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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2005
-------------------------------------
Commission File Number 000-19914
-------------------------------------
COTT
CORPORATION
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(Exact name of registrant as specified in its charter)
CANADA None
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
207 Queen's Quay West, Suite 340, Toronto, Ontario M5J 1A7
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(Address of principal executive offices) (Postal Code)
(416) 203-3898
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(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2). Yes [ ] No [X]
There were 71,709,630 shares of common stock outstanding as of October 31, 2005.
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TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income (loss) for the three and
nine month periods ended October 1, 2005 and
October 2, 2004............................................ Page 3
Consolidated Balance Sheets as of October 1, 2005 and
January 1, 2005............................................ Page 4
Consolidated Statements of Shareowners' Equity as of
October 1, 2005 and October 2, 2004........................ Page 5
Consolidated Statements of Cash Flows for the three and nine
month periods ended October 1, 2005 and October 2, 2004.... Page 6
Notes to the Consolidated Financial Statements ............... Page 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... Page 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk ... Page 29
Item 4. Controls and Procedures ...................................... Page 29
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings ............................................ Page 30
Item 6. Financial Statement Schedules and Exhibits ................... Page 30
Signatures ............................................................ Page 31
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COTT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
- --------------------------------------------------------------------------------
(in millions of U.S. dollars, except per share amounts)
Unaudited
<Table>
<Caption>
For the For the
three months ended nine months ended
---------------------- -------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
---------- ---------- ----------- ----------
SALES $ 469.9 $ 442.4 $ 1,358.1 $ 1,277.0
Cost of sales 404.5 371.4 1,156.0 1,050.1
---------- ---------- ----------- ----------
GROSS PROFIT 65.4 71.0 202.1 226.9
Selling, general and administrative
expenses 34.2 33.3 106.6 106.1
Unusual items -- note 2
Restructuring 2.0 -- 2.0 --
Asset impairments 23.7 (0.2) 23.5 (0.7)
---------- ---------- ----------- ----------
OPERATING INCOME 5.5 37.9 70.0 121.5
Other expense (income), net (0.4) -- (0.6) 0.3
Interest expense, net 7.7 6.4 20.8 19.6
Minority interest 1.1 1.0 3.4 3.2
---------- ---------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY LOSS (2.9) 30.5 46.4 98.4
Income tax recovery (expense) -- note 4 1.1 (8.3) (14.9) (31.2)
Equity loss -- (0.1) -- (0.3)
---------- ---------- ----------- ----------
NET INCOME (LOSS) -- note 5 $ (1.8) $ 22.1 $ 31.5 $ 66.9
========== ========== =========== ==========
PER SHARE DATA -- note 6
NET INCOME (LOSS) PER COMMON SHARE
Basic $ (0.03) $ 0.31 $ 0.44 $ 0.94
Diluted $ (0.03) $ 0.31 $ 0.44 $ 0.93
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
3
COTT CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(in millions of U.S. dollars)
<Table>
<Caption>
OCTOBER 1, JANUARY 1,
2005 2005
--------- ---------
Unaudited
ASSETS
CURRENT ASSETS
Cash $ 8.8 $ 26.6
Accounts receivable 222.1 184.3
Inventories -- note 7 140.2 122.8
Prepaid expenses and other assets -- note 8 13.2 9.7
--------- ---------
384.3 343.4
PROPERTY, PLANT AND EQUIPMENT -- note 9 401.2 313.7
GOODWILL -- note 10 157.7 88.8
INTANGIBLES AND OTHER ASSETS -- note 11 264.7 276.1
--------- ---------
$ 1,207.9 $ 1,022.0
========= =========
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings -- note 12 $ 154.5 $ 71.4
Current maturities of long-term debt 0.8 0.8
Accounts payable and accrued liabilities 201.2 145.2
--------- ---------
356.5 217.4
LONG-TERM DEBT 272.4 272.5
DEFERRED INCOME TAXES 65.0 51.0
--------- ---------
693.9 540.9
--------- ---------
MINORITY INTEREST 23.3 23.8
SHAREOWNERS' EQUITY
CAPITAL STOCK
Common shares -- 71,709,630 shares issued 291.4 287.0
RETAINED EARNINGS 193.1 161.6
ACCUMULATED OTHER COMPREHENSIVE INCOME 6.2 8.7
--------- ---------
490.7 457.3
--------- ---------
$ 1,207.9 $ 1,022.0
========= =========
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
4
COTT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
- --------------------------------------------------------------------------------
(in millions of U.S. dollars)
Unaudited
<Table>
<Caption>
NUMBER OF COMMON RETAINED ACCUMULATED OTHER TOTAL
COMMON SHARES EARNINGS COMPREHENSIVE EQUITY
SHARES INCOME (LOSS)
(in thousands)
-------------------------------------------------------------------------
Balance at January 3, 2004 70,259 $267.9 $ 83.3 $ (6.1) $345.1
Options exercised, including tax
benefit of $4.8 million 1,085 17.6 -- -- 17.6
Comprehensive income (loss)-- note 5
Currency translation adjustment -- -- -- 3.5 3.5
Unrealized losses on cash flow
hedges -- note 8 -- -- -- (0.6) (0.6)
Net income -- -- 66.9 -- 66.9
-------------------------------------------------------------------------
Balance at October 2, 2004 71,344 $285.5 $150.2 $ (3.2) $432.5
=========================================================================
Balance at January 1, 2005 71,440 $287.0 $161.6 $ 8.7 $457.3
Options exercised, including tax
benefit of $0.9 million 270 4.4 -- -- 4.4
Comprehensive income (loss) -- note 5
Currency translation adjustment -- -- -- (2.7) (2.7)
Unrealized gains on cash flow
hedges -- note 8 -- -- -- 0.2 0.2
Net income -- -- 31.5 -- 31.5
-------------------------------------------------------------------------
Balance at October 1, 2005 71,710 $291.4 $193.1 $ 6.2 $490.7
=========================================================================
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
5
COTT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in millions of U.S. dollars)
Unaudited
<Table>
<Caption>
For the For the
three months ended nine months ended
------------------------ ------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
--------- --------- --------- ---------
OPERATING ACTIVITIES
Net income (loss) $ (1.8) $ 22.1 $ 31.5 $ 66.9
Depreciation and amortization 18.3 14.7 51.0 44.7
Amortization of financing fees 0.2 0.2 0.5 0.5
Deferred income taxes -- 2.4 3.3 6.7
Minority interest 1.1 1.0 3.4 3.2
Equity loss -- 0.1 -- 0.3
Asset impairments 23.7 -- 23.5 --
Other non-cash items 0.3 0.2 1.0 0.8
Net change in non-cash working capital --
note 13 13.9 17.5 (3.6) (47.9)
--------- --------- --------- ---------
Cash provided by operating activities 55.7 58.2 110.6 75.2
--------- --------- --------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment (14.1) (19.3) (68.9) (38.7)
Acquisition of production capacity -- (3.8) -- (3.8)
Business acquisitions (135.1) -- (135.1) (17.7)
Other investing activities (2.0) (1.2) (4.1) (1.1)
--------- --------- --------- ---------
Cash used in investing activities (151.2) (24.3) (208.1) (61.3)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Payments of long-term debt (0.3) (0.7) (0.7) (3.2)
Short-term borrowings 91.0 (22.9) 85.5 (16.5)
Distributions to subsidiary minority
shareowner (2.0) (2.1) (3.9) (4.3)
Issue of common shares 1.1 2.9 3.5 12.8
Financing costs (1.2) -- (3.8) --
Other financing activities (0.1) (0.1) (0.3) (0.3)
--------- --------- --------- ---------
Cash provided by (used in) financing
activities 88.5 (22.9) 80.3 (11.5)
--------- --------- --------- ---------
Effect of exchange rate changes on cash (0.1) 0.4 (0.6) 0.2
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH (7.1) 11.4 (17.8) 2.6
CASH, BEGINNING OF PERIOD 15.9 9.6 26.6 18.4
--------- --------- --------- ---------
CASH, END OF PERIOD $ 8.8 $ 21.0 $ 8.8 $ 21.0
========= ========= ========= =========
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
6
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim consolidated financial statements have been prepared in accordance
with United States ("U.S.") generally accepted accounting principles ("GAAP")
for interim financial information. Accordingly, they do not include all
information and notes presented in the annual consolidated financial statements
in conformity with U.S. GAAP. In the opinion of management, the financial
statements reflect all adjustments that are necessary for a fair statement of
the results for the interim periods presented. All such adjustments are of a
normal recurring nature.
These financial statements should be read in conjunction with the most recent
annual consolidated financial statements. The accounting policies used in these
interim consolidated financial statements are consistent with those used in the
annual consolidated financial statements.
Material recognition, measurement, and presentation differences between U.S.
GAAP and Canadian GAAP are disclosed in note 18.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board issued SFAS123R,
Share-Based Payments requiring companies to recognize compensation expense for
all types of stock options. On April 14, 2005 the Financial Accounting Standards
Board approved a new rule that deferred the effective date of SFAS123R. We are
required to adopt this standard for our interim period ending April 1, 2006. We
are currently evaluating the impact of SFAS123R on our results of operations and
believe that adoption of SFAS123R will have a material impact on our financial
statements. As discussed in note 14, had compensation expense for the plans
been determined based on the fair value at the grant date consistent with SFAS
No. 123, net income per Common Share for the nine months ended October 1, 2005
would have been $0.36 instead of $0.44 per diluted common share.
In July 2005, the Financial Accounting Standards Board issued an Exposure Draft
on Uncertain Tax Positions - an Interpretation of FASB Statement 109. The
Exposure Draft contains proposed guidance on the recognition and measurement of
uncertain tax positions. It also addresses the accrual of any interest and
penalties related to the uncertain tax positions and the classification of
liabilities resulting from uncertain tax positions in the balance sheet. The
Exposure Draft contains a proposed effective date of December 15, 2005. If
passed, we will adopt this exposure draft for our year ending December 31, 2005.
We are currently evaluating the impact of this Exposure Draft on our results of
operations.
In November 2004, the Financial Accounting Standards Board issued SFAS151,
Inventory Costs. The Statement requires that the allocation of fixed production
overheads to inventory be based on the normal capacity of the production
facilities; unallocated overheads resulting from abnormally low production and
certain other costs are to be recognized as an expense in the period in which
they are incurred. We will adopt this standard for our interim period ending
April 1, 2006. We are currently evaluating the impact of SFAS151 on our
financial statements.
7
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ESTIMATES
The preparation of these consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable.
