United States
Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended January 1, 2005
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________ to _____
Commission file number 000-19914
COTT CORPORATION
(Exact name of registrant as specified in its charter)
CANADA NONE
(State or Other Jurisdiction of Incorporation (IRS Employer Identification No.)
or Organization)
207 QUEEN'S QUAY WEST, SUITE 340,
TORONTO, ONTARIO M5J 1A7
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (416) 203-3898
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------------------ -----------------------------------------
COMMON SHARES WITHOUT NOMINAL OR PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. [ ]
Indicate by check mark whether the registrant is 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 July 3, 2004 (based on the closing sale price of the
registrant's common stock as reported on the New York Stock Exchange on July 2,
2004) was $2,290,445,447.
(Reference is made to the last paragraph of Part II, Item 5 for a statement of
assumptions upon which the calculation is made.)
The number of shares outstanding of the registrant's common stock as of February
28, 2005 was 71,524,720.
22
TABLE OF CONTENTS
<Table>
<Caption>
Page
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PART I
Item 1 Business.................................................................................. 26
Item 2 Properties................................................................................ 30
Item 3 Legal Proceedings......................................................................... 31
Item 4 Submission of Matters to a Vote of Security Holders....................................... 31
Supplemental Item Part I - Executive Officers of Cott.................................... 32
PART II
Item 5 Market for the Registrant's Common Equity and Related Shareowner Matters ................. 33
Item 6 Selected Financial Data .................................................................. 35
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .... 36
Item 7A Quantitative and Qualitative Disclosures about Market Risk ............................... 48
Item 8 Financial Statements and Supplementary Data 49
Report of Management................................................................. 49
Report of Independent Registered Public Accounting Firm.............................. 50
Consolidated Statements of Income for fiscal years ended 2004, 2003 and 2002......... 52
Consolidated Balance Sheets as of the fiscal years ended 2004 and 2003............... 53
Consolidated Statements of Shareowners' Equity for the fiscal years ended 2004, 2003
and 2002.......................................................................... 54
Consolidated Statements of Cash Flows for the fiscal years ended 2004, 2003 and 2002. 55
Notes to the Consolidated Financial Statements for the fiscal years ended 2004, 2003
and 2002.......................................................................... 56
Quarterly Financial Information...................................................... 72
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 73
Item 9A Controls and Procedures................................................................... 73
PART III
Item 10 Directors and Executive Officers.......................................................... 74
Item 11 Executive Compensation.................................................................... 74
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Shareowner Matters............................................... 75
Item 13 Certain Relationships and Related Transactions............................................ 75
Item 14 Principal Accountant Fees and Services ................................................... 75
PART IV
Item 15 Exhibits and Financial Statement Schedules ............................................... 76
</Table>
- ------------------------------------------------------------------------------
Our consolidated financial statements are prepared in accordance with
United States ("U.S.") generally accepted accounting principles ("GAAP") in U.S.
dollars. Unless otherwise indicated, all amounts in this report are in U.S.
dollars and U.S. GAAP.
Any reference to 2004, 2003 and 2002 corresponds to the year-end dates
January 1, 2005, January 3, 2004 and December 28, 2002 respectively.
23
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of our definitive proxy statement for the 2005 Annual Meeting of
Shareowners, to be filed within 120 days of January 1, 2005, are incorporated by
reference in Part III.
Such report, except for the parts therein which have been specifically
incorporated by reference, shall not be deemed "filed" for the purposes of this
report on Form 10-K.
FORWARD-LOOKING
STATEMENTS
In addition to historical information, this report and the reports and documents
incorporated by reference in this report contain statements relating to future
events and our future results. These statements are "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995 and include, but
are not limited to, statements that relate to projections of sales, earnings,
earnings per share, cash flows, capital expenditures or other financial items,
discussions of estimated future revenue enhancements and cost savings. These
statements also relate to our business strategy, goals and expectations
concerning our market position, future operations, margins, profitability,
liquidity and capital resources. Generally, words such as "anticipate,"
"believe," "continue," "could," "estimate," "expect," "intend," "may," "plan,"
"predict,"" project," "should" and similar terms and phrases are used to
identify forward-looking statements in this report and in the documents
incorporated in this report by reference. These forward-looking statements are
made as of the date of this report.
Although we believe the assumptions underlying these forward-looking
statements are reasonable, any of these assumptions could prove to be inaccurate
and, as a result, the forward-looking statements based on these assumptions
could be incorrect. Our operations involve risks and uncertainties, many of
which are outside of our control, and any one or any combination of these risks
and uncertainties could also affect whether the forward-looking statements
ultimately prove to be correct.
24
The following are some of the factors that could affect our financial
performance, including but not limited to sales, earnings and cash flows, or
could cause actual results to differ materially from estimates contained in or
underlying the forward-looking statements:
- - loss of key customers, particularly Wal-Mart, and the commitment of our
retailer brand beverage customers to their own retailer brand beverage
programs;
- - increases in competitor consolidations and other market-place competition,
particularly among branded beverage products;
- - our ability to identify acquisition and alliance candidates and to
integrate into our operations the businesses and product lines that we
acquire or become allied with;
- - our ability to secure additional production capacity either through
acquisitions or third party manufacturing arrangements;
- - our ability to restore plant efficiencies and lower logistics costs;
- - fluctuations in the cost and availability of beverage ingredients and
packaging supplies, and our ability to maintain favorable arrangements and
relationships with our suppliers;
- - unseasonably cold or wet weather, which could reduce demand for our
beverages;
- - our ability to protect the intellectual property inherent in new and
existing products;
- - adverse rulings, judgments or settlements in our existing litigation, and
the possibility that additional litigation will be brought against us;
- - product recalls or changes in or increased enforcement of the laws and
regulations that affect our business;
- - currency fluctuations that adversely affect the exchange between the U.S.
dollar on the one hand and the pound sterling, the Canadian dollar and
other currencies on the other;
- - changes in tax laws and interpretations of tax laws;
- - changes in consumer tastes and preferences and market demand for new and
existing products;
- - interruption in transportation systems, labor strikes, work stoppages or
other interruptions or difficulties in the employment of labor or
transportation in our markets; and
- - changes in general economic and business conditions.
Many of these factors are described in greater detail in this report and
in other filings that we make with the U.S. Securities and Exchange Commission
("SEC") and the Canadian securities regulatory authorities. We undertake no
obligation to update any information contained in this report or to publicly
release the results of any revisions to forward-looking statements to reflect
events or circumstances of which we may become aware after the date of this
report. Undue reliance should not be placed on forward-looking statements.
All future written and oral forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by the
foregoing.
25
PART I
ITEM 1.
BUSINESS
OUR COMPANY
We operate in the U.S. through an indirect wholly owned subsidiary, Cott
Beverages Inc., in Canada through the Cott Beverages Canada division, in the
U.K. 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.
We incorporated in 1955 and are governed by the Canada Business
Corporation Act. Our registered Canadian office is located at 333 Avro Avenue,
Pointe-Claire, Quebec, Canada H9R 5W3 and our principal executive offices are
located at 207 Queen's Quay West, suite 340, Toronto, Ontario, Canada M5J 1A7.
PRINCIPAL MARKETS AND PRODUCTS
We are the leading supplier of premium quality retailer brand carbonated soft
drinks in the U.S., Canada and the U.K. Based on industry information, we
estimate that we produce (either directly or through third party manufacturers
with whom we have co-packing agreements) approximately 68% of all private label
carbonated soft drinks sold in the U.S., 38% of those sold in the U.K. and 97%
of those sold in Canada. In addition to carbonated soft drinks, our product
lines include clear, sparkling flavored beverages, juices and juice-based
products, bottled water, energy drinks and iced teas. During the year ended
January 1, 2005, approximately 93% of all of the beverages we sell in 8-ounce
equivalents, in the U.S., Canada and the U.K. are under customer controlled
retailer brands, and the remainder are sold under brand names that we either own
or license from others. Sales of carbonated soft drinks and flavored sparkling
waters represented approximately 87% of beverages sold in 8-ounce equivalents.
In recent years, we expanded our business through acquisitions and growth
with key customers. We believe that opportunities exist to increase sales of
beverages in our markets by leveraging existing customer relationships,
obtaining new customers, exploring new channels of distribution and introducing
new products.
During the past five years, we expanded and strengthened our production
and distribution capabilities in the U.S., Canada, U.K. and Mexico through a
series of acquisitions totaling $316.0 million.
RECENT ACQUISITIONS
In March 2004, we acquired certain of the assets of The Cardinal Companies of
Elizabethtown, LLC ("Cardinal") located in Kentucky for $17.8 million and in
October 2004 we acquired certain of the assets of Metro Beverage Co. ("Metro"),
a soft drink manufacturer based in Columbus, Ohio for $16.8 million. These
acquisitions increase production capacity to help address our U.S. manufacturing
requirements.
FINANCIAL INFORMATION ABOUT SEGMENTS
For financial information about segments and geographic areas, see note 24 to
the consolidated financial statements, found on pages 70 to 71 of this Annual
Report on Form 10-K.
MANUFACTURING AND DISTRIBUTION
Approximately 80% of our beverages produced in the U.S. were manufactured in
facilities that we or third party manufactures, with whom we have long-term
co-packing agreements, either own or lease. We manufacture virtually all of our
Canadian beverages and all of our U.K. and Mexican
26
beverages in facilities that we either own or lease. We rely on third parties to
produce and distribute products in areas or markets where we do not have our own
production facilities, such as continental Europe, or when additional production
capacity is required.
Our products are either picked up by customers at our facilities or
delivered by us, a common carrier, or third party distributors to either the
customer's distribution centers or directly to retail locations.
We may be liable if the consumption of any of our products causes injury,
illness or death. We also may be required to recall some of our products if they
become contaminated or are damaged or mislabeled. A significant unfavorable
product liability judgment or a widespread product recall could have a material
adverse effect on our results of operations or cash flows. As of February 28,
2005, we were insured against product liability claims with a limitation of $85
million and a $0.2 million deductible per occurrence with an annual aggregate of
$0.5 million. We are also insured against product recalls with a limitation of
$10 million and a $2 million deductible. We believe that our insurance coverage
is adequate.
INGREDIENTS AND PACKAGING SUPPLIES
The principal raw materials required to produce our products are polyethylene
terephthalate ("PET") bottles, caps and PET performs, cans and lids, labels,
cartons and trays, concentrates, sweeteners and carbon dioxide.
We typically enter into annual supply arrangements rather than long-term
contracts with our suppliers, which means that our suppliers are obligated to
continue to supply us with materials for one-year periods, at the end of which
we must either renegotiate the contracts with our incumbent suppliers or we
would be required to find an alternative source for supply. With respect to some
of our key packaging supplies, such as aluminum cans and lids and PET bottles,
and some of our key ingredients, such as artificial sweeteners, we have entered
into long-term supply agreements, the terms of which range from 1 to 7 years,
and therefore we are assured for a supply of those key packaging supplies and
ingredients for a longer period of time. During 2004, we extended our supply
contract with Crown Cork & Seal USA, Inc. ("CCS") from its original expiration
date of December 31, 2006 to December 31, 2011. The contract provides that CCS
will supply all of our aluminum can and end requirements worldwide, subject to
certain exceptions. The contract contains a pricing mechanism for certain
materials, standard representations, warranties, indemnities and termination
events, including termination events related to bankruptcy or insolvency of
either party. As with our annual supply contracts, we must either renegotiate
these long-term supply agreements with the incumbent suppliers when they expire
or find alternative sources for supply.
We rely upon our ongoing relationships with our key suppliers to support
our operations. We believe that we will be able to either renegotiate contracts
with these suppliers when they expire or, alternatively, if we are unable to
renegotiate contracts with our key suppliers, we believe that we could replace
them. We could, however, incur higher ingredient and packaging supply costs in
renegotiating contracts with existing suppliers or replacing those suppliers or
we could experience temporary dislocations in our ability to deliver products to
our customers, either of which could have a material adverse effect on our
results of operations.
We do not believe that any of the ingredients or packaging materials that
are used to produce or package our products are currently in short supply,
although the supply of specific ingredients and packaging materials could be
adversely affected by economic factors such as industry consolidation, energy
shortages, governmental controls, labor disputes and other factors.
The majority of our ingredient and packaging supply contracts allow our
suppliers to alter the costs they charge us based on changes in the costs of the
underlying commodities that are used to produce them. Aluminum for cans, resin
for PET bottles and high fructose corn syrup for sweeteners are examples of
these underlying commodities. In addition, the contracts for certain of our
ingredients and packaging materials permit our suppliers to increase the costs
they charge us based on increases in their cost of converting those underlying
commodities into the materials that we purchase. In certain cases those
increases are subject to negotiated limits and in other cases, they are not.
These changes in the prices that we pay for ingredients and packaging materials
occur at times that vary by product and supplier, but are principally on
semi-annual and annual bases. Accordingly, we bear the risk of increases in the
costs of these ingredients and packaging materials, including the underlying
costs of the commodities that comprise them and, to some extent, the costs of
converting those commodities into finished products. We do not use derivatives
to manage this risk. If the cost of these ingredients or packaging materials
increase, we may be unable to pass these costs along to our customers through
adjustments to the prices we charge. If we cannot pass on these increases to our
customers on a timely basis, they could have a material adverse effect on our
results of operations.
27
TRADE SECRETS, TRADEMARKS AND LICENSES
We sell the majority of our beverages to retailer brand customers who own the
trademarks associated with those products. We are the registered owner of
various trademarks that are important to our worldwide business, including
Cott(TM) in North America, as well as Stars & Stripes(TM), Vess(TM),
Vintage(TM), Top Pop(TM), and City Club(TM) in the U.S., Red Rooster(TM) and Ben
Shaws(TM) in the U.K. and RC(TM) in more than 100 countries outside of North
America. We are licensed to use certain trademarks, including Chubby(TM) in
Canada and the U. S. and RC(TM) in certain regions of Canada, Carters(TM) in the
U.K. and Jarritos(TM) in Mexico. Trademarks are generally of indefinite duration
and the licenses to which we are a party are of varying terms, certain of which
are perpetual.
Our success depends in part on our intellectual property which includes
trade secrets in the form of concentrate formulas for our beverages and
trademarks for the names of the beverages we sell. We either own the trademarks
for the products that we sell or license them from our retailer brand customers
and other third parties. To protect this intellectual property, we rely
principally on 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". We also emphasize
correct use of our trademarks and will vigorously pursue any party that
infringes on our trademarks, using all available legal remedies.
We may not be successful in protecting our intellectual property for a
number of reasons, including:
- - competitors may independently develop intellectual property that is
similar to or better than ours;
- - employees, consultants 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 our
intellectual property rights; and
- - trademarks may be challenged, invalidated or circumvented.
If we are unable to protect our intellectual property, it would weaken our
competitive position, and we could face significant expense to protect or
enforce our intellectual property rights.
If we are found to infringe on the intellectual property rights of others,
we could incur significant damages, be enjoined from continuing to manufacture,
market or use the affected product, or be required to obtain a license to
continue manufacturing or using the affected product. A license could be very
expensive to obtain or may not be available at all. Similarly, changing products
or processes to avoid infringing the rights of others may be costly or
impracticable.
Occasionally, third parties may assert that we are, or may be, infringing
on or misappropriating their intellectual property rights. In these cases, we
intend to defend against claims or negotiate licenses where we consider these
actions appropriate. Intellectual property
cases are uncertain and involve complex legal and factual questions. If we
become involved in this type of litigation, it could consume significant
resources and divert our attention from business operations.
SEASONALITY OF SALES
Sales of our beverages are seasonal, with the highest sales volumes generally
occurring in the second and third fiscal quarters, which correspond to the
warmer months of the year in our major markets.
CUSTOMERS
A significant portion of our sales are concentrated in a small number of
customers. Our customers include many large national and regional grocery,
mass-merchandise, drugstore, wholesale and convenience store chains in our core
markets of the U.S., Canada and the U.K. For the year ended January 1, 2005,
sales to Wal-Mart Stores, Inc. and its affiliates (collectively, "Wal-Mart")
accounted for approximately 40% of total sales. Wal-Mart was the only customer
that accounted for more that 10% of our total sales in that period. For the same
period, our top ten customers accounted for approximately 68% of total sales. We
expect that sales of our products to a limited number of customers will continue
to account for a high percentage of sales for the foreseeable future. The loss
of Wal-Mart, or customers which in the aggregate represent a significant portion
of our sales, would have a material adverse effect on our operating results and
cash flows.
28
COMPETITION
The carbonated soft drink category is highly competitive in each region in which
we compete. The brands owned by the three major national soft drink companies,
Coca-Cola, Pepsi and Cadbury Schweppes, control approximately 82% of the
aggregate take-home volume of soft drink sales in the combined U. S., Canadian
and U. K . 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. The carbonated soft drink market is highly
competitive and competition for incremental volume is intense.
In addition, we face competition in the U.S. and U.K. from regional soft
drink manufacturers who sell aggressively priced brands and, in many cases, also
supply retailer brand products. A number of larger U.S. retailers also
self-manufacture products for their own needs and consistently approach other
retailers seeking additional business.
Generally, carbonated soft drinks compete against all forms of liquid
beverages including water, teas, coffees and juice-based beverages for
consumers' shopping preferences.
