-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Er7FiScMT3irF8vc396RkvNwqjEdE1Bb9xtTfzQ8EklQGh69+5q3TtuTeSY5r8sj My0oL0Rc+oDqfQkHAI0SHQ== 0000909567-06-000332.txt : 20060306 0000909567-06-000332.hdr.sgml : 20060306 20060306154444 ACCESSION NUMBER: 0000909567-06-000332 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060306 DATE AS OF CHANGE: 20060306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COTT CORP /CN/ CENTRAL INDEX KEY: 0000884713 STANDARD INDUSTRIAL CLASSIFICATION: BOTTLED & CANNED SOFT DRINKS CARBONATED WATERS [2086] IRS NUMBER: 000000000 FISCAL YEAR END: 0125 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31410 FILM NUMBER: 06667213 BUSINESS ADDRESS: STREET 1: 207 QUEENS QUAY W STREET 2: SUITE 340 CITY: TORONTO ONTARIO CANA STATE: A6 ZIP: 00000 BUSINESS PHONE: 4162033898 MAIL ADDRESS: STREET 1: 207 QUEENS QUAY W STREET 2: SUITE 340 CITY: TORONTO ONTARIO STATE: A6 ZIP: 00000 10-K 1 o30438e10vk.txt 10-K United States Securities and Exchange Commission WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission file number 000-19914 COTT CORPORATION (Exact name of registrant as specified in its charter) CANADA NONE (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification No.)
207 QUEEN'S QUAY WEST, SUITE 340, TORONTO, ONTARIO M5J 1A7 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (416) 203-3898 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ---------------------- COMMON SHARES WITHOUT NOMINAL OR PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-12 of the Act). Yes [ ] No [X] The aggregate market value of the common equity held by non-affiliates of the registrant as of July 2, 2005 (based on the closing sale price of the registrant's common stock as reported on the New York Stock Exchange on July 1, 2005) was $1,546,902,683. (Reference is made to the last paragraph of Part II, Item 5 for a statement of assumptions upon which the calculation is made.) The number of shares outstanding of the registrant's common stock as of February 28, 2006 was 71,711,630. TABLE OF CONTENTS
PAGE ---- PART I Item 1 Business....................................................... 17 Item 1A Risk factors................................................... 21 Item 1B Unresolved staff comments...................................... 24 Item 2 Properties..................................................... 24 Item 3 Legal proceedings.............................................. 24 Item 4 Submission of matters to a vote of security holders............ 25 Supplemental Item Part I - Executive officers of Cott.......... 26 PART II Item 5 Market for the registrant's common equity and related shareowner matters ......................................... 27 Item 6 Selected financial data ....................................... 28 Item 7 Management's discussion and analysis of financial condition and results of operations ...................................... 29 Item 7A Quantitative and qualitative disclosures about market risk .... 38 Item 8 Financial statements and supplementary data Report of management........................................ 40 Report of independent registered public accounting firm..... 41 Consolidated Statements of Income for fiscal years ended 2005, 2004 and 2003...................................... 43 Consolidated Balance Sheets as of the fiscal years ended 2005 and 2004............................................ 44 Consolidated Statements of Shareowners' Equity for the fiscal years ended 2005, 2004 and 2003................... 45 Consolidated Statements of Cash Flows for the fiscal years ended 2005, 2004 and 2003................................ 46 Notes to the Consolidated Financial Statements for the fiscal years ended 2005, 2004 and 2003................... 47 Quarterly Financial Information............................. 61 Item 9 Changes in and disagreements with accountants on accounting and financial disclosure........................................ 62 Item 9A Controls and procedures........................................ 62 PART III Item 10 Directors and executive officers............................... 63 Item 11 Executive compensation......................................... 63 Item 12 Security ownership of certain beneficial owners and management and related shareowner matters................... 63 Item 13 Certain relationships and related transactions................. 63 Item 14 Principal accountant fees and services ........................ 63 PART IV Item 15 Exhibits and financial statement schedules .................... 64
Our consolidated financial statements are prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") in U.S. dollars. Unless otherwise indicated, all amounts in this report are in U.S. dollars and U.S. GAAP. Any reference to 2005, 2004 and 2003 corresponds to the year-end dates December 31, 2005, January 1, 2005, and January 3, 2004 respectively. 14 DOCUMENTS INCORPORATED BY REFERENCE Portions of our definitive proxy statement for the 2006 Annual and Special Meeting of Shareowners, to be filed within 120 days of December 31, 2005, are incorporated by reference in Part III. Such proxy statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed "filed" for the purposes of this report on Form 10-K. FORWARD-LOOKING STATEMENTS In addition to historical information, this report and the reports and documents incorporated by reference in this report contain statements relating to future events and our future results. These statements are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995 and include, but are not limited to, statements that relate to projections of sales, earnings, earnings per share, cash flows, capital expenditures or other financial items, discussions of estimated future revenue enhancements and cost savings. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. Generally, words such as "anticipate", "believe", "continue", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "should" and similar terms and phrases are used to identify forward-looking statements in this report and in the documents incorporated in this report by reference. These forward-looking statements are made as of the date of this report. Although we believe the assumptions underlying these forward-looking statements are reasonable, any of these assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions could be incorrect. Our operations involve risks and uncertainties, many of which are outside of our control, and any one or any combination of these risks and uncertainties could also affect whether the forward-looking statements ultimately prove to be correct. The following are some of the factors that could affect our financial performance, including but not limited to sales, earnings and cash flows, or could cause actual results to differ materially from estimates contained in or underlying the forward-looking statements: - - loss of key customers, particularly Wal-Mart, and the commitment of retailer brand beverage customers to their own retailer brand beverage programs; - - increases in competitor consolidations and other market-place competition, particularly among branded beverage products; - - our ability to identify acquisition and alliance candidates and to integrate into our operations the businesses and product lines that we acquire or become allied with; - - our ability to secure additional production capacity either through acquisitions, or third party manufacturing arrangements; - - increase in interest rates; - - our ability to restore plant efficiencies and lower logistics costs; - - fluctuations in the cost and availability of beverage ingredients and packaging supplies, and our ability to maintain favorable arrangements and relationships with our suppliers; - - our ability to pass on increased costs to our customers; - - unseasonably cold or wet weather, which could reduce demand for our beverages; - - our ability to protect the intellectual property inherent in new and existing products; - - adverse rulings, judgments or settlements in our existing litigation and regulatory reviews, and the possibility that additional litigation or regulatory reviews will be brought against us; - - product recalls or changes in or increased enforcement of the laws and regulations that affect our business; - - currency fluctuations that adversely affect the exchange between the U.S. dollar on one hand and the pound sterling, the Canadian dollar and other currencies on the other; - - changes in tax laws and interpretations of tax laws; - - changes in consumer tastes and preferences and market demand for new and existing products; - - interruption in transportation systems, labor strikes, work stoppages and other interruptions or difficulties in the employment of labor or transportation in our markets; and - - changes in general economic and business conditions. Many of these factors are described in greater detail in this report and in other filings that we make with the U.S. Securities and Exchange Commission ("SEC") and Canadian securities regulatory authorities. We undertake no obligation to update any information contained in this report or to publicly release the results of any revisions to forward-looking statements to reflect events or circumstances of which we may become aware of after the date of this report. Undue reliance should not be placed on forward-looking statements. All future written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. 15 NON-GAAP FINANCIAL MEASURES In this Annual Report on Form 10-K and in our Annual Report to Shareowners for the year ended December 31, 2005 we use certain non-GAAP measures to provide additional information with regards to our financial performance and liquidity including earnings before interest, taxes, depreciation and amortization ("EBITDA") and cash flow from operations after capital expenditures. EBITDA is defined as earnings from continuing operations before interest, income taxes, depreciation and amortization. Cash flow from operations after capital expenditures is defined as cash from operating activities less additions to property, plant and equipment. We use operating income as our primary measure of performance and cash flow from operations as our primary measure of liquidity. Nevertheless, we present EBITDA in our filings for several reasons. First, we use multiples of EBITDA and discounted cash flows in determining the value of our operations. In addition, we use "cash return on assets," which is a financial measure calculated by dividing our annualized EBITDA by our aggregate operating assets, for the purposes of calculating performance-related bonus compensation for our management employees, because that measure reflects the ability of management to generate cash while preserving assets. Finally, we include EBITDA in our filings because we believe that our current and potential investors use multiples of EBITDA to make investment decisions about us. Investors should not consider EBITDA an alternative to net income, nor to cash provided by operating activities nor any other indicator of performance or liquidity, which have been determined in accordance with U.S. or Canadian GAAP. Our method of calculating EBITDA may differ from the methods used by other companies and, accordingly, our EBITDA may not be comparable to similarly titled measures used by other companies. In addition, we use cash flow from operations after capital expenditures as a measure of cash we are able to generate after considering the investments required to maintain or expand our capital base. 16 PART I ITEM 1. BUSINESS OUR COMPANY We operate in North America through our indirect wholly owned subsidiary, Cott Beverages Inc., in the United States, and through our Cott Beverages Canada division in Canada, in the U.K. and Europe through our indirect wholly owned subsidiary, Cott Beverages Ltd., and in Mexico through an indirect 90% owned subsidiary, Cott Embotelladores de Mexico, S.A. de C.V. References throughout this report to North America or our North American business mean, unless otherwise indicated, Canada and the United States. We incorporated in 1955 and are governed by the Canada Business Corporations Act. Our registered Canadian office is located at 333 Avro Avenue, Pointe-Claire, Quebec, Canada H9R 5W3 and our principal executive office is located at 207 Queen's Quay West, Suite 340, Toronto, Ontario, Canada M5J 1A7. PRINCIPAL MARKETS AND PRODUCTS We are one of the world's largest suppliers of retailer brand beverages. Based on industry information, we estimate that we produce (either directly or through third party manufacturers with whom we have co-packing agreements) approximately 74% of all retailer brand carbonated soft drinks sold in North America. We produce 44% of those sold in the U.K. In addition to carbonated soft drinks, our product lines include clear, sparkling flavored beverages, juice-based products, bottled water, energy drinks and iced teas. During the year ended December 31, 2005, approximately 94% of all of the beverages we sell in 8-ounce equivalent cases, in North America and the U.K. are under customer controlled retailer brands, and the remainder are sold under brand names that we either own or license from others. 8-ounce equivalent cases is a standard industry measure and does not equate to physical cases. Sales of carbonated soft drinks including flavored sparkling waters and energy drinks represented approximately 85% of our sales volume in 8-ounce equivalent cases. Sales of bottled water represented 8% of our sales volume in 8-ounce equivalent cases. In recent years, we expanded our business through acquisitions and growth with key customers. We believe that opportunities exist to increase sales of beverages in our markets by leveraging existing customer relationships, obtaining new customers, exploring new channels of distribution and introducing new products. During the past five years, we expanded and strengthened our production and distribution capabilities in North America, the U.K. and Mexico through a series of acquisitions totaling $377.7 million. RECENT ACQUISITIONS In August 2005 we acquired 100% of the shares of Macaw (Holdings) Limited, the parent company of Macaw (Soft Drinks) Limited ("Macaw"), which at the time was the largest privately owned manufacturer of retailer brand carbonated soft drinks in the U.K. (the "Macaw Acquisition"). The Macaw Acquisition represents a significant strategic investment in our U.K. business. We expect that the additional production capacity and manufacturing capabilities in the fast-growing aseptic beverage segment will enable us to expand the variety of products and packages we offer and enhance the service we provide to our customers. Subsequent to the completion of the Macaw Acquisition, the U.K. Office of Fair Trading ("OFT") decided to review the transaction. Under applicable U.K. law, we were not required to seek pre-clearance of the Macaw Acquisition by the OFT in the U.K. The OFT has referred the transaction to the Competition Commission for further investigation. The Competition Commission ruling is expected in May 2006. Until this regulatory review is complete and a ruling is made, the OFT and Competition Commission have required us to refrain from further integrating the Macaw business into the Cott business in the U.K. CAPACITY ADDITIONS In June 2005 we began shipping from our new manufacturing facility in Fort Worth, Texas. As the largest plant in our global operations, Fort Worth is currently expected to produce about 32.0 million physical cases in 2006. NORTH AMERICAN REALIGNMENT In September 2005 we announced a plan to realign the management of our Canadian and U.S. businesses to a North American basis to leverage management strengths, improve supply chain efficiencies and position our North American business to become more profitable and responsive to customer needs. The plan includes organizational changes as well as rationalization of product offerings, elimination of underperforming assets and increased focus on high potential accounts. As part of this realignment we closed our juice plant in Lachine, Quebec effective February 2006 and we plan to close our manufacturing plant in Columbus, Ohio effective March 2006. 17 FINANCIAL INFORMATION ABOUT SEGMENTS For financial information about segments and geographic areas, see note 23 to the consolidated financial statements, found on pages 58 to 59 of this Annual Report on Form 10-K. MANUFACTURING AND DISTRIBUTION Approximately 86% of our beverages produced in North America were manufactured in facilities that we, or third party manufacturers with whom we have long-term co-packing agreements, either own or lease. We manufacture virtually all of our U.K. and Mexican beverages in facilities that we either own or lease. We rely on third parties to produce and distribute products in areas or markets where we do not have our own production facilities, such as continental Europe, or when additional production capacity is required. Our products are either picked up by customers at our facilities or delivered by us, a common carrier, or third party distributors to either the customer's distribution centers or directly to retail locations. We may be liable if the consumption of any of our products causes injury, illness or death. We also may be required to recall some of our products if they become contaminated or are damaged or mislabeled. A significant unfavorable product liability judgment or a widespread product recall could have a material adverse effect on our results of operations or cash flows. We are insured against product liability claims and product recalls. We believe that our insurance coverage is adequate. Our insurers are comfortable with our deductibles given our operational risk profile, our claims history and our financial stability. INGREDIENTS AND PACKAGING SUPPLIES The principal raw materials required to produce our products are polyethylene terephthalate ("PET") bottles, caps and PET preforms, cans and ends, labels, cartons and trays, concentrates, sweeteners and carbon dioxide. We typically enter into annual supply arrangements rather than long-term contracts with our suppliers, which means that our suppliers are obligated to continue to supply us with materials for one-year periods, at the end of which we must either renegotiate the contracts with our incumbent suppliers or find alternative sources. With respect to some of our key packaging supplies, such as aluminum cans and ends, and some of our key ingredients, such as artificial sweeteners, we have entered into long-term supply agreements, the terms of which range from 1 to 6 years. Crown Cork & Seal USA, Inc. ("CCS") supplies aluminum cans and ends under a contract that expires on December 31, 2011. The contract provides that CCS will supply all of our aluminum can and end requirements worldwide, subject to certain exceptions. The contract contains a pricing mechanism for certain materials, standard representations, warranties, indemnities and termination events, including termination events related to bankruptcy or insolvency of either party. As with our annual supply contracts, we must either renegotiate these long-term supply agreements with the incumbent suppliers when they expire or find alternative sources. We rely upon our ongoing relationships with key suppliers to support our operations. We believe that we will be able to either renegotiate contracts with these suppliers when they expire or replace them. We could, however, incur higher ingredient and packaging costs in renegotiating contracts with existing suppliers or replacing those suppliers or we could experience temporary disruptions in our ability to deliver products to our customers, either of which could have a material adverse effect on our results of operations. We believe there is adequate supply of the ingredients and packaging materials used to produce or package our products. However, the supply of specific ingredients and packaging materials could be adversely affected by economic factors such as industry consolidation, energy shortages, governmental controls, labor disputes, natural disasters, acts of war or terrorism and other factors. The majority of our ingredient and packaging supply contracts allow our suppliers to alter the amounts they charge us based on changes in the costs of the underlying commodities. Aluminum for cans, resin for PET bottles and high fructose corn syrup for sweeteners are examples of these underlying commodities. In addition, the contracts for certain of our ingredients and packaging materials permit our suppliers to increase the costs they charge us based on increases in their cost of converting the underlying commodities into the materials we purchase. In certain cases those increases are subject to negotiated limits. Changes in the prices we pay for ingredients and packaging materials occur at times that vary by product and supplier, but are principally on semi-annual or annual bases. Accordingly, we bear the risk of increases in the costs of these ingredients and packaging materials, including the underlying costs of the commodities that comprise them and, to some extent, the costs of converting those commodities into finished products. We do not use derivatives to manage this risk. If the cost of these ingredients or packaging materials increases, we may be unable to pass these costs along to our customers through adjustments to the prices we charge. If we cannot pass on these increases to our customers on a timely basis, they could have a material adverse effect on our results of operations. 