Determining whether an impairment has occurred requires various estimates and
assumptions including estimates of cash flows that are directly related to the
potentially impaired asset, the useful life over which cash flows will occur and
their amounts. The measurement of an impairment loss requires an estimate of
fair value, which is based on cash flow estimates and the application of an
appropriate discount rate.
NOTE 2 -- UNUSUAL ITEMS
As a result of declining sales and margins with certain customers, we conducted
an impairment analysis of the customer relationship assets by comparing
estimated future cash flows at the lowest level of cash flows that were
separately identifiable to the carrying value of the asset. This analysis showed
that the estimated future cash flows were not sufficient to recover the carrying
value on certain customer relationship assets and accordingly, during the third
quarter we recorded asset impairment charges of $20.0 million in order to write
down the customer relationship assets to their fair value. Fair value was
determined by discounting estimated future cash flows related to the customer
relationship assets. Certain equipment and our remaining investment in an equity
investee were written down by $3.7 million.
We also recorded restructuring charges of $2.0 million for severance payments.
We are currently evaluating various actions to reduce costs and are developing
detailed plans which may result in additional exit and other costs being
incurred.
We may also rationalize products and production capacity but have not yet
completed our analysis nor have we completed our detailed plans and accordingly,
the ultimate amount of any asset impairment charges or change in useful lives of
assets that may result is uncertain. It is reasonably possible that the
company's estimates of future cash flows, the useful lives, or both related to
certain equipment and intangibles will be significantly reduced in the near
term. As a result, the carrying value of the related assets may also be reduced
materially in the near term.
NOTE 3 -- BUSINESS SEASONALITY
Our net income for the quarter ended October 1, 2005 is not necessarily
indicative of the results that may be expected for the full year due to business
seasonality. Operating results are impacted by business seasonality, which leads
to higher sales in the second and third quarters versus the first and fourth
quarters of the year. Conversely, fixed costs such as depreciation, amortization
and interest, are not impacted by seasonal trends.
8
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 4 -- INCOME TAXES
The following table reconciles income taxes calculated at the basic Canadian
corporate rates with the income tax provision:
<Table>
<Caption>
For the three months ended For the nine months ended
------------------------------------- --------------------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
--------------- ----------------- --------------- ------------------
(in millions of U.S. dollars) (in millions of U.S. dollars)
Income tax recovery (provision)
based on
Canadian statutory rates $ 1.0 $ (10.6) $ (16.0) $ (34.1)
Foreign tax rate differential 1.6 0.3 2.5 0.5
Non-deductible and other items (1.5) 2.0 (1.4) 2.4
--------------- ----------------- --------------- ------------------
$ 1.1 $ (8.3) $ (14.9) $ (31.2)
=============== ================= =============== ==================
</Table>
NOTE 5 -- COMPREHENSIVE INCOME
<Table>
<Caption>
For the three months ended For the nine months ended
------------------------------------- --------------------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
--------------- ----------------- --------------- ------------------
(in millions of U.S. dollars) (in millions of U.S. dollars)
Net income (loss) $ (1.8) $ 22.1 $ 31.5 $ 66.9
Foreign currency translation 5.1 5.1 (2.7) 3.5
Unrealized gains (losses) on
cash flow hedges (0.5) (0.1) 0.2 (0.6)
--------------- ----------------- --------------- ------------------
$ 2.8 $ 27.1 $ 29.0 $ 69.8
=============== ================= =============== ==================
</Table>
NOTE 6 -- NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income (loss) per common 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.
9
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 6 -- NET INCOME (LOSS) PER COMMON SHARE (continued)
The following table reconciles the basic weighted average number of common
shares outstanding to the diluted weighted average number of common shares
outstanding:
<Table>
<Caption>
For the three months ended For the nine months ended
----------------------------------- ------------------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
(in thousands) (in thousands)
Weighted average number of shares
outstanding -- basic 71,703 71,294 71,600 70,870
Dilutive effect of stock options - 949 341 1,236
---------------- ---------------- ---------------- ----------------
Adjusted weighted average number
of shares outstanding -- diluted 71,703 72,243 71,941 72,106
================ ================ ================ ================
</Table>
At October 1, 2005, options to purchase 3,693,650 shares (1,437,000 -- October
2, 2004) of common stock at a weighted average exercise price of C$33.94 per
share (C$41.14 -- October 2, 2004) 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.
As of October 1, 2005, we had 71,709,630 common shares and 4,547,805 common
share options outstanding. Of the common share options outstanding, 2,349,294
options were exercisable as of October 1, 2005.
During the third quarter ended October 1, 2005, 1,009,250 of common share
options were issued at a weighted average price of C$29.06 and 79,010 common
share options were exercised at a weighted average exercise price of C$16.99.
NOTE 7 -- INVENTORIES
<Table>
<Caption>
OCTOBER 1, JANUARY 1,
2005 2005
---------- ----------
(in millions of U.S. dollars)
Raw materials $ 62.5 $ 47.9
Finished goods 61.3 59.9
Other 16.4 15.0
-------- --------
$ 140.2 $ 122.8
======== ========
</Table>
NOTE 8 -- DERIVATIVE FINANCIAL INSTRUMENTS
We enter 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 United Kingdom ("U.K.") and
European business segments. The hedges consist of monthly foreign exchange
options to buy U.S. dollars at fixed rates per Canadian dollar and pound
sterling and mature at various dates through December 28, 2006. The fair market
value of the foreign exchange options is included in prepaid expenses and other
assets.
10
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 8 -- DERIVATIVE FINANCIAL INSTRUMENTS (continued)
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 October 1, 2005, the fair value of the foreign exchange
options was $0.7 million ($0.3 million -- October 2, 2004) and we recorded $0.5
million unrealized loss in comprehensive income for the third quarter ($0.1
million -- October 2, 2004) and $0.2 million unrealized gain in comprehensive
income ($0.6 million unrealized loss -- October 2, 2004) for the nine months
ending October 1, 2005.
NOTE 9 -- PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
OCTOBER 1, JANUARY 1,
2005 2005
---------- ----------
(in millions of U.S. dollars)
Cost $ 690.0 $ 570.3
Accumulated depreciation (288.8) (256.6)
-------- --------
$ 401.2 $ 313.7
======== ========
</Table>
NOTE 10 -- GOODWILL
<Table>
<Caption>
OCTOBER 1, JANUARY 1,
2005 2005
---------- ----------
(in millions of U.S. dollars)
Balance at beginning of period $ 88.8 $81.6
Business acquisitions -- note 15 69.4 5.7
Foreign exchange (0.5) 1.5
------ -----
$157.7 $88.8
====== =====
</Table>
11
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 11 -- INTANGIBLES AND OTHER ASSETS
<Table>
<Caption>
OCTOBER 1, 2005 JANUARY 1, 2005
------------------------------ ------------------------------
COST ACCUMULATED NET COST ACCUMULATED NET
AMORTIZATION AMORTIZATION
------------------------------ ------------------------------
(in millions of U.S. dollars) (in millions of U.S. dollars)
INTANGIBLES
Not subject to
amortization
Rights $ 80.4 $ -- $ 80.4 $ 80.4 $ -- $ 80.4
------------------------------ ------------------------------
Subject to amortization
Customer relationships 167.2 37.3 129.9 164.7 31.5 133.2
Trademarks 29.1 8.8 20.3 30.0 7.3 22.7
Information technology 47.0 22.8 24.2 40.4 18.4 22.0
Other 3.5 0.9 2.6 3.6 0.6 3.0
------------------------------ ------------------------------
246.8 69.8 177.0 238.7 57.8 180.9
------------------------------ ------------------------------
327.2 69.8 257.4 319.1 57.8 261.3
------------------------------ ------------------------------
OTHER ASSETS
Financing costs 5.0 0.9 4.1 5.6 4.6 1.0
Other 5.6 2.4 3.2 15.5 1.7 13.8
------------------------------ ------------------------------
10.6 3.3 7.3 21.1 6.3 14.8
------------------------------ ------------------------------
$ 337.8 $ 73.1 $ 264.7 $ 340.2 $ 64.1 $ 276.1
============================== ==============================
</Table>
Amortization expense of intangible assets was $5.6 million for the quarter ended
October 1, 2005 ($4.4 million -- October 2, 2004). During the quarter we also
recorded impairment charges of $20.0 million. Amortization expense of intangible
assets for the first nine months ended of 2005 was $16.1 million ($13.2 million
- -- October 2, 2004).
NOTE 12 -- SHORT-TERM BORROWINGS
On March 31, 2005, we entered into committed senior secured credit facilities
that provide for financing in the United States, Canada, the United Kingdom, and
Mexico. The facilities replaced our former committed senior secured credit
facility in the United States and Canada and our demand bank credit facility in
the United Kingdom. The facilities terminate, and the debt under the senior
secured credit agreement is due, on March 31, 2010. These multicurrency
facilities were amended on August 10, 2005 to increase the facilities to $225
from $100 million, to add Macaw (Soft Drinks) Limited as a co-borrower, to
consent to the acquisition of Macaw (Holdings) Limited and its subsidiary, and
to increase the Maximum Facility Amount to $350 million. The amended facilities
allow for revolving credit borrowings in a principal amount of up
to $225 million and are currently comprised of two separate facilities: (1) a
$220 million multicurrency facility made by certain lenders to us and our
indirect wholly-owned subsidiaries, Cott Beverages Inc., Macaw (Soft Drinks)
Limited and Cott Beverages Limited as co-borrowers, and (2) a $5 million Mexican
facility made by certain lenders to our indirect 90% owned subsidiary Cott
Embottelladores de Mexico, S.A. de C.V. ("CEMSA"). Each facility includes
subfacilities for swingline loans and letters of credit. The $225 million
facilities can be increased up to an additional $125 million at our option if
the lenders agree to increase their commitments or new lenders join the facility
and we satisfy certain conditions. Within such $125 million of extra
availability, and subject to certain other limitations, we can establish
additional revolving loan facilities in an aggregate amount not to exceed $30
million to be provided in various currencies as agreed upon for additional
subsidiaries designated by us. Wachovia Bank, National Association acts as
administrative agent and security trustee for lenders under these facilities. In
general, borrowings under the credit facilities bear interest at either a
floating or fixed rate for the applicable currency plus a margin based on our
12
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 12 -- SHORT-TERM BORROWINGS (continued)
consolidated total leverage ratio. As at October 1, 2005, credit of $83.8
million was available after borrowings of $136.3 million and standby letters of
credit of $4.9 million. The weighted average interest rate was 5.77% on these
facilities as of October 1, 2005.