The competitive pressures in the carbonated soft drink industry are
significant. However, we seek to differentiate ourselves by offering our
customers efficient distribution methods, high-quality products, category
management strategies, strategies for packaging and marketing and superior
service.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Our operations and properties are subject to various federal, state, provincial,
local and foreign laws and regulations.
As a producer of beverages, we must comply with production, packaging ,
quality, labeling and distribution standards in each of the countries where we
operate, including, in the U.S., those of the federal Food, Drug and Cosmetic
Act. We are also subject to various federal, state, provincial, local and
foreign environmental laws and workplace regulations. These laws and regulations
include, in the U.S., the Occupational Safety and Health Act, the Unfair Labor
Standards Act, the Clean Air Act, the Clean Water Act and laws relating to the
maintenance of fuel storage tanks.
We do not expect to make any material expenditures in connection with
environmental remediation and compliance. However, compliance with, or violation
of, future laws or regulations could require material expenditures by us or
otherwise have a material adverse effect on our business, financial condition
and results of operations.
THE ONTARIO ENVIRONMENTAL PROTECTION ACT ("EPA")
EPA regulations provide that a minimum percentage of a bottler's soft drink
sales within specified areas in Ontario must be made in refillable containers.
The penalty for non-compliance is a fine, which for companies ranges from
$50,000 per day on which the offense occurs or continues for the first
conviction to $100,000 per day for each subsequent conviction, although such
fines may be increased to equal the amount of monetary benefit acquired by the
offender as a result of the commission of the offense. We, and we believe other
industry participants, are currently not in compliance with the requirements of
the EPA. To comply with these requirements we, and we believe many other
industry participants, would have to significantly increase sales in refillable
containers to a minimum refillable sales ratio of 30%. We are not in compliance
with these regulations and do not expect to be in the foreseeable future.
Ontario is not enforcing the EPA at this time, despite the fact that they are
still in effect and not amended, but if it chose to enforce it in the future, we
could incur fines for non-compliance and the possible prohibition of sales of
soft drinks in non-refillable containers in Ontario. We estimate that
approximately 4% of our sales would be affected by the possible limitation of
sales of soft drinks in non-refillable containers in Ontario if the Ontario
Ministry of the Environment initiated an action to enforce the provisions of the
EPA against us. Moreover, the Ontario Ministry of the Environment released a
report in 1997 stating that these EPA regulation are "outdated and unworkable".
However, despite the "unworkable" nature of the EPA regulations, they have not
yet been revoked.
We believe that the magnitude of the potential fines that we could incur
if the Ontario Ministry of the Environment chose to enforce these regulations is
such that the costs to us of non-compliance could be, although are not
contemplated to be, significant. However, our management believes that such
enforcement is very remote and, in any event, these regulations are expected to
be revoked in the near future given the more recent regulatory activity in this
area as described below.
29
In December of 2003, the Ontario Ministry of the Environment approved the
Blue Box Program, which included provisions regarding industry responsibility
for 50% of the net cost of the Program. Generally, the company that owns the
intellectual property rights to the brand of a product, or is the licensee of
those rights, and that manufactures, packages or distributes a product for sale
in Ontario or causes such manufacturing , packaging or distributing of a product
in Ontario, will be liable for the costs under the Program. We generally do not
own the intellectual property rights to the brands of our products. Rather, we
generally manufacture, package and distribute products for and on behalf of
Ontario-based third party customers who are the brand owners and we do not
believe that any costs for which we might be ultimately responsible would have a
material adverse effect on our results of operations; however we cannot
guarantee this outcome.
EMPLOYEES
As of January 1, 2005, we had approximately 3,236 employees, of whom an
estimated 1,839 were located in the U.S., 787 were located in Canada, 375 were
located in the U.K. and 235 were located in Mexico. We have entered into
numerous collective bargaining agreements that we believe contain terms that are
typical in the beverage industry. As these agreements expire, we believe they
can be renegotiated on terms satisfactory to us. We consider our relations with
employees to be good.
AVAILABILITY OF INFORMATION AND OTHER MATTERS
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to reports filed or furnished pursuant to Sections
13(a) and 15(d) of the Securities Exchange Act of 1934, as amended , are
available free of charge from our website at www.cott.com, when such reports are
available on the Securities and Exchange Commissions website, www.sec.gov. The
information found on our website is not part of this or any other report that we
file with, or furnish to, the Securities and Exchange Commission or to Canadian
securities regulators.
Our chief executive officer is required by the rules of the New York Stock
Exchange (the "NYSE") to certify annually to the NYSE that he is not aware of
any violation by us of our corporate governance listing standards. Our chief
executive officer made such certification to the NYSE as of May 20, 2004.
We are responsible for establishing and maintaining adequate internal
control over financial reporting as required by the U.S. Securities and Exchange
Commission. See Management's Report on Internal Control over Financial Reporting
on page 73.
ITEM 2.
PROPERTIES
We operate eleven beverage production facilities in the U.S., seven of which we
own and four of which we lease, as well as the global concentrate manufacturing
facility in Columbus, Georgia, which we own. We operate seven beverage
production facilities in Canada; five of which we own and two of which we lease.
In the U.K., we own and operate two beverage production facilities. We lease and
operate one beverage production facility in Mexico. Total square footage of our
production facilities are approximately 2,128,948 in the U.S., including the
concentrate facility; 992,467 in Canada; 543,910 in the U.K.; and 111,278 in
Mexico. Lease terms for non-owned beverage production facilities expire between
2008 and 2019.
30
ITEM 3.
LEGAL PROCEEDINGS
In August 1999, we were 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 we infringed on their U.S. patent relating to
plastic containers. The complaint subsequently was amended to include a Reissue
Patent based on the original patent in suit. We believe, based on the current
facts and circumstances of the case, that North American Container's likelihood
of success is remote. In addition, we are entitled to indemnification for more
than 95% of any damages we incur in connection with this suit and we believe
that the party obligated to provide such indemnification has the resources
necessary to satisfy such indemnification obligation should damages be awarded
against us. For these reasons, we believe that the probability that the outcome
of this litigation will have a material adverse effect on us 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 us. The district court's decision to dismiss the suit is
consistent with our previous determination that the plaintiff's likelihood of
success was remote. Although the plaintiff has appealed the district court's
decision, we do not believe that the resolution of this suit will have a
material adverse effect on our financial condition and results of operations. We
do not believe the plaintiff will ultimately be successful in this suit.
In January 2005, we were named as one of many defendants in a class action
claim, styled The Consumers' Association of Canada and Bruce Cran v. Coca-Cola
Bottling Ltd. et al., filed in the Supreme Court of British Columbia.
The plaintiffs are suing over 30 defendants, consisting of beverage
manufacturers, retailers and Encorp Pacific (Canada), the government-approved
steward of British Columbia's container deposit program, alleging the
unauthorized use by the defendants of container deposits collected from
consumers and the imposition of an unlawful container recycling fee on
consumers.
The relief sought by the plaintiffs includes a declaration that C$70
million in container deposits were unlawfully converted by the defendants and
are held on constructive trust for consumers and the repayment of C$60 million
collected as container recycling fees.
In February 2005, similar class action claims, styled Kruger et al. v.
Pepsi-Cola Beverage Ltd. et al., were filed in the Superior Courts of a number
of other Canadian provinces, naming essentially the same defendants, including
us, plus the other regional stewardship agencies.
We are investigating these matters; however, legal proceedings are subject
to uncertainties, and the outcomes are difficult to predict. Since the
litigation is at a very preliminary stage, sufficient information regarding the
merits of these claims is not yet available to us.
We are engaged in various litigation matters in the ordinary course of our
business. While we cannot predict with certainty the outcome of these matters,
we believe that the resolution of these matters will not have a material adverse
effect on our financial condition and results of operations.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareowners during the fourth quarter of
2004.
31
SUPPLEMENTAL ITEM PART I.
EXECUTIVE OFFICERS OF COTT CORPORATION
The following is a list of names and ages of all of our executive officers as of
February 28, 2005, and the positions and offices that each of them holds.
Name and Municipality of Residence Office Age Period Served as Officer
JOHN K. SHEPPARD
Hillsborough County, Florida President & Chief Executive Officer 47 2002 to present
MARK BENADIBA
Toronto, Ontario Executive Vice President, Canada & International 51 1990 to present
ROBERT J. FLAHERTY
Alpharetta, Georgia Executive Vice President, President, U.S. Operations 49 2005 to present
RAYMOND P. SILCOCK
Loveladies, New Jersey Executive Vice President & Chief Financial Officer 54 1998 to present
MARK R. HALPERIN
Toronto, Ontario Senior Vice President , General Counsel & Secretary 47 1995 to present
COLIN D. WALKER
London, Ontario Senior Vice President, Corporate Resources 47 1998 to present
CATHERINE M. BRENNAN
Toronto, Ontario Vice President, Treasurer 47 1999 to present
TINA DELL'AQUILA
Toronto, Ontario Vice President, Controller & Assistant Secretary 42 1998 to present
IVANO R. GRIMALDI
Rosemere, Quebec Vice President, Global Procurement 47 2000 to present
P. EDMUND O'KEEFFE
Toronto, Ontario Vice President, Investor Relations & Corporate Development 40 1999 to present
PREM VIRMANI
Columbus, Georgia Vice President, Technical Services 59 1991 to present
LEN WATSON
Toronto, Ontario Vice President, Chief Information Officer 56 2004 to present
During the last five years, the above persons have been engaged in their
principal occupations or in other executive capacities with us except as
follows:
- - prior to January 2002, John K. Sheppard was President and Chief Executive
Officer of ServiceCentral Technologies, Inc., a software development
company that specializes in field service management;
- - prior to January 2005, Robert J. Flaherty was engaged in various
consulting assignments. Prior to November 2002, he was President and Chief
Operating Officer of Med Center Direct.Com, an e-commerce technology
company;
- - prior to September 2004, Len Watson was Senior Vice President, Consulting
Services responsible for the Greater Toronto Area business unit of CGI
Group Inc. Prior to February 2001, he was Vice President, Consulting
Services of the Toronto business unit of LGS Group Inc., a subsidiary of
IBM. Prior to July 2000, he was Vice President and Managing Director of
the Ontario business unit of DMR Consulting Group Inc., which provides
information technology consulting and application outsourcing.
32
PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS
Our common shares are listed on the Toronto Stock Exchange (the "TSX") under the
ticker symbol "BCB," and on the New York Stock Exchange (the "NYSE") under the
ticker symbol "COT."
The tables below show the high and low reported per share sales prices of
common shares on the TSX (in Canadian dollars) and the NYSE (in U.S. dollars)
for the indicated periods of the years ended January 1, 2005 and January 3,
2004.
TORONTO STOCK EXCHANGE (C$)
2004 2003
------------- ------------
High Low High Low
----- ------ ----- -----
January 1-March 31 40.05 35.21 29.45 22.79
April 1-June 30 45.59 38.55 29.62 23.70
July 1-September 30 43.41 33.18 33.00 27.15
October 1-December 31 37.06 29.04 37.10 31.52
NEW YORK STOCK EXCHANGE (U. S. $)
2004 2003
------------- ------------
High Low High Low
----- ------ ----- -----
January 1-March 31 30.35 27.37 19.10 15.53
April 1-June 30 33.36 28.91 21.52 16.33
July 1-September 30 32.89 25.75 23.61 19.93
October 1-December 31 29.19 23.77 28.32 23.41
33
As of February 28, 2005, we had 737 shareowners of record. This number was
determined from records maintained by our transfer agent and it does not include
beneficial owners of securities whose securities are held in the names of
various dealers or clearing agencies. The closing sale price of our common
shares on February 28, 2005 was C$29.95 on the TSX and $24.01 on the NYSE.
We have not paid cash dividends since June 1998. 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. We currently can pay dividends subject to these limitations.
If we were to pay dividends to shareowners who are U.S. residents, those
dividends would generally be subject to Canadian withholding tax. Under current
Canadian tax law, dividends paid by a Canadian corporation to a nonresident
shareowner are generally subject to Canadian withholding tax at a 25% rate.
Under the current tax treaty between Canada and the U.S., U.S. residents are
eligible for a reduction in this withholding tax rate to 15% (and to 5% for a
company shareowner who is the beneficial owner of at least 10% of our voting
stock). Accordingly, under current tax law, our U.S. resident shareowners would
generally be subject to a Canadian withholding tax at a 15% rate on dividends
paid by us, provided that they had complied with applicable procedural
requirements to claim the benefit of the reduced rate under the tax treaty.
CALCULATION OF AGGREGATE MARKET VALUE OF NON-AFFILIATE SHARES
For purposes of calculating the aggregate market value of common shares held by
non-affiliates as shown on the cover page of this report, it was assumed that
all of the outstanding shares were held by non-affiliates except for outstanding
shares held or controlled by our directors and executive officers. This should
not be deemed to constitute an admission that any of these parties are, in fact,
affiliates of us, or that there are not other persons who may be deemed to be
affiliates. For further information concerning shareholdings of officers,
directors and principal stockholders see Item 12: Security Ownership of Certain
Beneficial Owners and Management and Related Shareowner Matters.
34
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data reflects the results of operations. This
information should be read in conjunction with, and is qualified by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this report. The financial information presented may not be
indicative of future performance.
JANUARY 1, January 3, December 28, December 29, December 30,
2005(1) 2004(2) 2002(3) 2001(4) 2000(5)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) (52 WEEKS) (53 weeks) (52 weeks) (52 weeks) (52 weeks)
- ------------------------------------------------------- ----------- ----------- -------------- ------------- -------------
SALES $ 1,646.3 $ 1,417.8 $ 1,198.6 $ 1,090.1 $ 990.6
Cost of sales 1,362.6 1,141.0 965.7 902.7 825.5
Selling, general and administrative 138.1 126.1 110.2 94.1 91.3
Unusual items 0.9 1.8 -- -- (2.1)
----------- ----------- -------------- ------------- -------------
OPERATING INCOME 144.7 148.9 122.7 93.3 75.9
----------- ----------- -------------- ------------- -------------
Income from continuing operations 78.3 77.4 48.7 39.9 25.4
Cumulative effect of change in accounting principle -- -- (44.8) -- --
----------- ----------- -------------- ------------- -------------
NET INCOME $ 78.3 $ 77.4 $ 3.9 $ 39.9 $ 25.4
=========== =========== ============== ============= =============
INCOME PER SHARE - BASIC
Income from continuing operations $ 1.10 $ 1.12 $ 0.75 $ 0.66 $ 0.42
Cumulative effect of change in accounting principle $ -- $ -- $ (0.69) $ -- $ --
Net income $ 1.10 $ 1.12 $ 0.06 $ 0.66 $ 0.42
=========== =========== ============== ============= =============
INCOME PER SHARE - DILUTED
Income from continuing operations $ 1.09 $ 1.09 $ 0.69 $ 0.58 $ 0.38
Cumulative effect of change in accounting principle $ -- $ -- $ (0.64) $ -- $ --
Net income $ 1.09 $ 1.09 $ 0.06 $ 0.58 $ 0.38
=========== =========== ============== ============= =============
Total assets $ 1,022.0 $ 908.8 $ 785.4 $ 1,065.4 $ 621.6
Current maturities of long-term debt 0.8 3.3 16.5 281.8 1.6
Long-term debt 272.5 275.7 339.3 359.5 279.6
Shareowners' equity 457.3 345.1 218.2 197.7 158.5
Under the 1986 Common Share Option Plan, as amended, we have reserved 14
million shares for future issuance.
(1) During the year we acquired certain of the assets of The Cardinal
Companies of Elizabethtown, LLC and certain of the assets of Metro
Beverage Co.
(2) During the year we acquired the retailer brand business of Quality
Beverage Brands, L.L.C.
(3) During the year, we acquired Premium Beverage Packers, Inc. and formed a
new business in Mexico, Cott Embotelladores de Mexico, S.A. de C.V. During
the year we adopted SFAS 142, Goodwill and Other Intangible Assets. This
change in method of valuing goodwill resulted in a $44.8 million non-cash
write down of the U.K. business.
(4) During the year, we acquired certain assets of the Royal Crown Company,
Inc., and formed a new business with Polar Corp. Current maturities of
long-term debt include the 2005 and 2007 Notes repaid on January 22, 2002
from cash held in trust.
(5) During the year, we acquired the assets of the private label beverage and
the Vintage(TM) 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 entry debt redemption
costs to be recorded as extraordinary items.
35
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are the leading supplier of retailer brand carbonated soft drinks in the
U.S., Canada and the U.K. Our fiscal year ends on the Saturday closest to
December 31 each year. As a result, a 53rd week is included in our fiscal year
every five or six years. Our prior fiscal year, which ended January 3, 2004,
consisted of 53 weeks. For the purpose of the discussion below, our fiscal years
that ended January 1, 2005, January 3, 2004 and December 28, 2002 are referred
to respectively as 2004, 2003 and 2002.
Sales for 2004 were $1,646.3 million up from $1,417.8 million in 2003.
Strong performance was recorded in all business units except Canada, which was
down 1% (7% excluding the impact of foreign exchange). Gross margin was 17.2%
for 2004 as compared to 19.5% in 2003. Higher plant costs, resulting primarily
from inefficiencies in the U.S. operations and increases in freight and
packaging costs contributed to this decline. In the fourth quarter the gross
margin was 15.4% compared to 19.8% for the fourth quarter last year. Inventory
write-offs and lower plant efficiencies adversely impacted the fourth quarter.