18 TRADE SECRETS, TRADEMARKS AND LICENSES We sell the majority of our beverages under retailer brands to customers who own the trademarks associated with those products. We are the registered owner of various trademarks that are important to our worldwide business, including Cott(R) in Canada and the U.S., as well as Stars & Stripes(R), Vess(R), Vintage(R), Top Pop(R), City Club(R) and Lotsa(R) in the U.S., Red Rooster(R) and Benshaws(R) in the U.K. and RC(R) in more than 100 countries outside of North America. We are licensed to use certain trademarks, including Chubby(R) in Canada and the U.S. and RC(R) in certain regions of Canada, Carters(R) in the U.K. and Jarritos(R) in Mexico. Trademarks are generally of indefinite duration and the licenses to which we are a party are of varying terms, certain of which are perpetual. Our success depends in part on our intellectual property, which includes trade secrets in the form of concentrate formulas for our beverages and trademarks for the names of the beverages we sell. We either own the trademarks for the products that we sell or license them from our retailer brand customers and other third parties. To protect this intellectual property, we rely principally on registration of trademarks, contractual responsibilities and restrictions in agreements (such as indemnification, nondisclosure and confidentiality agreements) with employees, consultants and customers, and on the common law and statutory protections afforded to trademarks, trade secrets and proprietary "know-how." We also emphasize correct use of our trademarks and vigorously pursue any party that infringes on our trademarks, using all available legal remedies. We may not be successful in protecting our intellectual property for a number of reasons, including: - - competitors may independently develop intellectual property that is similar to or better than ours; - - employees, consultants or customers may not abide by their contractual agreements and the cost of enforcing those agreements may be prohibitive, or those agreements may prove to be unenforceable or more limited than anticipated; - - foreign intellectual property laws may not adequately protect our intellectual property rights; and - - our intellectual property rights may be challenged, invalidated or circumvented. If we are unable to protect our intellectual property, it would weaken our competitive position, and we could face significant expense to protect or enforce our intellectual property rights. If we are found to infringe on the intellectual property rights of others, we could incur significant damages, be enjoined from continuing to manufacture, market or use the affected product, or be required to obtain a license to continue manufacturing or using the affected product. A license could be very expensive to obtain or may not be available at all. Similarly, changing products or processes to avoid infringing the rights of others may be costly or impracticable. Occasionally, third parties may assert that we are, or may be, infringing on or misappropriating their intellectual property rights. In these cases, we intend to defend against claims or negotiate licenses when we consider these actions appropriate. Intellectual property cases are uncertain and involve complex legal and factual questions. If we become involved in this type of litigation, it could consume significant resources and divert our attention from business operations. SEASONALITY OF SALES Sales of our beverages are seasonal, with the highest sales volumes generally occurring in the second and third fiscal quarters, which correspond to the warmer months of the year in our major markets. CUSTOMERS A significant portion of our sales is concentrated in a small number of customers. Our customers include many large national and regional grocery, mass-merchandise, drugstore, wholesale and convenience store chains in our core markets of North America and the U.K. and Europe. For the year ended December 31, 2005, sales to Wal-Mart Stores, Inc. and its affiliates (collectively, "Wal-Mart") accounted for approximately 40% of total sales. Wal-Mart was the only customer that accounted for more that 10% of our total sales in that period. For the same period, our top ten customers accounted for approximately 65% of total sales. We expect that sales of our products to a limited number of customers will continue to account for a high percentage of sales for the foreseeable future. The loss of Wal-Mart, or customers which in the aggregate represent a significant portion of our sales, would have a material adverse effect on our operating results and cash flows. COMPETITION The carbonated soft drink category is highly competitive in each region in which we compete and competition for incremental volume is intense. The brands owned by the three major national soft drink companies, Coca-Cola, Pepsi and Cadbury Schweppes, control approximately 82% of the aggregate take-home volume of soft drink sales in the combined North American and U.K. markets. Those companies have significant financial resources and spend heavily on promotional programs. They also have direct store delivery systems which enable their personnel to visit retailers frequently to sell new items, stock shelves and build displays. 19 In addition, we face competition in the U.S. and U.K. from regional soft drink manufacturers who sell aggressively priced brands and, in many cases, also supply retailer brand products. A few larger U.S. retailers also self-manufacture products for their own needs and consistently approach other retailers seeking additional business. Generally, carbonated soft drinks compete against all forms of liquid beverages, including water, teas, coffees and juice-based beverages, for consumers' shopping preferences. The competitive pressures in the carbonated soft drink industry are significant. However, we seek to differentiate ourselves by offering our customers efficient distribution methods, high-quality products, category management strategies, packaging and marketing strategies and superior service. GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS Our operations and properties are subject to various federal, state, provincial, local and foreign laws and regulations. As a producer of beverages, we must comply with production, packaging, quality, labeling and distribution standards in each of the countries where we operate, including, in the U.S., those of the federal Food, Drug and Cosmetic Act. We are also subject to various federal, state, provincial, local and foreign environmental laws and workplace regulations. These laws and regulations include, in the U.S., the Occupational Safety and Health Act, the Unfair Labor Standards Act, the Clean Air Act, the Clean Water Act and laws relating to the maintenance of fuel storage tanks. We do not expect to make any material expenditure in connection with environmental remediation and compliance. However, compliance with, or violation of, future laws or regulations could require material expenditures by us or otherwise have a material adverse effect on our business, financial condition and results of operations. THE ONTARIO ENVIRONMENTAL PROTECTION ACT ("EPA") EPA regulations provide that a minimum percentage of a bottler's soft drink sales within specified areas in Ontario must be made in refillable containers. The penalty for non-compliance is a fine, which for companies ranges from $50,000 per day on which the offense occurs or continues for the first conviction to $100,000 per day for each subsequent conviction, although such fines may be increased to equal the amount of monetary benefit acquired by the offender as a result of the commission of the offense. We, and we believe other industry participants, are currently not in compliance with the requirements of the EPA. To comply with these requirements we, and we believe many other industry participants, would have to significantly increase sales in refillable containers to a minimum refillable sales ratio of 30%. We are not in compliance with these regulations and do not expect to be in the foreseeable future. Ontario is not enforcing the EPA at this time, despite the fact that it is still in effect and not amended, but if it chooses to enforce it in the future, we could incur fines for non-compliance and the possible prohibition of sales of soft drinks in non-refillable containers in Ontario. We estimate that approximately 4% of our sales would be affected by the possible limitation of sales of soft drinks in non-refillable containers in Ontario if the Ontario Ministry of the Environment initiated an action to enforce the provisions of the EPA against us. Moreover, the Ontario Ministry of the Environment released a report in 1997 stating that these EPA regulations are "outdated and unworkable". However, despite the "unworkable" nature of the EPA regulations, they have not yet been revoked. We believe that the magnitude of the potential fines that we could incur if the Ontario Ministry of the Environment chose to enforce these regulations is such that the costs to us of non-compliance could be, although are not contemplated to be, significant. However, our management believes that such enforcement is very remote and, in any event, these regulations are expected to be revoked in the future given the more recent regulatory activity in this area as described below. In December of 2003, the Ontario Ministry of the Environment approved the Blue Box Program, which included provisions regarding industry responsibility for 50% of the net cost of the Program. Generally, the company that owns the intellectual property rights to the brand of a product, or is the licensee of those rights, and that manufactures, packages or distributes a product for sale in Ontario or causes such manufacturing, packaging or distributing of a product in Ontario, will be liable for the costs under the Program. We generally do not own the intellectual property rights to the brands of our products. Rather, we generally manufacture, package and distribute products for and on behalf of Ontario-based third party customers who are the brand owners and we do not believe that any costs for which we might be ultimately responsible would have a material adverse effect on our results of operations; however we cannot guarantee this outcome. EMPLOYEES As of December 31, 2005, we had approximately 3,484 employees, of whom an estimated 2,507 were located in North America, 723 were located in U.K. and 254 were located in Mexico. We have entered into numerous collective bargaining agreements that we believe contain terms that are typical in the beverage industry. As these agreements expire, we believe they can be renegotiated on 20 terms satisfactory to us. We consider our relations with employees to be good. AVAILABILITY OF INFORMATION AND OTHER MATTERS Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge from our website at www.cott.com, when such reports are available on the Securities and Exchange Commissions' website, www.sec.gov. The information found on our website is not part of this or any other report that we file with, or furnish to, the Securities and Exchange Commission or to Canadian securities regulators. Our chief executive officer is required by the rules of the New York Stock Exchange (the "NYSE") to certify annually to the NYSE that he is not aware of any violation by us of our corporate governance listing standards. Our chief executive officer made such certification to the NYSE as of May 12, 2005. We are responsible for establishing and maintaining adequate internal control over financial reporting as required by the U.S. Securities and Exchange Commission. See Management's Report on Internal Control over Financial Reporting on page 62. ITEM 1A. RISK FACTORS We face a number of risks and uncertainties, including the following: WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGHLY COMPETITIVE BEVERAGE CATEGORY. The markets for our products are extremely competitive. In comparison to the major national brand beverage manufacturers, we are a relatively small participant in the industry. We face competition from the national brand beverage manufacturers in all of our markets and from other retailer brand beverage manufacturers in the U.S. and the U.K. If our competitors reduce their selling prices or increase the frequency of their promotional activities in our core markets or if our customers do not allocate adequate shelf space for the beverages we supply, we could experience a decline in our volumes or be forced to reduce pricing or increase capital and other expenditures, any of which could adversely affect our profitability. BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR SALES, THE LOSS OF ANY SIGNIFICANT CUSTOMER COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. A significant portion of our sales is concentrated in a small number of customers. Our customers include many large national and regional grocery, mass-merchandise, drugstore, wholesale and convenience store chains in our core markets of North America and the U.K. and Europe. Sales to our top customer in 2005 and 2004 accounted for 40% of our total sales, and sales to the top ten customers in 2005 and 2004 were 65% and 68%, respectively. We expect that sales of our products to a limited number of customers will continue to account for a high percentage of our sales in the foreseeable future. The loss of any significant customer, or customers which in the aggregate represent a significant portion of our sales, could have a material adverse effect on our operating results and cash flows. At December 31, 2005, we have $126.6 million of customer relationships recorded as an intangible asset. The permanent loss of any customer included in the intangible asset will result in impairment in the value of the intangible asset. IF WE ARE UNABLE TO MAINTAIN RELATIONSHIPS WITH OUR RAW MATERIAL SUPPLIERS, WE MAY INCUR HIGHER SUPPLY COSTS OR BE UNABLE TO DELIVER PRODUCTS TO OUR CUSTOMERS. The principal raw materials required to produce our products are PET bottles, caps and PET preforms, cans and ends, labels, cartons and trays, concentrates, sweeteners and carbon dioxide. We typically enter into annual supply arrangements rather than long-term contracts with our suppliers, which means that our suppliers are obligated to continue to supply us with materials for one-year periods, at the end of which we must either renegotiate the contracts with our incumbent suppliers or we would be required to find an alternative source for supply. With respect to some of our key packaging supplies, such as aluminum cans and ends, and some of our key ingredients, such as artificial sweeteners, we have entered into long-term supply agreements, the terms of which range from 1 to 6 years, and therefore we are assured of a supply of those key packaging supplies and ingredients for a longer period of time. During 2004, we extended our supply contract with CCS from its original expiration date of December 31, 2006 to December 31, 2011. The contract provides that CCS will supply all of our aluminum can and end requirements worldwide, subject to certain exceptions. The contract contains a pricing mechanism for certain materials, standard representations, warranties, indemnities and termination events, including termination events related to bankruptcy or insolvency of either party. As with our annual supply contracts, we must either renegotiate these long-term supply agreements with the incumbent suppliers when they expire or find alternative sources for supply. 21 We rely upon our ongoing relationships with our key suppliers to support our operations. We believe that we will be able to either renegotiate contracts with these suppliers when they expire or, alternatively, if we are unable to renegotiate contracts with our key suppliers, we believe that we could replace them. We could, however, incur higher ingredient and packaging supply costs in renegotiating contracts with existing suppliers or replacing those suppliers or we could experience temporary dislocations in our ability to deliver products to our customers, either of which could have a material adverse effect on our results of operations. OUR INGREDIENTS AND PACKAGING SUPPLIES ARE SUBJECT TO PRICE INCREASES AND WE MAY BE UNABLE TO EFFECTIVELY PASS RISING COSTS ON TO OUR CUSTOMERS. We bear the risk of increasing prices on the ingredients and packaging in our products. The majority of our ingredient and packaging supply contracts allow our suppliers to alter the costs they charge us based on changes in the costs of the underlying commodities that are used to produce them. Aluminum for cans, resin for PET bottles and high fructose corn syrup for sweeteners are examples of these underlying commodities. In addition, the contracts for certain of our ingredients and packaging materials permit our suppliers to increase the costs they charge us based on increases in their cost of converting those underlying commodities into the materials that we purchase. In certain cases those increases are subject to negotiated limits and, in other cases, they are not. These changes in the prices that we pay for ingredients and packaging materials occur at times that vary by product and supplier, but are principally on semi-annual and annual bases. Accordingly, we bear the risk of increases in the costs of these ingredients and packaging materials, including the underlying costs of the commodities that comprise them and, to some extent, the costs of converting those commodities into finished products. We do not use derivatives to manage this risk. If the cost of these ingredients or packaging materials increases, we may be unable to pass these costs along to our customers through adjustments to the prices we charge. If we cannot pass on these increases to our customers on a timely basis, they could have a material adverse effect on our results of operations. IF WE FAIL TO MANAGE OUR EXPANDING OPERATIONS SUCCESSFULLY, OUR BUSINESS AND FINANCIAL RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED. Our success depends, in part, on our ability to manage new acquisitions. In recent years, we have grown our business and beverage offerings primarily through acquisition of other companies, new product lines and growth with key customers. A part of our strategy is to continue to expand our business through acquisitions and alliances. To succeed with this strategy, we must identify appropriate acquisition or strategic alliance candidates. The success of this strategy also depends on our ability to manage and integrate acquisitions and alliances at a pace consistent with the growth of our business. We cannot provide assurance that acquisition opportunities will be available, that we will continue to acquire businesses and product lines or that any of the businesses or product lines that we acquire or align with will be integrated successfully into our business or prove profitable. IF THE COMPETITION COMMISSION IN THE U.K. DOES NOT APPROVE THE MACAW ACQUISITION, WE MIGHT BE REQUIRED TO SELL ALL OR PART OF THIS BUSINESS AND MAY NOT RECOVER OUR FULL COST. When we completed the Macaw Acquisition, our valuation of this business was based on market conditions at the time of the acquisition and included synergies we