On April 1, 2005, our principal U.S. operating subsidiaries (the "Originators")
entered into a receivables securitization facility under which they agreed to
sell substantially all of their receivables generated from their ordinary course
operations, as well as certain related assets, to a new special purpose indirect
subsidiary of ours, Cott USA Receivables Corporation, which in turn sells and
assigns undivided interests in the receivables and related assets to an
unaffiliated entity, Park Avenue Receivables Company, LLC ("PARCO") and certain
other financial institutions (together with PARCO, the "Purchasers") in exchange
for cash in amounts determined by the parties, subject to specified conditions.
The transfers to the Purchasers are treated as a financing for purposes of our
consolidated financial statements; however, the presentation of consolidated
financial statements does not itself imply that the assets of any consolidated
entity (including any special-purpose entity formed for a particular project)
are available to pay the liabilities of any other consolidated entity, or that
the liabilities of any consolidated entity (including any special-purpose entity
formed for a particular project) are obligations of any other consolidated
entity. The transfers of the receivables and related assets to the Purchasers
are governed by a Receivables Purchase Agreement, dated April 1, 2005, by and
among Cott USA Receivables Corporation, Cott Beverages Inc., the Purchasers and
JPMorgan Chase Bank, N.A. ("JPMorgan"), acting for itself and the Purchasers.
The agreement contains representations, warranties, covenants, and indemnities
customary for facilities of this type. The facility does not contain any
covenants that the Company views as materially constraining its activities or
(except for Cott USA Receivables Corporation) the activities of its
subsidiaries.
The amount of funds available under the receivables facility is based upon the
amount of eligible receivables and various reserves required by the facility.
Accordingly, availability may fluctuate over time given changes in eligible
receivables balances and calculation of reserves, but will not exceed the $75
million program limit. As of October 1, 2005, $55.6 million of eligible
receivables, net of reserves, were available for purchase. As of October 1, 2005
$5 million was outstanding, under this facility, at a weighted average interest
rate of 4.42%.
NOTE 13 -- NET CHANGE IN NON-CASH WORKING CAPITAL
The changes in non-cash working capital components, net of effects of unrealized
foreign exchange gains and losses, are as follows:
<Table>
<Caption>
For the three months ended For the nine months ended
------------------------------ -----------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
-------------- ---------- ----------- ------------
(in millions of U.S. dollars) (in millions of U.S. dollars)
Increase (decrease) in accounts
receivable $ 23.4 $ 38.7 $ (24.1) $ (30.1)
Increase (decrease) in inventories 6.8 2.8 (10.6) (31.0)
Increase (decrease) in prepaid and
other expenses (1.4) 0.8 (3.7) (3.5)
Increase (decrease) in accounts payable
and accrued liabilities (14.9) (24.8) 34.8 16.7
------- ------- ------- -------
$ 13.9 $ 17.5 $ (3.6) $ (47.9)
======= ======= ======= =======
</Table>
13
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 14 -- STOCK OPTION PLANS
Pursuant to the SFAS No. 123, Accounting for Stock-Based Compensation, we have
elected to 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 this plan. Had compensation expense for the plans been determined
based on the fair value at the grant date consistent with SFAS No. 123, our net
income and net income per common share would have been as follows:
<Table>
<Caption>
For the three months ended For the nine months ended
------------------------------ ------------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
---------- -------------- ---------- -------------
(in millions of U.S. dollars, (in millions of U.S. dollars,
except per share amounts) except per share amounts)
NET INCOME (LOSS)
As reported $(1.8) $ 22.1 $ 31.5 $ 66.9
Compensation expense (2.0) (2.2) (5.5) (6.2)
----- ------ ------ ------
Pro forma $(3.8) $ 19.9 $ 26.0 $ 60.7
===== ====== ====== ======
NET INCOME PER SHARE -- BASIC
As reported $(0.03) $ 0.31 $ 0.44 $ 0.94
Pro forma $(0.05) $ 0.28 $ 0.36 $ 0.86
NET INCOME PER SHARE -- DILUTED
As reported $(0.03) $ 0.31 $ 0.44 $ 0.93
Pro forma $(0.05) $ 0.28 $ 0.36 $ 0.84
</Table>
The pro forma compensation expense has been tax effected to the extent it
relates to stock options granted in jurisdictions where the related benefits are
deductible for income tax purposes.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<Table>
<Caption>
OCTOBER 1, OCTOBER 2,
2005 2004
----------- -----------
Risk-free interest rate 3.3% - 3.7% 3.3% - 3.9%
Average expected life (years) 4 4
Expected volatility 40.0% 45.0%
Expected dividend yield -- --
</Table>
14
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 15 -- BUSINESS ACQUISITIONS
Effective August 10, 2005 we acquired 100% of the shares of Macaw (Holdings)
Limited, the parent company of Macaw (Soft Drinks) Limited, the largest
privately owned manufacturer of retailer brand carbonated soft drinks in the
United Kingdom. The acquisition of Macaw represents a significant strategic
investment in our U.K. business. We expect that the additional production
capacity and Macaw's manufacturing capability in the fast-growing aseptic
beverage segment will enable us to expand the variety of products and packages
we offer and enhance the service we provide to our customers.
This acquisition has been accounted for using the purchase method. The results
of operations have been included in our consolidated statements of income from
the effective date of purchase. The purchase price for the acquisition was
$135.1 million (75.4 million pound sterling) including acquisition costs of $2.4
million (1.3 million pound sterling). The acquisition was financed under our
global credit facilities, which were increased from $100.0 million to $225.0
million in connection with this transaction. The goodwill recognized on the
transaction is not deductible for tax purposes.
The preliminary purchase price allocation is as follows based on the fair values
of the net assets acquired:
<Table>
<Caption>
AUGUST 10, 2005
--------------------
(in millions of U.S.
dollars)
Current assets $ 23.2
Property, plant & equipment 50.1
Customer relationships 24.9
Goodwill 69.4
-------
167.6
-------
Current liabilities 20.4
Deferred income taxes 12.1
32.5
-------
Purchase cost $ 135.1
-------
</Table>
15
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 15 -- BUSINESS ACQUISITIONS (continued)
The following unaudited pro forma information for the nine months ended October
1, 2005 and October 2, 2004 presents the consolidated results of operations of
the Company as if the acquisition of Macaw had occurred as of January 1, 2005.
Pro forma information does not include the synergies that we anticipate should
result from the acquisition.
<Table>
<Caption>
OCTOBER 1, OCTOBER 2,
2005 2004
----------- -----------
(in millions of U.S. dollars,
except per share amounts)
SALES
As reported $ 1,358.1 $ 1,277.0
Pro forma 1,417.3 1,358.1
NET INCOME
As reported 31.5 66.9
Pro forma 28.1 64.7
NET INCOME PER SHARE -- BASIC
As reported 0.44 0.94
Pro forma 0.39 0.91
NET INCOME PER SHARE -- DILUTED
As reported 0.44 0.93
Pro forma 0.39 0.89
</Table>
NOTE 16 -- CONTINGENCIES
In January 2005, we were named as one of many defendants in a class action
lawsuit alleging the unauthorized use by the defendants of container deposits
and the imposition of recycling fees on customers. This litigation is at a very
preliminary stage and the merits of the case have not been determined.
In addition, 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. We believe that the resolution of
these matters will not have a material adverse effect on our financial position
or results from operations.
16
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 17 -- SEGMENT REPORTING
We produce, package and distribute retailer brand and branded bottled and canned
beverages to regional and national grocery, mass-merchandise and wholesale
chains in the U.S., Canada, the U.K. & Europe and International business
segments. The International segment includes our Mexican business, our Royal
Crown International business and our business in Asia. The concentrate assets,
sales and related expenses have been included in the Corporate & Other segment.
BUSINESS SEGMENTS
<Table>
<Caption>
FOR THE THREE UNITED
MONTHS ENDED UNITED KINGDOM CORPORATE
OCTOBER 1, 2005 STATES CANADA & EUROPE INTERNATIONAL & OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions of U.S. dollars)
External sales $ 320.2 $ 56.4 $ 73.8 $ 18.4 $ 1.1 $ 469.9
Intersegment sales 0.2 4.0 -- -- (4.2) --
Depreciation and
amortization 11.5 2.3 3.5 0.3 0.7 18.3
Asset impairments 20.0 3.7 -- -- -- 23.7
Operating income (loss) 1.5 (0.4) 4.5 2.4 (2.5) 5.5
Property, plant and
equipment 212.8 56.6 114.9 9.6 7.3 401.2
Goodwill 55.6 24.4 68.0 4.6 5.1 157.7
Intangibles and other
assets 137.4 3.1 27.6 1.1 95.5 264.7
Total assets 602.9 133.6 310.1 79.9 81.4 1,207.9
Additions to property,
plant and equipment 10.5 1.3 1.9 -- 0.4 14.1
- ------------------------------------------------------------------------------------------------------------------------------------
</Table>
17
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 17 -- SEGMENT REPORTING (continued)
<Table>
<Caption>
FOR THE THREE UNITED
MONTHS ENDED UNITED KINGDOM CORPORATE
OCTOBER 2, 2004 STATES CANADA & EUROPE INTERNATIONAL & OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions of U.S. dollars)
External sales $ 325.3 $ 49.8 $ 51.1 $ 15.5 $ 0.7 $ 442.4
Intersegment sales 0.3 4.3 -- -- (4.6) --
Depreciation and
amortization 10.0 2.1 1.9 0.3 0.4 14.7
Operating income (loss) 29.8 2.9 4.4 1.9 (1.1) 37.9
Property, plant and
equipment (as of
January 1, 2005) 174.9 53.0 68.7 9.6 7.5 313.7
Goodwill (as of
January 1, 2005) 55.6 23.5 -- 4.6 5.1 88.8
Intangibles and other
assets (as of
January 1, 2005) 179.3 3.4 3.9 1.2 88.3 276.1
Total assets (as of
January 1, 2005) 591.1 131.3 135.6 85.3 78.7 1,022.0
Additions to property,
plant and equipment 15.3 2.1 1.0 0.6 0.3 19.3
Acquisition of
production capacity 3.8 -- -- -- -- 3.8
- ------------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
FOR THE NINE UNITED
MONTHS ENDED UNITED KINGDOM CORPORATE
OCTOBER 1, 2005 STATES CANADA & EUROPE INTERNATIONAL & OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions of U.S. dollars)
External sales $ 968.9 $ 157.2 $ 175.3 $ 54.1 $ 2.6 $ 1,358.1
Intersegment sales 0.2 10.1 -- -- (10.3) --
Depreciation and
amortization 32.5 7.6 7.8 1.0 2.1 51.0
Asset impairments 20.0 3.7 (0.2) -- -- 23.5
Operating income
(loss) 56.5 5.5 9.7 7.5 (9.2) 70.0
Additions to property,
plant and equipment 49.3 8.4 9.7 0.5 1.0 68.9
- ------------------------------------------------------------------------------------------------------------------------------------
</Table>
18
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 17 -- SEGMENT REPORTING (continued)
<Table>
<Caption>
FOR THE NINE UNITED
MONTHS ENDED UNITED KINGDOM CORPORATE
OCTOBER 2, 2004 STATES CANADA & EUROPE INTERNATIONAL & OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions of U.S. dollars)
External sales $ 938.8 $ 144.5 $ 145.5 $ 46.3 $ 1.9 $ 1,277.0
Intersegment sales 0.3 16.3 -- -- (16.6) --
Depreciation and
amortization 29.9 6.4 6.0 0.9 1.5 44.7
Operating income (loss) 100.8 9.6 9.8 8.4 (7.1) 121.5
Additions to property,
plant and equipment 28.6 4.0 3.1 1.4 1.6 38.7
Acquisition of
production capacity 3.8 -- -- -- -- 3.8
- ------------------------------------------------------------------------------------------------------------------------------------
</Table>
Intersegment sales and total assets under the Corporate & Other caption include
the elimination of intersegment sales, receivables and investments.