Supplier rebates, partially offset by packaging price increases, had a favorable
impact of approximately 90 basis points on fourth quarter gross margin.
Income from continuing operations in 2004 was $78.3 million or $1.09 per
diluted share, compared with reported income from continuing operations of $77.4
million or $1.09 per diluted share in 2003.
The aggregate cost of our acquisitions in 2004 was $34.6 million. In 2004,
we completed the acquisition of certain of the assets of The Cardinal Companies
of Elizabethtown, LLC ("Cardinal") and certain of the assets of Metro Beverage
Co.("Metro") which added production capacity to our beverage system.
2004 VERSUS 2003
RESULTS OF OPERATIONS
Sales - Sales in 2004 were $1,646.3 million, an increase of 16% from $1,417.8
million in 2003. The extra week in 2003 added $20 million in sales that year.
Excluding the impact of the extra week in 2003, sales increased 18% in 2004. In
December 2003, we acquired the retailer brand beverage business of Quality
Beverage Brands, L.L.C. located in North Carolina and in 2004, we acquired
certain of the assets of Cardinal and Metro. These acquisitions added $62.3
million or 3.8%, in the aggregate, to sales in 2004. When the impact of these
acquisitions and foreign exchange are also excluded, sales increased 13% and
11%, respectively. Total case volume in 8 ounce equivalents for 2004 was 1,148
million, up from 1,013 million in 2003.
In the U.S., our sales were $1,199.0 million in 2004, an increase of 18%
from 2003 or 20% excluding the extra week in 2003. When also excluding
acquisitions, sales increased 13% from 2003. The growth was driven by increased
volume with existing customers, introduction of new products and sales to new
customers.
In Canada, our sales were $189.5 million in 2004, a decrease of 1% in 2004
from $191.0 million in 2003. However, when the impact of foreign exchange rates
is excluded, sales in Canada were down 7% from 2003. This decrease reflected the
overall weak demand for carbonated soft drinks in grocery stores.
In the U.K. and Europe, our sales were $194.3 million in 2004, an increase
of 17% from $166.6 million in 2003. Excluding the impact of the strengthened
pound sterling, sales increased 4% in 2004. The increase was due to continued
focus on core products, manufacturing for non-retailer third parties, partnering
with key suppliers, optimizing manufacturing processes and warehouse logistics
and introducing new products.
The international segment includes the Mexican operations, the Royal Crown
International division and our business in Asia. Sales by this segment were
$61.2 million in 2004, an increase of 45% when compared with sales of $42.1
million in 2003. Excluding foreign exchange, sales increased 49%. The increase
in sales is primarily due to sales in Mexico where sales were $ 40.7 million, an
increase of 67% from $24.4 million in 2003.
36
Gross profit - Gross profit was 17.2% of sales for 2004 compared with 19.5% in
2003. Lower margins resulted primarily from reduced plant efficiencies and
higher logistics costs as we struggled to meet increased demand during the first
half of 2004. Higher
commodity costs including resin for PET bottles and aluminum for cans were
largely offset by price increases charged to our customers.
Variable costs represented 90% of total cost of sales in 2004. Major
elements of these variable costs included ingredient and packaging costs, fees
paid to third party manufacturers and distribution costs. In the U.S.,
approximately 80% of our beverages are manufactured in facilities that we or
third party manufacturers, with whom we have long-term co-packing agreements,
either own or lease. We manufacture virtually all of our Canadian beverages and
all of our U.K. and Mexican beverages in facilities that we either own or lease.
These proportions have remained substantially unchanged during the past few
years.
Selling, General and Administrative Expenses ("SG&A") - SG&A was $138.1 million
in 2004, an increase of $12.0 million or 9.5% from $126.1 million in 2003.
Increases in SG&A include costs associated with Sarbanes-Oxley Section 404
compliance, provisions taken during the year to write-off certain export
receivables in Canada, adding new employees, principally to serve our growing
U.S. business, and a negative impact from the weakened U.S. dollar. These
increases were partially offset by a decrease in incentive compensation.
Unusual Items - Unusual items of $0.9 million in 2004 and $1.8 million in 2003
are primarily due to write-downs we took relating to our investment in the
Iroquois Water Ltd. business. At January 1, 2005, the net book value of our
Iroquois Water investment is $1.5 million.
Interest Expense - Net interest expense was $26.0 million in 2004, down 5.5%
from $27.5 million in 2003. This decrease was primarily due to lower average
borrowings on our credit facilities during the year.
Income Taxes - We recorded an income tax provision of $35.8 million in 2004
reflecting an effective tax rate of 31.2%. This decreased from $40.1 million, or
an effective rate of 34.1%, in 2003 primarily due to a change in management's
estimate to the reserve.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition - Cash provided by operating activities in 2004 was $52.4
million, after capital expenditures of $50.3 million, as compared to 2003 in
which cash provided by operating activities was $103.1 million, after capital
expenditures of $39.6 million. While capital expenditures increased by $10.7
million, the decrease in cash from operating activities was primarily driven by
increased accounts receivable and inventory. The increase in accounts receivable
was mainly due to 2004 supplier rebates paid in January 2005 and an increase in
income taxes receivable due to a lower than expected income tax liability.
Inventory levels were adversely impacted by plant inefficiencies and poor
forecasting by our U.S. division.
Investing Activities - In March 2004, we acquired certain of the assets of
Cardinal. The acquisition is expected to add $12 million a year annually in
carbonated soft drink sales and additional manufacturing capacity to support our
growing demand for retailer branded beverages in the U.S. The total purchase
price was $17.8 million and was funded from cash flow from operations and
short-term borrowings.
In October 2004, we purchased certain of the assets of Metro to increase
production capacity in the U.S. The total purchase price was $16.8 million and
was funded from cash flow from operations and short-term borrowings.
The total cost of these acquisitions in 2004 was $34.6 million including
acquisition costs of $0.8 million.
In addition, we purchased the plant and equipment of Elan Waters in
Blairsville, Georgia for $3.8 million to add to our production capacity in the
U.S. The purchase was funded from short-term borrowings.
Capital Expenditures - Our capital expenditures were $50.3 million in 2004 as
compared with $39.6 million in 2003. Major capital expenditures include $42.9
million on manufacturing equipment and plates and film, primarily in the U.S.,
to meet the needs of our growing business in that market. We commenced
construction on a new beverage manufacturing facility in Dallas-Fort Worth,
Texas. We currently anticipate the plant will be operational in 2005 and ready
for full production in 2006.
37
Capital Resources and Long-Term Debt - Our sources of capital include operating
cash flows, short-term borrowings under current credit facilities, issuance of
public debt and issuance of equity securities. Management believes we have
adequate financial resources to meet our ongoing cash requirements for
operations and capital expenditures, as well as our other financial obligations
based on our operating cash flows and current available credit.
We have a committed senior secured credit facility in the U.S. 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 $125.0 million. Borrowings under this facility bear
interest at base rate plus 0.50% per annum or LIBOR plus 1.75% per annum. A
facility fee of 0.50% per annum is payable on the entire line of credit. As of
January 1, 2005, the outstanding amount of revolving credit loans was $63.3
million. We and our wholly owned subsidiary, Cott Beverages Inc., are
co-borrowers on the facility, but the debt is guaranteed by most of our U.S. and
Canadian subsidiaries. The debt and guarantees are secured by substantially all
of the assets of the borrowers and the guarantors. We are currently in the
process of negotiating a replacement for this facility. We expect alternative
sources of financing to be in place toward the end of the first quarter of 2005.
We also have outstanding 8% senior subordinated notes, which are due in
2011. As of January 1, 2005, the principal amount of those notes was $275
million. The issuer of the notes is Cott Beverages Inc., but the notes are
guaranteed by us and most of our U.S. and Canadian subsidiaries.
We also had a $28.7 million ((pound)15.0 million) demand bank credit
facility in the U.K., with $4.9 million outstanding as of January 1, 2005. This
credit facility expired on December 31, 2004 as we are currently negotiating a
new worldwide facility. 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 month's notice. As of January 1, 2005, only U.S. dollar borrowings were
outstanding under this credit facility at an interest rate of 2.20%.
Our current credit facilities provide maximum credit of $153.7 million. At
January 1, 2005, after $4.0 million of standby letters of credit, $57.7 million
of the senior secured credit facility in the U.S. and Canada and $23.8 million
of the U.K. credit facility in the U.K. were available. The weighted average
interest rate on outstanding borrowings under the credit facility was 4.24% as
of January 1, 2005.
Long-term debt as of January 1, 2005 was $273.3 million, compared with
$279.0 million at the end of 2003. Long-term debt in 2004 and 2003 consisted
primarily of 8% senior subordinated notes with a stated face value of $275
million.
Our senior secured credit facility and the indenture respecting the 2011
notes contain a number of business and financial covenants and events of default
that apply to the borrowers and the restricted subsidiaries. The restricted
subsidiaries are, in general, the guarantor subsidiaries organized in Canada and
the U.S. Among other events of default or triggers for prepayment in our credit
facilities and indenture are: a change of control of us in certain
circumstances; cross default or cross acceleration to other indebtedness in
excess of $10 million; unsatisfied judgments in excess of $10 million; our
insolvency or that of the restricted subsidiaries; and covenant default under
the indenture or credit facilities. Some of the more material business and
financial covenants are discussed below.
Our senior secured credit facility restricts additional indebtedness for
subsidiaries to the existing debt and credit facilities, certain intercompany
debt, $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 to 1.0. Capital
expenditures in the U.S. and Canada are limited, in the aggregate, to $52.5
million plus a 50% carryforward 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 we are in default under the
senior secured credit agreement. In addition, many of the covenants effectively
limit transactions with our unrestricted subsidiaries or non-guarantor entities.
Finally, there are additional business covenants in our 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 our operations.
38
In addition to business covenants, there are financial covenants in our
senior secured credit facility. Since the third quarter of 2004, our leverage
ratio was required to be no more than 2.25 to 1.0 and that requirement is
tightened to 2.00 to 1.0 in the second quarter of 2005. At the end of 2004, our
leverage ratio was 1.69 to 1.0. The senior secured credit facility also has an
interest coverage test and a fixed charge test. During 2004, our interest
coverage ratio was required to 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 1, 2005 it was 8.26 to
1.0. Our fixed charge coverage ratio had to be at least 1.25 to 1.0 at the end
of 2004. At January 1, 2005, our fixed charge coverage ratio was 6.05 to 1.0.
The indenture for the 2011 notes also has numerous covenants that are
applicable to Cott Beverages Inc., us and the restricted subsidiaries. We can
only make restricted payments, such as paying dividends, buying back stock or
making certain investments, if our fixed charge coverage ratio is at least 2.0
to 1.0. Even then, we can only make those restricted payments in an amount that
is no greater than 50% of our consolidated net income subject to certain
adjustments. Certain other investments, like those not exceeding $ $60 million
in the aggregate, may be made without satisfying the restricted payments test.
We can only incur additional debt or issue preferred stock, other than
certain specified debt, if our fixed charge coverage ratio is greater than 2.0
to 1.0. For purposes of the indenture, our fixed charge coverage ratio was 7.64
to 1.0 as of January 1, 2005. Subject to some exceptions, asset sales may only
be made where the sale price is equal to the fair market value of the asset sold
and we receive at least 75% of the proceeds in cash. There are also limitations
on what we may do with the sale proceeds such that we may be required to pay
down debt or reinvest the proceeds in enumerated business uses within a
specified period of time. There are further restrictions in several of the
covenants, such as a complete prohibition on paying any dividends, if we are in
default under the indenture. Many of the covenants also effectively limit
transactions with our unrestricted subsidiaries or non-guarantor entities.
Several of the terms, 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 our 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 our operations.
We believe that we have sufficient financial flexibility under the terms
of our indebtedness to operate our business as currently planned.
Capital Structure - In 2004, shareowner's equity increased by $112.2 million
from 2003. Net income of $78.3 million, additional share capital of $19.1
million from the exercise of employee stock options, including the related tax
benefit, $15.8 million in favorable foreign currency translation on the net
assets of self-sustaining foreign operations and a reduction of $1.0 million in
unrealized losses on cash flow hedges all contributed to the net increase. The
foreign currency translation adjustment resulted from the strengthening of the
pound sterling and the Canadian dollar relative to the U.S. dollar.
Dividend Payments - No dividends were paid in 2004 and we are not expecting to
change this policy in 2005 as we intend to use cash for future growth or debt
repayment.
There are certain restrictions on the payment of dividends under our
credit facility and 2011 notes indenture. The most restrictive provision is the
quarterly limitation of dividends based on the prior quarter's earnings. We
currently can pay dividends subject to these limitations.
39
Contractual Obligations - The following chart shows the schedule of future
payments under certain contracts, including debt agreements and guarantees as of
January 1, 2005:
Payments due by period
---------------------------------------------------------------------------------------
Contractual obligations (IN MILLIONS) Total Less than 1 Year Years 2-3 Years 4-5 After 5 years
- ------------------------------------- ------------- ---------------- --------- --------- -------------
2011 notes $ 275.0 $ -- $ -- $ -- $ 275.0
Operating leases 99.7 14.6 26.9 16.9 41.3
Capital lease 3.5 0.8 1.5 1.2 --
Purchase obligations(1) 208.9 61.3 45.3 33.4 68.9
------------- ---------- --------- -------- -----------
$ 587.1 $ 76.7 $ 73.7 $ 51.5 $ 385.2
============= ========== ========= ======== ===========
(1) Purchase obligations consist of an information technology outsourcing
contract, contracts with certain co-packers and commitments for the
purchase of inventory and capital expenditures. These obligations
represent expected expenditures under the normal course of business, not
our minimum contractual obligations.
CRITICAL ACCOUNTING POLICIES
Note 1 to the consolidated financial statements includes a summary of the
significant accounting policies and estimates used in the preparation of our
consolidated financial statements.
Our critical accounting policies require management to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and the accompanying notes. These estimates are based on historical
experience, the advice of external experts or on other assumptions management
believes to be reasonable. Where actuals differ from estimates, revisions are
included in the results of the period in which actuals become known.
Historically, differences between estimates and actuals have not had a
significant impact on our consolidated financial statements.
Critical accounting policies and estimates used to prepare the financial
statements are discussed with our Audit Committee as they are implemented and on
an annual basis and include the following:
Revenue Recognition
We report sales when ownership passes to customers for products manufactured in
our own plants and/or by third parties on our behalf. We regularly evaluate the
facts and circumstances in relation to the criteria in the EITF 99-19 and use
our best judgment to determine whether to report sales on a gross or net basis
for products manufactured by third parties. Currently, the facts and
circumstances surrounding all of our business support the reporting of all sales
on a gross basis.
We offer sales incentives to certain customers. We account for these
incentives as a reduction from sales. We follow the guidance under EITF 01-9 in
accounting for sales incentives. Where the incentive has been paid in advance,
we amortize the amount based on expected future sales related to the incentive.
Where the incentive is to be paid in arrears, we accrue the amount based on
expected future sales related to the incentive.
Impairment Testing of Goodwill and Intangible Assets with an Indefinite Life
With the implementation of Statement of Financial Accounting Standard ("SFAS")
142 in 2002, goodwill and intangible assets with an indefinite life are no
longer amortized, but instead are tested at least annually for impairment. Any
impairment loss is recognized in income. We have goodwill of $88.8 million and
rights of $80.4 million on our balance sheet at January 1, 2005.
In accordance with SFAS 142, we evaluate goodwill for impairment on a
reporting unit basis. The evaluation of goodwill for each reporting unit is
based upon the following approach. We compare the fair value of a reporting unit
to its carrying value. Where the carrying value is greater than the fair value,
the implied fair value of the reporting unit goodwill is determined by
allocating the fair value of the reporting unit to all the assets and
liabilities of the reporting unit with any of the remainder being allocated to
goodwill. The implied fair value of the reporting unit goodwill is then compared
to the carrying value of that goodwill to determine the impairment loss.
We measure the fair value of reporting units using discounted future cash
flow. Because the business is assumed to continue in perpetuity, the discounted
future cash flow includes a terminal value. The long-term growth assumptions
incorporated into the discounted cash flow calculation reflect our long-term
view of the market and the discount rate is based on our weighted average cost
of capital. Each year we re-evaluate the assumptions used to reflect changes in
the business environment. Based on the evaluation performed this year, we
determined that the fair values of our reporting units exceeded their carrying
value and that as a result the second step of the impairment test was not
required.
40
Our only intangible asset with an indefinite life relates to our 2001
acquisition of intellectual property from Royal Crown Company, Inc. including
the right to manufacture our concentrates, with all related inventions,
processes, technologies, technical and manufacturing information and know-how.
There is an indefinite life to our ownership of these rights, and there are no
legal, regulatory, contractual, competitive, economic, or other factors that
limit the useful life. In accordance with SFAS 142, based on the above factors,
the life of the rights is considered to be indefinite and they are not
amortized, but are tested annually for impairment. Impairment of an intangible
asset with an indefinite life, if any, is determined using the same discounted
future cash flow assumptions and model discussed above for goodwill. We compare
the carrying value of the rights to their fair value and recognize in income any
impairment in value.