expect to be able to achieve once it is integrated into our existing U.K. business. Our total cost of the Macaw Acquisition was $135.1 million, including goodwill of $69.4 million. The Competition Commission in the U.K. is currently investigating the Macaw Acquisition. Should the Competition Commission rule against us, we could be required to divest ourselves of all or a part of this business. Were a divestiture required, we would probably need the consent of our lenders under the terms of our credit agreement. Moreover, market conditions may deteriorate or the purchaser may not be able to achieve the synergies that we would expect to achieve. As a result, we may not be able to recover our full cost. OUR SUCCESS DEPENDS, IN PART, ON OUR INTELLECTUAL PROPERTY, WHICH WE MAY BE UNABLE TO PROTECT. We possess certain intellectual property that is important to our business. This intellectual property includes trade secrets, in the form of the concentrate formulas for most of the beverages that we produce, and trademarks for the names of the beverages that we sell, which are trademarks that we either own or license from our retailer brand customers and others. Our success depends, in part, on our ability to protect our intellectual property. To protect this intellectual property, we rely principally on registration of trademarks, contractual responsibilities and restrictions in agreements (such as indemnification, nondisclosure and confidentiality agreements) with employees, consultants and customers, and on common law and statutory protections afforded to trademarks, trade secrets and proprietary "know-how". In addition, we vigorously pursue any person who infringes on our intellectual property using any and all legal remedies available. Notwithstanding our efforts, we may not be successful in protecting our intellectual property for a number of reasons, including: - - our competitors may independently develop intellectual property that is similar to or better than ours; 22 - - employees, consultants or customers may not abide by their contractual agreements and the cost of enforcing those agreements may be prohibitive, or those agreements may prove to be unenforceable or more limited than anticipated; - - foreign intellectual property laws may not adequately protect our intellectual property rights; and - - our intellectual property rights may be successfully challenged, invalidated or circumvented. If we are unable to protect our intellectual property, it would weaken our competitive position and we could face significant expense to protect or enforce our intellectual property rights. At December 31, 2005, we had $80.4 million of rights recorded as an intangible asset. OUR GEOGRAPHIC DIVERSITY SUBJECTS US TO THE RISK OF CURRENCY FLUCTUATIONS. We are exposed to changes in foreign currency exchange rates, including those between the U.S. dollar, on the one hand, and the Canadian dollar and the pound sterling, on the other hand. Our operations outside of the U.S. accounted for approximately 29% of our 2005 sales. Accordingly, currency fluctuations in respect of our outstanding non-U.S. dollar denominated net asset balances may affect our reported results and competitive position. A PORTION OF OUR INDEBTEDNESS IS VARIABLE RATE DEBT, AND CHANGES IN INTEREST RATES COULD ADVERSELY AFFECT US BY CAUSING US TO INCUR HIGHER INTEREST COSTS WITH RESPECT TO SUCH VARIABLE RATE DEBT. Our credit and securitization facilities subject us to interest rate risk. We have a secured revolving credit facility, under which we borrow from time to time for various purposes, including to fund our day-to-day operations and to finance acquisitions. The maximum amount that we may borrow under these facilities was increased from $100.0 million to $225.0 million on August 10, 2005. We obtain funding under the securitization facility for our day-to-day operations. The maximum amount that we may borrow under this facility is $75.0 million, based on eligible receivables and various reserves required in the facility. As of December 31, 2005, total borrowings under these facilities were $151.3 million. The interest rate applicable to our revolving credit facility is variable, meaning that the rate at which we pay interest on amounts borrowed under the facility fluctuates with changes in interest rates and our leverage. The interest rate applicable to our securitization facility is also variable, based on the cost of borrowing of Park Avenue Receivables Company, LLC and certain other financial institutions, as required (the "Purchasers"). Accordingly, with respect to any amounts from time to time outstanding under this facility, we are exposed to changes in interest rates. We do not currently use derivative instruments to hedge interest rate exposure. However, we do regularly review the structure of our indebtedness and consider changes to the proportion of variable versus fixed rate debt through refinancing, interest rate swaps or other measures in response to the changing economic environment. We cannot assure that we will be able to continue to refinance our indebtedness on terms that are favorable to us. If we are unable to refinance our indebtedness or otherwise adequately manage our debt structure in response to changes in the market, our interest expense could increase, which would negatively impact our financial condition and results of operations. IF WE BREACH THE COVENANTS AND CONDITIONS SET OUT IN OUR SENIOR SECURED CREDIT FACILITIES OR SECURITIZATION FACILITY, THE LENDERS COULD TERMINATE THE FACILITIES OR WE WOULD HAVE TO RENEGOTIATE THESE AGREEMENTS AND MAY INCUR HIGHER FEES AND INTEREST COSTS. Our senior secured credit facilities allow for revolving credit borrowings of up to $225.0 million provided we are in compliance with the covenants and conditions of the agreement. Our securitization facility allows for borrowings of up to $75.0 million, depending on eligible receivables balances and calculations of reserves. Both facilities contain cross default provisions. If we are in default under one facility, default is triggered under the other facility. As of December 31, 2005, total borrowings under these facilities were $151.3 million. If we breach the covenants, or an event occurs that would have a material adverse effect on us, we would be required to renegotiate the agreements with higher fees and interest rates, provided the lenders wish to renegotiate. The lenders could choose to terminate the facilities in which case we believe we could replace them. We could however incur higher fees and interest expense which would negatively impact our financial condition and results of operations. The senior unsecured notes include covenants that limit new borrowings with certain exceptions, including borrowings based on receivables and inventory, unless certain conditions are met. WE ARE NOT IN COMPLIANCE WITH THE REQUIREMENTS OF THE ONTARIO ENVIRONMENTAL PROTECTION ACT ("EPA") AND, IF THE ONTARIO GOVERNMENT SEEKS TO ENFORCE THOSE REQUIREMENTS OR IMPLEMENTS MODIFICATIONS TO THEM, WE COULD BE ADVERSELY AFFECTED. Certain regulations under the EPA provide that a minimum percentage of a bottler's soft drink sales within specified areas in Ontario must be made in refillable containers. The penalty for non-compliance is a fine, which for companies ranges from $50,000 per day on which the offense occurs or 23 continues for the first conviction to $100,000 per day for each subsequent conviction, although such fines may be increased to equal the amount of monetary benefit acquired by the offender as a result of the commission of the offense. We, and we believe other industry participants, are currently not in compliance with the requirements of the EPA. Ontario is not enforcing the EPA at this time, but if it chose to enforce the EPA in the future, we could incur fines for non-compliance and the possible prohibition of sales of soft drinks in non-refillable containers in Ontario. We estimate that approximately 4% of our sales would be affected by the possible limitation on sales of soft drinks in non-refillable containers in Ontario if the Ontario Ministry of the Environment initiated an action to enforce the provisions of the EPA against us. In April 2003, the Ontario Ministry of the Environment proposed to revoke these regulations in favor of new mechanisms under the Ontario Waste Diversion Act to enhance diversion from disposal of carbonated soft drink containers. On December 22, 2003, the Ontario provincial government approved the implementation of the Blue Box Program plan under the Ministry of Environment Waste Diversion Act. The Program requires those parties who are brand owners or licensees of rights to brands which are manufactured, packaged or distributed for sale in Ontario to contribute to the net cost of the Blue Box Program. We generally manufacture, package and distribute products for and on behalf of third party customers. Therefore, we do not believe that we will be responsible for direct costs of the Program. However, our customers may attempt to pass these costs, or a portion of them, onto us. We do not believe that the costs for which we may ultimately be responsible under this Program will have a material adverse effect on our results of operations; however, we cannot guarantee this outcome. The Blue Box Program does not revoke any of the regulations mentioned above under the EPA regarding refillable containers, although the industry anticipates that they will be reversed in the future. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES As of the end of 2005, we operated 19 beverage production facilities in North America, 12 of which we owned and seven of which we leased. We also operate our global concentrate manufacturing facility in Columbus, Georgia, which we own. In connection with our North American realignment plan, we closed our Lachine, Quebec juice plant in February 2006 and we plan to cease operations at our Columbus, Ohio manufacturing plant in March 2006, reducing the number of leased properties to five. In the U.K., we own and operate four beverage production facilities. We lease and operate one beverage production facility in Mexico. Total square footage of our production facilities is approximately 2,589,776 in the U.S., excluding the Columbus, Ohio facility and including the concentrate facility; 931,050 in Canada excluding the Lachine, Quebec facility; 1,010,848 in the U.K.; and 111,278 in Mexico. Lease terms for non-owned beverage production facilities, excluding the Columbus, Ohio and Lachine, Quebec leases that we expect to terminate, expire between 2007 and 2017. ITEM 3. LEGAL PROCEEDINGS In August 1999, we were named as a defendant in an action styled North American Container, Inc. ("NAC") v. Plastipak Packaging Inc., et al., filed in the United States District Court for the Northern District of Texas, Dallas Division. The plaintiff, NAC, sued over 40 defendants, alleging, among other things, infringement on their U.S. patent relating to plastic containers. The defendants, including us, were successful in the Motions for Summary Judgment of Invalidity and Non-Infringement, which were predominantly affirmed on appeal, with remand back on one issue. Subsequently, the Plaintiffs have stipulated to completely dismiss the case. The order dismissing the claim was entered on November 30, 2005, and accordingly, the action is no longer pending. In January 2005, we were named as one of many defendants in an action styled The Consumers' Association of Canada and Bruce Cran v. Coca-Cola Bottling Ltd. et al., filed in the Supreme Court of British Columbia (Canada). This claim has been brought under the British Columbia Class Proceedings Act as a class action, but it has not to date been certified as a class action. The plaintiffs are suing over 30 defendants, consisting of beverage manufacturers, retailers and Encorp Pacific (Canada), the government-approved steward of British Columbia's container deposit program, alleging the improper use and collection by the defendants of deposits and container recycling fees pursuant to the British Columbia container recycling program. The relief sought by the plaintiffs includes a declaration that C$70 million in container deposits were unlawfully converted by the defendants and are held on constructive trust for consumers and the repayment of C$60 million collected as container recycling fees. 24 The defendants, including us, brought and argued a summary trial application in January 2006. Judgment in the summary trial application has not yet been rendered, and it is too early to assess the chances of success of that application. In February 2005, similar class action claims, styled Kruger et al. v. Pepsi-Cola Beverage Ltd. et al., were filed in the Superior Courts of a number of other Canadian provinces, naming essentially the same defendants, including us, plus the other regional stewardship agencies. Subsequent to the completion of the Macaw Acquisition, the OFT decided to review the transaction. Under applicable U.K. law, we were not required to seek pre-clearance of the Macaw Acquisition by the OFT in the U.K. The OFT has referred the transaction to the Competition Commission for further investigation. The Competition Commission ruling is expected in May 2006. We expect that the transaction will be approved, but we cannot guarantee this outcome. If the Competition Commission rules against us, we may be required to divest ourselves of all or a part of this business. We are investigating these matters; however, legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Since the litigation is at a very preliminary stage, sufficient information regarding the merits of these claims is not yet available to us. We are engaged in various litigation matters in the ordinary course of our business. While we cannot predict with certainty the outcome of these matters, we believe that the resolution of these matters will not have a material adverse effect on our financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareowners during the fourth quarter of 2005. 25 SUPPLEMENTAL ITEM PART I. EXECUTIVE OFFICERS OF COTT CORPORATION The following is a list of names and ages of all of our executive officers as of February 28, 2006, and the positions and offices that each of them holds.
NAME AND MUNICIPALITY PERIOD SERVED OF RESIDENCE OFFICE AGE AS OFFICER - --------------------- ------ --- ------------- JOHN K. SHEPPARD President & Chief Executive Officer 48 2002 to present Tampa, Florida MARK BENADIBA Executive Vice President, 52 1990 to present Toronto, Ontario North American Operations B. CLYDE PRESLAR Executive Vice President & 51 2005 to present Tampa, Florida Chief Financial Officer MARK R. HALPERIN Senior Vice President, 48 1995 to present Toronto, Ontario General Counsel & Secretary ANDREW J. MURFIN Senior Vice President & 45 2005 to present West Yorkshire, England Managing Director U.K./Europe COLIN D. WALKER Senior Vice President, 48 1998 to present London, Ontario Corporate Resources CATHERINE M. BRENNAN Vice President, Treasurer 48 1999 to present Toronto, Ontario TINA DELL'AQUILA Vice President, Controller & 43 1998 to present Toronto, Ontario Assistant Secretary JOHN DENNEHY Vice President, North American 44 2005 to present Weston, Massachusetts Sales & Marketing JASON NICHOL Vice President, 34 2005 to present Bentonville, Arkansas Business Development Wal-Mart P. EDMUND O'KEEFFE Vice President, Investor Relations 41 1999 to present Toronto, Ontario & Corporate Development CSABA REIDER Vice President, Global Sourcing 49 2005 to present Markham, Ontario PREM VIRMANI Vice President, Technical Services 60 1991 to present Columbus, Georgia LEN WATSON Vice President, 57 2004 to present Toronto, Ontario Chief Information Officer
During the last five years, the above persons have been engaged in their principal occupations or in other executive capacities with us except as follows: - - prior to January 2002, John K. Sheppard was President and Chief Executive Officer of ServiceCentral Technologies, Inc., a software development company that specializes in field service management; - - prior to August 2005, B. Clyde Preslar was Chief Financial Officer of Lance, Inc., a manufacturer of branded and retail branded snack foods; - - prior to April 2003, Andrew J. Murfin was CEO of Parallel Brands Limited (an acquisition vehicle) and before that he was managing director of Princes Soft Drinks Limited (a soft drinks manufacturer); - - prior to October 2003, Jason Nichol was Director of Sales & Marketing of Cott Beverages Inc.; and - - prior to September 2004, Len Watson was Senior Vice President, Consulting Services responsible for the Greater Toronto Area business unit of CGI Group Inc. 26 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS Our common shares are listed on the Toronto Stock Exchange (the "TSX") under the ticker symbol "BCB," and on the New York Stock Exchange (the "NYSE") under the ticker symbol "COT." The tables below show the high and low reported per share sales prices of common shares on the TSX (in Canadian dollars) and the NYSE (in U.S. dollars) for the indicated periods of the years ended December 31, 2005 and January 1, 2005. TORONTO STOCK EXCHANGE (C$)
2005 2004 ------------- ------------- High Low High Low ----- ----- ----- ----- January 1-March 31 31.41 28.79 40.05 35.21 April 1-June 30 30.09 26.50 45.59 38.55 July 1-September 30 31.45 20.31 43.41 33.18 October 1-December 31 20.51 16.10 37.06 29.04
NEW YORK STOCK EXCHANGE (U.S.$)
2005 2004 ------------- ------------- High Low High Low ----- ----- ----- ----- January 1-March 31 25.26 23.55 30.35 27.37 April 1-June 30 24.26 21.12 33.36 28.91 July 1-September 30 25.93 17.40 32.89 25.75 October 1-December 31 17.51 13.58 29.19 23.77
As of February 28, 2006, we had 712 shareowners of record. This number was determined from records maintained by our transfer agent and it does not include beneficial owners of securities whose securities are held in the names of various dealers or clearing agencies. The closing sale price of our common shares on February 28, 2006 was C$13.90 on the TSX and $12.32 on the NYSE. We have not paid cash dividends since June 1998. There are certain restrictions on the payment of dividends under our senior secured credit facility and the indenture governing the 8% senior subordinated notes maturing in 2011. The most restrictive is the quarterly limitation on dividends based on the prior quarter's earnings. If we were to pay dividends to shareowners that are U.S. residents, those dividends would generally be subject to Canadian withholding tax. Under current Canadian tax law, dividends paid by a Canadian corporation to a nonresident shareowner are generally subject to Canadian withholding tax at a 25% rate. Under the current tax treaty between Canada and the U.S., U.S. residents are eligible for a reduction in this withholding tax rate to 15% (and to 5% for a company shareowner who is the beneficial owner of at least 10% of our voting stock). Accordingly, under current tax law, our U.S. resident shareowners would generally be subject to a Canadian withholding tax at a 15% rate on dividends paid by us, provided that they had complied with applicable procedural requirements to claim the benefit of the reduced rate under the tax treaty. CALCULATION OF AGGREGATE MARKET VALUE OF NON-AFFILIATE SHARES For purposes of calculating the aggregate market value of common shares held by non-affiliates as shown on the cover page of this report, it was assumed that all of the outstanding shares were held by non-affiliates except for outstanding shares held or controlled by our directors and executive officers. This should not be deemed to constitute an admission that any of these parties are, in fact, affiliates of us, or that there are not other persons who may be deemed to be affiliates. For further information concerning shareholdings of officers, directors and principal stockholders see Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Shareowner Matters. 27 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data reflects the results of operations. This information should be read in conjunction with, and is qualified by reference to "Management's discussion and analysis of financial condition and results of operations" and the consolidated financial statements and notes thereto included elsewhere in this report. The financial information presented may not be indicative of future performance.