Credit risk arises from the potential default of a customer in meeting its
financial obligations with us. Concentrations of credit exposure may arise with
a group of customers which have similar economic characteristics or that are
located in the same geographic region. The ability of such customers to meet
obligations would be similarly affected by changing economic, political or other
conditions.
For the nine months ended October 1, 2005, sales to one major customer accounted
for 41% (40% -- October 2, 2004) of our total sales.
Revenues by geographic area are as follows:
<Table>
<Caption>
For the three months ended For the nine months ended
----------------------------- ------------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
----------- -------------- ---------- ----------
(in millions of U.S. dollars) (in millions of U.S. dollars)
United States $ 327.5 $ 330.6 $ 988.2 $ 957.3
Canada 56.3 49.8 157.2 144.5
United Kingdom 71.8 49.3 169.5 139.8
Other Countries 14.3 12.7 43.2 35.4
-------- ---------- ---------- ----------
$ 469.9 $ 442.4 $ 1,358.1 $ 1,277.0
======== ========== ========== ==========
</Table>
Revenues are attributed to countries based on the location of the plant.
19
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 17 -- SEGMENT REPORTING (continued)
Property, plant and equipment, goodwill, and intangibles and other assets by
geographic area are as follows:
<Table>
<Caption>
OCTOBER 1, JANUARY 1,
2005 2005
----------- -----------
(in millions of U.S. dollars)
United States $ 505.0 $ 508.9
Canada 95.7 86.3
United Kingdom 210.5 72.5
Other countries 12.4 10.9
-------- --------
$ 823.6 $ 678.6
======== ========
</Table>
NOTE 18 -- DIFFERENCES BETWEEN UNITED STATES AND CANADIAN ACCOUNTING PRINCIPLES
AND PRACTICES
These consolidated financial statements have been prepared in accordance with
U.S. GAAP, which differ in certain respects from those principles and practices
that we would have followed had our consolidated financial statements been
prepared in accordance with Canadian GAAP.
(a) Under U.S. GAAP, we have elected not to record compensation expense for
options issued to employees with an exercise price equal to the market
value of the options. Under Canadian GAAP, effective January 1, 2004, stock
options issued to employees subsequent to January 1, 2002 are recognized in
net income based on their fair value. As a result, compensation expense of
$7.4 million ($6.8 million -- October 2, 2004), $5.5 million ($5.1 million
-- October 2, 2004) net of tax of $1.9 million ($1.7 million -- October 2,
2004), was recorded in the first nine months of 2005. This policy was
adopted on a retroactive basis with no restatement of comparative figures
and as a result $5.6 million was charged to opening retained earnings as at
January 3, 2004. Contributed surplus of $22.9 ($12.8 million -- October 2,
2004) was recorded to reflect the charge for unexercised options. Share
capital of $1.3 million was recorded to reflect the options exercised for
the period ending October 2, 2004. Of the options exercised during the
period, all were granted prior to January 1, 2002.
(b) Under U.S. GAAP, costs of start-up activities and organization costs are
expensed as incurred. Under Canadian GAAP these costs, if they meet certain
criteria, can be capitalized and amortized over the future benefit period.
(c) Under U.S. GAAP, the adoption of the U.S. dollar in 1998 as the
presentation and reporting currency was implemented retroactively, such
that prior period financial statements are translated under the current
rate method using the foreign exchange rates in effect on those dates.
Under Canadian GAAP, the change in presentation and reporting currency was
implemented by translating all prior year financial statement amounts at
the foreign exchange rate on January 31, 1998. As a result, there is a
difference in the share capital, retained earnings and cumulative
translation adjustment amounts under Canadian GAAP as compared to U.S.
GAAP.
20
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 18 -- DIFFERENCES BETWEEN UNITED STATES AND CANADIAN ACCOUNTING PRINCIPLES
AND PRACTICES (continued)
Under Canadian GAAP, these differences would have been reported in the
consolidated statements of income, consolidated balance sheets, consolidated
statements of shareowners' equity and consolidated statements of cash flow as
follows:
<Table>
<Caption>
OCTOBER 1, 2005 JANUARY 1, 2005
------------------------------ --------------------------------
U.S. GAAP CANADIAN GAAP U.S. GAAP CANADIAN GAAP
---------- ------------- ---------- -------------
CONSOLIDATED BALANCE SHEETS (in millions of U.S. dollars) (in millions of U.S. dollars)
Property, plant &
equipment (b) $ 401.2 $ 401.3 $ 313.7 $ 314.1
Goodwill (b) 157.7 158.2 88.8 89.3
Total assets 1,207.9 1,208.5 1,022.0 1,023.9
Deferred income taxes (a),(b) 65.0 59.2 51.0 47.2
Total liabilities 693.9 688.1 540.9 537.1
Capital stock (a),(c) 291.4 263.9 287.0 259.5
Contributed Surplus (a) -- 22.9 -- 15.5
Retained earnings (a), (b), (c) 193.1 161.7 161.6 135.9
Accumulated other comprehensive
income (c) 6.2 48.6 8.7 51.1
Total shareowners' equity 490.7 497.1 457.3 462.0
</Table>
<Table>
<Caption>
Income reconciliation for Income reconciliation for
the three months ended the nine months ended
-------------------------- ----------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
CONSOLIDATED STATEMENTS OF ---------- ---------- ---------- ----------
INCOME (LOSS) (in millions of U.S. dollars) (in millions of U.S. dollars)
Net (loss) income under U.S. GAAP $ (1.8) $ 22.1 $ 31.5 $ 66.9
Cost of sales (b) (0.1) (0.1) (0.3) (0.3)
Stock compensation expense (a) (2.2) (2.8) (7.4) (6.8)
Recovery of income taxes (a),(b) 0.6 0.8 2.0 1.8
------ ------ ------ ------
Net income (loss) under Canadian GAAP $ (3.5) $ 20.0 $ 25.8 $ 61.6
====== ====== ====== ======
Basic income (loss) per common share,
Canadian GAAP $(0.05) $ 0.28 $ 0.36 $ 0.87
Diluted income (loss) per common share,
Canadian GAAP $(0.05) $ 0.28 $ 0.36 $ 0.85
</Table>
21
COTT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited
NOTE 18. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN ACCOUNTING PRINCIPLES
AND PRACTICES (continued)
<Table>
<Caption>
Cash flow reconciliation Cash flow reconciliation
for the three months ended for the nine months ended
-------------------------- --------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
---------- ---------- ---------- ----------
CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions of U.S. dollars) (in millions of U.S. dollars)
Cash provided by operating activities
U.S. GAAP $ 55.7 $ 58.2 $ 110.6 $ 75.2
Net income (a),(b) (1.7) (2.1) (5.7) (5.3)
Depreciation & amortization (b) 0.1 0.1 0.3 0.3
Deferred income taxes (a),(b) (0.6) (0.8) (2.0) (1.8)
Other non-cash items (a) 2.2 2.8 7.4 6.8
------- ------- -------- -------
Cash provided by operating activities
Canadian GAAP $ 55.7 $ 58.2 $ 110.6 $ 75.2
======= ======= ======== =======
</Table>
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
We recorded asset impairment and restructuring charges of $25.7 million on a
pre-tax basis (or $0.24 per diluted share after taxes) in the quarter, resulting
in a net loss of $1.8 million or $0.03 per diluted share. This compared to net
income of $22.1 million or $0.31 per share in last year's third quarter. For the
first nine months of 2005, net income decreased 53% to $31.5 million or $0.44
per diluted share, from $66.9 million or $0.93 per diluted share in the same
period last year. The decrease was due to the asset impairment and restructuring
charges; continued carbonated soft drink ("CSD") softness in North America as
indicated by the ACNielsen data which states that the U.S. Food and Mass
Merchandising Channels including Wal-Mart have experienced a 1.8% decline in CSD
volume for the nine months ended October 1, 2005; higher packaging and raw
material costs; higher fixed costs resulting from recently-added production
capacity, including the start-up of our new Texas plant; and changes in product
mix toward lower margin bottled water, particularly in the U.S.
SALES -- Sales for the third quarter of 2005 were $469.9 million, an increase of
6.2% from $442.4 million in the third quarter of 2004. Sales increased 5.1%
after excluding the impact of foreign exchange. Sales increased 1.1% when also
excluding the acquisition of Macaw (Holdings) Limited, the parent company of
Macaw (Soft Drinks) Limited (the "Macaw Acquisition") in August 2005 and certain
of the assets of Metro Beverage Co. (the "Metro Acquisition") in October 2004.
Total 8oz equivalent case volume was 329.3 million cases in the third quarter of
2005, up 9% from 302.0 million cases in the third quarter of 2004. Excluding the
Macaw and Metro acquisitions and concentrate sales, volume was 225.6 million 8oz
equivalent cases, up 2.1% from 220.9 million 8 oz equivalent cases in the third
quarter of 2004. The increase is due primarily to an increase in volumes to our
customers in the U.K. and International business units. The Macaw and Metro
acquisitions contributed 15.2 million 8oz equivalent cases to sales volume in
the third quarter of 2005. Sales of concentrates in the third quarter of 2005
were 88.5 million 8oz equivalent cases, up 28.8% from 68.7 million 8oz
equivalent cases in the third quarter of 2004. The increase is primarily driven
by timing differences in customer ordering patterns. Concentrate manufacturing
is a high volume but low dollar component of our overall sales.