Other Intangible Assets
Other intangible assets consist principally of customer relationships that arise
from acquisitions which amounted to $133.2 million at January 1, 2005. Customer
relationships are amortized on a straight-line basis for the period over which
we expect to receive economic benefits. We periodically compare the carrying
value of customer relationships by customer to the estimated undiscounted future
cash flows of the related customers and recognize any impairment in our income
statement. The expected life and value of these intangible assets is based on an
evaluation of the competitive environment, customer history and future prospects
as appropriate.
Income Taxes
We regularly review the recognized and unrecognized deferred income tax assets
to determine whether or not a valuation allowance is required. Management
believes that virtually all deferred tax assets will be realized as a result of
anticipated future taxable income from operations. Deferred tax assets of $19.5
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
We make available to all shareowners consolidated financial statements prepared
in accordance with Canadian generally accepted accounting practices ("GAAP") and
file 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 2004, we reported net income of $70.6
million and total assets of $1,023.9 million compared to net income and total
assets reported under U.S. GAAP of $78.3 million and $1,022.0 million,
respectively.
There is one material U.S./Canadian GAAP difference in 2004. Under
Canadian GAAP, effective January 1, 2004, stock options issued to employees
subsequent to January 1, 2002 are recognized in net income based on their fair
value. As a result, compensation expense of $7.5 million, $10.0 million net of
tax of $2.5 million, was recorded during the year. This policy was adopted on a
retroactive basis with no restatement of comparative figures and as a result
$5.6 million was charged to opening retained earnings as at January 3, 2004.
Under U.S. GAAP, we have elected not to record compensation expense for options
issued to employees with an exercise price equal to the market value of the
options.
Under Canadian GAAP in 2003, we reported net income of $77.2 million and
total assets of $910.1 million compared to net income and total assets reported
under U.S. GAAP of $77.4 million and $908.8 million, respectively. There were no
material U.S./Canadian GAAP differences for 2003.
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"), our sales increased 13%. The
additional week in 2003 added $20 million dollars in sales. When the extra
week of sales is also excluded, our sales were up 11% in 2003 as described in
detail by business segment below. Total 8 ounce 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.
41
In the U.S., our 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, our 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, our sales were $166.6 million in 2003, an increase
of 24% from $134.3 million in 2002. Excluding the impact of the strengthened
pound sterling, 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 our 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 our 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, and distribution costs. About 84% of our
beverage products are manufactured in facilities we own or lease, or by third
party manufacturers with whom we have 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 our 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.
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 our 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 we 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 - We 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 331 %, 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 our effective
tax rate.
42
CANADIAN GAAP
Results reported under Canadian GAAP may differ from results reported under U.S.
GAAP from time to time. Under Canadian GAAP in 2003, we reported net income of
$77.2 million and total assets of $910.1 million compared to net income and
total assets reported under U.S. GAAP of $77.4 million and $908.8 million,
respectively. There are no material U.S./Canadian GAAP differences for 2003.
Under Canadian GAAP in 2002, we 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.
OUTLOOK
Our ongoing focus is to increase sales, market share and profitability for us
and our customers. While the carbonated soft drink industry is experiencing low
growth, the retailer brand segment of the carbonated soft drink category is
experiencing positive growth in the U.S. We believe that our existing customers
are generally committed to building their retailer brand programs and we are
gaining new customers as well. Expanding customer relationships as well as new
product opportunities for diet soft drinks and flavored sparkling waters all
contribute to our positive outlook for 2005.
In 2005, we intend to adopt a back-to-basics approach. As part of our
back-to-basics approach we intend to focus on effective logistics, managing
inventory to appropriate levels and increasing plant efficiencies towards their
2003 levels. We expect sales growth in 2005 to be between 8% and 10% since we
believe there are significant opportunities for growth in the U.S. market as
retailer brand volumes increase. The Canadian division intends to focus on
better customer support and sales execution and to expand the non-supermarket
channel with dedicated products to help grow its business. The U.K. business
intends to continue to enhance its performance through product innovation and a
customer - centric focus to identify opportunities. In Mexico, our business
continued to make progress with 67% sales growth in 2004. We view Mexico as a
strong long-term growth opportunity.
As of the date of this report, we expect 2005 earnings per share, on a
diluted basis, to rise to between $1.21 and $1.25 excluding the impact of
adopting SFAS 123R, Share-Based Payments. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") for 2005 is expected to be the
following:
(IN MILLIONS)
- ---------------------------------
INCOME FROM CONTINUING OPERATION $ 88-91
Depreciation and amortization $ 69
Interest expense, net $ 30
Income taxes $ 43-50
------------
EBITDA $ 230-240
============
Total capital expenditures for 2005 are expected to be approximately $95.0
million, which will consist primarily of manufacturing equipment in the U.S.
including the new plant in Texas.
43
EBITDA is defined as earnings from continuing operations before interest,
income taxes, depreciation and amortization. We use operating income as our
primary measure of performance and cash flow from operations as our primary
measure of liquidity. Nevertheless, we present EBITDA in our filings for several
reasons. First, we use multiples of EBITDA and discounted cash flows in
determining the value of our operations. In addition, we use "cash return on
assets," which is a financial measure calculated by dividing our annualized
EBITDA by our aggregate operating assets, for the purposes of calculating
performance-related bonus compensation for our management employees, because
that measure reflects the ability of management to generate cash while
preserving assets. Finally, we include EBITDA in our filings because we believe
that our current and potential investors use multiples of EBITDA to make
investment decisions about us. Investors should not consider EBITDA an
alternative to net income, nor to cash provided by operating activities nor any
other indicator of performance or liquidity, which have been determined in
accordance with U.S. or Canadian GAAP. Our method of calculating EBITDA may
differ from the methods used by other companies and, accordingly, our EBITDA may
not be comparable to similarly titled measures used by other companies.
RISKS FACTORS
We face a number of risks and uncertainties, including the following:
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE BEVERAGE
MARKET.
The markets for our products are extremely competitive. In comparison to the
major national brand beverage manufactures, we are a relatively small
participant in the industry. We face competition from the national brand
beverage manufacturers in all of our markets and from other retailer brand
beverage manufacturers in the U.S. and the U.K. If our competitors reduce their
selling prices or increase the frequency of their promotional activities in our
core markets or if our customers do not allocate adequate shelf space for
beverages supply, we could lose market share or be forced to reduce pricing or
increase capital and other expenditures, any of which could adversely affects
our profitability.
BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR
SALES, THE LOSS OF ANY SIGNIFICANT CUSTOMER COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
A significant portion of our sales are concentrated in a small number of
customers. Our customers include many large national and regional grocery,
mass-merchandise, drugstore, wholesale and convenience store chains in our core
markets of the U.S., Canada and the U.K. Sales to our top customer in 2004 and
2003 accounted for 40% and 42%, respectively, of our total sales, and sales to
the top ten customers in 2004 and 2003 were 68% and 71%, respectively. We expect
that sales of our products to a limited number of customers will continue to
account for a high percentage of our sales in the foreseeable future. The loss
of any significant customer, or customers which in the aggregate represent a
significant portion of our sales, could have a material adverse effect on our
operating results and cash flows. At January 1, 2005, we have $133.2 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.
44
IF WE ARE UNABLE TO MAINTAIN RELATIONSHIPS WITH OUR RAW MATERIAL SUPPLIERS, WE
MAY INCUR HIGHER SUPPLY COSTS OR BE UNABLE TO DELIVER PRODUCTS TO OUR CUSTOMERS.
The principal raw materials required to produce our products are polyethylene
terephthalate ("PET") bottles, caps and PET preforms, cans and lids, labels,
cartons and trays, concentrates, sweeteners and carbon dioxide.
We typically enter into annual supply arrangements rather than long-term
contracts with our suppliers, which means that our suppliers are obligated to
continue to supply us with materials for one-year periods, at the end of which
we must either renegotiate the contracts with our incumbent suppliers or we
would be required to find an alternative source for supply. With respect to some
of our key packaging supplies, such as aluminum cans and lids and PET bottles,
and some of our key ingredients , such as artificial sweeteners, we have entered
into long-term supply agreements, the terms of which range from 1 to 7 years,
and therefore we are assured of a supply of those key packaging supplies and
ingredients of a longer period of time. During 2004, we extended our supply
contract with Crown Cork & Seal USA, Inc. ("CCS") from its original expiration
date of December 31, 2006 to December 31, 2011. The contract provides that CCS
will supply all of our aluminum can and end requirements worldwide, subject to
certain exceptions. The contract contains a pricing mechanism for certain
materials, standard representations, warranties, indemnities and termination
events, including termination events related to bankruptcy or insolvency of
either party. As with our annual supply contracts, we must either renegotiate
these long-term supply agreements with the incumbent suppliers when they expire
or find alternative sources for supply.
We rely upon our ongoing relationships with our key suppliers to support
our operations. We believe that we will be able to either renegotiate contracts
with these suppliers when they expire or, alternatively, if we are unable to
renegotiate contracts with our key suppliers, we believe that we could replace
them. We could, however, incur higher ingredient and packaging supply costs in
renegotiating contracts with existing suppliers or replacing those suppliers or
we could experience temporary dislocations in our ability to deliver products to
our customers, either of which could have a material adverse effect on our
results of operations.
OUR INGREDIENTS AND PACKAGING SUPPLIES ARE SUBJECT TO PRICE INCREASES AND WE MAY
BE UNABLE TO EFFECTIVELY PASS RISING COSTS ON TO OUR CUSTOMERS.
We bear the risk of increasing prices on the ingredients and packaging in our
products. The majority of our ingredient and packaging supply contracts allow
our suppliers to alter the costs they charge us based on changes in the costs of
the underlying commodities that are used to produce them. Aluminum for cans,
resin for PET bottles and high fructose corn syrup for sweeteners are examples
of these underlying commodities. In addition, the contracts for certain of our
ingredients and packaging materials permit our suppliers to increase the costs
they charge us based on increases in their cost of converting those underlying
commodities into the materials that we purchase. In certain cases those
increases are subject to negotiated limits and in other cases, they are not.
These changes in the prices that we pay for ingredients and packaging materials
occur at times that vary by product and supplier, but are principally on
semi-annual and annual bases. Accordingly, we bear the risk of increases in the
costs of these ingredients and packaging materials, including the underlying
costs of the commodities that comprise them and, to some extent, the costs of
converting those commodities into finished products. We do not use derivatives
to manage this risk. If the cost of these ingredients or packaging materials
increase, we may be unable to pass these costs along to our customers through
adjustments to the prices we charge. If we cannot pass on these increases to our
customers on a timely basis, they could have a material adverse effect on our
results of operations.
IF WE FAIL TO MANAGE OUR EXPANDING OPERATIONS SUCCESSFULLY, OUR BUSINESS AND
FINANCIAL RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our success depends, in part, on our ability to manage new acquisitions. In
recent years, we have grown our business and beverage offerings primarily
through acquisition of other companies, new product lines and growth with key
customers. A part of our strategy is to continue to expand our business through
acquisitions and alliances. To succeed with this strategy, we must identify
appropriate acquisition or strategic alliance candidates. The success of this
strategy also depends on our ability to manage and integrate acquisitions and
alliances at a pace consistent with the growth of our business. We cannot
provide assurance that acquisition opportunities will be available, that we will
continue to acquire business and product lines or that any of the businesses or
product lines that we acquire or align with will be integrated successfully into
our business or prove profitable.
45
OUR SUCCESS DEPENDS, IN PART, ON OUR INTELLECTUAL PROPERTY, WHICH WE MAY BE
UNABLE TO PROTECT.
We possess certain intellectual property that is important to our business. This
intellectual property includes trade secrets, in the form of the concentrate
formulae for most of the beverages that we produce, and trademarks for the names
of the beverages that we sell, which are trademarks that we either own or
license from our retailer brand customers and others. Our success depends, in
part, on our ability to protect our intellectual property.
To protect this intellectual property, we rely principally on 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, we will vigorously
pursue any person who infringes on our intellectual property using any and all
legal remedies available. Notwithstanding our efforts, we may not be successful
in protecting our intellectual property for a number of reasons, including:
- - our competitors may independently develop intellectual property that is
similar to or better than ours;
- - 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 our
intellectual property rights; and
- - our intellectual property rights may be successfully challenged,
invalidated or circumvented.
If we are unable to protect our intellectual property, it would weaken our
competitive position and we could face significant expense to protect or enforce
our intellectual property rights. At January 1, 2005, we had $80.4 million of
rights recorded as an intangible asset.
OUR GEOGRAPHIC DIVERSITY SUBJECTS US TO THE RISK OF CURRENCY FLUCTUATIONS.
We are exposed to changes in foreign currency exchange rates, including those
between the U.S. dollar, on the one hand, and the Canadian dollar and the pound
sterling, on the other hand. Our operations outside of the U.S. accounted for
approximately 26% of our 2004 sales. Accordingly, currency fluctuations in
respect of our outstanding non-U.S. dollar denominated net asset balances may
affect our reported results and competitive position.
A PORTION OF OUR INDEBTEDNESS IS VARIABLE RATE DEBT, AND CHANGES IN INTEREST
RATES COULD ADVERSELY AFFECT US BY CAUSING US TO INCUR HIGHER INTEREST COSTS
WITH RESPECT TO SUCH VARIABLE RATE DEBT.
Our credit facilities subject us to interest rate risk. We have a secured
revolving credit facility, under which we borrow from time to time for various
purposes, including to fund our day-to-day operations and to finance additional
acquisitions. The maximum amount that we may borrow under this facility was
increased from $120.0 million to $125.0 million on April 30, 2004. This credit
facility expires December 31, 2005 and we are currently negotiating a new
facility. As of January 1, 2005, total borrowings under this facility were $63.3
million.
The interest rate applicable to our revolving credit facility is variable,
meaning that the rate at which we pay interest on amounts borrowed under the
facility fluctuates with changes in interest rates. Accordingly, with respect to
any amounts from time to time outstanding under this facility, we are exposed to
changes in interest rates. We do not currently use derivative instruments to
hedge interest rate exposure. However, we do regularly review the structure of
our indebtedness and consider changes to the proportion of variable versus fixed
rate debt through refinancing, interest rate swaps or other measures in response
to the changing economic environment. We cannot assure that we will be able to
continue to refinance our indebtedness on terms that are favorable to us. If we
are unable to refinance our indebtedness or otherwise adequately manage our debt
structure in response to changes in the market, our interest expense could
increase, which would negatively impact our financial condition and results of
operations.
46
WE MAY BE UNABLE TO RESTORE THE EFFICIENCY OF OUR U.S. PLANT OPERATIONS.
Our U.S. plants were unable to produce as efficiently in 2004 as in prior years.
As a consequence, our cost of product was higher and, in addition, we had to
ship product between plants at significant added cost in order to be able to
supply U.S. customers in a timely manner. If we are unable to restore our plants
to their previously achieved levels of operating performance we may continue to
incur higher manufacturing costs.
In addition we may incur higher costs as a result of having to ship
product between plants in order to satisfy customer demand.
WE ARE NOT IN COMPLIANCE WITH THE REQUIREMENTS OF THE ONTARIO ENVIRONMENTAL
PROTECTION ACT ("EPA") AND, IF THE ONTARIO GOVERNMENT SEEKS TO ENFORCE THOSE
REQUIREMENTS OR IMPLEMENTS MODIFICATIONS TO THEM, WE COULD BE ADVERSELY
AFFECTED.
Certain regulations under the EPA provide that a minimum percentage of a
bottler's soft drink sales within specified areas in Ontario must be made in
refillable containers. The penalty for non-compliance is a fine, which for
companies ranges from $50,000 per day on which the offense occurs or continues
for the first conviction to $100,000 per day for each subsequent conviction,
although such fines may be increased to equal the amount of monetary benefit
acquired by the offender as a result of the commission of the offense. We, and
we believe other industry participants, are currently not in compliance with the
requirements of the EPA. Ontario is not enforcing the EPA at this time, but if
it chose to enforce the EPA in the future, we could incur fines for
non-compliance and the possible prohibition of sales of soft drinks in
non-refillable containers in Ontario.
We estimate that approximately 4% of our sales would be affected by the possible
limitation on sales of soft drinks in non-refillable containers in Ontario if
the Ontario Ministry of the Environment initiated an action to enforce the
provisions of the EPA against us.
In April 2003, the Ontario Ministry of the Environment proposed to revoke
these regulations in favor of new mechanisms under the Ontario Waste Diversion
Act to enhance diversion from disposal of carbonated soft drink containers. On
December 22, 2003, the Ontario provincial government approved the implementation
of the Blue Box Program plan under the Ministry of Environment Waste
Diversion Act. The Program requires those parties who are brand owners or
licensees of rights to brands which are manufactured, packaged or distributed
for sale in Ontario to contribute to the net cost of the Blue Box Program. We
generally manufacture, package and distribute products for and on behalf of
third party customers. Therefore, we do not believe that we will be responsible
for direct costs of the Program. However, our customers may attempt to pass
these costs, or a portion of them, onto us. We do not believe that the costs for
which we may ultimately be responsible under this Program will have a material
adverse effect on our results of operations; however, we cannot guarantee this
outcome. The Blue Box Program does not revoke any of the regulations mentioned
above under the EPA regarding refillable containers, although the industry
anticipates that they will be reversed in the near future.