DECEMBER 31, January 1, January 3, December 28, December 29, 2005 (1) 2005 (2) 2004 (3) 2002 (4) 2001 (5) (52 WEEKS) (52 weeks) (53 weeks) (52 weeks) (52 weeks) ------------ ---------- ---------- ------------ ------------ (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) SALES $1,755.3 $1,646.3 $1,417.8 $1,198.6 $1,090.1 Cost of sales 1,505.8 1,362.6 1,141.0 965.7 902.7 Selling, general and administrative 138.6 138.1 126.1 110.2 94.1 Unusual items Restructuring 3.2 -- -- -- -- Asset impairments 33.5 0.9 1.8 -- -- Other 0.8 -- -- -- -- -------- -------- -------- -------- -------- OPERATING INCOME 73.4 144.7 148.9 122.7 93.3 -------- -------- -------- -------- -------- Income from continuing operations 24.6 78.3 77.4 48.7 39.9 Cumulative effect of change in accounting principle -- -- -- (44.8) -- -------- -------- -------- -------- -------- NET INCOME $ 24.6 $ 78.3 $ 77.4 $ 3.9 $ 39.9 ======== ======== ======== ======== ======== INCOME PER SHARE - BASIC Income from continuing operations $ 0.34 $ 1.10 $ 1.12 $ 0.75 $ 0.66 Cumulative effect of change in accounting principle $ -- $ -- $ -- $ (0.69) $ -- Net income $ 0.34 $ 1.10 $ 1.12 $ 0.06 $ 0.66 ======== ======== ======== ======== ======== INCOME PER SHARE - DILUTED Income from continuing operations $ 0.34 $ 1.09 $ 1.09 $ 0.69 $ 0.58 Cumulative effect of change in accounting principle $ -- $ -- $ -- $ (0.64) $ -- Net income $ 0.34 $ 1.09 $ 1.09 $ 0.06 $ 0.58 ======== ======== ======== ======== ======== Total assets $1,171.4 $1,022.0 $ 908.8 $ 785.4 $1,065.4 Current maturities of long-term debt 0.8 0.8 3.3 16.5 281.8 Long-term debt 272.3 272.5 275.7 339.3 359.5 Shareowners' equity 481.9 457.3 345.1 218.2 197.7
Under the 1986 Common Share Option Plan, as amended, we have reserved 14 million shares for future issuance. (1) During the year we acquired 100% of the shares of Macaw (Holdings) Limited, the parent company of Macaw (Soft Drinks) Limited. We also recorded asset impairment charges of $33.5 million as described in Note 2 to the Consolidated Financial Statements on page 49. (2) During the year we acquired certain of the assets of The Cardinal Companies of Elizabethtown, LLC and certain of the assets of Metro Beverage Co. (3) During the year we acquired the retailer brand business of Quality Beverage Brands, L.L.C. (4) During the year, we acquired Premium Beverage Packers, Inc. and formed a new business in Mexico, Cott Embotelladores de Mexico, S.A. de C.V. During the year we adopted SFAS 142, Goodwill and Other Intangible Assets. This change in method of valuing goodwill resulted in a $44.8 million non-cash write down of the U.K. business. (5) During the year, we acquired certain assets of the Royal Crown Company, Inc., and formed a new business with Polar Corp. Current maturities of long-term debt include the 2005 and 2007 Notes repaid on January 22, 2002 from cash held in trust. 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are one of the world's largest suppliers of retailer brand beverages. 2005 was a challenging year for us and our industry as we faced unprecedented commodity cost increases and a consumer shift toward non-carbonated beverages. Accordingly we undertook actions to increase financial performance by improving our operating performance, enhancing our sales focus and realigning our organization. In September 2005 we announced a plan to realign the management of our Canadian and U.S. businesses to a North American basis. The realignment is designed to leverage management strengths, improve supply chain efficiencies and position the North American business to become more profitable and responsive to customer needs. Additional key elements of our plan include rationalizing product offerings, eliminating under-performing assets and increasing focus on high potential accounts. In 2005, we recorded $37.5 million in pre-tax unusual items ($0.35 per diluted share after tax), including restructuring charges of $3.2 million, customer relationships impairment of $20.0 million and other asset impairment of $13.5 million. As part of the North American realignment we closed our juice plant in Lachine, Quebec effective February 2006 and we plan to close our manufacturing plant in Columbus, Ohio effective March 2006. Severance and lease cancellation costs relating to the closure of these plants are expected to be approximately $2.7 million. We completed the Macaw Acquisition in August 2005 for a purchase price of $135.1 million (75.4 million pounds sterling). At the time of the Macaw Acquisition, Macaw was the largest privately owned manufacturer of retailer brand carbonated soft drinks in the U.K. with six production lines in two production facilities including aseptic capabilities. In June 2005 we began shipping from our new manufacturing facility in Fort Worth, Texas. As the largest plant in our global operations, Fort Worth is currently expected to produce about 32.0 million physical cases for 2006. The total cost of this new plant is $50.6 million, including $30.7 million spent in 2005. Our net income in 2005 was $24.6 million or $0.34 per diluted share, compared with $78.3 million or $1.09 per diluted share in 2004. The decrease resulted from: - - asset impairment, restructuring and other unusual charges; - - higher packaging and raw materials costs that were only partially offset by increased prices; - - higher fixed costs from recently-added production capacity, including the start-up of our new Fort Worth, Texas plant; - - changes in product mix toward lower margin bottled water in North America; - - the highly competitive environment in the North American carbonated soft drinks ("CSD") industry; and - - a higher effective tax rate. 2005 VERSUS 2004 RESULTS OF OPERATIONS
2005 2004 ------------------ ------------------ MILLIONS PERCENT MILLIONS PERCENT OF OF OF OF DOLLARS SALES DOLLARS SALES -------- ------- -------- ------- Sales $1,755.3 100.0% $1,646.3 100.0% Cost of sales 1,505.8 85.8% 1,362.6 82.8% -------- ----- -------- ----- Gross margin 249.5 14.2% 283.7 17.2% SG&A 138.6 7.9% 138.1 8.4% Unusual items 37.5 2.1% 0.9 -- -------- ----- -------- ----- Operating income 73.4 4.2% 144.7 8.8% Other expense 0.8 -- (0.1) -- Interest expense 28.8 1.7% 26.0 1.6% Minority interest 4.5 0.3% 4.0 0.2% Income taxes 14.7 0.8% 35.8 2.2% Equity loss -- -- 0.7 -- -------- ----- -------- ----- Net income $ 24.6 1.4% $ 78.3 4.8% ======== ===== ======== ===== Depreciation & amortization 70.2 4.0% 60.0 3.6%
SALES Sales in 2005 were $1,755.3 million, an increase of 7% from $1,646.3 million in 2004. The August 2005 Macaw Acquisition, the March 2004 acquisition of certain assets of The Cardinal Companies of Elizabethtown, LLC ("Cardinal") and the October 2004 acquisition of certain of the assets of Metro Beverage Co. ("Metro") added $55.5 million or 3%, in the aggregate, to sales in 2005 as compared with 2004. As shown in the following table, sales increased 2% when the impact of these acquisitions and foreign exchange are excluded. Total case volume in 8-ounce equivalents for 2005 was 1,201 million, up 5% from 1,148 million in 2004. Excluding the impact of acquisitions, sales volume was up 1%. 29
NORTH UK & INTER- COTT AMERICA EUROPE NATIONAL ------ ------- ------ -------- Change in sales $109.0 $39.5 $57.6 $10.4 Impact of acquisitions 55.5 17.7 37.8 -- Impact of foreign exchange 14.0 13.8 (1.5) 1.7 ------ ----- ----- ----- Change excluding acquisitions & exchange $ 39.5 $ 8.0 $21.3 $ 8.7 ====== ===== ===== ===== Percentage change excluding acquisitions & exchange 2% 1% 11% 14%
In North America, our sales were $1,428.0 million in 2005, an increase of 3% from 2004. Excluding acquisitions and the impact of foreign exchange, sales increased by almost 1% from 2004. Case volume in 8-ounce equivalents decreased by almost 2% in 2005, down 3% excluding the impact of acquisitions. The volume decrease was driven by weakness in the North American CSD market and was offset by selling price increases implemented in response to higher raw material costs. In the U.K. and Europe, our sales were $251.9 million in 2005, an increase of 30% from $194.3 million in 2004. Excluding the impact of the Macaw Acquisition and the weakened pound sterling, sales increased 11% in 2005 reflecting higher volume. Case volume in 8-ounce equivalents was up 40% from 2004, an increase of 10% excluding the Macaw Acquisition. Volume increased as customers expanded their retailer brand product offerings and we grew our contract packing business. The international segment includes Mexico, Royal Crown International and Asia. Sales by this segment were $71.6 million in 2005, an increase of 17% when compared with sales of $61.2 million in 2004. Excluding foreign exchange, sales increased 14%. Sales in Mexico continue to expand, reaching $50.9 million for an increase of 25% over 2004. COST OF SALES Cost of sales was $1,505.8 million or 85.8% of sales, a 3 percentage point increase from $1,362.6 million or 82.8% of sales in 2004. Variable costs represented 89% of total cost of sales in 2005, down from 90% in 2004 as a result of recent capacity additions. Major elements of these variable costs included ingredient and packaging costs, fees paid to third party manufacturers and distribution costs. The increase in total cost of sales as a percent of sales reflects an increase in raw material costs as well as higher fixed costs. Raw material costs have increased primarily for packaging materials, including PET bottles and cans. Higher fixed costs result from recently added production capacity. Variable cost savings from the increase in the proportion of our North American production manufactured in our own facilities partially offset these increases. GROSS PROFIT Gross profit was 14.2% of sales for 2005, down from 17.2% in 2004 as realized selling price increases were more than offset by higher packaging and raw material prices. The change in product mix toward lower margined bottled water and the fixed cost of additional plant capacities also contributed to lower margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") SG&A was $138.6 million in 2005, up slightly from $138.1 million in 2004. As a percentage of sales, SG&A declined to 7.9% for 2005, down from 8.4% in 2004. Excluding the impact of acquisitions and foreign exchange, SG&A was down $5.0 million from 2004 primarily due to lower incentive compensation and lower bad debt expense. A $3.1 million provision was recorded against a North American export receivable in 2004. UNUSUAL ITEMS In 2005, we recorded charges for unusual items of $37.5 million on a pre-tax basis or $0.35 per diluted share after tax. Unusual items were $0.9 million before tax in 2004 and were primarily related to the writedown of an investment in an equity investee. NORTH AMERICA - In 2005, we recorded asset impairment and restructuring charges of $36.0 million relating to our North American operations. In September 2005 we announced a plan to realign the management of our Canadian and U.S. businesses to a North American basis. We recorded restructuring charges of $3.0 million, including $2.6 million for severance payments and $0.4 million for contract termination payments as part of this plan. We anticipate additional charges of $2.7 million including $0.7 million for severance and $2.0 million for contract terminations, relating to the closures of the Columbus, Ohio plant and the Lachine, Quebec juice plant will be recognized during 2006. Asset impairment charges relating to the realignment included $9.3 million for the closure of the Columbus, Ohio plant announced in December 2005, including property, plant and equipment of $3.4 million and goodwill of $5.9 million; and $3.7 million reflecting the write down of certain equipment and our remaining investment in an equity investee. We also recorded an impairment loss of $20.0 million with respect to customer relationships. As a result of declining sales and margins relating to certain customers we reviewed related long-lived assets for impairment. This review indicated that the customer relationship assets were impaired and as a result the carrying value was written down to its estimated fair value. 30 OTHER - Other unusual items of $1.5 million in 2005 relate primarily to the $0.8 million in legal fees for the OFT and Competition Commission reviews of the Macaw Acquisition in the U.K. and $0.7 million in other asset impairments in the Corporate and Other segment. OPERATING INCOME Operating income was $73.4 million in 2005 including unusual items of $37.5 million, as compared with $144.7 million in 2004 which included unusual items of $0.9 million. INTEREST EXPENSE Net interest expense was $28.8 million in 2005, up 11% from $26.0 million in 2004. The increase was primarily due to higher borrowings on our credit facilities during the year to finance the Macaw Acquisition. INCOME TAXES We recorded an income tax provision of $14.7 million in 2005 reflecting an effective tax rate of 37.4% as compared with $35.8 million, or an effective rate of 31.2%, in 2004. The effective tax rate increase is largely due to our inability to recognize the tax benefit of our losses in Canada. A reduction in reserves of $19.3 million partially offset the $21.0 million valuation allowance recorded for Canadian tax losses. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES Cash provided by operating activities in 2005 was $53.3 million, after capital expenditures of $75.8 million, as compared to 2004 in which cash provided by operating activities was $52.4 million after capital expenditures of $50.3 million. We use cash flow from operating activities after capital expenditures to measure cash we are able to generate after considering the investments required to maintain or expand our capital base. It is defined as follows:
2005 2004 ------ ------ Cash provided by operating $129.1 $102.7 activities Additions to property, plant & equipment (75.8) (50.3) ------ ------ Cash flow from operations after $ 53.3 $ 52.4 capital expenditures ====== ======
Cash flow from operations after capital expenditures increased slightly in 2005 despite a $25.5 million increase in capital spending as net working capital increased by $1.0 million in 2005 compared with the $52.4 million increase in 2004. At the end of 2004, accounts receivable were high as a result of supplier rebates not collected until January 2005 and inventories were adversely impacted by plant inefficiencies, poor forecasting and inventory build up for January 2005 promotions. In 2005, increases in accounts receivable and inventory are more reflective of the changes in sales and costs. Accounts payable levels are higher in 2005 primarily as a result of the capacity additions in North America. INVESTING ACTIVITIES CAPITAL EXPENDITURES - Our capital expenditures were $75.8 million in 2005 as compared with $50.3 million in 2004. Major capital expenditures include $62.5 million on leasehold improvements and manufacturing equipment, primarily in the North America, as we added capacity to support future growth. We completed construction on a new beverage manufacturing facility in Fort Worth, Texas and began shipping from this location in June 2005. The total cost of the Fort Worth plant was $50.6 million, including $30.7 million spent in 2005. ACQUISITIONS - We completed the Macaw Acquisition in August 2005. The purchase price of the acquisition was $135.1 million (75.4 million pounds sterling) including acquisition costs of $2.4 million (1.3 million pounds sterling). The acquisition was financed under our global credit facilities, which were increased from $100.0 million to $225.0 million in connection with this transaction. In March 2004, we acquired certain of the assets of Cardinal. The acquisition added carbonated soft drink sales and manufacturing capacity in North America. The total purchase price was $17.8 million and was funded from cash flow from operations and short-term borrowings. In October 2004, we purchased certain of the assets of Metro. The total purchase price was $16.8 million and was funded from cash flow from operations and short-term borrowings. The total cost of these acquisitions in 2004 was $34.6 million including acquisition costs of $0.8 million. CAPACITY ADDITIONS - In October 2004, we purchased the plant and equipment of Elan Waters in Blairsville, Georgia for $3.8 million to add to our production capacity in North America. The purchase was funded from short-term borrowings. OTHER INVESTING ACTIVITIES - Other investing activities relate primarily to additions to information technology assets included in intangibles and other assets. We made progress in implementing our standardized information system during 2005 and expect to complete the roll out in 2006. 31 CAPITAL RESOURCES AND DEBT Our sources of capital include operating cash flows, short-term borrowings under current credit facilities, issuance of public debt and issuance of equity securities. Management believes we have adequate financial resources to meet our ongoing cash requirements for operations and capital expenditures, as well as our other financial obligations based on our operating cash flows and current available credit. SENIOR SECURED CREDIT FACILITY - On March 31, 2005 we entered into a committed senior secured credit facility for financing in North America, the U.K. and Mexico. The facilities replaced our former committed senior secured credit facility in North America and our demand bank credit facility in the U.K. The facilities terminate, and the debt under the senior secured credit agreement is due, on March 31, 2010. These multicurrency facilities were amended on August 10, 2005 to increase the facilities to $225.0 million from $100.0 million to add Macaw (Soft Drinks) Limited as a co-borrower, to consent to the Macaw Acquisition and to increase the Maximum Facility Amount to $350.0 million. The amended facilities allow for revolving credit borrowings in a principal amount of up to $225.0 million, provided we are in compliance with the covenants and conditions of the agreements, and are comprised of two separate facilities: (1) a $220.0 million multicurrency facility made by certain lenders to us and our indirect wholly-owned subsidiaries, Cott Beverages Inc., Macaw (Soft Drinks) Limited and Cott Beverages Limited as co-borrowers, and (2) a $5.0 million Mexican facility made by the lender to our indirect 90% owned subsidiary Cott Embotelladores de Mexico, S.A. de C.V. ("CEMSA"). Each facility includes subfacilities for swingline loans and letters of credit. The $225.0 million facility can be increased up to an additional $125.0 million at our option if the lenders agree to increase their commitments or new lenders join the facility and we satisfy certain conditions. Within the $125.0 million of extra availability, and subject to certain limitations, we can establish additional revolving credit facilities in an aggregate amount not to exceed $30.0 million to be provided in various currencies as agreed upon for additional subsidiaries designated by us. Wachovia Bank, National Associations acts as administrative agent and security trustee under the facilities. The facilities are collateralized by substantially all our personal property with certain exceptions including the receivables sold as part of our receivables securitization facility discussed below. In general, borrowings under these facilities bear interest at either a floating or fixed rate for the applicable currency plus a margin based on our consolidated total leverage ratio. A facility fee of between 0.15% and 0.375% per annum is payable on the entire line of credit. The level of the facility fee is dependent on financial covenants. As of December 31, 2005 credit of $78.8 million was available after borrowings of $141.3 million, comprised of $6.0 million and 78.1 million pounds sterling, and standby letters of credit of $4.9 million. The weighted average interest rate was 5.83% on these facilities as of December 31, 2005. SECURITIZATIONS - In April 2005 our principal U.S. operating subsidiaries entered into a receivables securitization facility under which they agreed to sell substantially all of their receivables generated from their ordinary course operations, as well as certain related assets, to a new special purpose indirect subsidiary, Cott USA Receivables Corporation, which in turn sells and assigns undivided interests in the receivables and related assets to an unaffiliated entity, Park Avenue Receivables Company, LLC and certain other financial institutions in exchange for cash in amounts determined by the parties, subject to specified