Sales for the first nine months of 2005 increased to $1,358.1 million, 6.4%
higher than the same period last year and up 2.6% when the impact of
acquisitions and foreign exchange rates are excluded. The impact of acquisitions
for the first half of the year includes the Macaw and Metro Acquisitions as well
as the acquisition of certain of the assets of The Cardinal Companies of
Elizabethtown, LLC (the "Cardinal Acquisition"). The Cardinal Acquisition was
completed in March 2004. As such, the effect of the acquisition on our
comparative results, on a quarterly basis, is limited to our first quarter
results.
Total 8oz equivalent case volume was 927.6 million cases for the first nine
months of 2005, up 3.0% from the first nine months of 2004 where case volume was
900.7 million cases. Excluding concentrate sales, volume was 694.1 million 8oz
equivalent cases for the first nine months of 2005, an increase of 2.1% compared
to the first nine months of 2004.
Sales in the U.S. during the third quarter of 2005 were $320.2 million, down
1.6% from $325.3 million in the third quarter of 2004. Excluding the Metro
Acquisition, sales decreased 2.7% for the quarter. The third quarter decline in
sales was primarily driven by the softness of the CSD market in the U.S. In the
first nine months of 2005, sales of $968.9 million grew by 3.2% compared with
the first nine months of 2004. Excluding acquisitions, sales in the first nine
months of 2005 increased 1.4% as compared to the first nine months of 2004. The
year to date increase in sales was primarily driven by price increases to our
customers to recover raw material cost increases.
23
Sales in Canada were $56.4 million for the third quarter of 2005, up 13.3% from
$49.8 million in the third quarter of 2004 and down 3.5% excluding the impact of
foreign exchange rates. The third quarter decrease is primarily attributable to
a continuing decline in volume to our customers which is a result of the
softness in the CSD market. For the first nine months of the year, sales of
$157.2 million were 8.8% higher than $144.5 million for the same period last
year, and consistent with prior year when the effect of foreign exchange rates
is taken into account.
Sales in the U.K. and Europe were $73.8 million for the third quarter of 2005,
up 44.4% from $51.1 million in the third quarter of 2004 and up 18.5% when
excluding the impact of foreign exchange and the Macaw Acquisition. For the
first nine months of 2005, sales of $175.3 million were up 20.5% from the same
period in 2004. Excluding the impact of foreign exchange rates and the Macaw
Acquisition, sales were up 9.5%. The rise in sales is primarily attributable to
increased volumes.
The International business unit includes Mexico, Royal Crown International and
the Asia business. Sales by this business unit were $18.4 million for the third
quarter of 2005, up 18.7% from $15.5 million in the third quarter of 2004. For
the first nine months of the year, sales of $54.1 million were 16.8% higher than
$46.3 million for the same period last year. Much of this business unit's growth
was driven by increased volumes in our Mexican division, which accounted for
$1.7 million of the increase in the third quarter and $7.9 million of the
increase in the first nine months of 2005.
GROSS PROFIT -- Gross profit for the third quarter of 2005 was $65.4 million, or
13.9% of sales, down from 16.0% of sales in the third quarter of 2004. Gross
profit in the first nine months of 2005 was $202.1 million, or 14.9% of sales,
compared to gross profit of $226.9 million, or 17.8% of sales, in the first nine
months of 2004. The third quarter and year-to-date gross profit decline was
largely a consequence of CSD softness in North America; higher packaging and raw
material costs; higher fixed costs resulting from recently added production
capacity; and changes in product mix towards an increase in lower margin bottled
water, particularly in the US.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") -- SG&A was $34.2 million
for the third quarter of 2005, an increase of $0.9 million, or 2.7%, from $33.3
million for the third quarter of 2004. For the first nine months of 2005, SG&A
of $106.6 million was $0.5 million, or 0.5%, higher than the same period in
2004. As a percentage of sales, SG&A declined to 7.3% during the third quarter
of 2005, down from 7.5% for the same period last year and to 7.8% for the first
nine months of the year, down from 8.3% for the same period last year.
UNUSUAL ITEMS -- For the third quarter ended October 1, 2005, we recorded asset
impairments of $23.7 million on a pre-tax basis, reflecting adjustments of $20.0
million to the carrying value of customer relationships and $3.7 million
reflecting the write down of certain equipment and our remaining investment in
an equity investee. As a result of continuing decline in sales and margin
relating to certain customers we reviewed related long-lived assets for
impairment. This review indicated that the customer relationship assets were
impaired and as a result the carrying value was written down to its estimated
fair value. We also recorded restructuring charges of $2.0 million for severance
payments as part of the plan we announced on September 29, 2005 to realign the
management of our Canadian and United States businesses to a North American
basis. We made the determination on October 19, 2005 as to the amounts and
character of these charges in connection with the preparation of its financial
statements for the third quarter ended October 1, 2005.
24
INTEREST EXPENSE -- Net interest expense was $7.7 million for the third quarter
of 2005, up 20.3% from $6.4 million in the third quarter of 2004. This increase
was due to an increase in borrowings to finance the Macaw Acquisition. Net
interest expense for the first nine months of 2005 was $20.8 million, up 6.1%
from $19.6 million in the first nine months of 2004.
INCOME TAXES -- As a result of the decline in the CSD volume in North America
for the third quarter ended October 1, 2005 we recorded an income tax recovery
of $1.1 million compared to an income tax provision of $8.3 million for the same
quarter last year. For the first nine months of 2005 we recorded an income tax
provision of $14.9 million as compared with $31.2 million for the same period
last year. For the first nine months of 2005, the overall effective tax rate was
32.1%, which is consistent with the effective tax rate for the first nine months
of 2004, which was 31.7%.
FINANCIAL CONDITION -- Cash provided by operating activities for the first nine
months of 2005 was $41.7 million after capital expenditures of $68.9 million, as
compared to the first nine months of 2004 in which cash provided by operating
activities was $36.5 million after capital expenditures of $38.7 million. Cash
flow from operations increased in the first nine months of 2005 due to an
increase in non-cash working capital of $3.6 million versus an increase in
non-cash working capital of $47.9 million for the nine months ended October 2,
2004. The lower increase for the first nine months of 2005 was primarily due to
a lower working capital investment required as a result of the growth rate
decline in the U.S. This was partially offset by the capital expenditures
incurred as a result of the new Texas plant.
Cash decreased $17.8 million in the first nine months of 2005 to $8.8 million as
of October 1, 2005.
INVESTING ACTIVITIES -- On August 10, 2005 we acquired 100% of the shares of
Macaw (Holdings) Limited, the parent company of Macaw (Soft Drinks) Limited, the
largest privately owned manufacturer of retailer brand carbonated soft drinks in
the United Kingdom. The purchase price for the acquisition was $135.1 million
(75.4 million pound sterling) including acquisition costs of $2.4 million
(1.3 million pound sterling). The acquisition was financed under our global
credit facilities, which were increased from $100.0 million to $225.0 million in
connection with this transaction. On March 17, 2004, we acquired certain of the
assets of The Cardinal Companies of Elizabethtown, LLC in Kentucky, including a
bottling facility. The total purchase price for the acquisition was $17.7
million, including estimated acquisition costs of $0.3 million. The acquisition
was funded from cash flow from operations and short-term borrowings.
CAPITAL RESOURCES AND LONG-TERM DEBT -- Our sources of capital include operating
cash flows, short term borrowings under current credit facilities, issuance of
public and private debt and issuance of equity securities. We believe we have
adequate financial resources to meet our ongoing cash requirements for
operations and capital expenditures, as well as our other financial obligations
based on our operating cash flows and currently available credit.
On March 31, 2005, we entered into committed senior secured credit facilities
that provide for financing in the United States, Canada, the United Kingdom, and
Mexico. The facilities replaced our former committed senior secured credit
facility in the United States and Canada and our demand bank credit facility in
the United Kingdom. The facilities terminate, and the debt under the senior
secured credit agreement is due, on March 31, 2010. These multicurrency
facilities were amended on August 10, 2005 to increase the facilities to $225
from $100 million, to add Macaw (Soft Drinks) Limited as a co-borrower, to
consent to the acquisition of Macaw (Holdings) Limited and its subsidiary, and
to increase the Maximum Facility Amount to $350 million. The amended facilities
allow for revolving credit borrowings in a principal amount of up to $225
million and are currently comprised of two separate facilities: (1) a $220
million multicurrency facility made by certain lenders to us and our indirect
wholly-owned subsidiaries, Cott Beverages Inc., Macaw (Soft Drinks) Limited and
Cott Beverages Limited as co-borrowers, and (2) a $5 million Mexican facility
made by certain lenders to our indirect 90% owned subsidiary Cott
Embottelladores de Mexico, S.A. de C.V. ("CEMSA"). Each facility includes
subfacilities for swingline loans and letters of credit. The
25
$225 million facilities can be increased up to an additional $125 million at our
option if the lenders agree to increase their commitments or new lenders join
the facility and we satisfy certain conditions. Within such $125 million of
extra availability, and subject to certain other limitations, we can establish
additional revolving loan facilities in an aggregate amount not to exceed $30
million to be provided in various currencies as agreed upon for additional
subsidiaries designated by us. Wachovia Bank, National Association acts as
administrative agent and security trustee for lenders under the facilities. In
general, borrowings under the credit facilities bear interest at either a
floating or fixed rate for the applicable currency plus a margin based on our
consolidated total leverage ratio. As at October 1, 2005, credit of $83.8
million was available after borrowings of $136.3 million and standby letters of
credit of $4.9 million. The weighted average interest rate was 5.77% on these
facilities as of October 1, 2005.
On April 1, 2005, our principal U.S. operating subsidiaries (the "Originators")
entered into a receivables securitization facility under which they agreed to
sell substantially all of their receivables generated from their ordinary course
operations, as well as certain related assets, to a new special purpose indirect
subsidiary of ours, Cott USA Receivables Corporation, which in turn sells and
assigns undivided interests in the receivables and related assets to an
unaffiliated entity, Park Avenue Receivables Company, LLC ("PARCO") and certain
other financial institutions (together with PARCO, the "Purchasers") in exchange
for cash in amounts determined by the parties, subject to specified conditions.