47
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange-We are exposed to changes in foreign currency exchange rates.
Operations outside of the U.S. accounted for approximately 26% of 2004 sales and
27% of 2003 sales, and are concentrated principally in the U.K., and Canada. Our
debt instruments (excluding the U.K. credit facility) are denominated in U.S.
dollars. We translate the revenues and expenses of our foreign operations using
average exchange rates prevailing during the period. The effect of a 10% change
in foreign currency exchange rates among the U.S. dollar versus the Canadian
dollar and pound sterling at current levels of foreign debt and operations would
be immaterial to our financial condition and profitability.
In 2004, we entered into cash flow hedges to mitigate exposure to declines in
the value of the Canadian dollar and pound sterling attributable to certain
forecasted U.S. dollar raw material purchases of the Canadian and U.K. and
European business segments. The hedges consist of monthly foreign exchange
options to buy U.S. dollars at fixed rates per Canadian dollar and pound
sterling and mature at various dates through December 30, 2005. In addition, we
entered into one forward foreign exchange contract to purchase U.S. dollars at a
fixed rate per pound sterling which matured in January 2005. The fair market
value of the foreign exchange options and the forward contract is included in
prepaid expenses and other assets.
The instruments are cash flow hedges under SFAS 133; accordingly, changes
in the fair value of the cash flow hedge instruments are recognized in
accumulated other comprehensive income. Amounts recognized in accumulated other
comprehensive income and prepaid expenses and other assets are recorded in
earnings in the same periods in which the forecasted purchases or payments
affect earnings. At January 1, 2005, the fair value of the options are forward
contract was $0.9 million and we recorded a $1.0 million unrealized loss in
comprehensive income in 2004.
Debt Obligations and Interest Rates - We have exposure to interest rate risk
from our short-term and long-term debt. Our long-term debt is fixed and our
short-term debt is variable. Our short-term credit facilities are most
vulnerable to fluctuations in the U.S. short-term base rate and the LIBOR rate.
At current debt levels, a hypothetical increase of 10% in either interest rate
measure would not be material to our cash flows or our results of operations.
The weighted average interest rate of our debt outstanding at January 1, 2005
was 7.2%.
We regularly review the structure of our indebtedness and consider changes
to the proportion of floating versus fixed rate debt through refinancing,
interest rate swaps or other measures in response to the changing economic
environment. Historically, we have not used derivative instruments to manage
interest rate risk. If we use and fail to manage these derivative instruments
successfully, or if we are unable to refinance our indebtedness or otherwise
increase our debt capacity in response to changes in the marketplace, the
expense associated with debt service could increase. This would negatively
impact our financial condition and profitability.
The information below summarizes our market risks associated with
long-term debt obligations as of January 1, 2005. The table presents principal
cash flows and related interest rates by year of maturity. Interest rates
disclosed represent the actual weighted average rates as of January 1, 2005.
DEBT MATURING IN
---------------------------------------------------------------------------------------
(IN MILLIONS OF U.S. DOLLARS) 2005 2006 2007 2008 2009 Thereafter Total Fair Value
- ------------------------------------------- ------- ------- ------- ------- ------- ------------ --------- ----------
DEBT
Fixed rate $ 0.8 $ 0.8 $ 0.7 $ 0.7 $ 0.5 $ 275.0 $ 278.5 $ 302.6
------- ------- ------- ------- ------- ------------ --------- ---------
Weighted average interest rate for debt
maturing 5.2% 5.2% 5.2% 5.2% 5.2% 8.0% 8.0%
------- ------- ------- ------- ------- ------------ --------- ---------
48
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared by
management in conformity with generally accepted accounting principles in the
U.S. to reflect our financial position and our operating results. Financial
information appearing throughout this Annual Report is consistent with that in
the consolidated financial statements. Management is responsible for the
information and representations in such consolidated financial statements,
including the estimates and judgments required for their preparation.
In order to meet our responsibility, management maintains a system of
internal controls including policies and procedures designed to provide
reasonable assurance that assets are safeguarded and reliable financial records
are maintained. We have contracted with Deloitte and Touche LLP to provide
internal audit services including monitoring and reporting on the adequacy of
and compliance with internal controls. The internal audit function reports
regularly to the Audit Committee of the Board of Directors and we take such
actions as are appropriate to address control deficiencies and other
opportunities for improvement as they are identified.
The report of PricewaterhouseCoopers LLP, our independent registered
public accounting firm, covering their audit of the consolidated financial
statements and internal control over financial reporting as of January 1, 2005
and audits of the January 3, 2004 and December 28, 2002 financial statements, is
included in this Annual Report. We used PricewaterhouseCoopers LLP for audit and
tax compliance services in 2004 and plan to engage them only to provide these
services in the future.
The Board of Directors annually appoints an Audit Committee, consisting of
at least three 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 Registered Public Accounting Firm and
other information in the Annual Report and recommends their approval to the
Board of Directors.
/s/ John K. Sheppard
John K. Sheppard
President & Chief Executive Officer
March 10, 2005
/s/ Raymond P. Silcock
Raymond P. Silcock
Executive Vice President & Chief Financial Officer
March 10, 2005
49
Report of Independent
Registered Public Accounting Firm
TO THE SHAREOWNERS OF COTT CORPORATION:
We have completed an integrated audit of Cott Corporation's January 1, 2005
consolidated financial statements and of its internal control over financial
reporting as of January 1, 2005 and audits of its January 3, 2004 and December
28, 2002 consolidated financial statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.
Consolidated financial statements and financial statement schedules
In our opinion, the consolidated financial statements listed in the appendix
appearing under Item 8 of Form 10-K present fairly, in all material respects,
the financial position of Cott Corporation at January 1, 2005 and January 3,
2004 and the results of its operations and its cash flows for each of the three
years in the period ended January 1, 2005 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedules appearing under Item 15 of Form
10-K present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in note 6 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standard 142 for goodwill and
other intangibles acquired prior to June 30, 2001 on December 31, 2001.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control over Financial Reporting appearing in Item 9A of Form 10-K,
that the Company maintained effective internal control over financial reporting
as of January 1, 2005 based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
January 1, 2005, based on criteria established in Internal Control -- Integrated
Framework issued by the COSO. The Company's management is responsible for
maintaining effective internal-control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
50
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
We reported separately in our report dated March 7, 2005, in accordance
with Canadian generally accepted auditing standards, to the shareowners of Cott
Corporation on consolidated financial statements for each of the three years in
the period ended January 1, 2005, prepared in accordance with Canadian generally
accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Ontario
March 7, 2005
51
Consolidated Statements of Income
FOR THE YEARS ENDED
----------------------------------------------
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2002
- ------------------------------------------------------------------------ ----------- ----------- -------------
SALES $ 1,646.3 $ 1,417.8 $ 1,198.6
Cost of sales 1,362.6 1,141.0 965.7
----------- ----------- -------------
GROSS PROFIT 283.7 276.8 232.9
Selling, general and administrative expenses 138.1 126.1 110.2
Unusual items - note 2 0.9 1.8 --
----------- ----------- -------------
OPERATING INCOME 144.7 148.9 122.7
Other expense (income), net - note 3 (0.1) 0.5 14.0
Interest expense, net - note 4 26.0 27.5 32.9
Minority interest 4.0 3.2 2.1
----------- ----------- -------------
INCOME BEFORE INCOME TAXES AND EQUITY LOSS 114.8 117.7 73.7
Income taxes - note 5 (35.8) (40.1) (24.4)
Equity loss (0.7) (0.2) (0.6)
----------- ----------- -------------
INCOME FROM CONTINUING OPERATIONS 78.3 77.4 48.7
Cumulative effect of change in accounting principle, net of tax - note 6 -- -- (44.8)
----------- ----------- -------------
NET INCOME - note 7 $ 78.3 $ 77.4 $ 3.9
----------- ----------- -------------
PER SHARE DATA - note 8
INCOME PER COMMON SHARE - BASIC
Income from continuing operations $ 1.10 $ 1.12 $ 0.75
Cumulative effect of change in accounting principle $ -- $ -- $ (0.69)
Net income $ 1.10 $ 1.12 $ 0.06
INCOME PER COMMON SHARE - DILUTED
Income from continuing operations $ 1.09 $ 1.09 $ 0.69
Cumulative effect of change in accounting principle $ -- $ -- $ (0.64)
Net income $ 1.09 $ 1.09 $ 0.06
The accompanying notes are an integral part of these consolidated financial
statements.
52
Consolidated Balance Sheets
JANUARY 1, January 3,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004
- ----------------------------------------------------------------- -------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 26.6 $ 18.4
Accounts receivable - note 9 184.3 148.8
Inventories - note 10 122.8 94.4
Prepaid expenses and other assets 9.7 5.5
-------------- -------------
343.4 267.1
PROPERTY, PLANT AND EQUIPMENT - note 12 313.7 293.3
GOODWILL - note 13 88.8 81.6
INTANGIBLES AND OTHER ASSETS - note 14 276.1 266.8
-------------- -------------
$ 1,022.0 $ 908.8
============== =============
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings - note 15 $ 71.4 $ 78.1
Current maturities of long-term debt - note 16 0.8 3.3
Accounts payable and accrued liabilities - note 17 145.2 140.5
-------------- -------------
217.4 221.9
LONG-TERM DEBT - note 16 272.5 275.7
DEFERRED INCOME TAXES - note 5 51.0 40.5
-------------- -------------
540.9 538.1
-------------- -------------
MINORITY INTEREST 23.8 25.6
SHAREOWNERS' EQUITY
CAPITAL STOCK - note 18
Common shares - 71,440,020 (2003 - 70,258,831) shares issued 287.0 267.9
RETAINED EARNINGS 161.6 83.3
ACCUMULATED OTHER COMPREHENSIVE INCOME 8.7 (6.1)
-------------- -------------
457.3 345.1
-------------- -------------
$ 1,022.0 $ 908.8
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
Approved by the Board of Directors
/s/ Serge Gouin /s/ Philip B. Livingston
- ------------------------- -----------------------------
Director Director
53
Consolidated Statements of Shareowners' Equity
Number of Accumulated
Common Other
Shares Common Preferred Retained Comprehensive Total
(IN MILLIONS OF U.S. DOLLARS) (IN THOUSANDS) Shares Shares Earnings Income Equity
- ------------------------------------------------------------------ -------------- ------- -------- -------- ------------- -------
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 19 953 8.7 -- -- -- 8.7
Conversion of preferred shares into common shares - note 18 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 19 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
Options exercised, including tax benefit of $4.8 million - note 19 1,181 19.1 -- -- -- 19.1
Comprehensive income - note 7
Currency translation adjustment -- -- -- -- 15.8 15.8
Unrealized losses on cash flow hedges - note 11 -- -- -- -- (1.0) (1.0)
Net income -- -- -- 78.3 -- 78.3
------ ------- --------- -------- ---------- -------
BALANCE AT JANUARY 1, 2005 71,440 $ 287.0 $ -- $ 161.6 $ 8.7 $ 457.3
====== ======= ========= ======== ========== =======
The accompanying notes are an integral part of these consolidated financial
statements.
54
Consolidated Statements of Cash Flows
For the years ended
-------------------------------------------
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004 2002
- ------------------------------------------------ ------------- ----------- ------------
OPERATING ACTIVITIES
Net income $ 78.3 $ 77.4 $ 3.9
Depreciation and amortization 60.0 51.0 44.1
Amortization of financing fees 0.7 1.7 1.7
Deferred income taxes-note 5 9.1 9.6 5.3
Minority interest 4.0 3.2 2.1
Equity loss 0.7 0.2 0.6
Non-cash unusual items 1.5 1.8 --
Gain on disposal of investment -- -- (1.3)
Cumulative effect of accounting change - note 6 -- -- 44.8
Other non-cash items 0.8 1.6 5.9
Net change in non-cash working capital - note 20 (52.4) (3.8) (16.5)
------------- ----------- ----------
Cash provided by operating activities 102.7 142.7 90.6
------------- ----------- ----------
INVESTING ACTIVITIES
Additions to property, plant and equipment (50.3) (39.6) (33.9)
Acquisition of production capacity (3.8) -- --
Acquisitions and equity investments - note 21 (34.6) (49.8) (30.6)
Notes receivable -- (2.5) --
Other investing activities (4.7) (9.9) (7.8)
-------------- ----------- ----------
Cash used in investing activities (93.4) (101.8) (72.3)
-------------- ----------- ----------
FINANCING ACTIVITIES
Issue of long-term debt -- -- 1.0
Decrease in cash in trust -- -- 297.3
Payments of long-term debt (3.5) (90.2) (287.2)
Payment of deferred consideration on acquisition -- -- (19.5)
Short-term borrowings (7.0) 55.8 (12.9)
Distributions to subsidiary minority shareowner (5.9) (4.1) (3.9)
Issue of common shares 14.3 12.3 5.8
Other financing activities (0.4) (0.4) (0.2)
------------- ----------- ----------
Cash used in financing activities (2.5) (26.6) (19.6)
------------- ----------- ----------
Effect of exchange rate changes on cash 1.4 0.8 0.7
------------- ----------- ----------
NET INCREASE (DECREASE) IN CASH 8.2 15.1 (0.6)
CASH, BEGINNING OF YEAR 18.4 3.3 3.9
------------- ----------- ----------
CASH, END OF YEAR $ 26.6 $ 18.4 $ 3.3
============= =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
55
Notes to Consolidated Financial Statements
FOR THE FISCAL YEARS ENDED 2004, 2003 AND 2002
NOTE 1
Summary of Significant Accounting Policies
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance with
United States ("U.S.") generally accepted accounting principles ("GAAP") using
the U.S. dollar as the reporting currency, as the majority of our business and
the majority of our shareowners are in the U.S. 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 our accounts and our wholly owned and
majority-owned subsidiaries where we are exposed to the majority of the expected
losses or returns. We adopted the new guidelines under FIN 46 in 2004 and it had
no material impact on our financial statements. Previously, we consolidated
subsidiaries where we exercised voting control. 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 future proposed changes in accounting guidance and
does not expect any of these changes to have a material impact on us except for
SFAS 123R.
On December 16, 2004, the Financial Accounting Standards Board issued SFAS 123R,
Share-Based Payments which requires companies to recognize compensation expense
for all types of stock options. We will be required to adopt this standard for
our interim period ending September 30, 2005.
REVENUE RECOGNITION
We recognize sales at the time ownership passes to the customer. This may be
upon shipment of goods or upon delivery to the customer, depending on
contractual terms. Shipping and handling costs paid by the customer to us are
included in revenue.
SALES INCENTIVES
We participate in various incentive programs with our customers including ones
under which incentives can be earned for attaining agreed upon sales volume
targets over time. Sales incentives are deducted in arriving at sales. Sales
incentives based on our customers achieving volume targets are accrued as the
incentive is earned and is based on management's estimate of the total rebate
expected to be earned and claimed by the customer. We regularly review customer
sales forecasts to ensure volume targets will be met and adjust incentive
accruals accordingly.
COSTS OF SALES
We record shipping and handling and finished goods inventory costs in cost of
sales. Finished goods inventory costs include the cost of direct labor and
materials and the applicable share of overhead expense chargeable to production.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
We record all other expenses not charged to production as general and
administrative expenses.
56
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
Plates and films 3 years
--------------
We compare the carrying value of property, plant and equipment to the estimated
undiscounted future cash flows that may be generated by the related assets and
recognize in net income any impairment to fair value when events indicate there
may be an impairment.
GOODWILL
Goodwill represents the excess purchase price of acquired businesses over the
fair value of the net assets acquired. We compare the carrying amount of the
goodwill to the fair value, at least annually, and recognize in net income any
impairment in value.
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. We compare the carrying amount of the rights to their fair
value, at least annually, and recognize in net income any impairment in value.
Customer relationships are amortized over periods of up to 15 years.
Trademarks are recorded at the cost of acquisition and are amortized over 15
years. We periodically compare 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 recognize in net income any impairment
to fair value.
Information technology includes computer software and licenses, computer
programs and information systems which are amortized over a period of 3 to 5
years.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of foreign operations, all of which are
self-sustaining, are translated at the exchange rates in effect at the balance
sheet dates. Revenues and expenses are translated using average exchange rates
prevailing during the period. The resulting gains or losses are accumulated in
the other comprehensive income account in shareowners' equity.
TAXATION
We account for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized based on the differences between the
accounting values of assets and liabilities and their related tax bases using
currently enacted income tax rates.
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 and unrealized gains
and losses on cash flow hedges.
57
NOTE 2
Unusual Items
During the year ended January 1, 2005, unusual items of $0.9 million ($1.8
million - January 3, 2004) included a charge of $1.5 million ($2.1 million -
January 3, 2004) relating to a provision for a note due from an equity investee.