conditions. The transfers to the Purchasers are treated as a financing for purposes of our consolidated financial statements; however, the presentation of consolidated financial statements does not itself imply that the assets of any consolidated entity, including any special-purpose entity formed for a particular project, are available to pay the liabilities of any other consolidated entity, or that the liabilities of any consolidated entity, including any special-purpose entity formed for a particular project, are obligations of any other consolidated entity. The transfers of the receivables and related assets to the Purchasers are governed by a Receivables Purchase Agreement, dated April 1, 2005, by and among Cott USA Receivables Corporation, Cott Beverages Inc., the Purchasers and JPMorgan Chase Bank, N.A., acting for itself and the Purchasers. The agreement contains representations, warranties, covenants, and indemnities customary for facilities of this type. The facility does not contain any covenants that we view as materially constraining our activities or, except for Cott USA Receivables Corporation, the activities of our subsidiaries. The amount of funds available under the receivables facility is based upon the amount of eligible receivables and various reserves required by the facility. Accordingly, availability may fluctuate over time given changes in eligible receivables balances and calculation of reserves, but will not exceed the $75.0 million program limit. This facility bears interest at a variable rate, based on the cost of borrowing of the Purchasers. A fee of between 0.20% and 0.40% per annum is payable on the unused portion of the facility. The level of the facility fee is dependent on financial covenants. As of December 31, 2005, $39.6 million of eligible receivables, net of reserves, were available for purchase and $10.0 million was outstanding 32 under this facility at a weighted average interest rate of 5.08%. SENIOR SUBORDINATED NOTES - We also have outstanding 8% senior subordinated notes, which are due in 2011. As of December 31, 2005, the principal amount of those notes was $275.0 million. The issuer of the notes is Cott Beverages Inc., but we and most of our U.S., Canadian and U.K. subsidiaries guarantee the notes. LONG-TERM DEBT - Long-term debt as of December 31, 2005 was $273.1 million, compared with $273.3 million at the end of 2004. Long-term debt in 2005 and 2004 consisted of 8% senior subordinated notes with a stated face value of $275.0 million and capital leases of $2.6 million. DEBT COVENANTS - Our senior secured credit facility and the indenture respecting the 2011 notes contain a number of business and financial covenants and events of default that apply to the borrowers and the restricted subsidiaries. The restricted subsidiaries are, in general, the guarantor subsidiaries organized in Canada, the U.S., the U.K. and Mexico. Among other events of default or triggers for prepayment in our credit facilities and indenture are: a change of control of us in certain circumstances; cross default or cross acceleration to other indebtedness in excess of $15.0 million; unsatisfied judgments in excess of $15.0 million; our insolvency or that of the restricted subsidiaries; and covenant default under the indenture or credit facilities. Some of the more material business and financial covenants are discussed below. Our senior secured credit facility restricts additional indebtedness for subsidiaries to the existing debt and credit facilities, certain intercompany debt, $50.0 million of purchase money indebtedness and capital lease obligations, $25.0 million of guarantee obligations and a $25.0 million basket of other additional indebtedness. The senior secured credit facility contains restrictions on investments, including investments in subsidiaries outside of the U.S., Canada or the U.K., and acquisitions. In general, individual acquisitions are permitted up to $100.0 million with the aggregate expenditure for all acquisitions limited to $150.0 million in any fiscal year. There is also a restriction on disposition of assets having a fair market value exceeding $40.0 million in a fiscal year with certain specified exemptions. Dividends are currently limited to 25% of consolidated net income for the immediately preceding fiscal quarter but that amount increases to 50% of consolidated net income for the immediately preceding fiscal quarter if the leverage ratio is below 2.0 to 1.0. Capital stock purchases are limited to $50.0 million during the term of this credit facility. There are further restrictions in several of the covenants, such as a complete prohibition on paying any dividends, if we are in default under the senior secured credit agreement. In addition, many of the covenants effectively limit transactions with our unrestricted subsidiaries or non-guarantor entities. In addition to business covenants, there are financial covenants in our senior secured credit facility. Since March 31, 2005, our Total Leverage Ratio was required to be no more than 3.25 to 1.0 and that requirement is tightened to 3.00 to 1.0 from July 1, 2006. At the end of 2005, our leverage ratio was 2.3 to 1.0. The senior secured credit facility also has a Minimum Fixed Charge Coverage Ratio. From March 31, 2005, our fixed charge coverage ratio was required to be at least 1.05 to 1.0 and July 1, 2006 it must be at least 1.10 to 1.0 and after July 1, 2007 it must be at least 1.15 to 1.0. As of December 31, 2005 it was 2.3 to 1.0. The indenture for the 2011 notes also has numerous covenants that are applicable to Cott Beverages Inc., the restricted subsidiaries and us. We can only make restricted payments, such as paying dividends, buying back stock or making certain investments, if our fixed charge coverage ratio is at least 2.0 to 1.0. Even then, we can only make those restricted payments in an amount that is no greater than 50% of our consolidated net income subject to certain adjustments. Certain other investments, like those not exceeding $60.0 million in the aggregate, may be made without satisfying the restricted payments test. We can only incur additional debt or issue preferred stock, other than certain specified debt, if our fixed charge coverage ratio is greater than 2.0 to 1.0. For purposes of the indenture, our fixed charge coverage ratio was 6.2 to 1.0 as of December 31, 2005. Subject to some exceptions, asset sales may only be made where the sale price is equal to the fair market value of the asset sold and we receive at least 75% of the proceeds in cash. There are also limitations on what we may do with the sale proceeds such that we may be required to pay down debt or reinvest the proceeds in enumerated business uses within a specified period of time. There are further restrictions in several of the covenants, such as a complete prohibition on paying any dividends, if we are in default under the indenture. Many of the covenants also effectively limit transactions with our unrestricted subsidiaries or non-guarantor entities. Several of the terms, such as restricted payments, are defined differently in the indenture and the senior secured credit facility and certain calculations are made differently in the two agreements. We believe that we have sufficient financial flexibility under the terms of our indebtedness to operate our business as currently planned. CAPITAL STRUCTURE In 2005, shareowner's equity increased by $24.6 million from 2004. Shareowners' equity increased as a result of net 33 income of $24.6 million, additional share capital of $4.4 million from the exercise of employee stock options, including the related tax benefit, and the $0.6 million reduction in the unrealized losses on cash flow hedges. These increases were partially offset by a $5.0 million foreign currency translation loss on the net assets of self-sustaining foreign operations. The foreign currency translation adjustment resulted from the net changes in the pound sterling and the Canadian dollar relative to the U.S. dollar. DIVIDEND PAYMENTS No dividends were paid in 2005 and we are not expecting to change this policy in 2006 as we intend to use cash for future growth or debt repayment. There are certain restrictions on the payment of dividends under our credit facility and 2011 notes indenture. The most restrictive provision is the quarterly limitation of dividends based on the prior quarter's earnings. CONTRACTUAL OBLIGATIONS The following chart shows the schedule of future payments under certain contracts, including long-term debt agreements and guarantees as of December 31, 2005:
Payments due by period -------------------------------------------- Less than Years Years After Total 1 Year 2-3 4-5 5 years ------ --------- ----- ----- ------- (IN MILLIONS) 2011 notes $275.0 $ -- $ -- $ -- $275.0 Operating leases 95.6 17.8 24.4 17.5 35.9 Capital lease 2.6 0.8 1.5 0.3 -- Purchase obligations (1) 239.4 55.0 72.6 37.6 74.2 ------ ----- ----- ----- ------ $612.6 $73.6 $98.5 $55.4 $385.1 ====== ===== ===== ===== ======
(1) Purchase obligations consist of an information technology outsourcing contract, contracts with certain co-packers and commitments for the purchase of inventory and capital expenditures. These obligations represent expected expenditures under the normal course of business, not our minimum contractual obligations. CRITICAL ACCOUNTING POLICIES Note 1 to the consolidated financial statements includes a summary of the significant accounting policies and estimates used in the preparation of our consolidated financial statements. Our critical accounting policies require management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and the accompanying notes. These estimates are based on historical experience, the advice of external experts or on other assumptions management believes to be reasonable. Where actuals differ from estimates, revisions are included in the results of the period in which actuals become known. Historically, differences between estimates and actuals have not had a significant impact on our consolidated financial statements. Critical accounting policies and estimates used to prepare the financial statements are discussed with our Audit Committee as they are implemented and on an annual basis and include the following: REVENUE RECOGNITION We report sales when ownership passes to customers for products manufactured in our own plants and/or by third parties on our behalf. We regularly evaluate the facts and circumstances in relation to the criteria in the EITF 99-19 and use our best judgment to determine whether to report sales on a gross or net basis for products manufactured by third parties. Currently, the facts and circumstances surrounding all of our business support the reporting of all sales on a gross basis. We offer sales incentives to certain customers. We account for these incentives as a reduction in sales. We follow the guidance under EITF 01-9 in accounting for sales incentives. Where the incentive has been paid in advance, we amortize the amount based on expected future sales related to the incentive. Where the incentive is to be paid in arrears, we accrue the amount based on expected future sales related to the incentive. IMPAIRMENT TESTING OF GOODWILL AND INTANGIBLE ASSETS WITH AN INDEFINITE LIFE With the implementation of Statement of Financial Accounting Standard ("SFAS") 142 in 2002, goodwill and intangible assets with an indefinite life are no longer amortized, but instead are tested at least annually for impairment. Any impairment loss is recognized in income. We have goodwill of $150.3 million and rights of $80.4 million on our balance sheet at December 31, 2005. In accordance with SFAS 142, we evaluate goodwill for impairment on a reporting unit basis. Reporting units are operating segments or components of operating segments for which discrete financial information is available. The evaluation of goodwill for each reporting unit is based upon the following approach. We compare the fair value of a reporting unit to its carrying value. Where the carrying value is greater than the fair value, the implied fair value of the reporting unit goodwill is determined by allocating the fair value of the reporting unit to all the assets and liabilities of the reporting unit with any of the remainder being allocated to goodwill. The implied fair value of the reporting unit goodwill is then compared to the carrying value of that goodwill to determine the impairment loss. 34 We measure the fair value of reporting units using discounted future cash flow. Because the business is assumed to continue in perpetuity, the discounted future cash flow includes a terminal value. The long-term growth assumptions incorporated into the discounted cash flow calculation reflect our long-term view of the market and the discount rate is based on our weighted average cost of capital. Each year we re-evaluate the assumptions used to reflect changes in the business environment. Based on the evaluation performed this year, we determined that the fair values of our reporting units, except for our Columbus, Ohio plant, exceeded their carrying value and that as a result the second step of the impairment test was not required. We performed an impairment test on the value of the goodwill relating to our Columbus, Ohio plant as a result of its announced closure. The impairment charge of $5.9 million relating to this goodwill has been included in unusual items. Our only intangible asset with an indefinite life relates to our 2001 acquisition of intellectual property from Royal Crown Company, Inc. including the right to manufacture our concentrates, with all related inventions, processes, technologies, technical and manufacturing information and know-how. There is an indefinite life to our ownership of these rights, and there are no legal, regulatory, contractual, competitive, economic, or other factors that limit the useful life. In accordance with SFAS 142, based on the above factors, the life of the rights is considered to be indefinite and they are not amortized, but are tested annually for impairment. Impairment of an intangible asset with an indefinite life, if any, is determined using the same discounted future cash flow assumptions and model discussed above for goodwill. We compare the carrying value of the rights to their fair value and recognize in income any impairment in value. OTHER INTANGIBLE ASSETS Other intangible assets consist principally of customer relationships that arise from acquisitions, which amounted to $126.6 million at December 31, 2005. Customer relationships are amortized on a straight-line basis for the period over which we expect to receive economic benefits. IMPAIRMENT OF LONG-LIVED ASSETS We periodically compare the carrying value of long-lived assets, including customer relationships by customer, to the estimated undiscounted future cash flows at the lowest level of independent cash flows for the group of long-lived assets and recognize any impairment in our income statement. The expected life and value of these long-lived assets is based on an evaluation of the competitive environment, history and future prospects as appropriate. In 2005, we recorded impairment losses of $20.0 million relating to customer relationships and $5.3 million relating to long-lived assets of our Columbus, Ohio and Lachine, Quebec facilities in unusual items. INCOME TAXES We regularly review the recognized and unrecognized deferred income tax assets to determine whether or not a valuation allowance is required. Management believes that it is more likely than not that the deferred tax asset in respect of Canada will not be realized and has recorded a valuation allowance in the amount of $21.0 million in 2005. A reduction in reserves of $19.3 million partially offset the increase in the valuation allowance. All other deferred tax assets will be realized as a result of anticipated future taxable income from these operations. The remaining deferred tax assets of $5.0 million relate primarily to the United States. A significant change in the volumes or profitability of these operations could affect the realization of the deferred tax assets. We periodically review exposures and make our best estimate of the reserve amount. In the ordinary course of business, we enter into transactions where the ultimate tax determination may be uncertain. These uncertainties require us to make estimates of the ultimate tax liabilities and, accordingly, the provision for income taxes. While we believe our estimates are reasonable and appropriate, additional income tax provisions may result if tax matters are resolved or settled at amounts different from those estimates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2004 the Financial Accounting Standard's Board ("FASB") issued SFAS 123R, Share-Based Payments, requiring companies to recognize compensation expense for all types of stock options. We will adopt this standard using the modified prospective approach for 2006. As a result of this new standard, compensation expense for 2005 would have increased by $9.8 million and income taxes would decrease by $2.5 million. Comparative figures for the year ended December 31, 2005 would show income before income taxes and equity loss of $29.5 million, income tax expense of $12.2 million and net income of $17.3 million or $0.24 per basic share and fully diluted share. In November 2004 FASB issued SFAS 151, Inventory Costs, requiring the allocation of fixed production overheads to be based on normal capacity of the production facilities. Unallocated overheads resulting from abnormally low production and certain other costs are to be recognized as an expense in the period in which they are incurred. We will adopt this standard for our interim period ending April 1, 2006. We do not expect this change to have a material impact on us. 35 CANADIAN GAAP Results determined under Canadian GAAP may differ from results determined under U.S. GAAP from time to time. Under Canadian GAAP in 2005, our net income would be $17.2 million and total assets would be $1,171.9 million compared to net income and total assets under U.S. GAAP of $24.6 million and $1,171.4 million, respectively. Under Canadian GAAP in 2004, our net income would be $70.6 million and total assets would be $1,023.9 million compared to net income and total assets under U.S. GAAP of $78.3 million and $1,022.0 million, respectively. There is one material U.S./Canadian GAAP difference in 2005 and 2004. Under Canadian GAAP, effective January 1, 2004, stock options issued to employees subsequent to January 1, 2002 are recognized in net income over the vesting period based on their fair value. As a result, compensation expense of $9.7 million, $7.2 million after tax, was recorded in 2005. Compensation expense of $10.0 million, $7.5 million after tax, was recorded for 2004. This policy was adopted on a retroactive basis with no restatement of comparative figures and as a result $5.6 million was charged to opening retained earnings as at January 3, 2004. Under U.S. GAAP, we have elected not to record compensation expense for options issued to employees with an exercise price equal to the market value of the common shares. In 2006, we will adopt SFAS 123R which requires recognition of compensation expense relating to stock options. 2004 VERSUS 2003 Our fiscal year ends on the Saturday closest to December 31 each year. As a result, a 53rd week is included in our fiscal year every five or six years. The fiscal year that ended January 3, 2004 consisted of 53 weeks. RESULTS OF OPERATIONS
2004 2003 ------------------ ------------------ MILLIONS PERCENT MILLIONS PERCENT OF OF OF OF DOLLARS SALES DOLLARS SALES -------- ------- -------- ------- Sales $1,646.3 100.0% $1,417.8 100.0% Cost of sales 1,362.6 82.8% 1,141.0 80.5% -------- ----- -------- ----- Gross margin 283.7 17.2% 276.8 19.5% SG&A 138.1 8.4% 126.1 8.9% Unusual items 0.9 -- 1.8 0.1% -------- ----- -------- ----- Operating income 144.7 8.8% 148.9 10.5% Other expense (0.1) -- 0.5 -- Interest expense 26.0 1.6% 27.5 2.0% Minority interest 4.0 0.2% 3.2 0.2% Income taxes 35.8 2.2% 40.1 2.8% Equity loss 0.7 -- 0.2 -- -------- ----- -------- ----- Net income $ 78.3 4.8% $ 77.4 5.5% ======== ===== ======== ===== Depreciation & amortization 60.0 3.6% 51.0 3.6% -------- ----- -------- -----
SALES Sales in 2004 were $1,646.3 million, an increase of 16% from $1,417.8 million in 2003. The following table shows the change in sales by significant segment from 2003 to 2004 excluding the impact of acquisitions, foreign exchange and the extra week in 2003:
