment 49.3 138.6 - 59.0 - 246.9
Goodwill 17.2 46.7 5.1 45.1 - 114.1
Intangibles and other assets 11.2 140.3 - 58.1 - 209.6
Due from affiliates 251.1 284.0 297.9 42.3 (875.3) -
Investments in subsidiaries 190.6 41.7 279.5 - (511.8) -
----------- ----------- ----------- ---------- -------- -----------
$ 858.5 $ 774.5 $ 582.9 $ 246.5 $(1,397.0) $ 1,065.4
=========== =========== =========== =========== ========= ===========
LIABILITIES
Current liabilities
Short-term borrowings $ 1.7 $ 32.5 $ - $ - $ - $ 34.2
Current maturities of
long-term debt 276.4 5.4 - - - 281.8
Accounts payable and
accrued liabilities 39.8 66.1 0.2 26.6 (9.6) 123.1
----------- ----------- ----------- ---------- -------- -----------
317.9 104.0 0.2 26.6 (9.6) 439.1
Long-term debt - 359.4 - 0.1 - 359.5
Due to affiliates 328.0 12.3 497.7 37.3 (875.3) -
Deferred income taxes 14.9 7.4 - 1.1 0.8 24.2
Other liabilities - - - 16.8 - 16.8
----------- ----------- ----------- ---------- -------- -----------
660.8 483.1 497.9 81.9 (884.1) 839.6
----------- ----------- ----------- ---------- -------- -----------
Minority interest - - - 28.1 - 28.1
SHAREOWNERS' EQUITY
Capital stock
Common shares 199.4 265.8 59.0 214.4 (539.2) 199.4
Second preferred shares,
Series 1 40.0 - - - - 40.0
----------- ----------- ----------- ---------- -------- -----------
239.4 265.8 59.0 214.4 (539.2) 239.4
Retained earnings (deficit) 2.0 25.6 26.0 (58.7) 7.1 2.0
Accumulated other
comprehensive income (43.7) - - (19.2) 19.2 (43.7)
----------- ----------- ----------- ---------- -------- -----------
197.7 291.4 85.0 136.5 (512.9) 197.7
----------- ----------- ----------- ---------- -------- -----------
$ 858.5 $ 774.5 $ 582.9 $ 246.5 $(1,397.0) $ 1,065.4
=========== =========== =========== ========== ========= ===========
108
COTT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
FOR THE YEAR ENDED DECEMBER 29, 2001
---------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------- -------------- ------------ ------------- ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 39.9 $ 52.2 $ 31.6 $ (0.2) $ (83.6) $ 39.9
Depreciation and amortization 7.0 24.4 0.2 8.6 - 40.2
Amortization of financing fees 1.0 0.9 - - - 1.9
Deferred income taxes 0.8 11.4 - (2.2) (0.7) 9.3
Minority interest - - - 0.4 - 0.4
Equity income, net of
distributions (31.5) (0.4) (28.5) - 60.4 -
Other non-cash items 0.8 (1.2) - (0.5) 0.2 (0.7)
Net change in non-cash
working capital 7.8 6.0 (3.0) (7.3) (1.1) 2.4
----------- ------------ ----------- ----------- ---------- -----------
Cash provided by (used in)
operating activities 25.8 93.3 0.3 (1.2) (24.8) 93.4
----------- ------------ ----------- ----------- ---------- -----------
INVESTING ACTIVITIES
Additions to property, plant
and equipment (8.3) (23.4) - (4.1) - (35.8)
Acquisitions - (97.6) - (30.0) - (127.6)
Proceeds from disposal of
business - - - 3.5 - 3.5
Investment in subsidiaries 14.8 (29.5) (15.8) - 30.5 -
Advances to affiliates (20.9) (283.9) (283.6) 15.6 572.8 -
Other (6.1) 11.4 - (4.0) - 1.3
----------- ------------ ----------- ----------- ---------- -----------
Cash used in investing
activities (20.5) (423.0) (299.4) (19.0) 603.3 (158.6)
----------- ------------ ----------- ----------- ---------- -----------
FINANCING ACTIVITIES
Issue of long-term debt - 367.4 - - - 367.4
Increase in cash in trust (297.3) - - - - (297.3)
Payments of long-term debt (2.5) (4.4) - (0.3) - (7.2)
Short-term borrowings 1.6 (4.1) -. - - (2.5)
Debt issue costs - (5.0) - - - (5.0)
Advances from affiliates 283.6 (15.6) 299.7 5.1 (572.8) -
Distributions to subsidiary
minority shareowner - - - (0.7) - (0.7)
Issue of common shares 8.0 15.8 - 29.5 (45.3) 8.0
Redemption of common shares - - - (14.8) 14.8 -
Dividends paid - (23.7) - (1.1) 24.8 -
----------- ------------ ----------- ----------- ---------- -----------
Cash provided by (used in)
financing activities (6.6) 330.4 299.7 17.7 (578.5) 62.7
----------- ------------ ----------- ----------- ---------- -----------
Net cash used in discontinued
operations - - (0.6) - - (0.6)
Effect of exchange rate
changes on cash (0.2) - - - - (0.2)
----------- ------------ ----------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN
CASH (1.5) 0.7 - (2.5) - (3.3)
CASH, BEGINNING OF YEAR 1.5 - - 5.7 - 7.2
----------- ------------ ----------- ----------- ---------- -----------
CASH, END OF YEAR $ - $ 0.7 $ - $ 3.2 $ - $ 3.9
=========== ============ =========== =========== ========== ===========
109