NOTE 3
Other Expense (Income), Net
For the years ended
----------------------------------------------------
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004 2002
- ---------------------------------------------------- ------------ ---------- ---------------
Foreign exchange loss $ 0.7 $ 1.2 $ 0.7
Costs of extinguishment of debt - - 14.1
Gain on disposal of investment in Menu Foods Limited - - (1.3)
Other (0.8) (0.7) 0.5
------------ ----------- ---------------
$ (0.1) $ 0.5 $ 14.0
============ =========== ===============
NOTE 4
Interest Expense, Net
For the years ended
----------------------------------------------------
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004 2002
- ----------------------------- ------------ ---------- ---------------
Interest on long-term debt $ 23.9 $ 26.4 $ 31.8
Other interest expense 2.6 1.7 1.7
Interest income (0.5) (0.6) (0.6)
------------ ---------- ---------------
$ 26.0 $ 27.5 $ 32.9
============ ========== ===============
Interest paid during the year was approximately $25.0 million ($25.9 million -
January 1, 2004; $38.4 million - December 28, 2002).
NOTE 5
Income Taxes
Income (loss) before income taxes and equity loss consisted of the following:
For the years ended
-------------------------------------------
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004 2002
- ----------------------------- ----------- ----------- -------------
Canada $ (1.9) $ 3.6 $ (0.5)
Outside Canada 116.7 114.1 74.2
----------- ----------- -------------
$ 114.8 $ 117.7 $ 73.7
=========== =========== =============
58
Provision for income taxes consisted of the following:
For the years ended
----------------------------------------------
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004 2002
---------------------------- ---------- ----------- ------------
CURRENT
Canada $ (0.1) $ (0.2) $ (0.2)
Outside Canada (26.6) (30.3) (18.9)
---------- ----------- ----------
$ (26.7) $ (30.5) $ (19.1)
---------- ----------- ----------
DEFERRED
Canada $ 1.5 $ (1.2) $ (1.5)
Outside Canada (10.6) (8.4) (3.8)
---------- ----------- ----------
$ (9.1) $ (9.6) $ (5.3)
---------- ----------- ----------
PROVISION FOR INCOME TAXES $ (35.8) $ (40.1) $ (24.4)
========== =========== ==========
Income taxes paid during the year were $27.3 million ($21.8 million - January 3,
2004; $19.0 million - December 28, 2002). The following table reconciles income
taxes calculated at the basic Canadian corporate rates with the income tax
provision:
For the years ended
-------------------------------------
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004 2002
- ------------------------------------------------------ ---------- ----------- -----------
Income tax provision based on Canadian statutory rates $ (39.8) $ (42.3) $ (29.1)
Foreign tax rate differential 1.7 2.6 1.8
Manufacturing and processing deduction - 0.1 0.2
Decrease (increase) in valuation allowance 0.6 (0.6) -
Adjustment for change in enacted rates - 1.0 0.7
Realization of benefit on carry back of capital loss - - 1.8
Non-deductible and other items 1.7 (0.9) 0.2
---------- ---------- ----------
Provision for income taxes $ (35.8) $ (40.1) $ (24.4)
========== ========== ==========
59
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 1, January 3,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004
- ----------------------------- ---------- ----------
DEFERRED TAX ASSETS
Loss carryforwards $ 19.5 $ 19.1
Liabilities and reserves 5.5 8.6
Other 2.4 2.5
---------- ----------
27.4 30.2
Valuation allowance - (0.6)
---------- ----------
27.4 29.6
---------- ----------
DEFERRED TAX LIABILITIES
Property, plant and equipment 41.8 35.4
Intangible assets 12.3 8.3
Other 24.3 26.4
---------- ----------
78.4 70.1
---------- ----------
NET DEFERRED TAX LIABILITY $ (51.0) $ (40.5)
========== ==========
As of January 1, 2005, operating loss carryforwards primarily in Canada, of
$55.2 million are available to reduce future taxable income. These losses expire
as follows:
(IN MILLIONS OF U.S. DOLLARS)
- ----------------------------
2005 $ 14.2
2006 24.4
2008 6.2
Thereafter 10.4
---------
$ 55.2
=========
NOTE 6
Changes in Accounting Principles
In the first quarter of 2002, we adopted SFAS 142, Goodwill and Other Intangible
Assets, for goodwill and other intangibles acquired prior to June 30, 2001. We
adopted SFAS 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.
We 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 U.K. 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.
60
NOTE 7
Other Comprehensive Income
For the years ended
------------------------------------
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004 2002
- ------------------------------------- ---------- ---------- ------------
Net income $ 78.3 $ 77.4 $ 3.9
Foreign currency translation gain 15.8 29.7 7.9
Unrealized losses on cash flow hedges (1.0) - -
---------- ---------- ------------
$ 93.1 $ 107.1 $ 11.8
========== ========== ============
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 1, January 3, December 28,
(IN THOUSANDS) 2005 2004 2002
- ---------------------------------------------------------------- ---------- ---------- ------------
Weighted average number of shares outstanding-- basic 71,006 69,389 65,262
Dilutive effect of stock options 1,065 1,607 2,202
Dilutive effect of second preferred shares - - 3,074
------ ------ ------
Adjusted weighted average number of shares outstanding-- diluted 72,071 70,996 70,538
====== ====== ======
At January 1, 2005, options to purchase 1,493,000 (December 28, 2002 -
1,069,500) shares of common stock at a weighted average exercise price of
C$40.83 (December 28, 2002 -- C$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.
NOTE 9
Accounts Receivable
JANUARY 1, January 3,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004
- ------------------------------- ----------- -----------
Trade receivables $ 154.2 $ 134.6
Allowance for doubtful accounts (12.1) (6.8)
Other 42.2 21.0
----------- -----------
$ 184.3 $ 148.8
=========== ===========
As of January 1, 2005, other receivables include $7.0 million due from an equity
investee ($6.6 million -- January 3, 2004) and the allowance for doubtful
accounts include $3.9 million due from an equity investee ($2.0 million --
January 3, 2004).
61
NOTE 10
Inventories
JANUARY 1, January 3,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004
- ----------------------------- ----------- ----------
Raw materials $ 47.9 $ 37.7
Finished goods 59.9 46.8
Other 15.0 9.9
----------- ---------
$ 122.8 $ 94.4
=========== =========
NOTE 11
Derivative Financial Instruments
In 2004, we entered into cash flow hedges to mitigate exposure to declines in
the value of the Canadian dollar and pound sterling attributable to certain
forecasted U.S. dollar raw material purchases of the Canadian and U.K. and
European business segments. The hedges consist of monthly foreign exchange
options to buy U.S. dollars at fixed rates per Canadian dollar and pound
sterling and mature at various dates through December 30, 2005. In addition, we
entered into one forward foreign exchange contract to purchase U.S. dollars at a
fixed rate per pound sterling. The forward foreign exchange contract matured in
January 2005. The fair market value of the foreign exchange options and the
forward foreign exchange contract is included in prepaid expenses and other
assets.
Changes in the fair value of the cash flow hedge instruments are
recognized in accumulated other comprehensive income. Amounts recognized in
accumulated other comprehensive income and prepaid expenses and other assets are
recorded in earnings in the same periods in which the forecasted purchases or
payments affect earnings. At January 1, 2005, the fair value of the options and
forward contract was $0.9 million and we recorded $1.0 million unrealized loss
in comprehensive income in 2004.
NOTE 12
Property, Plant and Equipment
JANUARY 1, 2005 January 3, 2004
--------------------------------------------------------------------------------
ACCUMULATED Accumulated
(IN MILLIONS OF U.S. DOLLARS) COST DEPRECIATION NET Cost Depreciation Net
- ------------------------------- ---------- ------------ ---------- ---------- ------------ ----------
Land $ 21.4 $ - $ 21.4 $ 19.7 $ - $ 19.7
Buildings 110.8 27.9 82.9 98.5 22.8 75.7
Machinery and equipment 402.6 205.4 197.2 353.2 169.2 184.0
Computer hardware - - - 12.7 8.2 4.5
Furniture and fixtures 12.3 9.6 2.7 11.0 8.4 2.6
Plates and film 23.2 13.7 9.5 16.1 9.3 6.8
---------- --------- ---------- ---------- --------- ----------
$ 570.3 $ 256.6 $ 313.7 $ 511.2 $ 217.9 $ 293.3
========== ========= ========== ========== ========= ==========
During the year ended January 3, 2004, we recorded $9.8 million of property,
plant and equipment financed through capital leases. Depreciation expense for
fiscal 2004 was $41.7 million ($38.4 million -- January 3, 2004; $32.7 million
- -- December 28, 2002).
62
NOTE 13
Goodwill
JANUARY 1, January 3,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004
- ------------------------------ ---------- ----------
Balance at beginning of period $ 81.6 $ 77.0
Acquisitions -- note 21 5.7 0,7
Foreign exchange 1.5 3.9
--------- ---------
Balance at end of period $ 88.8 $ 81.6
========= =========
NOTE 14
Intangibles and Other Assets
JANUARY 1, 2005 January 3, 2004
--------------------------------------------------------------------------------
ACCUMULATED Accumulated
(IN MILLIONS OF U.S. DOLLARS) COST AMORTIZATION NET Cost Amortization Net
- ------------------------------- ---------- ------------ ---------- ---------- ------------ ----------
INTANGIBLES
Not subject to amortization
Rights $ 80.4 $ - $ 80.4 $ 80.4 $ - $ 80.4
---------- -------- ---------- ---------- -------- ----------
Subject to amortization
Customer relationships 164.7 31.5 133.2 157.9 20.8 137.1
Trademarks 30.0 7.3 22.7 25.8 5.5 20.3
Information technology 40.4 18.4 22.0 41.5 20.5 21.0
Other 3.6 0.6 3.0 3.6 0.3 3.3
---------- -------- ---------- ---------- -------- ----------
238.7 57.8 180.9 228.8 47.1 181.7
---------- -------- ---------- ---------- -------- ----------
319.1 57.8 261.3 309.2 47.1 262.1
---------- -------- ---------- ---------- -------- ----------
OTHER ASSETS
Financing costs 5.6 4.6 1.0 5.6 3.9 1.7
Other 15.5 1.7 13.8 3.9 0.9 3.0
---------- -------- ---------- ---------- -------- ----------
21.1 6.3 14.8 9.5 4.8 4.7
---------- -------- ---------- ---------- -------- ----------
$ 340.2 $ 64.1 $ 276.1 $ 318.7 $ 51.9 $ 266.8
========== ======== ========== ========== ======== ==========
Amortization expense of intangibles was $17.8 million ($12.5 million - January
3, 2004; $10.9 million - December 28, 2002). The estimated amortization expense
for intangibles over the next five years is:
(IN MILLIONS OF U.S. DOLLARS)
- -----------------------------
2005 $ 18.6
2006 18.5
2007 18.3
2008 18.1
2009 14.4
---------
$ 87.9
=========
63
NOTE 15
Short-Term Borrowings
Short-term borrowings include bank overdrafts and borrowings under our credit
facilities.
At January 1, 2005, we had a committed, revolving, senior secured credit
facility of $125.0 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 1, 2005, credit
of $57.7 million was available after borrowings of $63.3 million and standby
letters of credit of $4.0 million. Borrowings under the bank credit facility
bear interest at base rate plus 0.50% per annum or LIBOR plus 1.75% per annum. A
facility fee of 0.50% per annum is payable on the entire line of credit. The
weighted average interest rate was 4.4% at January 1, 2005 (3.2% - January 3,
2004, 5.5% - December 28, 2002) on this short-term credit facility.
We also had a $28.7 million ((pound)15.0 million) demand bank credit
facility in the U.K. with $4.9 million outstanding as of January 1, 2005. This
credit facility expired on December 31, 2004 and is currently being
renegotiated. 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 month's
notice. As at January 1, 2005 only U.S. dollar borrowings were outstanding under
this credit facility at an interest rate of 2.20%.
NOTE 16
Long-Term Debt
JANUARY 1, January 3,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004
- ----------------------------------------------------- ----------- -----------
Senior subordinated unsecured notes at 8% due 2011 (a) $ 269.8 $ 269.0
Capital leases 3.5 7.9
Other - 2.1
----------- -----------
273.3 279.0
Less current maturities (0.8) (3.3)
----------- -----------
$ 272.5 $ 275.7
=========== ===========
a) Our 8% senior subordinated unsecured notes were issued at a discount of 2.75%
on December 21, 2001. The fair value of the notes as of January 1, 2005 is
estimated to be $299.1 million (January 3, 2004 - $299.8 million). The notes
contain a number of financial covenants including limitations on capital
stock repurchases, dividend payments and incurrence of indebtedness,
Penalties exist if we redeem the notes prior to December 15, 2009.
JANUARY 1, January 3,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004
- ----------------------------- ----------- -----------
Face value $ 275.0 $ 275.0
Discount (5.2) (6.0)
----------- -----------
$ 269.8 $ 269.0
=========== ===========
64
b) Long-term debt payments required in each of the next five years and
thereafter are as follows:
(IN MILLIONS OF U.S. DOLLARS)
- -----------------------------
2005 $ 0.8
2006 0.8
2007 0.7
2008 0.7
2009 0.5
Thereafter 275.0
----------
$ 278.5
==========
NOTE 17
Accounts Payable and Accrued Liabilities
JANUARY 1, January 3,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004
- ----------------------------- ---------- ----------
Trade payables $ 79.1 $ 64.3
Accrued compensation 17.5 26.6
Accrued promotion and rebates 24.9 24.2
Accrued interest 1.2 1.2
Income, sales and other taxes 8.8 11.5
Other accrued liabilities 13.7 12.7
---------- ----------
$ 145.2 $ 140.5
========== ==========
NOTE 18
Capital Stock
Our authorized capital stock 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 us 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.
65
NOTE 19
Stock Option Plans
Under the 1986 Common Share Option Plan, as amended, we have reserved 14.0
million common shares for future issuance. Options are granted at a price not
less than fair value of the shares on the date of grant.
Options granted on or after April 12, 1996 but before September 1,1998
expire after 10 years and vest at 25% per annum commencing on the second
anniversary date of the grant. Options granted after September 1,1998 expire
after 7 years and vest at 30%
per annum on the anniversary date of the grant for the first two years and the
balance on the third anniversary date of the grant. Certain options granted
under the plan vest monthly over a period of 24 or 36 months. Options granted
after July 17, 2001 to the non-management members of the Board of Directors vest
immediately. All options are non-transferable.
We account for our employee stock option plan under APB opinion No. 25,
Accounting for Stock Issued to Employees. Under this method of accounting,
compensation expense is measured as the excess, if any, of the market value of
our common stock at the award date over the amount the employee must pay for the
stock (exercise price). Our policy is to award stock options with an exercise
price equal to the closing price of our common stock on the Toronto Stock
Exchange on the last trading day immediately before the date of award, and
accordingly, no compensation expense has been recognized for stock options
issued under these plans. Had compensation expense for the plans been determined
based on the fair value at the grant date consistent with SFAS 123, our net
income and income per common share would have been as follows:
For the years ended
-------------------
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2002
- ------------------------------------------------------- ---------- ---------- ------------
NET INCOME (LOSS)
As reported $ 78.3 $ 77.4 $ 3.9
Compensation expense (8.6) (6.3) (5.4)
---------- ---------- ---------
Pro forma $ 69.7 $ 71.1 $ (1.5)
---------- ---------- ---------
NET INCOME (LOSS) PER SHARE -- BASIC
As reported $ 1.10 $ 1.12 $ 0.06
Pro forma $ 0.98 $ 1.02 $ (0.02)
NET INCOME (LOSS) PER SHARE -- DILUTED
As reported $ 1.09 $ 1.09 $ 0.06
Pro forma $ 0.97 $ 1.00 $ (0.02)
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 1, January 3, December 28,
2005 2004 2002
------------ ---------- ------------
Risk-free interest rate 3.3% - 3.9% 3.9% - 4.3% 3.8% - 4.7%
Average expected life (years) 4 4 4
Expected volatility 40.0% - 45.0% 45.0% 45.0%
Expected dividend yield - - -
66
Option activity was as follows:
JANUARY 1, 2005 January 3, 2004 December 28, 2002
------------------------ ------------------------ ------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE (C$) Shares Price (C$) Shares Price (C$)
---------- ---------- ---------- ---------- ---------- ----------
Balance -- at beginning 4,067,154 $ 22.90 4,984,340 $ 16.90 4,752,845 $ 11.63
Granted 1,538,750 $ 40.70 929,250 $ 29.95 1,476,000 $ 28.98
Exercised (1,181,189) $ 16.06 (1,699,796) $ 9.51 (952,776) $ 9.60
Cancelled (218,750) $ 31.22 (146,640) $ 20.10 (291,729) $ 12.15
---------- ---------
Balance -- at end 4,205,965 $ 30.90 4,067,154 $ 22.90 4,984,340 $ 16.90
========= ========== =========
Weighted average fair value of options
granted during the year $ 15.96 $ 12.24 $ 11.20
Outstanding options at January 1, 2005 are as follows:
Options Outstanding Options Exercisable
--------------------------------------- ------------------------
Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices (C$) Outstanding Life (Years) Price (C$) Exercisable Price (C$)
- ----------------- ----------- ------------ ---------- ----------- ----------
$ 5.95 - $ 16.10 193,791 3.3 $ 9.63 193,791 $ 9.63
$ 16.68 - $ 24.25 893,074 3.7 $ 19.24 777,574 $ 18.56
$ 26.00 - $ 33.30 1,658,100 5.1 $ 30.76 791,675 $ 30.19
$ 35.21 - $ 43.64 1,461,000 6.3 $ 41.01 -- --
--------- --- ---------- --------- ----------
4,205,965 5.1 $ 30.90 1,763,040 $ 22.80
========= === ========== ========= ==========
NOTE 20
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 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004 2002
- --------------------------------------------------------------- ---------- ---------- ------------
Decrease (increase) in accounts receivable $ (21.3) $ (2.7) $ (5.4)
Decrease (increase) in inventories (22.8) (11.0) (3.5)
Decrease (increase) in prepaid expenses (4.8) (1.0) 0.2
Increase (decrease) in accounts payable and accrued liabilities (3.5) 10.9 (7.8)
---------- ---------- ---------
$ (52.4) $ (3.8) $ (16.5)
========== ========== =========
67
NOTE 21
Acquisitions and Equity Investments
All acquisitions have been accounted for using the purchase method, and
accordingly, the results of operations are included in our consolidated
statements of income from the effective dates of purchase, except as otherwise
indicated.