NORTH UK & INTER- COTT AMERICA EUROPE NATIONAL ------ ------- ------ -------- Change in sales $228.5 $180.8 $27.7 $19.1 Impact of acquisitions 62.3 62.3 -- -- Impact of extra week in 2003 (20.5) (17.8) (1.9) (0.8) Impact of foreign exchange 32.6 13.3 20.2 (1.1) ------ ------ ----- ----- Change excluding acquisitions, exchange & extra week $154.1 $123.0 $ 9.4 $21.0 ------ ------ ----- ----- Percentage change excluding acquisitions, exchange & extra week 11% 10% 5% 52% ------ ------ ----- -----
36 Excluding the impact of the extra week in 2003, sales increased 18% in 2004. In December 2003, we acquired the retailer brand beverage business of Quality Beverage Brands, L.L.C. located in North Carolina and in 2004, we acquired certain of the assets of Cardinal and Metro. These acquisitions added $62.3 million or 3.8%, in the aggregate, to sales in 2004. When the impact of these acquisitions and foreign exchange are also excluded, sales increased 13% and 11%, respectively. Total case volume in 8-ounce equivalents for 2004 was 1,148 million, up from 1,013 million in 2003. In North America, our sales were $1,388.5 million in 2004, an increase of 15% from 2003 or 17% excluding the extra week in 2003. When also excluding acquisitions and foreign exchange, sales increased 10% from 2003. The growth was driven by increased volume with existing customers in the U.S., introduction of new products and sales to new customers partially offset by overall weak demand for carbonated soft drinks in Canadian grocery stores. In the U.K. and Europe, our sales were $194.3 million in 2004, an increase of 17% from $166.6 million in 2003. Excluding the impact of the strengthened pound sterling and the extra week in 2003, sales increased 5% in 2004. The increase was due to continued focus on core products, manufacturing for non-retailer third parties, partnering with key suppliers, optimizing manufacturing processes and warehouse logistics and introducing new products. The international segment includes the Mexican operations, the Royal Crown International division and our business in Asia. Sales by this segment were $61.2 million in 2004, an increase of 45% when compared with sales of $42.1 million in 2003. Excluding foreign exchange and the extra week in 2003, sales increased 52%. The increase in sales is primarily due to sales in Mexico where sales were $40.7 million, an increase of 67% from $24.4 million in 2003. COST OF SALES Cost of sales was $1,362.6 million or 82.8% of sales in 2004 as compared with $1,141.0 million or 80.5% of sales in 2003. The increase in cost of sales resulted primarily from reduced plant efficiencies and higher logistics costs as we struggled to meet increased demand during the first half of 2004. Higher commodity costs including resin for PET bottles and aluminum for cans. Variable costs represented 90% of total cost of sales in 2004. Major elements of these variable costs included ingredient and packaging costs, fees paid to third party manufacturers and distribution costs. GROSS PROFIT Gross profit was 17.2% of sales for 2004 compared with 19.5% in 2003. Lower margins resulted primarily from reduced plant efficiencies and higher logistics costs. Higher commodity costs were largely offset by price increases charged to our customers. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") SG&A was $138.1 million in 2004, an increase of $12.0 million or 10% from $126.1 million in 2003. Increases in SG&A include costs associated with Sarbanes-Oxley Section 404 compliance, provisions taken during the year to write-off certain export receivables in North America, adding new employees principally to serve our growing North American business, and a negative impact from the weakened U.S. dollar. These increases were partially offset by a decrease in incentive compensation. UNUSUAL ITEMS Unusual items of $0.9 million in 2004 and $1.8 million in 2003 are primarily related to write downs to our investment in an equity investee. OPERATING INCOME Operating income was $144.7 million in 2004 as compared with $148.9 million for 2003. INTEREST EXPENSE Net interest expense was $26.0 million in 2004, down 5% from $27.5 million in 2003. This decrease was primarily due to lower average borrowings on our credit facilities during the year. INCOME TAXES We recorded an income tax provision of $35.8 million in 2004 reflecting an effective tax rate of 31.2%. This decreased from $40.1 million, or an effective rate of 34.1%, in 2003 primarily due to a change in management's best estimate of the reserve. CANADIAN GAAP Results reported under Canadian GAAP may differ from results reported under U.S. GAAP from time to time. Under Canadian GAAP in 2003, we reported net income of $77.2 million and total assets of $910.1 million compared to net income and total assets reported under U.S. GAAP of $77.4 million and $908.8 million, respectively. There are no material U.S./Canadian GAAP differences for 2003. 37 OUTLOOK We expect 2006 to be another challenging year. The carbonated soft drinks industry is expected to be flat in 2006 compared with 2005 as the decline in sales of regular CSDs is offset by higher sales of diet CSDs. Strong growth is expected for bottled water and non-carbonated beverages. To be successful, we will need to take a more disciplined, strategic approach to pricing, work to strategically reduce costs, aggressively improve the efficiency of our overall supply chain including bottled water profitability and increase our penetration into the non-carbonated beverages category. We intend to raise prices to recover all 2006 raw material cost increases and, over the next 18 months, implement incremental pricing to recover the 2005 gap between cost and pricing increases. We continue to move forward on the North American realignment plan we announced in September 2005. We are leveraging management strengths across a broader territory and maximizing opportunities and processes to improve supply chain efficiencies and financial performance. We have improved asset efficiencies and made tough decisions to close certain operations and better align resources with customer needs. To date, we have recorded charges of $16.9 million relating to this plan and $20.0 million for customer relationship impairment and could incur additional pre-tax charges, including asset impairments, severance and other costs, of $23.0 to $43.0 million. We have not completed the detailed plans and the requisite analyses to estimate the remaining charges to specific categories. As a result, the ultimate amount and timing of the charges is uncertain. We continue to strategically realign our asset base to improve our efficiencies and reduce fixed costs. We are also looking into opportunities such as expanded in-house PET blow-moulding capabilities and dedicated high-speed water lines to improve the profitability of bottled water. Our longer term priority is to position ourselves for growth in the non-carbonated beverages category. We will evaluate opportunities to increase our penetration in fast growing segments such as isotonics, enhanced or fortified drinks, energy and juice-based beverages. Our business strategy also involves continuing to expand outside of North America. We continue to view Mexico as a strong long-term growth opportunity and are working closely with our customers to grow the retailer brand beverage segment in this market. The U.K. business intends to continue to enhance its performance through product innovation and a customer-centric focus to identify opportunities. The Macaw Acquisition has added additional production capacity and aseptic beverage capabilities to our U.K. business unit. Subsequent to the completion of the Macaw Acquisition, the OFT in the U.K. decided to review the transaction. Under applicable U.K. law, we were not required to seek pre-clearance of the Macaw Acquisition by the OFT. However, the OFT has referred the transaction to the Competition Commission for further investigation. The Competition Commission ruling is expected in May 2006. We expect that the transaction will be approved, but we cannot guarantee this outcome. However, until a ruling is made, the OFT and Competition Commission have required us to refrain from further integrating the Macaw business into the Cott business in the U.K. We expect 2006 net income to be substantially below the 2005 level as, along with charges for unusual items and compensation expense for stock options resulting from the implementation of SFAS 123R, we will have higher depreciation expense from capacity additions and the Macaw Acquisition, increased interest expense from the Macaw Acquisition and a higher effective tax rates mainly due to our inability to record tax benefits on losses in Canada. The actions we have outlined will take time to implement. We are moving forward in an urgent yet disciplined way and are working to position Cott for long term success. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOREIGN EXCHANGE We are exposed to changes in foreign currency exchange rates. Operations outside of the U.S. accounted for approximately 29% of 2005 sales and 26% of 2004 sales, and are concentrated principally in the U.K. and Canada. Our debt instruments, excluding debt of $135.3 million (78.1 million pounds sterling) related to the Macaw Acquisition and the U.K. operations, are denominated in U.S. dollars. We translate the revenues and expenses of our foreign operations using average exchange rates prevailing during the period. The effect of a 10% change in foreign currency exchange rates among the U.S. dollar versus the Canadian dollar and pound sterling at current levels of foreign debt and operations could be material to our financial condition and profitability. In 2005, we entered into cash flow hedges to mitigate exposure to declines in the value of the Canadian dollar and pound sterling attributable to certain forecasted U.S. dollar raw material purchases of the Canadian and U.K. and European business segments. The hedges consist of monthly foreign exchange options to buy U.S. dollars at fixed rates per Canadian dollar and mature at various dates through December 28, 2006. The fair market value of the 38 foreign exchange options is included in prepaid expenses and other assets. The instruments are cash flow hedges under SFAS 133; accordingly, changes in the fair value of the cash flow hedge instruments are recognized in accumulated other comprehensive income. Amounts recognized in accumulated other comprehensive income and prepaid expenses and other assets are recorded in earnings in the same periods in which the forecasted purchases or payments affect earnings. At December 31, 2005, the fair value of the options was $0.4 million and we had a $0.4 million unrealized loss in comprehensive income. DEBT OBLIGATIONS AND INTEREST RATES We have exposure to interest rate risk from our short-term and long-term debt. Our long-term debt is fixed and our short-term debt is variable. Our short-term credit facilities are most vulnerable to fluctuations in the U.K. short-term base rate and the LIBOR rate. At current debt levels, a hypothetical increase of 10% in either interest rate measure would not be material to our cash flows or our results of operations. The weighted average interest rate of our debt outstanding at December 31, 2005 was 5.78%. We regularly review the structure of our indebtedness and consider changes to the proportion of floating versus fixed rate debt through refinancing, interest rate swaps or other measures in response to the changing economic environment. Historically, we have not used derivative instruments to manage interest rate risk. If we use and fail to manage these derivative instruments successfully, or if we are unable to refinance our indebtedness or otherwise increase our debt capacity in response to changes in the marketplace, the expense associated with debt service could increase. This would negatively impact our financial condition and profitability. The information below summarizes our market risks associated with long-term debt obligations as of December 31, 2005. The table presents principal cash flows and related interest rates by year of maturity. Interest rates disclosed represent the actual weighted average rates as of December 31, 2005.
DEBT OBLIGATIONS ------------------------------ WEIGHTED AVERAGE INTEREST RATE FOR FIXED RATE DEBT MATURING ---------- ----------------- (IN MILLIONS OF US DOLLARS) DEBT MATURING IN: 2006 $ 0.8 5.2% 2007 0.8 5.2% 2008 0.7 5.2% 2009 0.3 5.2% 2010 -- -- Thereafter 275.0 8.0% ------ --- Total $277.6 8.0% ------ --- Fair Value $285.9 ------
39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT The accompanying consolidated financial statements have been prepared by management in conformity with generally accepted accounting principles in the U.S. to reflect our financial position and our operating results. Financial information appearing throughout this Annual Report is consistent with that in the consolidated financial statements. Management is responsible for the information and representations in such consolidated financial statements, including the estimates and judgments required for their preparation. In order to meet our responsibility, management maintains a system of internal controls including policies and procedures designed to provide reasonable assurance that assets are safeguarded and reliable financial records are maintained. We have contracted with Deloitte and Touche LLP to provide internal audit services including monitoring and reporting on the adequacy of and compliance with internal controls. The internal audit function reports regularly to the Audit Committee of the Board of Directors and we take such actions as are appropriate to address control deficiencies and other opportunities for improvement as they are identified. The report of PricewaterhouseCoopers LLP, our independent registered public accounting firm, covering their audit of the consolidated financial statements and internal control over financial reporting as of December 31, 2005 and January 1, 2005 and the audit of the January 3, 2004 financial statements, is included in this Annual Report. We used PricewaterhouseCoopers LLP for audit and tax compliance services in 2005 and plan to engage them only to provide these services in the future. The Board of Directors annually appoints an Audit Committee, consisting of at least three independent directors. The Audit Committee meets with management, internal auditors and the independent auditors to review any significant accounting and auditing matters and to discuss the results of audit examinations. The Audit Committee also reviews the consolidated financial statements, the Report of Independent Registered Public Accounting Firm and other information in the Annual Report and recommends their approval to the Board of Directors. /s/ John K. Sheppard ---------------------------------------- John K. Sheppard President & Chief Executive Officer February 22, 2006 /s/ B. Clyde Preslar ---------------------------------------- B. Clyde Preslar Executive Vice President & Chief Financial Officer February 22, 2006 40 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREOWNERS OF COTT CORPORATION: We have completed an integrated audit of Cott Corporation's December 31, 2005 and January 1, 2005 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and an audit of its January 3, 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions on Cott Corporation's December 31, 2005, January 1, 2005 and January 3, 2004 financial statements and on its' internal control over financial reporting as at December 31, 2005 based on our audits are presented below. CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES In our opinion, the consolidated financial statements appearing under Item 8 of Form 10-K present fairly, in all material respects, the financial position of Cott Corporation and its subsidiaries at December 31, 2005 and January 1, 2005 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules appearing under Item 15 of Form 10-K present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. INTERNAL CONTROL OVER FINANCIAL REPORTING Also, in our opinion, management's assessment, included in Management's Report on Internal Control over Financial Reporting appearing in Item 9A of Form 10-K, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control -- Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal-control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the 41 company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chartered Accountants Toronto, Ontario February 22, 2006 42 COTT CORPORATION CONSOLIDATED STATEMENTS OF INCOME
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) SALES $1,755.3 $1,646.3 $1,417.8 Cost of sales 1,505.8 1,362.6 1,141.0 -------- -------- -------- GROSS PROFIT 249.5 283.7 276.8 Selling, general and administrative expenses 138.6 138.1 126.1 Unusual items - note 2 Restructuring 3.2 -- -- Asset impairments 33.5 0.9 1.8 Other 0.8 -- -- -------- -------- -------- OPERATING INCOME 73.4 144.7 148.9 Other expense (income), net - note 3 0.8 (0.1) 0.5 Interest expense, net - note 4 28.8 26.0 27.5 Minority interest 4.5 4.0 3.2 -------- -------- -------- INCOME BEFORE INCOME TAXES AND EQUITY LOSS 39.3 114.8 117.7 Income taxes - note 5 (14.7) (35.8) (40.1) Equity loss -- (0.7) (0.2) -------- -------- -------- NET INCOME - note 6 $ 24.6 78.3 $ 77.4 ======== ======== ======== PER SHARE DATA - note 7 NET INCOME PER COMMON SHARE Basic $ 0.34 $ 1.10 $ 1.12 Diluted $ 0.34 $ 1.09 $ 1.09
The accompanying notes are an integral part of these consolidated financial statements. 43 COTT CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, January 1, 2005 2005 ------------ ---------- (IN MILLIONS OF U.S. DOLLARS) ASSETS CURRENT ASSETS Cash $ 21.7 $ 26.6 Accounts receivable - note 8 191.1 184.3 Inventories - note 9 144.2 122.8 Prepaid expenses and other assets 9.5 9.7 -------- -------- 366.5 343.4 PROPERTY, PLANT AND EQUIPMENT - note 11 394.2 313.7 GOODWILL - note 12 150.3 88.8 INTANGIBLES AND OTHER ASSETS - note 13 260.4 276.1 -------- -------- $1,171.4 $1,022.0 ======== ======== LIABILITIES CURRENT LIABILITIES Short-term borrowings - note 14 $ 157.9 $ 71.4 Current maturities of long-term debt - note 15 0.8 0.8 Accounts payable and accrued liabilities - note 16 182.5 145.2 -------- -------- 341.2 217.4 LONG-TERM DEBT - note 15 272.3 272.5 DEFERRED INCOME TAXES - note 5 53.5 51.0 -------- -------- 667.0 540.9 -------- -------- MINORITY INTEREST 22.5 23.8 SHAREOWNERS' EQUITY CAPITAL STOCK - note 17 Common shares - 71,711,630 (2004 - 71,440,020) shares issued 291.4 287.0 RETAINED EARNINGS 186.2 161.6 ACCUMULATED OTHER COMPREHENSIVE INCOME 4.3 8.7 -------- -------- 481.9 457.3 -------- -------- $1,171.4 $1,022.0 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors /s/ Serge Gouin /s/ Philip B. Livingston - ------------------------------------- ---------------------------------------- Director Director 44 COTT CORPORATION CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
Accumulated Number of Other Common Common Retained Comprehensive Total Shares Shares Earnings Income Equity -------------- ------ -------- ------------- ------ (IN MILLIONS OF U.S. DOLLARS) (IN THOUSANDS) Balance at December 28, 2002 68,559 $248.1 $ 5.9 $(35.8) $218.2 Options exercised, including tax benefit of $7.5 million - note 18 1,700 19.8 -- -- 19.8 Comprehensive income - note 6 Currency translation adjustment -- -- -- 29.7 29.7 Net income -- -- 77.4 -- 77.4 ------ ------ ------ ------ ------ Balance at January 3, 2004 70,259 267.9 83.3 (6.1) 345.1 Options exercised, including tax benefit of $4.8 million - note 18 1,181 19.1 -- -- 19.1 Comprehensive income - note 6 Currency translation adjustment -- -- -- 15.8 15.8 Unrealized losses on cash flow hedges - note 10 -- -- -- (1.0) (1.0) Net income -- -- 78.3 -- 78.3 ------ ------ ------ ------ ------ Balance at January 1, 2005 71,440 287.0 161.6 8.7 457.3 Options exercised, including tax benefit of $0.8 million - note 18 272 4.4 -- -- 4.4 Comprehensive income - note 6 Currency translation adjustment -- -- -- (5.0) (5.0) Change in unrealized loss on cash flow hedges - note 10 -- -- -- 0.6 0.6 Net income -- -- 24.6 -- 24.6 ------ ------ ------ ------ ------ BALANCE AT DECEMBER 31, 2005 71,712 $291.4 $186.2 $ 4.3 $481.9 ====== ====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements. 45 COTT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) OPERATING ACTIVITIES Net income $ 24.6 $ 78.3 $ 77.4 Depreciation and amortization 70.2 60.0 51.0 Amortization of financing fees 0.8 0.7 1.7 Deferred income taxes - note 5 (6.5) 9.1 9.6 Minority interest 4.5 4.0 3.2 Equity loss -- 0.7 0.2 Asset impairments 33.5 1.5 1.8 Other non-cash items 3.0 0.8 1.6 Net change in non-cash working capital - note 19 (1.0) (52.4) (3.8) ------- ------ ------- Cash provided by operating activities 129.1 102.7 142.7 ------- ------ ------- INVESTING ACTIVITIES Additions to property, plant and equipment (75.8) (50.3) (39.6) Acquisitions - note 20 (135.1) (34.6) (49.8) Acquisition of production capacity -- (3.8) -- Notes receivable -- -- (2.5) Other investing activities (6.8) (4.7) (9.9) ------- ------ ------- Cash used in investing activities (217.7) (93.4) (101.8) ------- ------ ------- FINANCING ACTIVITIES Payments of long-term debt (0.9) (3.5) (90.2) Short-term borrowings 91.8 (7.0) 55.8 Distributions to subsidiary minority shareowner (5.8) (5.9) (4.1) Issue of common shares 3.6 14.3 12.3 Financing costs (3.8) -- -- Other financing activities (0.4) (0.4) (0.4) ------- ------ ------- Cash used in financing activities 84.5 (2.5) (26.6) ------- ------ ------- Effect of exchange rate changes on cash (0.8) 1.4 0.8 ------- ------ ------- NET INCREASE (DECREASE) IN CASH (4.9) 8.2 15.1 CASH, BEGINNING OF YEAR 26.6 18.4 3.3 ------- ------ ------- CASH, END OF YEAR $ 21.7 $ 26.6 $ 18.4 ======= ====== =======