The transfers to the Purchasers are treated as a financing for purposes of our
consolidated financial statements; however, the presentation of consolidated
financial statements does not itself imply that the assets of any consolidated
entity (including any special-purpose entity formed for a particular project)
are available to pay the liabilities of any other consolidated entity, or that
the liabilities of any consolidated entity (including any special-purpose entity
formed for a particular project) are obligations of any other consolidated
entity. The transfers of the receivables and related assets to the Purchasers
are governed by a Receivables Purchase Agreement, dated April 1, 2005, by and
among Cott USA Receivables Corporation, Cott Beverages Inc., the Purchasers and
JPMorgan Chase Bank, N.A. ("JPMorgan"), acting for itself and the Purchasers.
The agreement contains representations, warranties, covenants, and indemnities
customary for facilities of this type. The facility does not contain any
covenants that the Company views as materially constraining its activities or
(except for Cott USA Receivables Corporation) the activities of its
subsidiaries.
The amount of funds available under the receivables facility is based upon the
amount of eligible receivables and various reserves required by the facility.
Accordingly, availability may fluctuate over time given changes in eligible
receivables balances and calculation of reserves, but will not exceed the $75
million program limit. As of October 1, 2005, $55.6 million of eligible
receivables, net of reserves, were available for purchase. As of October 1, 2005
$5 million was outstanding, under this facility, at a weighted average interest
rate of 4.42%.
CANADIAN GAAP -- Under Canadian GAAP, in the first nine months of 2005, we
reported net income of $25.8 million and total assets of $1,208.5 million
compared to net income and total assets under U.S. GAAP of $31.5 million and
$1,207.9 million, respectively, in the first nine months of 2005.
The main U.S./Canadian GAAP difference in the first nine months of 2005 was the
accounting of stock options. Under Canadian GAAP, effective January 1, 2004,
stock options issued to employees subsequent to January 1, 2002 are recognized
in net income based on their fair value. As a result, compensation expense of
$7.4 million, $5.5 million after tax of $1.9 million, was recorded in the first
nine months of 2005 and $5.6 million was charged to opening retained earnings as
this policy was adopted on a prospective basis. 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.
OUTLOOK -- Our ongoing focus is to increase sales, market share and
profitability for Cott and for our customers. While the CSD industry continues
to experience weakness in major markets, we believe that there are significant
opportunities for retailer brand beverage growth in the U.S. and the U.K.
26
In the first quarter, we implemented a back-to-basics approach that focused on
improving logistics, managing inventories to appropriate levels and increasing
plant efficiencies. On September 29, 2005, we announced a plan to realign the
management of our Canadian and U.S. businesses to a North American basis to
leverage management strengths across a broader territory and maximize
opportunities and processes to improve supply chain efficiencies and position
the North American business to become more profitable and more responsive to
customers' needs. In connection with this plan, we anticipate recording
additional pre-tax charges of approximately $34 to 54 million over the 12 to 18
month period following the announcement. We expect that the largest of these
charges will be related to asset impairment and that there will also be charges
for severance and other costs. While we are considering various actions
including product and capacity rationalization, we have not completed our
detailed plans and the requisite analyses to estimate the remaining charges to
specific categories. As a result, the ultimate amount and timing of the charges
is uncertain.
In addition to initiatives related to the recent North American management
restructuring, our business strategy involves continuing to expand outside of
the U.S. market. We continue to view Mexico as a strong long-term growth
opportunity and are working closely with our customers to grow the retailer
brand beverage segment in that market. Our U.K. division intends to continue to
enhance its performance through product innovation and a customer-centric focus
to identify opportunities. The acquisition of Macaw has added additional
production capacity and aseptic beverage capabilities to our
U.K. business unit. Under applicable U.K. law, we were not required to seek
pre-clearance of the Macaw Acquisition by the U.K. Office of Fair Trading
("OFT"). We are currently in discussions with the OFT regarding the competitive
effects of the acquisition in an effort to secure a decision from the OFT not to
refer the transaction to the Competition Commission for a further
investigation. As part of its review of the transaction, the OFT has asked us
to undertake to refrain from further integrating the Macaw business into the
Cott business in the U.K. The fact that such request has been made does not
impact the decision as to whether the transaction would be referred to the
Competition Commission. The undertakings will expire if a decision is taken by
the OFT not to refer the transaction to the Competition Commission. If the
transaction is so referred, then undertakings in this or a similar form will
remain in force until the Competition Commission reaches a final decision.
RISKS AND UNCERTAINTIES -- Risks and uncertainties include a continuation of the
decline in CSD sales in the U.S., an increased or expanding reliance on sales of
lower-margin products, the successful implementation of our plan to realign our
operations on a North American basis, the increase in procurement costs for
items such as sweetener, packaging and other ingredients and our ability to pass
those increases on to our customers, the successful integration of new
acquisitions, national brand pricing strategies, the commitment of major
customers to retailer brand programs, our ability to expand outside of the U.S.
market, the ability to protect intellectual property and fluctuations in
interest rates and foreign currencies versus the U.S. dollar.
Sales to our top customer (Wal-Mart Stores, Inc.) in the first nine months of
2005 and 2004 accounted for 41% and 40%, respectively, of our total sales. Sales
to the top ten customers in the first nine months of 2005 and 2004 accounted for
67% and 68%, respectively, of our total sales. The loss of any significant
customer, or customers which in the aggregate represent a significant portion of
our sales, or a significant reduction in orders from such customers, could have
a material adverse effect on our operating results and cash flows.
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
27
report by reference. These forward-looking statements are made as of the date of
this report.
Although we believe the assumptions underlying these forward-looking statements
are reasonable, any of these assumptions could prove to be inaccurate and, as a
result, the forward-looking statements based on those assumptions could be
incorrect. Our operations involve risks and uncertainties, many of which are
outside of our control, and any one or any combination of these risks and
uncertainties could also affect whether the forward-looking statements
ultimately prove to be correct.
The following are some of the factors that could affect our financial
performance, including but not limited to sales, earnings and cash flows, or
could cause actual results to differ materially from estimates contained in or
underlying the forward-looking statements:
o loss of key customers, particularly Wal-Mart, and the commitment of
retailer brand beverage customers to their own retailer brand beverage
programs;
o increases in competitor consolidations and other market-place
competition, particularly among branded beverage products;
o 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;
o our ability to secure additional production capacity either through
acquisitions, or third party manufacturing arrangements;
o success of our plan to realign our operations on a North American basis
and the possibility of unanticipated charges in connection with the
plan;
o increase in interest rates;
o our ability to restore plant efficiencies and lower logistics costs;
o fluctuations in the cost and availability of beverage ingredients and
packaging supplies, and our ability to maintain favorable arrangements
and relationships with our suppliers;
o our ability to pass on increased costs to our customers;
o unseasonably cold or wet weather, which could reduce demand for our
beverages;
o our ability to protect the intellectual property inherent in new and
existing products;
o adverse rulings, judgments or settlements in our existing litigation,
and the possibility that additional litigation will be brought against
us;
o product recalls or changes in or increased enforcement of the laws and
regulations that affect our business;
o currency fluctuations that adversely affect the exchange between the
U.S. dollar on one hand and the pound sterling, the Canadian dollar and
other currencies on the other;
o changes in tax laws and interpretations of tax laws;
o changes in consumer tastes and preferences and market demand for new
and existing products;
o interruption in transportation systems, labor strikes, work stoppages
and other interruptions or difficulties in the employment of labor or
transportation in our markets; and
o changes in general economic and business conditions.
Many of these factors are described in greater detail in this report and in
other filings that we make with the U.S. Securities and Exchange Commission
("SEC") and Canadian securities regulatory authorities. We
28
undertake no obligation to update any information contained in this report or to
publicly release the results of any revisions to forward-looking statements to
reflect events or circumstances of which we may become aware of after the date
of this report. Undue reliance should not be placed on forward-looking
statements.
All future written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
foregoing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Item 7A: Quantitative and Qualitative Disclosures about
Market Risk described in our Annual Report on Form 10-K for the fiscal year
ended January 1, 2005 and to Item 3: Quantitative and Qualitative Disclosures
about Market Risk found in our Quarterly Report on Form 10-Q for the quarter
ended July 2, 2005.
In the first nine months of 2005, we entered into cash flow hedges to mitigate
exposure to declines in the value of the Canadian dollar and British pound
attributable to certain forecasted U.S. dollar raw material purchases of the
Canada and U.K. and Europe business segments. The hedges consist of monthly
foreign exchange options to buy U.S. dollars at fixed rate per Canadian dollar
and British pound and mature at various dates through to December 28, 2006. The
fair market value of the foreign exchange options is included in prepaid
expenses and other assets.
Changes in the fair value of the cash flow hedge instruments are recognized in
accumulated other comprehensive income. Amounts recognized in accumulated other
comprehensive income and prepaid and other expenses are recorded in earnings in
the same periods in which the forecasted purchases or payments affect earnings.
At October 1, 2005, the fair value of the foreign exchange options was $0.7
million ($0.3 million -- October 2, 2004) and we recorded $0.5 million
unrealized loss in comprehensive income for the third quarter ($0.1 million --
October 2, 2004) and $0.2 million unrealized gain in comprehensive income ($0.6
million unrealized loss -- October 2, 2004) for the nine months ending October
1, 2005. See "Note 8 Derivative Financial Instruments."
Our sales outside the U.S. are concentrated principally in the U.K. and Canada.
We believe that our foreign currency exchange rate risk has been immaterial
given the historic stability of the U.S. dollar exchange rates with respect to
the foreign currencies to which we have our principal exposure. However, there
can be no assurance that these exchange rates will remain stable or that our
exposure to foreign currency exchange rate risk will not increase in the future.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended) are effective,
based on their evaluation of these controls and procedures as of the end of the
period covered by this report. There have been no changes in our internal
control over financial reporting or in other factors during the quarter ended
October 1, 2005 that could materially affect, or are likely to materially
affect, our internal control over financial reporting.
29
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the legal proceedings described in our Annual Report on
Form 10-K for the fiscal year ended January 1, 2005. With respect to the North
American Container, Inc. ("NAC") litigation, pending final agreement and
approval by the court on specific language, NAC has agreed, in principle, to
dismiss all remaining claims.
ITEM 6. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
1. Financial Statement Schedules
Schedule III -- Consolidating Financial Statements
2. Exhibits
Number Description
------ -----------
2.1 Agreement Relating to the Sale and Purchase of the Whole of
the Issued Share Capital of Macaw (Holdings) Limited, dated
August 10, 2005, between Andrew Cawthray and Others and
Martyn Rose and Cott Beverages Limited (incorporated by
reference to Exhibit 2.1 to our Form 8-K dated August 16,
2005).
3.1 Articles of Incorporation of Cott (incorporated by reference
to Exhibit 3.1 to our Form 10-K dated March 31, 2000).