The total purchase prices of the acquisitions and equity investments were
allocated as follows based on the fair value of the net assets:
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004 2002
- ------------------------------------ ---------- ---------- -------------
Current assets $ 6.0 $ (0.6) $ 11.8
Property, plant and equipment 19.3 3.6 14.0
Rights -- 0.3 --
Customer relationships 6.8 49.7 4.8
Trademarks 0.8 -- 6.8
Goodwill 5.7 0.7 7.7
Other assets -- 0.2 3.0
Equity investments -- (1.3) 2.8
---------- ---------- ----------
38.6 52.6 50.9
---------- ---------- ----------
Current liabilities 4.0 0.4 12.8
Deferred taxes and other liabilities -- 2.4 7.1
Minority interest -- -- 0.4
---------- ---------- ----------
PURCHASE PRICE $ 34.6 $ 49.8 $ 30.6
========== ========== ==========
Year ended January 1, 2005
Effective March 17, 2004, we acquired certain of the assets of The Cardinal
Companies of Elizabethtown, LLC, located in Kentucky. The purchase of $17.8
million was allocated primarily to machinery and equipment.
Effective October 19, 2004, we acquired for $16.8 million certain of the
assets of Metro Beverage Co. The purchase price was allocated to customer
relationships, goodwill and machinery and equipment.
The total purchase price for all acquisitions was $34.6 million, including
acquisition costs of $0.8 million. The acquisitions were funded from cash and
borrowings on our revolving credit facility.
Year ended January 3, 2004
Effective May 15, 2003, our Mexican subsidiary Cott Embotelladores de Mexico,
S.A. de C.V. ("CEMSA"), acquired a soft drink distribution business from
Embotelladora de Puebla, S.A. de C.V. ("EPSA"). The purchase price was allocated
to license and machinery and equipment.
Effective December 19, 2003, we acquired the retailer brand beverage
business of North Carolina's Quality Beverage Brands, L.L.C. ("QBB"). The assets
acquired include customer relationships and certain machinery and equipment. The
acquisition is expected to enhance our capabilities and expand our customer base
in the Mid-Atlantic region of the U.S.
The total purchase price for all acquisitions was $49.8 million, including
estimated acquisition costs of $0.6 million and the purchase of the remaining
interest in Iroquois West Bottling Ltd. in January 2003. The acquisitions were
funded from cash and borrowings on our revolving credit facility.
Year ended December 28, 2002
Effective June 21, 2002, we acquired a new venture in Mexico, CEMSA, with EPSA
in order to establish manufacturing and marketing capabilities in Mexico. We
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.
68
Effective June 25, 2002, we 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 our
growing presence in the Northeast U.S.
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. We funded the acquisitions from borrowings on our
short-term credit facility. The goodwill recognized on the transactions is not
deductible for tax purposes.
In January 2002, we made equity investments in two spring water companies,
Iroquois Water Ltd. and Iroquois West Bottling Ltd. (now known as Cott
Revelstoke Ltd.), totalling $1.8 million to strengthen our position in the
spring water segment across Canada.
NOTE 22
Benefit Plans
Cott maintains primarily defined contribution pension plans covering qualifying
employees in the U.S., Canada and the U.K. The total expense with respect to
these plans was $5.6 million for the year ended January 1, 2005 ($4.5 million -
January 3, 2004; $4.2 million -- December 28, 2002).
NOTE 23
Commitments and Contingencies
a) We lease buildings, machinery & equipment, computer 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)
- -----------------------------
2005 $ 14.6
2006 14.7
2007 12.2
2008 8.8
2009 8.1
Thereafter 41.3
--------
$ 99.7
========
Operating lease expenses were:
(IN MILLIONS OF U.S. DOLLARS)
- -----------------------------
Year ended January 1, 2005 $ 11.9
Year ended January 3, 2004 $ 13.0
Year ended December 28, 2002 $ 11.9
b) As of January 1, 2005, we had commitments for capital expenditures of
approximately $13.5 million (January 3, 2004 -- $10.7 million) and
commitments for inventory of approximately $18.3 million (January 3, 2004
-- $14.2 million).
c) We are subject to various claims and legal proceedings with respect to
matters such as governmental regulations, income taxes, and other actions
arising out of the normal course of business. Management believes that the
resolution of these matters will not have a material adverse effect on our
financial position or results from operations.
d) We had $4.0 million in standby letters of credit outstanding as of January
1, 2005.
e) In January 2005, we were named as one of many defendants in a class action
suit alleging the unauthorized use by the defendants of container deposits
and the imposition of recycling fees on consumers. This litigation is at a
very preliminary stage and the merits of the case have not been
determined.
69
NOTE 24
Segment Reporting
We produce, package and distribute retailer brand and branded bottled and canned
soft drinks to regional and national grocery, mass-merchandise and wholesale
chains in the U.S., Canada, the U.K. & Europe and International business
segments. The International segment includes the 2002 Mexican acquisitions and
the Royal Crown International business. The concentrate assets and related
expenses are included in the Corporate & Other segment for comparative purposes.
The segmented information for prior periods has been restated to conform to the
way we currently manage our beverage business by geographic segments as
described below:
BUSINESS SEGMENTS
FOR THE YEAR ENDED JANUARY 1, 2005
------------------------------------------------------------------------------------
UNITED KINGDOM CORPORATE
(IN MILLIONS OF U.S. DOLLARS) UNITED STATES CANADA & EUROPE INTERNATIONAL & OTHER TOTAL
- -------------------------------------------- ------------- --------- -------------- ------------- --------- -----------
External sales $ 1,199.0 $ 189.5 $ 194.3 $ 61.2 $ 2.3 $ 1,646.3
Intersegment sales 0.4 18.9 -- -- (19.3) --
Depreciation and amortization 39.7 8.8 8.2 1.2 2.1 60.0
Operating income (loss) before unusual items 120.5 11.6 12.3 10.4 (9.2) 145.6
Unusual items -- (1.5) 0.4 -- 0.2 (0.9)
Property, plant and equipment 174.9 53.0 68.7 9.6 7.5 313.7
Goodwill 55.6 23.5 -- 4.6 5.1 88.8
Intangibles and other assets 179.3 3.4 3.9 1.2 88.3 276.1
Total assets 591.1 131.3 135.6 85.3 78.7 1,022.0
Additions to property, plant and equipment 36.3 4.9 4.9 1.6 2.6 50.3
Acquisition of production capacity 3.8 -- -- -- -- 3.8
For the year ended January 3, 2004
------------------------------------------------------------------------------------
United Kingdom Corporate
(IN MILLIONS OF U.S. DOLLARS) United States Canada & Europe International & Other Total
- -------------------------------------------- ------------- --------- -------------- ------------- --------- -----------
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 155.5 54.9 66.7 9.2 7.0 293.3
Goodwill 49.9 22.0 -- 4.6 5.1 81.6
Intangibles and other assets 177.0 3.2 1.1 1.3 84.2 266.8
Total assets 514.9 130.3 126.7 77.6 59.3 908.8
Additions to property, plant and equipment 19.0 4.6 7.0 6.1 2.9 39.6
70
For the year ended December 28, 2002
------------------------------------------------------------------------------------
United Kingdom Corporate
(IN MILLIONS OF U.S. DOLLARS) United States Canada & Europe International & Other Total
- ------------------------------------------ ------------- --------- -------------- ------------- --------- -----------
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 146.9 41.2 59.5 0.2 10.6 258.4
Goodwill 49.9 17.4 -- 4.6 5.1 77.0
Intangibles and other assets 129.4 5.2 1.8 1.1 87.8 225.3
Total assets 452.8 107.9 101.6 61.7 61.4 785.4
Additions to property, plant and equipment 21.9 3.5 2.3 3.2 3.0 33.9
Intersegment sales and total assets under the Corporate & Other caption include
the elimination of intersegment sales, receivables and investments.
For the year ended January 1, 2005, sales to Wal-Mart accounted for 40% (2003 --
42%, 2002 -- 40%) of our total sales.
Credit risk arises from the potential default of a customer in meeting its
financial obligations with us. Concentrations of credit exposure may arise with
a group of customers which have similar economic characteristics or that are
located in the same geographic region. The ability of such customers to meet
obligations would be similarly affected by changing economic, political or other
conditions.
Revenues by geographic area are as follows:
JANUARY 1, January 3, December 28,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004 2002
- ----------------------------- ---------- ----------- ------------
United States $ 1,221.8 $ 1,035.8 $ 885.3
Canada 189.5 191.0 171.2
United Kingdom 186.9 160.2 125.6
Other countries 48.1 30.8 16.5
---------- ---------- -----------
$ 1,646.3 $ 1,417.8 $ 1,198.6
========== ========== ===========
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 1, January 3,
(IN MILLIONS OF U.S. DOLLARS) 2005 2004
- ----------------------------- ---------- -----------
United States $ 508.9 $ 481.4
Canada 86.3 81.9
United Kingdom 72.5 67.8
Other countries 10.9 10.6
---------- ----------
$ 678.6 $ 641.7
========== ==========
71
Quarterly Financial Information
(UNAUDITED)
YEAR ENDED JANUARY 1, 2005
-----------------------------------------------------------
FIRST SECOND THIRD FOURTH
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER TOTAL
- ------------------------------------------------------- --------- --------- --------- --------- -----------
Sales $ 370.9 $ 463.7 $ 442.4 $ 369.3 $ 1,646.3
Cost of sales 300.5 378.2 371.4 312.5 1,362.6
--------- --------- --------- --------- -----------
Gross profit 70.4 85.5 71.0 56.8 283.7
Selling, general and administrative expenses 38.7 34.1 33.3 32.0 138.1
Unusual items -- (0.5) (0.2) 1.6 0.9
--------- --------- --------- --------- -----------
Operating income 31.7 51.9 37.9 23.2 144.7
--------- --------- --------- --------- -----------
Net income $ 15.4 $ 29.4 $ 22.1 $ 11.4 $ 78.3
========= ========= ========= ========= ===========
Per share data:
Income per common share -- basic
Net income $ 0.22 $ 0.41 $ 0.31 $ 0.16 $ 1.10
Income per common share -- diluted
Net income $ 0.21 $ 0.41 $ 0.31 $ 0.16 $ 1.09
========= ========= ========= ========= ===========
YEAR ENDED JANUARY 3, 2004
-----------------------------------------------------------
FIRST SECOND THIRD FOURTH
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER TOTAL
- ------------------------------------------------------- --------- --------- --------- --------- -----------
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
--------- --------- --------- --------- -----------
Gross profit 56.4 76.9 75.1 68.4 276.8
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
========= ========= ========= ========= ===========
72
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended) are effective,
based on their evaluation of these controls and procedures as of the end of the
period covered by this report. There have been no changes in our internal
controls or in other factors during the quarter ended January 1, 2005 that could
materially affect, or are likely to materially affect, our controls over
financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined
in Rules 13a-15(f) or 15d-(f) promulgated under the Exchange Act as a process
designed by, or under the supervision of, our principal executive and principal
financial officer and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
- pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect our transactions and dispositions of
our assets;
- provide reasonable assurance our transactions are recorded as
necessary to permit preparation of our financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
- provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial
reporting as of January 1, 2005. In making this assessment, we used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") in Internal Control-Integrated Framework.
Based on our assessment, we determined that, as of January 1, 2005, our
internal control over financial reporting is effective based on those criteria.
Our assessment of the effectiveness of our internal control over financial
reporting as of January 1, 2005 has been audited by PricewaterhouseCoopers LLP,
an independent registered public accounting firm, as stated in their report
which appears on page 50.
73
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item regarding directors is incorporated by
reference to, and will be contained in, the "Election of Directors" section of
our definitive proxy statement for the 2005 Annual Meeting of Shareowners, which
will be filed within 120 days after January 1, 2005. The information required by
this item regarding audit committee financial expert disclosure is incorporated
by reference to, and will be contained in, the "Board Committees" section of our
definitive proxy statement for the 2005 Annual Meeting of Shareowners. The
information required by this item regarding executive officers appears as the
Supplemental Item in Part I.
The Audit Committee of our Board of Directors is an "audit committee" for
the purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended. The members of the Audit Committee are Philip B. Livingston (Chairman),
W. John Bennett and Andrew Prozes.
We have adopted a Code of Ethics applicable to our Chief Executive
Officer, Chief Financial Officer and principal accounting officer and certain
other employees. We intend to disclose any amendment to, or waiver from, any
provision of the Code by posting such information on our Internet website,
www.cott.com.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information required by this item is incorporated by reference to, and will
be contained in, the "Section 16(a) Beneficial Ownership Reporting Compliance"
section of our definitive proxy statement for the 2005 Annual Meeting of
Shareowners, which will be filed within 120 days after January 1, 2005.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to, and will
be contained in, the "Executive Compensation", "Employment Agreements", "Report
on Executive Compensation", "Shareowner Return Performance Graph", and
"Compensation of Directors" sections of our definitive proxy statement for the
2005 Annual Meeting of Shareowners, which will be filed within 120 days after
January 1, 2005.
74
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREOWNER MATTERS
The information required by this item is incorporated by reference to, and will
be contained in, the "Principal Shareowners," the "Security Ownership of
Directors and Management" and "Equity Compensation Plan Information" sections of
our definitive proxy statement for the 2005 Annual Meeting of Shareowners, which
will be filed within 120 days after January 1, 2005.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to, and will
be contained in, the "Certain Relationships and Related Transactions" section of
our definitive proxy statement for the 2005 Annual Meeting of Shareowners, which
will be filed within 120 days after January 1, 2005.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to, and will
be contained in, the "Auditors" section of our definitive proxy statement for
the 2005 Annual Meeting of Shareowners, which will be filed within 120 days
after January 1, 2005.
75
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. FINANCIAL STATEMENTS:
The consolidated financial statements are included in Item 8 of this Annual
Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts
Schedule III -- Consolidating Financial Statements
All other schedules called for by the applicable SEC accounting regulations are
not required under the related instructions or are inapplicable and, therefore,
have been omitted.
76
3. EXHIBITS:
NUMBER DESCRIPTION
- ------ -----------
2.1(1) Asset Purchase Agreement by and between Concord Beverage Company and
Concord Beverae LP, dated as of October 18, 2000 (incorporated by
reference to Exhibit 2.1 to our Form 8-K dated as of October 18,
2000).
2.2(1) 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 our 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 our
Form 10-K filed March 31, 2000).
2.4(2) 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 our Form 10-Q filed May 16, 2000).
2.5(1,2) 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 our Form 8-K dated July 19, 2001).
3.1 Articles of Incorporation of Cott Corporation (incorporated by
reference to Exhibit 3.1 to our Form 10-K filed March 31, 2000).
3.2 By-laws of Cott Corporation (incorporated by reference to Exhibit
3.2 to our Form 10-K filed March 8, 2002).
4.1 Subscription Agreement dated as of June 12, 1998 for Cott
Corporation's (as issuer) Convertible Participating Voting Second
Preferred Shares, Series 1 (incorporated by reference to Exhibit 4.2
to our Form 10-K filed March 31, 2000).
4.2 Letter Agreement dated as of November 3,1999, regarding standstill
provisions between Cott Corporation and the Thomas H. Lee Company
(incorporated by reference to Exhibit 4.3 to our Form 10-K filed
March 31, 2000).
4.3 Indenture dated as of December 21, 2001, between Cott Beverages Inc.
(as issuer) and HSBC Bank USA (as trustee) (incorporated by
reference to Exhibit 4.3 to our Form 10-K filed March 8, 2002).
4.4 Registration Rights Agreement dated as of December 21, 2001, among
Cott Beverages Inc., the Guarantors named therein and Lehman
Brothers Inc., BMO Nesbitt Burns Corp. and CIBC World Markets Corp.
(incorporated by reference to Exhibit 4.4 to our Form 10-K filed
March 8, 2002).
10.1(2) 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 our Form 10-K
filed March 31, 2000).
10.2(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 our Form 10-K filed
March 31, 2000).
10.3(3) Employment Agreement of Mark Benadiba dated October 15, 2003
(incorporated by reference to Exhibit 10.1 to our Form S-3 filed on
January 22, 2004).
10.4(3) Employment Agreement of Raymond P. Silcock dated August 17,1998
(incorporated by reference to Exhibit 10.9 to our Form 10-K filed
March 31, 2000) (including Confidentiality & Restrictive Covenants
(filed herewith)).
10.5(3) Employment Agreement of John K. Sheppard dated March 11, 2004
(incorporated by reference to Exhibit 10.4 to our Form S-3/A filed
on June 18, 2004).