The accompanying notes are an integral part of these consolidated financial statements. 46 COTT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED 2005, 2004 AND 2003 NOTE 1 Summary of Significant Accounting Policies BASIS OF PRESENTATION These consolidated financial statements have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") using the U.S. dollar as the reporting currency, as the majority of our business and the majority of our shareowners are in the U.S. Comparative amounts in prior years have been reclassified to conform to the financial statement presentation adopted in the current year. BASIS OF CONSOLIDATION The financial statements consolidate our accounts and our wholly owned and majority-owned subsidiaries where we are exposed to the majority of the expected losses or returns. ESTIMATES The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Determining whether impairment has occurred requires various estimates and assumptions including estimates of cash flows that are directly related to the potentially impaired asset, the useful life over which cash flows will occur and their amounts. The measurement of an impairment loss requires an estimate of fair value, which is based on cash flow estimates and the application of an appropriate discount rate. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board issued SFAS 123R, Share-Based Payments requiring companies to recognize compensation expense for all types of stock options. On April 14, 2005 the Financial Accounting Standards Board approved a new rule that deferred the effective date of SFAS 123R. We will adopt this standard using the modified prospective approach for our interim period ending April 1, 2006. As discussed in note 18, had compensation expense for the plans been determined based on the fair value at the grant date consistent with SFAS 123, compensation expense for 2005 would have increased by $9.8 million and incomes taxes would decrease by $2.5 million. Comparative figures for the year ended December 31, 2005 would show income before income taxes and equity loss of $29.5 million, income tax expense of $12.2 million and net income of $17.3 million or $0.24 per basic and fully diluted share. In November 2004, the Financial Accounting Standards Board issued SFAS 151, Inventory Costs. The Statement requires that the allocation of fixed production overheads to inventory be based on the normal capacity of the production facilities; unallocated overheads resulting from abnormally low production and certain other costs are to be recognized as an expense in the period in which they are incurred. We will adopt this standard for our interim period ending April 1, 2006. We do not expect this change to have a material impact on us. REVENUE RECOGNITION We recognize sales at the time ownership passes to the customer. This may be upon shipment of goods or upon delivery to the customer, depending on contractual terms. Shipping and handling costs paid by the customer to us are included in revenue. SALES INCENTIVES We participate in various incentive programs with our customers including programs under which incentives can be earned for attaining agreed upon sales volume targets over time. Sales incentives are deducted in arriving at sales. Sales incentives based on our customers achieving volume targets are accrued as the incentive is earned and is based on management's estimate of the total rebate the customer is expected to earn and claim. We regularly review customer sales forecasts to ensure volume targets will be met and adjust incentive accruals accordingly. COSTS OF SALES We record shipping and handling and finished goods inventory costs in cost of sales. Finished goods inventory costs include the cost of direct labor and materials and the applicable share of overhead expense chargeable to production. 47 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES We record all other expenses not charged to production as general and administrative expenses. INVENTORIES Inventories are stated at the lower of cost, determined on the first-in, first-out method, or net realizable value. Returnable bottles and plastic shells are valued at the lower of cost, deposit value or net realizable value. Finished goods and work-in-process include the cost of raw materials, direct labor and manufacturing overhead costs. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: Buildings 20 to 40 years Machinery and equipment 7 to 15 years Furniture and fixtures 3 to 10 years Plates and films up to 3 years
Leasehold improvements are amortized over the remaining life of the lease. GOODWILL Goodwill represents the excess purchase price of acquired businesses over the fair value of the net assets acquired. We test the goodwill for impairment at least annually. We evaluate goodwill for impairment on a reporting unit basis. Reporting units are operating segments or components of operating segments for which discrete financial information is available. We compare the fair value of a reporting unit to its carrying value. If the carrying value is greater than the fair value, the implied fair value of the reporting unit goodwill is determined by allocating the fair value of the reporting unit to all the assets and liabilities of that unit with any of the remainder being allocated to goodwill. The implied fair value of the reporting unit goodwill is then compared to the carrying value of that goodwill. Any impairment in value is recognized in net income. INTANGIBLES AND OTHER ASSETS Issuance costs for credit facilities and long-term debt are deferred and amortized over the term of the credit agreement or related debt, respectively. Rights to manufacture concentrate formulas, with all the related inventions, processes and technical expertise, are recorded as intangible assets at the cost of acquisition. The rights are not amortized because their useful lives extend indefinitely. We compare the carrying amount of the rights to their fair value, at least annually, and recognize in net income any impairment in value. Customer relationships are amortized over periods of up to 15 years. Trademarks are recorded at the cost of acquisition and are amortized over 15 years. Information technology includes computer software and licenses, computer programs and information systems, which are amortized over a period of 3 to 5 years. IMPAIRMENT OF LONG-LIVED ASSETS If events and changes in circumstances indicate that the carrying values of long-lived assets or, if appropriate, groups of long-lived assets may not be recoverable, we compare the undiscounted future cash flows from the use and eventual disposal of the assets to the carrying amounts. If the carrying amounts exceed these cash flows, we recognize an impairment to the extent that the carrying amounts exceed the fair values of the assets. FOREIGN CURRENCY TRANSLATION The assets and liabilities of foreign operations, all of which are self-sustaining, are translated at the exchange rates in effect at the balance sheet dates. Revenues and expenses are translated using average exchange rates prevailing during the period. The resulting gains or losses are accumulated in the other comprehensive income account in shareowners' equity. TAXATION We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized based on the differences between the accounting values of assets and liabilities and their related tax bases using currently enacted income tax rates. A valuation allowance is established to reduce deferred income tax assets if, on the basis of available evidence, it is not more likely than not that all or a portion of any deferred tax assets will be realized. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the consolidated balance sheets for cash, receivables, payables, short-term borrowings and long-term debt approximate their respective fair values, except as otherwise indicated. DERIVATIVE FINANCIAL INSTRUMENTS We enter into foreign exchange option and forward contracts to mitigate exposure to declines in the value of the Canadian dollar and pound sterling. We account for foreign exchange options as cash flow hedges. Changes in the fair value of the cash flow hedge instruments are recognized in accumulated other comprehensive income. Amounts recognized in accumulated other comprehensive income and prepaid 48 expenses and other assets are recorded in earnings in the same periods in which the forecasted purchases or payments affect earnings. TRANSFERS OF FINANCIAL ASSETS We account for accounts receivables sold through our receivable securitization facility in accordance with SFAS 125 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Debt. The transactions are accounted for as short-term borrowings as we have not surrendered control of the receivables. The accounts receivables and related debt have both been recorded in the consolidated financial statements. STOCK BASED COMPENSATION We account for our employee stock option plan under APB opinion No. 25, Accounting for Stock Issued to Employees. Under this method of accounting, compensation expense is measured as the excess, if any, of the market value of our common stock at the award date over the amount the employee must pay for the stock (exercise price). Our policy is to award stock options with an exercise price equal to the closing price of our common stock on the Toronto Stock Exchange on the last trading day immediately before the date of award, and accordingly, no compensation expense has been recognized for stock options issued under these plans. COMPREHENSIVE INCOME Comprehensive income is comprised of net income adjusted for changes in the cumulative foreign currency translation adjustment account and unrealized gains and losses on cash flow hedges. NOTE 2 Unusual Items
For the years ended ------------------------------------------------- DECEMBER 31, 2005 ----------------------- January 1, January 3, NORTH 2005 2004 AMERICA OTHER TOTAL Total Total ------- ----- ----- ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) Restructuring $ 3.0 $ 0.2 $ 3.2 $ -- $ -- Asset impairments 33.0 0.5 33.5 0.9 1.8 Other -- 0.8 0.8 -- -- ----- ----- ----- ---- ---- $36.0 $ 1.5 $37.5 $0.9 $1.8 ===== ===== ===== ==== ====
NORTH AMERICA In September 2005 we announced our plan to realign the management of our Canadian and U.S. businesses to a North American basis, rationalize product offerings, eliminate under performing assets and increase focus on high potential accounts. In conjunction with this plan, in December 2005 we announced our intention to close our Columbus, Ohio manufacturing plant in March 2006 to bring production capacity in line with the needs of our customers and in February 2006 we closed our juice plant in Lachine, Quebec. Restructuring - We recorded restructuring charges of $3.0 million including $2.6 million for severance and $0.4 million for contract termination payments relating to the management realignment. We anticipate additional charges of $2.7 million will be recognized, including $0.7 for severance and $2.0 million for contract terminations, relating to the closures of Columbus, Ohio plant and the Lachine, Quebec juice plant in the year ending December 30, 2006. We are currently evaluating various actions to reduce costs but have not developed detailed plans to sufficient extent to determine the liabilities. Asset impairment - As a result of declining sales and margins with certain customers, we conducted an impairment analysis of our customer relationship assets by comparing estimated future cash flows at the lowest level of cash flows that were separately identifiable to the carrying value of the asset. This analysis showed that the estimated future cash flows were not sufficient to recover the carrying value on certain customer relationship assets and accordingly, in 2005 we recorded asset impairment charges of $20.0 million in order to write down the customer relationship assets to their estimated fair value. Fair value was determined by discounting estimated future cash flows related to the customer relationship assets. We recorded an impairment loss of $9.3 million related to the closure of our Columbus, Ohio plant, including a $3.4 million writedown to property, plant and equipment and a $5.9 million writedown of all the goodwill relating to this component. The remaining asset impairment loss of $3.7 million in North America pertains primarily to write downs of certain equipment and our remaining investment in an equity investee. We may also rationalize products and additional production capacity but have not yet completed our analysis nor have we completed our detailed plans and accordingly, the ultimate amount of any asset impairment charges or change in useful lives of assets that may result is uncertain. It is reasonably possible that our estimates of future cash flows, the useful lives, or both related to certain equipment and intangibles will be significantly reduced in the near term. As a result, the carrying value of the related assets may also be reduced materially in the near term. OTHER Other unusual items includes primarily legal fees relating to the U.K. Office of Fair Trading ("OFT") and Competition 49 Commission review of the acquisition of 100% of the shares of Macaw (Holdings) Limited, the parent company of Macaw (Soft Drinks) Limited (the "Macaw Acquisition") in the U.K. and other asset impairment charges in the Corporate and Other segment. YEARS ENDED JANUARY 1, 2005 AND JANUARY 3, 2004 During the years ended January 1, 2005 and January 3, 2004 unusual items were $0.9 million and $1.8 million, respectively, including charges of $1.5 million and $2.1 million, respectively, relating to provisions for a note due to an equity investee. NOTE 3 Other Expense (Income), Net
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) Foreign exchange (gain) loss $(0.5) $ 0.7 $ 1.2 Loss (gain) on disposal of property, plant and equipment 1.5 (0.3) (0.1) Other (0.2) (0.5) (0.6) ----- ----- ----- $ 0.8 $(0.1) $ 0.5 ===== ===== =====
NOTE 4 Interest Expense, Net
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) Interest on long-term debt $23.1 $23.3 $26.4 Other interest expense 6.2 3.2 1.7 Interest income (0.5) (0.5) (0.6) ----- ----- ----- $28.8 $26.0 $27.5 ===== ===== =====
Interest paid during the year was approximately $27.2 million ($25.0 million - January 1, 2005; $25.9 million - January 3, 2004). NOTE 5 Income Taxes Income (loss) before income taxes and equity loss consisted of the following:
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) Canada $(10.2) $ (1.9) $ 3.6 Outside Canada 49.5 116.7 114.1 ------ ------ ------ $ 39.3 $114.8 $117.7 ====== ====== ======
Provision for income taxes consisted of the following:
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) CURRENT Canada $ (0.2) $ (0.1) $ (0.2) Outside Canada (21.0) (26.6) (30.3) ------ ------ ------ $(21.2) $(26.7) $(30.5) ------ ------ ------ DEFERRED Canada $ (0.8) $ 1.5 $ (1.2) Outside Canada 7.3 (10.6) (8.4) ------ ------ ------ $ 6.5 $ (9.1) $ (9.6) ------ ------ ------ PROVISION FOR INCOME TAXES $(14.7) $(35.8) $(40.1) ====== ====== ======
Income taxes paid during the year were $14.3 million ($27.3 million - January 1, 2005; $21.8 million - January 3, 2004). The following table reconciles income taxes calculated at the basic Canadian corporate rates with the income tax provision:
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) Income tax provision based on Canadian statutory rates $(13.6) $(39.8) $(42.3) Foreign tax rate differential 4.6 1.7 2.6 Manufacturing and processing deduction -- -- 0.1 Decrease (increase) in valuation allowance (21.0) 0.6 (0.6) Adjustment for change in enacted rates -- -- 1.0 Reduction to reserve 19.3 2.0 -- Non-deductible and other items (4.0) (0.3) (0.9) ------ ------ ------ Provision for income taxes $(14.7) $(35.8) $(40.1) ====== ====== ======
50 Deferred income tax assets and liabilities were recognized on temporary differences between the financial and tax bases of existing assets and liabilities as follows:
DECEMBER 31, January 1, 2005 2005 ------------ ---------- DEFERRED TAX ASSETS Loss carryforwards $ 12.4 $ 19.5 Property, plant and equipment 7.7 -- Liabilities and reserves 4.8 5.5 Other 1.1 2.4 ------ ------ 26.0 27.4 Valuation allowance (21.0) -- ------ ------ 5.0 27.4 ------ ------ DEFERRED TAX LIABILITIES Property, plant and equipment 42.8 41.8 Intangible assets 10.7 12.3 Other 5.0 24.3 ------ ------ 58.5 78.4 ------ ------ NET DEFERRED TAX LIABILITY $(53.5) $(51.0) ====== ======
As of December 31, 2005, operating loss carryforwards primarily in Canada, of $35.6 million are available to reduce future taxable income. These losses expire as follows: (IN MILLIONS OF U.S. DOLLARS) 2006 $25.2 2008 7.3 2009 1.4 2010 1.4 2011 0.3 ----- $35.6 =====
NOTE 6 Other Comprehensive Income
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) Net income $24.6 $78.3 $ 77.4 Foreign currency translation gain (loss) (5.0) 15.8 29.7 Change in unrealized loss on cash flow hedges 0.6 (1.0) -- ----- ----- ------ $20.2 $93.1 $107.1 ===== ===== ======
NOTE 7 Income per Common Share Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted average number of common shares outstanding adjusted to include the effect that would occur if in-the-money stock options were exercised. The following table reconciles the basic weighted average number of shares outstanding to the diluted weighted average number of shares outstanding:
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN THOUSANDS) Weighted average number of shares outstanding -- basic 71,628 71,006 69,389 Dilutive effect of stock options 272 1,065 1,607 ------ ------ ------ Adjusted weighted average number of shares outstanding -- diluted 71,900 72,071 70,996 ====== ====== ======
At December 31, 2005, options to purchase 4,102,864 (January 1, 2005 -- 1,493,000) shares of common stock at a weighted average exercise price of C$32.60 (January 1, 2005 -- C$40.83) per share were outstanding, but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common stock. NOTE 8 Accounts Receivable
DECEMBER 31, January 1, 2005 2005 ------------ ---------- (IN MILLIONS OF U.S. DOLLARS) Trade receivables $178.7 $154.2 Allowance for doubtful accounts (7.8) (12.1) Other 20.2 42.2 ------ ------ $191.1 $184.3 ====== ======
We wrote down the remaining balance due from an equity investee in the year ended December 31, 2005. As of January 1, 2005, other receivables included $7.0 million due from an equity investee and the allowance for doubtful accounts included $3.9 million due from an equity investee. NOTE 9 Inventories
DECEMBER 31, January 1, 2005 2005 ------------ ---------- (IN MILLIONS OF U.S. DOLLARS) Raw materials $ 63.9 $ 47.9 Finished goods 62.9 59.9 Other 17.4 15.0 ------ ------ $144.2 $122.8 ====== ======