3.2 By-laws of Cott (incorporated by reference to Exhibit 3.2 to
our Form 10-K dated March 8, 2002).
10.1 First Amendment, Consent and Joinder Agreement, dated August
10, 2005, by and among Cott Corporation, Cott Beverages
Inc., Cott Beverages Limited, Macaw (Soft Drinks) Limited,
Cott Embotelladores de Mexico, S.A. de C.V., certain Cott
Corporation subsidiaries, the Lenders specified therein and
Wachovia Bank, National Association (incorporated by
reference to Exhibit 10.1 to our Form 8-K dated August 16,
2005).
10.2 Employment Agreement of B. Clyde Preslar dated July 22, 2005
(including Confidentiality and Restrictive Covenants) (filed
herewith).
31.1 Certification of the President and Chief Executive Officer
pursuant to section 302 of the Sarbanes-Oxley Act of 2002
for the quarterly period ended October 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 quarterly period ended
October 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 quarterly period ended October 1, 2005.
32.2 Certification of the Executive Vice President and Chief
Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 for the quarterly period ended
October 1, 2005.
In accordance with SEC Release No. 33-8238, Exhibits 32.1
and 32.2 are to be treated as "accompanying" this report
rather than "filed" as part of the report.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COTT CORPORATION
(Registrant)
Date: November 10, 2005 /s/ B. Clyde Preslar
-------------------------------
B. Clyde Preslar
Executive Vice President
and Chief Financial Officer
(On behalf of the Company)
Date: November 10, 2005 /s/ Tina Dell'Aquila
-------------------------------
Tina Dell'Aquila
Vice President, Controller
and Assistant Secretary
(Principal accounting officer)
31
SCHEDULE III -- CONSOLIDATING FINANCIAL STATEMENTS
Cott Beverages Inc., a wholly owned subsidiary of Cott Corporation, has entered
into financing arrangements that are guaranteed by Cott and certain other wholly
owned subsidiaries of Cott Corporation (the "Guarantor Subsidiaries"). Such
guarantees are full, unconditional and joint and several.
The following supplemental financial information sets forth on an unconsolidated
basis, balance sheets, statements of income and cash flows for Cott Corporation,
Cott Beverages Inc., Guarantor Subsidiaries and Cott Corporation's other
subsidiaries (the "Non-guarantor Subsidiaries"). The supplemental financial
information reflects the investments of Cott Corporation and Cott Beverages Inc.
in their respective subsidiaries using the equity method of accounting.
COTT CORPORATION
CONSOLIDATING STATEMENTS OF INCOME (LOSS)
- --------------------------------------------------------------------------------
(in millions of U.S. dollars, unaudited)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED OCTOBER 1, 2005
---------------------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
---------------------------------------------------------------------------------------------------
SALES $ 60.4 $ 293.8 $ 94.9 $ 29.9 $ (9.1) $ 469.9
Cost of sales 51.7 252.8 83.5 25.6 (9.1) 404.5
---------------------------------------------------------------------------------------------------
GROSS PROFIT 8.7 41.0 11.4 4.3 -- 65.4
Selling, general and
administrative expenses 9.6 17.3 5.2 2.1 -- 34.2
Unusual items
Restructuring 0.2 1.8 -- -- -- 2.0
Asset impairments 3.7 20.0 -- -- -- 23.7
---------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (4.8) 1.9 6.2 2.2 -- 5.5
Other expense (income), net (0.2) (6.9) (0.9) 6.8 0.8 (0.4)
Interest expense (income), net -- 8.1 (1.1) 0.7 -- 7.7
Minority interest -- -- -- 1.1 -- 1.1
---------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY INCOME (4.6) 0.7 8.2 (6.4) (0.8) (2.9)
Income tax recovery (expense) 0.6 1.7 (0.8) (0.4) 1.1
Equity income 2.4 (1.3) 24.9 -- (26.0) --
---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (1.6) $ 1.1 $ 32.3 $ (6.8) $ (26.8) $ (1.8)
===================================================================================================
</Table>
32
COTT CORPORATION
CONSOLIDATING STATEMENTS OF INCOME (LOSS)
- --------------------------------------------------------------------------------
(in millions of U.S. dollars, unaudited)
<Table>
<Caption>
FOR THE NINE MONTHS ENDED OCTOBER 1, 2005
---------------------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
---------------------------------------------------------------------------------------------------
SALES $ 167.3 $ 900.3 $ 221.7 $ 91.3 $ (22.5) $ 1,358.1
Cost of sales 141.9 765.8 193.2 77.6 (22.5) 1,156.0
---------------------------------------------------------------------------------------------------
GROSS PROFIT 25.4 134.5 28.5 13.7 -- 202.1
Selling, general and
administrative expenses 28.9 56.2 15.9 5.6 -- 106.6
Unusual items
Restructuring 0.2 1.8 -- -- -- 2.0
Asset impairments 3.7 20.0 (0.2) -- -- 23.5
---------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (7.4) 56.5 12.8 8.1 -- 70.0
Other expense (income), net (0.3) (25.3) (1.3) 28.5 (2.2) (0.6)
Interest expense (income), net (0.1) 24.7 (5.0) 1.2 -- 20.8
Minority interest -- -- -- 3.4 -- 3.4
---------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY INCOME (7.0) 57.1 19.1 (25.0) 2.2 46.4
Income taxes recovery (expense) 1.1 (12.8) (2.5) (0.7) -- (14.9)
Equity income (loss) 37.5 3.4 51.7 -- (92.6) --
---------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 31.6 $ 47.7 $ 68.3 $ (25.7) $ (90.4) $ 31.5
===================================================================================================
</Table>
33
COTT CORPORATION
CONSOLIDATING BALANCE SHEETS
- --------------------------------------------------------------------------------
(in millions of U.S. dollars, unaudited)
<Table>
<Caption>
AS OF OCTOBER 1, 2005
---------------------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
---------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 4.1 $ (0.2) $ 3.6 $ 1.3 $ -- $ 8.8
Accounts receivable 35.5 46.0 78.6 111.1 (49.1) 222.1
Inventories 21.2 80.5 33.0 5.5 -- 140.2
Prepaid expenses 2.2 4.5 6.1 0.4 -- 13.2
---------------------------------------------------------------------------------------------------
63.0 130.8 121.3 118.3 (49.1) 384.3
Property, plant and equipment 51.9 210.2 129.3 9.8 -- 401.2
Goodwill 23.6 60.3 73.8 -- -- 157.7
Intangibles and other assets 15.6 177.3 29.9 41.9 -- 264.7
Due from affiliates 55.7 102.4 153.7 41.8 (353.6) --
Investments in subsidiaries 404.6 72.4 139.7 138.2 (754.9) --
---------------------------------------------------------------------------------------------------
$ 614.4 $ 753.4 $ 647.7 $ 350.0 $ (1,157.6) $ 1,207.9
===================================================================================================
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings $ 3.4 $ 13.9 $ 132.0 $ 5.2 $ -- $ 154.5
Current maturities of
long-term debt -- 0.8 -- -- -- 0.8
Accounts payable and
accrued liabilities 35.3 125.8 78.6 12.8 (51.3) 201.2
---------------------------------------------------------------------------------------------------
38.7 140.5 210.6 18.0 (51.3) 356.5
Long-term debt -- 272.4 -- -- -- 272.4
Due to affiliates 81.8 113.7 49.4 108.7 (353.6) --
Deferred income taxes 3.2 43.5 18.4 (0.1) -- 65.0
---------------------------------------------------------------------------------------------------
123.7 570.1 278.4 126.6 (404.9) 693.9
---------------------------------------------------------------------------------------------------
Minority interest -- -- -- 23.3 -- 23.3
SHAREOWNERS' EQUITY
Capital stock
Common shares 291.4 302.8 602.2 168.6 (1,073.6) 291.4
Retained earnings (deficit) 193.1 (119.5) (146.0) (34.3) 299.8 193.1
Accumulated other
comprehensive income (loss) 6.2 -- (86.9) 65.8 (21.1) 6.2
---------------------------------------------------------------------------------------------------
490.7 183.3 369.3 200.1 (752.7) 490.7
---------------------------------------------------------------------------------------------------
$ 614.4 $ 753.4 $ 647.7 $ 350.0 $ (1,157.6) $ 1,207.9
===================================================================================================
</Table>
34
COTT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars, unaudited)
<Table>
<Caption>
FOR THE NINE MONTHS ENDED OCTOBER 1, 2005
-----------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 31.6 $ 47.7 $ 68.3 $ (25.7) $ (90.4) $ 31.5
Depreciation and amortization 8.8 28.1 10.2 3.9 -- 51.0
Amortization of financing fees -- 0.2 0.1 0.2 -- 0.5
Deferred income taxes (1.2) 5.3 (0.4) (0.4) -- 3.3
Minority interest -- -- -- 3.4 -- 3.4
Equity income (loss), net of
distributions (37.5) 1.0 (51.7) -- 88.2 --
Asset impairments 3.7 20.4 -- -- -- 24.1
Other non-cash items (0.2) 1.6 (2.1) 1.1 -- 0.4
Net change in non-cash
working capital from
continuing operations 18.7 (4.7) (12.1) (3.3) (2.2) (3.6)
-----------------------------------------------------------------------------------------
Cash provided by (used in)
operating activities 23.9 99.6 12.3 (20.8) (4.4) 110.6
-----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant
and equipment (8.4) (47.1) (12.8) (0.6) -- (68.9)
Business acquisitions -- -- (135.1) -- -- (135.1)
Advances to affiliates (11.9) 0.1 (1.2) -- 13.0 --
Investment in subsidiary (15.0) -- (15.0) -- 30.0 --
Other (6.1) 1.4 1.5 (0.9) -- (4.1)
-----------------------------------------------------------------------------------------
Cash used in investing
activities (41.4) (45.6) (162.6) (1.5) 43.0 (208.1)
-----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments of long-term debt -- (0.7) -- -- -- (0.7)
Short-term borrowings 3.3 (52.7) 129.7 5.2 -- 85.5
Advances from affiliates -- 1.2 11.9 (0.1) (13.0) --
Distributions to subsidiary
minority shareowner -- -- -- (3.9) -- (3.9)
Issue of common shares 3.5 -- 15.0 15.0 (30.0) 3.5
Dividends paid -- -- -- (4.4) 4.4 --
Financing costs -- (3.8) -- -- -- (3.8)
Other -- 1.8 (2.1) -- -- (0.3)
-----------------------------------------------------------------------------------------
Cash provided by (used in)
financing activities 6.8 (54.2) 154.5 11.8 (38.6) 80.3