10.6(3) Amended 1999 Executive Incentive Share Compensation Plan effective
January 3,1999 (incorporated by reference to Exhibit 10.9 to our
Form 10-K filed March 20, 2001).
10.7(3) 2000 Executive Incentive Share Compensation Plan effective January
2, 2001 (incorporated by reference to Exhibit 10.10 to our Form 10-K
filed March 20, 2001).
NUMBER DESCRIPTION
- ------ -----------
10.8(3) 2001 Executive Incentive Share Compensation Plan effective January
2, 2002 (incorporated by reference to Exhibit 10.10 to our Form 10-K
filed March 8, 2002).
77
10.9(3) 2002 Executive Incentive Share Compensation Plan effective January
2, 2003 (incorporated by reference to Exhibit 10.11 to our Form 10-K
filed March 17, 2003).
10.10(3) Second Canadian Employee Share Purchase Plan effective January 2,
2001 (incorporated by reference to Exhibit 10.11 to our Form 10-K
filed March 20, 2001).
10.11(2) 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 our Form 8-K dated July 19, 2001), as
amended December 13, 2001 and December 19, 2001 (incorporated by
reference to Exhibit 10.13 to our Form 10-K filed March 8, 2002).
10.12(2) Supply Agreement executed November 11, 2003, effective January 1,
2002 between Crown Cork & Seal Company, Inc. and Cott Corporation
(incorporated by reference to Exhibit 10.14 to our Form 10-Q/A filed
August 5, 2004).
10.13(3) Share Purchase Plan for Non-employee Directors effective November 1,
2003 (incorporated by reference to Exhibit 10.15 to our Form 10-K
filed March 18, 2004).
10.14(3) Cott Corporation Executive Investment Share Purchase Plan (filed
herewith).
10.15(3) Restated 1986 Common Share Option Plan of Cott
Corporation/Corporation Cott as amended through October 20, 2004
(filed herewith).
10.16(3) Letter Agreement with Frank E. Weise III, dated April 28, 2004
(incorporated by reference to Exhibit 10.5 to our Form S-3/A filed
on June 18, 2004).
10.17(2) Amendment to Supply Agreement between Crown Cork & Seal USA, Inc.
(successor to Crown Cork & Seal Company, Inc.) and Cott Corporation,
dated December 23, 2004 (filed herewith).
10.18(3) Employment Agreement of Robert J. Flaherty dated December 8, 2004
(incorporated by reference to Exhibit 10.1 to our Form 8-K dated
December 14, 2004) (including Confidentiality & Restrictive
Covenants (filed herewith)).
10.19(3) Employment Agreement of Mark R. Halperin dated July 14, 2000
(incorporated by reference to Exhibit 10.7 to our Form 10-K filed
March 8, 2002) (including Confidentiality & Restrictive Covenants
(filed herewith)).
10.20(3) Employment Agreement of Colin Walker, dated August 20, 1998 (filed
herewith).
13.1 Annual Report to Shareowners for the year ended January 1, 2005
(filed herewith).
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to our
Form 10-K filed March 18, 2004).
21.1 List of Subsidiaries of Cott Corporation (filed herewith).
23.1 Consent of Independent Registered Public Accounting Firm (filed
herewith).
31.1 Certification of the President and Chief Executive Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002 for the year ended
January 1, 2005 (filed herewith).
31.2 Certification of the Executive Vice President and Chief Financial
Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
for the year ended January 1, 2005 (filed herewith).
32.1 Certification of the President and Chief Executive Officer pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 for the year ended
January 1, 2005 (filed herewith).
NUMBER DESCRIPTION
- ---------- -----------------------------------------------------------------
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 1, 2005 (filed herewith).
- ----------
(1) In accordance with Item 601 (b)(2) of Regulation S-K, the schedules 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.
(2) Document is subject to request for confidential treatment.
(3) Indicates a management contract or compensatory plan.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Cott Corporation
/s/ John K. Sheppard
- -------------------------------------
John K. Sheppard
President & Chief Executive Officer
Date: March 10, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
/s/ John K. Sheppard President & Chief Executive Officer Date: March 10, 2005
- -------------------------------------
John K. Sheppard
/s/ Raymond P. Silcock Executive Vice President & Chief Financial Officer Date: March 10, 2005
- ------------------------------------- (Principal Financial Officer)
Raymond P. Silcock
/s/ Tina Dell' Aquila Vice President, Controller & Assistant Secretary Date: March 10, 2005
- ------------------------------------- (Principal Accounting Officer)
Tina Dell' Aquila
/s/ Colin J. Adair Director Date: March 10, 2005
- -------------------------------------
Colin J. Adair
/s/ W. John Bennett Director Date: March 10, 2005
- -------------------------------------
W. John Bennett
/s/ Serge Gouin Director Date: March 10, 2005
- -------------------------------------
Serge Gouin
/s/ Stephen H. Halperin Director Date: March 10, 2005
- -------------------------------------
Stephen H. Halperin
/s/ Betty Jane Hess Director Date: March 10, 2005
- -------------------------------------
Betty Jane Hess
/s/ Philip B. Livingston Director Date: March 10, 2005
- -------------------------------------
Philip B. Livingston
/s/ Christine A. Magee Director Date: March 10, 2005
- -------------------------------------
Christine A. Magee
/s/ Andrew Prozes Director Date: March 10, 2005
- -------------------------------------
Andrew Prozes
/s/ Donald G. Watt Director Date: March 10, 2005
- -------------------------------------
Donald G. Watt
/s/ Frank E. Weise Chairman, Director Date: March 10, 2005
- -------------------------------------
Frank E. Weise
79
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JANUARY 1, 2005
--------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
Description BEGINNING OF YEAR COSTS AND EXPENSES OTHER ACCOUNTS DEDUCTION END OF YEAR
----------- ----------------- ------------------ -------------- --------- -----------
RESERVES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY
Allowances for losses on:
Accounts receivables $ (6.8) $ (6.5) $ -- $ 1.2 $ (12.1)
Inventories (7.2) 0.1 (0.2) 0.5 (6.8)
Intangibles and other assets (0.6) 0.2 -- -- (0.4)
--------- ------- ------ ----- -------
$ (14.6) $ (6.2) $ (0.2) $ 1.7 $ (19.3)
========= ======= ====== ===== =======
Year ended January 3, 2004
--------------------------
Balance at Charged to Charged to Balance at
Description Beginning of Year Costs and Expenses Other Accounts Deduction End of Year
----------- ----------------- ------------------ -------------- --------- -----------
RESERVES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY
Allowances for losses on:
Accounts receivables $ (3.4) $ (3.6) $ (0.7) $ 0.9 $ (6.8)
Inventories (6.7) (0.6) (1.3) 1.4 (7.2)
Intangibles and other assets (1.1) -- 0.5 -- (0.6)
--------- ------- ------ ----- -------
$ (11.2) $ (4.2) $ (1.5) $ 2.3 $ (14.6)
========= ======= ====== ===== =======
Year ended December 28, 2002
----------------------------
Balance at Charged to Charged to Balance at
Description Beginning of Year Costs and Expenses Other Accounts Deduction End of Year
----------- ----------------- ------------------ -------------- --------- -----------
RESERVES DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY
Allowances for losses on:
Accounts receivables $ (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)
========= ======= ====== ===== =======
80
SCHEDULE III -- CONSOLIDATING FINANCIAL STATEMENTS
Cott Beverages Inc., our wholly owned subsidiary, has entered into financing
arrangements that are guaranteed by Cott Corporation and certain other wholly
owned subsidiaries (the "Guarantor Subsidiaries"). Such guarantees are full,
unconditional and joint and several.
The following supplemental financial information sets forth on an
unconsolidated basis, our balance sheets, statements of income and cash flows
for Cott Corporation, Cott Beverages Inc., Guarantor Subsidiaries and our other
subsidiaries (the "Non-guarantor Subsidiaries"). The balance sheets, statements
of income and cash flows for Cott Beverages Inc. have been adjusted
retroactively to include Concord Beverage Company, Concord Holdings GP and
Concord Holdings LP that were amalgamated with Cott Beverages Inc. on December
29, 2001. The supplemental financial information reflects our investments and
those of Cott Beverages Inc. in their respective subsidiaries using the equity
method of accounting.
Consolidating Statements of Income
For the year ended January 1, 2005
----------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
- ----------------------------- ----------- -------------- ------------ ------------- ----------- ------------
SALES $ 208.3 $ 1,113.5 $ 46.6 $ 308.8 $ (30.9) $ 1,646.3
Cost of sales 172.9 919.0 39.7 261.9 (30.9) 1,362.6
------- --------- ------- --------- ------- ---------
GROSS PROFIT 35.4 194.5 6.9 46.9 -- 283.7
Selling, general and administrative
expenses 35.8 75.4 3.7 23.2 -- 138.1
Unusual items 1.3 -- -- (0.4) -- 0.9
------- --------- ------- --------- ------- ---------
OPERATING INCOME (LOSS) (1.7) 119.1 3.2 24.1 -- 144.7
Other expense (income), net 0.5 1.1 (1.9) 0.2 -- (0.1)
Interest expense (income), net (0.2) 32.9 (6.5) (0.2) -- 26.0
Minority interest -- -- -- 4.0 -- 4.0
------- --------- ------- --------- ------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND (2.0) 85.1 11.6 20.1 -- 114.8
EQUITY INCOME (LOSS)
Income taxes 2.7 (34.1) -- (4.4) -- (35.8)
Equity income (loss) 77.6 9.3 55.1 -- (142.7) (0.7)
------- --------- ------- --------- ------- ---------
NET INCOME $ 78.3 $ 60.3 $ 66.7 $ 15.7 $(142.7) $ 78.3
======= ========= ======= ========= ======= =========
81
Consolidating Balance Sheets
As of January 1, 2005
---------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
- ----------------------------- ----------- -------------- ------------ ------------- ----------- ------------
ASSETS
CURRENT ASSETS
Cash $ 14.7 $ -- $ -- $ 11.9 $ -- $ 26.6
Accounts receivable 52.2 109.3 17.5 44.2 (38.9) 184.3
Inventories 20.9 72.4 5.9 23.6 -- 122.8
Prepaid expenses and other assets 3.0 3.3 0.8 2.6 -- 9.7
------- --------- -------- --------- ------- --------
90.8 185.0 24.2 82.3 (38.9) 343.4
Property, plant and equipment 48.3 162.0 20.0 83.4 -- 313.7
Goodwill 22.8 51.8 13.5 0.7 -- 88.8
Intangibles and other assets 11.6 203.7 11.7 49.1 -- 276.1
Due from affiliates 47.0 4.7 109.4 276.7 (437.8) --
Investments in subsidiaries 354.0 74.2 46.6 -- (474.8) --
------- --------- -------- --------- ------- --------
$ 574.5 $ 681.4 $ 225.4 $ 492.2 $(951.5) $1,022.0
======= ========= ======== ========= ======= ========
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings $ -- $ 66.5 $ 0.1 $ 4.8 $ -- $ 71.4
Current maturities of long-term debt -- 0.8 -- -- -- 0.8
Accounts payable and accrued liabilities 31.7 82.5 9.8 60.1 (38.9) 145.2
------- --------- -------- --------- ------- --------
31.7 149.8 9.9 64.9 (38.9) 217.4
Long-term debt -- 272.5 -- -- -- 272.5
Due to affiliates 80.4 112.6 197.3 47.5 (437.8) --
Deferred income taxes 5.1 38.1 -- 7.8 -- 51.0
------- --------- -------- --------- ------- --------
117.2 573.0 207.2 120.2 (476.7) 540.9
------- --------- -------- --------- ------- --------
Minority interest -- -- -- 23.8 -- 23.8
SHAREOWNERS' EQUITY
Capital stock
Common shares 287.0 275.8 152.7 451.4 (879.9) 287.0
Retained earnings (deficit) 161.6 (167.4) (134.5) (84.5) 386.4 161.6
Accumulated other comprehensive income
(loss) 8.7 -- -- (18.7) 18.7 8.7
------- --------- -------- --------- ------- --------
457.3 108.4 18.2 348.2 (474.8) 457.3
------- --------- -------- --------- ------- --------
$ 574.5 $ 681.4 $ 225.4 $ 492.2 $(951.5) $1,022.0
======= ========= ======== ========= ======= ========
82
Consolidating Statements of Cash Flows
For the year ended January 1, 2005
-----------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
- ------------------------------------------ ----------- -------------- ------------ ------------- ----------- ------------
OPERATING ACTIVITIES
Net income $ 78.3 $ 60.3 $ 66.7 $ 15.7 $ (142.7) $ 78.3
Depreciation and amortization 9.5 31.2 5.8 13.5 -- 60.0
Amortization of financing fees -- 0.7 -- -- -- 0.7
Deferred income taxes (0.8) 8.9 -- 1.0 -- 9.1
Minority interest -- -- -- 4.0 -- 4.0
Equity income, net of distributions (68.7) (3.3) (50.9) -- 123.6 0.7
Non-cash unusual items 1.5 -- -- -- -- 1.5
Other non-cash items 1.2 (1.2) (0.1) 0.9 -- 0.8
Net change in non-cash working capital (36.8) (27.2) 3.0 9.0 (0.4) (52.4)
-------- ------- -------- ------- -------- -------
Cash provided by (used in) operating
activities (15.8) 69.4 24.5 44.1 (19.5) 102.7
-------- ------- -------- ------- -------- -------
INVESTING ACTIVITIES
Additions to property, plant and equipment (4.8) (34.4) (3.9) (7.2) -- (50.3)
Acquisitions -- (34.6) -- -- -- (34.6)
Acquisition of production capacity -- (3.8) -- -- -- (3.8)
Advances to affiliates 13.9 0.1 (21.5) 0.4 7.1 --
Investment in subsidiaries (15.0) -- -- -- 15.0 --
Other investing activities (4.8) 2.6 0.4 (2.9) -- (4.7)
-------- ------- -------- ------- -------- -------
Cash used in investing activities (10.7) (70.1) (25.0) (9.7) 22.1 (93.4)
-------- ------- -------- ------- -------- -------
FINANCING ACTIVITIES
Payments of long-term debt -- (1.3) -- (2.2) -- (3.5)
Short-term borrowings -- (5.6) (0.9) (0.5) -- (7.0)
Advances from affiliates 12.8 21.5 (13.3) (14.0) (7.0) --
Distributions to subsidiary minority
shareowner -- -- -- (5.9) -- (5.9)
Issue of common shares 14.3 -- 15.0 -- (15.0) 14.3
Dividends paid -- (13.3) -- (6.1) 19.4 --
Other financing activities -- -- (0.4) -- -- (0.4)
-------- ------- -------- ------- -------- -------
Cash provided by (used in) financing
activities 27.1 1.3 0.4 (28.7) (2.6) (2.5)
-------- ------- -------- ------- -------- -------
Effect of exchange rate changes on cash 0.7 -- -- 0.7 -- 1.4
-------- ------- -------- ------- -------- -------
NET INCREASE (DECREASE) IN CASH 1.3 0.6 (0.1) 6.4 -- 8.2
CASH, BEGINNING OF YEAR 13.4 (0.6) 0.1 5.5 -- 18.4
-------- ------- -------- ------- -------- -------
CASH, END OF YEAR $ 14.7 $ -- $ -- $ 11.9 $ -- $ 26.6
======== ======= ======== ======= ======== =======
83
Consolidating Statements of Income
For the year ended January 3, 2004
------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages 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 items 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 (LOSS) 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
======== ======== ======== ======== ======== ========
84
Consolidating Balance Sheets
As of January 3, 2004
------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages 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 50.7 140.4 21.1 81.1 -- 293.3
Goodwill 21.2 46.1 13.5 0.8 -- 81.6
Intangibles and other assets 7.6 195.7 12.7 50.8 -- 266.8
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
======== ======== ======== ======== ======== ========
85
Consolidating Statements of Cash Flows
For the year ended January 3, 2004
------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) 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
Non-cash unusual items 2.0 (0.2) -- -- -- 1.8
Other non-cash items 0.8 (1.1) -- 1.5 0.4 1.6
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 (8.7) (17.4) (2.0) (11.5) -- (39.6)
Acquisitions and equity investments -- (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 investing activities 4.2 (10.6) (0.3) (3.2) -- (9.9)
-------- -------- -------- -------- -------- --------
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 financing activities -- -- (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
======== ======== ======== ======== ======== ========
86
Consolidating Statements of Income
For the year ended December 28, 2002
-----------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) 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
======== ========= ======== ========= ========= ===========
87
Consolidating Balance Sheets
As of the year ended December 28, 2002
---------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) 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 45.4 129.3 23.7 60.0 -- 258.4
Goodwill 17.5 46.0 13.5 -- -- 77.0
Intangibles and other assets 11.7 143.8 13.0 56.8 -- 225.3
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
======== ========= ========= ========= ========= =========
88
Consolidating Statements of Cash Flows
For the year ended December 28, 2002
--------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) 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 (9.5) (17.7) (1.6) (5.1) -- (33.9)
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 investing activities 0.1 (5.9) (0.1) (1.9) -- (7.8)
-------- --------- ------- -------- -------- --------
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 financing activities -- -- (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
======== ========= ======= ======== ======== ========
89