-----------------------------------------------------------------------------------------
Effect of exchange rate
changes on cash 0.1 -- (0.6) (0.1) -- (0.6)
-----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
CASH (10.6) (0.2) 3.6 (10.6) -- (17.8)
CASH, BEGINNING OF PERIOD 14.7 -- -- 11.9 -- 26.6
-----------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 4.1 $ (0.2) $ 3.6 $ 1.3 $ -- $ 8.8
=========================================================================================
</Table>
35
COTT CORPORATION
CONSOLIDATING STATEMENTS OF INCOME (LOSS)
- --------------------------------------------------------------------------------
(in millions of U.S. dollars, unaudited)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED OCTOBER 2, 2004
-----------------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-----------------------------------------------------------------------------------------------
SALES $ 54.1 $ 302.7 $ 66.8 $ 27.4 $ (8.4) $ 442.4
Cost of sales 46.4 254.6 56.0 22.8 (8.4) 371.4
-----------------------------------------------------------------------------------------------
GROSS PROFIT 7.7 48.1 10.8 4.4 -- 71.0
Selling, general and
administrative expenses 10.4 16.3 4.8 1.8 -- 33.3
Unusual items
Asset impairments (0.2) -- -- -- -- (0.2)
-----------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (2.5) 31.8 6.0 2.6 -- 37.9
Other expense, net -- 0.8 (0.8) -- -- --
Interest expense (income), net -- 8.2 (1.8) -- -- 6.4
Minority interest -- -- -- 1.0 -- 1.0
-----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY INCOME (2.5) 22.8 8.6 1.6 -- 30.5
Income taxes recovery (expense) 2.7 (9.6) (1.3) (0.1) -- (8.3)
Equity income (loss) 21.9 3.2 14.3 -- (39.5) (0.1)
-----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 22.1 $ 16.4 $ 21.6 $ 1.5 $ (39.5) $ 22.1
===============================================================================================
</Table>
<Table>
<Caption>
FOR THE NINE MONTHS ENDED OCTOBER 2, 2004
--------------------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
--------------------------------------------------------------------------------------------------
SALES $ 160.8 $ 873.4 $ 189.4 $ 81.1 $ (27.7) $ 1,277.0
Cost of sales 133.2 716.7 160.8 67.1 (27.7) 1,050.1
--------------------------------------------------------------------------------------------------
GROSS PROFIT 27.6 156.7 28.6 14.0 -- 226.9
Selling, general and
administrative expenses 33.5 51.4 15.6 5.6 -- 106.1
Unusual items
Asset impairments (0.2) -- (0.5) -- -- (0.7)
--------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (5.7) 105.3 13.5 8.4 -- 121.5
Other expense, net 0.7 0.9 (1.3) -- -- 0.3
Interest expense (income), net -- 24.5 (4.8) (0.1) -- 19.6
Minority interest -- -- -- 3.2 -- 3.2
--------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EQUITY INCOME (6.4) 79.9 19.6 5.3 -- 98.4
Income taxes recovery (expense) 4.2 (32.2) (3.0) (0.2) -- (31.2)
Equity income (loss) 69.1 7.7 51.0 -- (128.1) (0.3)
--------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 66.9 $ 55.4 $ 67.6 $ 5.1 $ (128.1) $ 66.9
==================================================================================================
</Table>
36
COTT CORPORATION
CONSOLIDATING BALANCE SHEETS
- --------------------------------------------------------------------------------
(in millions of U.S. dollars)
<Table>
<Caption>
AS OF JANUARY 1, 2005
----------------------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
----------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 14.7 $ -- $ -- $ 11.9 $ -- $ 26.6
Accounts receivable 52.2 109.3 49.4 12.9 (39.5) 184.3
Inventories 20.9 72.4 24.6 4.9 -- 122.8
Prepaid expenses and other
assets 3.0 3.3 3.0 0.4 -- 9.7
----------------------------------------------------------------------------------------------------
90.8 185.0 77.0 30.1 (39.5) 343.4
Property, plant and equipment 48.3 162.0 93.7 9.7 -- 313.7
Goodwill 22.8 51.8 14.2 -- -- 88.8
Intangibles and other assets 11.6 203.7 16.8 44.0 -- 276.1
Due from affiliates 47.0 4.7 152.4 41.8 (245.9) --
Investments in subsidiaries 354.0 74.2 65.2 133.4 (626.8) --
----------------------------------------------------------------------------------------------------
$ 574.5 $ 681.4 $ 419.3 $ 259.0 $ (912.2) $ 1,022.0
====================================================================================================
LIABILITIES
Current liabilities
Short-term borrowings $ -- $ 66.5 $ 4.9 $ -- $ -- $ 71.4
Current maturities of
long-term debt -- 0.8 -- -- -- 0.8
Accounts payable and
accrued liabilities 31.7 82.5 52.5 18.0 (39.5) 145.2
----------------------------------------------------------------------------------------------------
31.7 149.8 57.4 18.0 (39.5) 217.4
Long-term debt -- 272.5 -- -- -- 272.5
Due to affiliates 80.4 112.6 45.9 7.0 (245.9) --
Deferred income taxes 5.1 38.1 7.6 0.2 -- 51.0
----------------------------------------------------------------------------------------------------
117.2 573.0 110.9 25.2 (285.4) 540.9
----------------------------------------------------------------------------------------------------
Minority interest -- -- -- 23.8 -- 23.8
SHAREOWNERS' EQUITY
Capital stock
Common shares 287.0 275.8 587.2 153.6 (1,016.5) 287.0
Retained earnings (deficit) 161.6 (167.4) (214.3) (4.2) 385.9 161.6
Accumulated other
comprehensive income 8.7 -- (64.5) 60.6 3.9 8.7
----------------------------------------------------------------------------------------------------
457.3 108.4 308.4 210.0 (626.8) 457.3
----------------------------------------------------------------------------------------------------
$ 574.5 $ 681.4 $ 419.3 $ 259.0 $ (912.2) $ 1,022.0
====================================================================================================
</Table>
37
COTT CORPORATION
CONSOLIDATING STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in millions of U.S. dollars, unaudited)
<Table>
<Caption>
FOR THE NINE MONTHS ENDED OCTOBER 2, 2004
-------------------------------------------------------------------------------------------------
COTT COTT GUARANTOR NON-GUARANTOR ELIMINATION
CORPORATION BEVERAGES INC. SUBSIDIARIES SUBSIDIARIES ENTRIES CONSOLIDATED
-------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income 66.9 55.4 67.6 5.1 (128.1) 66.9
Depreciation and amortization 7.0 23.2 10.7 3.8 -- 44.7
Amortization of financing fees -- 0.5 -- -- -- 0.5
Deferred income taxes (2.3) 8.0 3.0 (2.0) -- 6.7
Minority interest -- -- -- 3.2 -- 3.2
Equity income (loss), net of
distributions (69.1) (3.2) (51.0) -- 123.6 0.3
Asset impairments (0.2) -- (0.5) -- -- (0.7)
Other non-cash items 1.1 (0.8) 0.5 0.7 -- 1.5
Net change in non-cash
working capital from
continuing operations (14.0) (27.9) (2.9) (3.1) -- (47.9)
-------------------------------------------------------------------------------------------------
Cash provided by (used in)
operating activities (10.6) 55.2 27.4 7.7 (4.5) 75.2
-------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant
and equipment (3.5) (27.4) (6.0) (1.8) -- 38.7
Business acquisitions -- (17.7) -- -- -- (17.7)
Acquisition of production
capacity -- (3.8) -- -- -- (3.8)
Advances to affiliates 3.5 -- (9.8) -- 6.3 --
Investment in subsidiary (5.0) -- -- -- 5.0 --
Other (1.9) 0.3 0.2 0.3 -- (1.1)
-------------------------------------------------------------------------------------------------
Cash used in investing
activities (6.9) (48.6) (15.6) (1.5) 11.3 (61.3)
-------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments of long-term debt -- (1.1) (1.9) (0.2) -- (3.2)
Short-term borrowings -- (16.2) (0.3) -- -- (16.5)
Advances from affiliates -- 9.8 (3.5) -- (6.3) --
Distributions to subsidiary
minority shareowner -- -- -- (4.3) -- (4.3)
Issue of common shares 12.8 -- 5.0 -- (5.0) 12.8
Dividends paid -- -- -- (4.5) 4.5 --
Other -- -- (0.3) -- -- (0.3)
-------------------------------------------------------------------------------------------------
Cash provided by (used in)
financing activities 12.8 (7.5) (1.0) (9.0) (6.8) (11.5)
-------------------------------------------------------------------------------------------------
Effect of exchange rate
changes on cash 0.3 -- -- (0.1) -- 0.2
-------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
CASH (4.4) (0.9) 10.8 (2.9) -- 2.6
CASH, BEGINNING OF PERIOD 13.4 (0.6) 0.1 5.5 -- 18.4
-------------------------------------------------------------------------------------------------
CASH, END OF PERIOD 9.0 (1.5) 10.9 2.6 -- 21.0
=================================================================================================
</Table>
38
EXHIBIT INDEX
2.1 Agreement Relating to the Sale and Purchase of the Whole of the Issued
Share Capital of Macaw (Holdings) Limited, dated August 10, 2005,
between Andrew Cawthray and Others and Martyn Rose and Cott Beverages
Limited (incorporated by reference to Exhibit 2.1 to our Form 8-K dated
August 16, 2005).
3.1 Articles of Incorporation of Cott (incorporated by reference to Exhibit
3.1 to our Form 10-K dated March 31, 2000).
3.2 By-laws of Cott (incorporated by reference to Exhibit 3.2 to our Form
10-K dated March 8, 2002).
10.1 First Amendment, Consent and Joinder Agreement, dated August 10, 2005,
by and among Cott Corporation, Cott Beverages Inc., Cott Beverages
Limited, Macaw (Soft Drinks) Limited, Cott Embotelladores de Mexico,
S.A. de C.V., certain Cott Corporation subsidiaries, the Lenders
specified therein and Wachovia Bank, National Association (incorporated
by reference to Exhibit 10.1 to our Form 8-K dated August 16, 2005).
10.2 Employment Agreement of B. Clyde Preslar dated July 22, 2005 (including
Confidentiality and Restrictive Covenants) (filed herewith).
31.1 Certification of the President and Chief Executive Officer pursuant to
section 302 of the Sarbanes-Oxley Act of 2002 for the quarterly period
ended October 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 quarterly period ended October 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 quarterly period
ended October 1, 2005.
32.2 Certification of the Executive Vice President and Chief Financial
Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 for
the quarterly period ended October 1, 2005.
39