51 NOTE 10 Derivative Financial Instruments In 2005, we entered into cash flow hedges to mitigate exposure to declines in the value of the Canadian dollar and pound sterling attributable to certain forecasted U.S. dollar raw material purchases of the Canadian and U.K. and European business segments. The hedges consist of monthly foreign exchange options to buy U.S. dollars at fixed rates per Canadian dollar and pound sterling and mature at various dates through December 28, 2006. The fair market value of the foreign exchange options is included in prepaid expenses and other assets. In addition, in 2004 we entered into one forward foreign exchange contract to purchase U.S. dollars at a fixed rate per pound sterling. The forward foreign exchange contract matured in January 2005. The fair market value of the forward foreign exchange contract is included in prepaid expenses and other assets as of January 1, 2005. At December 31, 2005, the hedges consisted of foreign exchange options to buy U.S. dollars at fixed rates per Canadian dollar at a cost of $0.8 million. The fair value of the options of $0.4 million has been included in prepaid expenses and other assets and the unrealized loss of $0.4 million is recorded in comprehensive income, reflecting a $0.6 million change in the unrealized loss in comprehensive income in 2005. The fair value of options and forward contract was $0.9 million at January 1, 2005 and we recorded a $1.0 million unrealized loss in other comprehensive income. NOTE 11 Property, Plant and Equipment
DECEMBER 31, 2005 January 1, 2005 ------------------------------ ------------------------------ ACCUMULATED Accumulated COST DEPRECIATION NET Cost Depreciation Net ------ ------------ ------ ------ ------------ ------ (IN MILLIONS OF U.S. DOLLARS) Land $ 20.6 $ -- $ 20.6 $ 21.4 $ -- $ 21.4 Buildings 119.0 27.7 91.3 101.5 24.0 77.5 Machinery and equipment 484.3 230.0 254.3 402.6 205.4 197.2 Plates and film 23.1 14.0 9.1 23.2 13.7 9.5 Leasehold improvements 21.4 4.7 16.7 9.3 3.9 5.4 Furniture and fixtures 12.4 10.2 2.2 12.3 9.6 2.7 ------ ------ ------ ------ ------ ------ $680.8 $286.6 $394.2 $570.3 $256.6 $313.7 ====== ====== ====== ====== ====== ======
Depreciation expense for fiscal 2005 was $49.8 million ($41.7 million -- January 1, 2005; $38.4 million -- January 3, 2004). NOTE 12 Goodwill
DECEMBER 31, January 1, 2005 2005 ------------ ---------- (IN MILLIONS OF U.S. DOLLARS) Balance at beginning of period $ 88.8 $81.6 Acquisitions -- note 20 69.4 5.7 Impairment losses recognized - note 2 (5.9) -- Foreign exchange (2.0) 1.5 ------ ----- Balance at end of period $150.3 $88.8 ====== =====
52 NOTE 13 Intangibles and Other Assets
DECEMBER 31, 2005 January 1, 2005 ------------------------------ ------------------------------ ACCUMULATED Accumulated COST AMORTIZATION NET Cost Amortization Net ------ ------------ ------ ------ ------------ ------ (IN MILLIONS OF U.S. DOLLARS) INTANGIBLES Not subject to amortization Rights $ 80.4 $ -- $ 80.4 $ 80.4 $ -- $ 80.4 ------ ----- ------ ------ ----- ------ Subject to amortization Customer relationships - note 2 166.7 40.1 126.6 164.7 31.5 133.2 Trademarks 29.0 9.3 19.7 30.0 7.3 22.7 Information technology 49.1 24.1 25.0 40.4 18.4 22.0 Other 3.6 1.0 2.6 3.6 0.6 3.0 ------ ----- ------ ------ ----- ------ 248.4 74.5 173.9 238.7 57.8 180.9 ------ ----- ------ ------ ----- ------ 328.8 74.5 254.3 319.1 57.8 261.3 ------ ----- ------ ------ ----- ------ OTHER ASSETS Financing costs 4.6 1.2 3.4 5.6 4.6 1.0 Other 5.4 2.7 2.7 15.5 1.7 13.8 ------ ----- ------ ------ ----- ------ 10.0 3.9 6.1 21.1 6.3 14.8 ------ ----- ------ ------ ----- ------ $338.8 $78.4 $260.4 $340.2 $64.1 $276.1 ====== ===== ====== ====== ===== ======
During the year we recorded a $20.0 million impairment loss on customer relationships as described in note 2. Amortization expense of intangibles was $20.0 million ($17.8 million - January 1, 2005; $12.5 million - January 3, 2004). Amortization of intangibles includes $6.4 million ($6.2 million - January 1, 2005; $5.1 million - January 3, 2004) relating to information technology assets. The estimated amortization expense for intangibles over the next five years is: (IN MILLIONS OF U.S. DOLLARS) 2006 $21.9 2007 21.9 2008 21.4 2009 13.4 2010 13.4 ----- $92.0 =====
NOTE 14 Short-Term Borrowings Short-term borrowings include bank overdrafts, and borrowings under our credit facilities and receivables securitization facility. On March 31, 2005, we entered into committed senior secured credit facilities that provide for financing in North America, the U.K. and Mexico expiring on March 31, 2010. The facilities replaced our former committed senior secured credit facility in the U.S. and Canada and our demand bank credit facility in the U.K. These multicurrency facilities were amended on August 10, 2005 to increase the facilities to $225.0 from $100.0 million, to add Macaw (Soft Drinks) Limited as a co-borrower, to consent to the Macaw Acquisition, and to increase the maximum facility amount to $350.0 million. The amended facilities allow for revolving credit borrowings in a principal amount of up to $225.0 million provided we are in compliance with the covenants and conditions of the agreement. The amended facilities include two separate facilities: (1) a $220.0 million multicurrency facility made by certain lenders to us and our indirect wholly-owned subsidiaries, Cott Beverages Inc., Macaw (Soft Drinks) Limited and Cott Beverages Limited as co-borrowers, and (2) a $5.0 million Mexican facility made by certain lenders to our indirect 90% owned subsidiary Cott Embotelladores de Mexico, S.A. de C.V. ("CEMSA"). Each facility includes subfacilities for swingline loans and letters of credit. The $225.0 million facilities can be increased up to an additional $125.0 million at our option if the lenders agree to increase their commitments or new lenders join the facility and we satisfy certain conditions. Within such $125.0 million of extra availability, and subject to certain other limitations, we can establish additional revolving loan facilities in an aggregate amount not to exceed $30.0 million to be provided in various currencies as agreed upon for additional subsidiaries designated by us. Wachovia Bank, National Association acts as administrative agent and security trustee for lenders under these facilities. The facilities are collateralized by substantially all our personal property with certain exceptions including the 53 receivables sold as part of our receivables securitization facility discussed below. In general, borrowings under the credit facilities bear interest at either a floating or fixed rate for the applicable currency plus a margin based on our consolidated total leverage ratio. A facility fee of between 0.15% and 0.375% per annum is payable on the entire line of credit. The level of the facility fee is dependent on financial covenants. As at December 31, 2005, credit of $78.8 million was available after borrowings of $141.3 million ($6.0 million and 78.1 million pounds sterling) and standby letters of credit of $4.9 million. The weighted average interest rate was 5.83% on these facilities as of December 31, 2005. The weighted average interest rate on short-term borrowings outstanding as of January 1, 2005 was 4.19%. On April 1, 2005, our principal U.S. operating subsidiaries entered into a receivables securitization facility under which they agreed to sell substantially all of their receivables generated from their ordinary course operations, as well as certain related assets, to our new special purpose indirect subsidiary, Cott USA Receivables Corporation. This subsidiary in turn sells and assigns undivided interests in the receivables and related assets to an unaffiliated entity, Park Avenue Receivables Company, LLC and certain other financial institutions (the "Purchasers") in exchange for cash in amounts determined by the parties, subject to specified conditions. The transfers to the Purchasers are treated as financing activities for purposes of our consolidated financial statements. The agreement contains representations, warranties, covenants, and indemnities customary for facilities of this type. The facility does not contain any covenants that we view as materially constraining its activities or the activities of its subsidiaries, except for Cott USA Receivables Corporation. The amount of funds available under the receivables facility is based upon the amount of eligible receivables and various reserves required by the facility. Accordingly, availability may fluctuate over time given changes in eligible receivables balances and calculation of reserves, but will not exceed the $75.0 million program limit. This facility bears interest at a variable rate, based on the cost of borrowing of the Purchasers. A fee of between 0.20% and 0.40% per annum is currently payable on the unused portion of the facility. The level of the facility fee is dependent on financial covenants. As of December 31, 2005, $39.6 million of eligible receivables, net of reserves, were available for purchase and $10.0 million was outstanding, under this facility, at a weighted average interest rate of 5.08%. NOTE 15 Long-Term Debt
DECEMBER 31, January 1, 2005 2005 ------------ ---------- (IN MILLIONS OF U.S. DOLLARS) Senior subordinated unsecured notes at 8% due 2011 (a) $270.5 $269.8 Capital leases 2.6 3.5 ------ ------ 273.1 273.3 Less current maturities (0.8) (0.8) ------ ------ $272.3 $272.5 ====== ======
a) Our 8% senior subordinated unsecured notes were issued at a discount of 2.75% on December 21, 2001. The fair value of the notes as of December 31, 2005 is estimated to be $283.3 million (January 1, 2005 - $299.1 million). The notes contain a number of financial covenants including limitations on capital stock repurchases, dividend payments and incurrence of indebtedness. Penalties exist if we redeem the notes prior to December 15, 2009.
DECEMBER 31, January 1, 2005 2005 ------------ ---------- (IN MILLIONS OF U.S. DOLLARS) Face value $275.0 $275.0 Discount (4.5) (5.2) ------ ------ $270.5 $269.8 ====== ======
b) Long-term debt payments required in each of the next five years and thereafter are as follows: (IN MILLIONS OF U.S. DOLLARS) 2006 $ 0.8 2007 0.8 2008 0.7 2009 0.3 2010 -- Thereafter 275.0 ------ $277.6 ======
NOTE 16 Accounts Payable and Accrued Liabilities
DECEMBER 31, January 1, 2005 2005 ------------ ---------- (IN MILLIONS OF U.S. DOLLARS) Trade payables $112.6 $ 79.1 Accrued compensation 14.7 17.5 Accrued promotion and rebates 27.6 24.9 Accrued interest 1.8 1.2 Restructuring 1.5 -- Income, sales and other taxes 8.9 8.8 Other accrued liabilities 15.4 13.7 ------ ------ $182.5 $145.2 ====== ======
54 NOTE 17 Capital Stock Our authorized capital stock consists of an unlimited number of common shares. NOTE 18 Stock Option Plans Under the 1986 Common Share Option Plan, as amended, we have reserved 14.0 million common shares for future issuance. Options are granted at a price not less than fair value of the shares on the date of grant. Options granted on or after April 12, 1996 but before September 1, 1998 expire after 10 years and vest at 25% per annum commencing on the second anniversary date of the grant. Options granted after September 1, 1998 expire after 7 years and vest at 30% per annum on the anniversary date of the grant for the first two years and the balance on the third anniversary date of the grant. Certain options granted under the plan vest monthly over a period of 24 or 36 months. Options granted after July 17, 2001 to the non-management members of the Board of Directors vest immediately. All options are non-transferable. Our policy is to award stock options with an exercise price equal to the closing price of our common stock on the Toronto Stock Exchange on the last trading day immediately before the date of award, and accordingly, no compensation expense has been recognized for stock options issued under these plans. Had compensation expense for the plans been determined based on the fair value at the grant date consistent with SFAS 123, our net income and income per common share would have been as follows:
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) NET INCOME As reported $ 24.6 $ 78.3 $ 77.4 Compensation expense, net of tax of $2.5 million (January 1, 2005 - $2.9 million; January 3, 2004 - $1.9 million) (7.3) (8.6) (6.3) ------ ------ ------ Pro forma $ 17.3 $ 69.7 $ 71.1 ====== ====== ====== NET INCOME PER SHARE -- BASIC As reported $ 0.34 $ 1.10 $ 1.12 Pro forma $ 0.24 $ 0.98 $ 1.02 NET INCOME PER SHARE -- DILUTED As reported $ 0.34 $ 1.09 $ 1.09 Pro forma $ 0.24 $ 0.97 $ 1.00 ------ ------ ------
The pro forma compensation expense has been tax effected to the extent it relates to stock options granted to employees in jurisdictions where the related benefits are deductible for income tax purposes. Total compensation cost related to non-vested awards not yet recognized is $18.8 million. The weighted average period over which this is expected to be recognized is 1.6 years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- Risk-free interest rate 3.3%-3.9% 3.3%-3.9% 3.9%-4.3% Average expected life (years) 4 4 4 Expected volatility 40.0% 40.0%-45.0% 45.0% Expected dividend yield -- -- --
Option activity was as follows:
Weighted average fair value of WEIGHTED options AVERAGE granted EXERCISE during the SHARES PRICE (C$) year ---------- ---------- ------------ Balance at December 28, 2002 4,984,340 $16.90 Granted 929,250 $29.95 $12.24 Exercised (1,699,796) $ 9.51 Forfeited (146,640) $20.10 ---------- ------ Balance at January 3, 2004 4,067,154 $22.90 Granted 1,538,750 $40.70 $15.96 Exercised (1,181,189) $16.06 Forfeited (218,750) $31.22 ---------- ------ Balance at January 1, 2005 4,205,965 $30.90 Granted 1,309,250 $29.07 $ 9.55 Exercised (271,610) $15.65 Forfeited (638,950) $33.23 ---------- ------ Balance at December 31, 2005 (4,604,655) $30.69 ========== ======
Outstanding options at December 31, 2005 are as follows:
Options Outstanding Options Exercisable --------------------------------------- ------------------------ Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices (C$) Outstanding Life (Years) Price (C$) Exercisable Price (C$) ----------- ----------- ------------ ---------- ----------- ---------- $5.95 - $16.10 131,691 2.0 $ 9.91 131,691 $ 9.91 $16.68- $24.25 679,964 2.8 $19.84 674,438 $19.80 $26.00 - $33.30 2,499,350 5.2 $29.77 1,107,190 $30.30 $35.21 - $43.64 1,293,650 5.3 $41.02 404,475 $41.02 --------- --- ------ --------- ------ 4,604,655 4.8 $30.69 2,317,794 $28.05 ========= === ====== ========= ======
55 NOTE 19 Net Change in Non-Cash Working Capital The changes in non-cash working capital components, net of effects of acquisitions and divestitures of businesses and unrealized foreign exchange gains and losses, are as follows:
For the years ended -------------------------------------- DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) Decrease (increase) in accounts receivable $(5.0) $(21.3) $ (2.7) Decrease (increase) in inventories (15.4) (22.8) (11.0) Decrease (increase) in prepaid expenses 0.5 (4.8) (1.0) Increase (decrease) in accounts payable and accrued liabilities 18.9 (3.5) 10.9 ----- ------ ------ $(1.0) $(52.4) $ (3.8) ===== ====== ======
NOTE 20 Acquisitions All acquisitions have been accounted for using the purchase method, and accordingly, the results of operations are included in our consolidated statements of income from the effective dates of purchase, except as otherwise indicated. The total purchase prices of the acquisitions and equity investments were allocated as follows based on the fair value of the net assets:
DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) Current assets $ 23.2 $ 6.0 $(0.6) Property, plant and equipment 50.1 19.3 3.6 Rights -- -- 0.3 Customer relationships 24.9 6.8 49.7 Trademarks -- 0.8 -- Goodwill 69.4 5.7 0.7 Other assets -- -- 0.2 Equity investments -- -- (1.3) ------ ----- ----- 167.6 38.6 52.6 ------ ----- ----- Current liabilities 22.0 4.0 0.4 Other liabilities -- -- 2.4 Deferred taxes 10.5 -- -- ------ ----- ----- PURCHASE PRICE $135.1 $34.6 $49.8 ====== ===== =====
Year ended December 31, 2005 Effective August 10, 2005 we acquired 100% of the shares of Macaw (Holdings) Limited, the parent company of Macaw (Soft Drinks) Limited, the largest privately owned manufacturer of retailer brand carbonated soft drinks in the United Kingdom. The Macaw Acquisition represents a significant strategic investment in our U.K. business with additional production capacity and manufacturing capabilities in the fast-growing aseptic beverage segment. The purchase price for the acquisition was $135.1 million (75.4 million pounds sterling) including acquisition costs of $2.4 million (1.3 million pounds sterling). The acquisition was financed under our senior secured credit facility, which was increased from $100.0 million to $225.0 million in connection with this transaction. The goodwill recognized on the transaction is not deductible for tax purposes. The value of customer relationships acquired is being amortized over 15 years. The following unaudited pro forma information for the year ended December 31, 2005 and January 1, 2005 presents the consolidated results of operations of the Company as if the acquisition of Macaw had occurred as of January 4, 2004. Pro forma information does not include the synergies that we anticipate should result from the acquisition.
DECEMBER 31, January 1, 2005 2005 ------------ ---------- (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) SALES As reported $1,755.3 $1,646.3 Pro forma 1,813.7 1,755.1 NET INCOME As reported 24.6 78.3 Pro forma 21.7 75.3 NET INCOME PER SHARE - BASIC As reported 0.34 1.10 Pro forma 0.30 1.06 NET INCOME PER SHARE - DILUTED As reported 0.34 1.09 Pro forma 0.30 1.04 ---- ----
Year ended January 1, 2005 Effective March 17, 2004, we acquired certain of the assets of The Cardinal Companies of Elizabethtown, LLC, located in Kentucky. The purchase of $17.8 million was allocated primarily to machinery and equipment. Effective October 19, 2004, we acquired for $16.8 million certain of the assets of Metro Beverage Co. The purchase price was allocated to customer relationships, goodwill and machinery and equipment. The total purchase price for all acquisitions was $34.6 million, including acquisition costs of $0.8 million. The acquisitions were funded from cash and borrowings on our revolving credit facility. 56 Year ended January 3, 2004 Effective May 15, 2003, our Mexican subsidiary Cott Embotelladores de Mexico, S.A. de C.V. ("CEMSA"), acquired a soft drink distribution business from Embotelladora de Puebla, S.A. de C.V. ("EPSA"). The purchase price was allocated to license and machinery and equipment. Effective December 19, 2003, we acquired the retailer brand beverage business of North Carolina's Quality Beverage Brands, L.L.C. ("QBB"). The assets acquired include customer relationships and certain machinery and equipment. The acquisition is expected to enhance our capabilities and expand our customer base in the Mid-Atlantic region of the U.S. The total purchase price for all acquisitions was $49.8 million, including estimated acquisition costs of $0.6 million and the purchase of the remaining interest in Iroquois West Bottling Ltd. in January 2003. The acquisitions were funded from cash and borrowings on our revolving credit facility. NOTE 21 Benefit Plans Cott primarily maintains defined contribution retirement plans covering qualifying employees. The total expense with respect to these plans was $5.6 million for the year ended December 31, 2005 ($5.6 million - January 1, 2005; $4.5 million -- January 3, 2004). NOTE 22 Commitments and Contingencies a) We lease buildings, machinery & equipment, computer software and furniture & fixtures. All contractual increases and rent free periods included in the lease contract are taken into account when calculating the minimum lease payment and recognized on a straight line basis over the lease term. Certain leases have renewal periods and contingent rentals which are not included in the table below. The minimum annual payments under operating leases are as follows: (IN MILLIONS OF U.S. DOLLARS) 2006 $17.8 2007 13.8 2008 10.6 2009 9.2 2010 8.3 Thereafter 35.9 ----- $95.6 =====
Operating lease expenses were: (IN MILLIONS OF U.S. DOLLARS) Year ended December 31, 2005 $17.6 Year ended January 1, 2005 $11.9 Year ended January 3, 2004 $13.0
b) As of December 31, 2005, we had commitments for capital expenditures of approximately $0.7 million and commitments for inventory of approximately $16.9 million. In addition, we have certain contracts with suppliers and co-packers which would require us to pay an aggregate of $5.1 million in order to cancel these contracts. c) We are subject to various claims and legal proceedings with respect to matters such as governmental regulations, income taxes, and other actions arising out of the normal course of business. Management believes that the resolution of these matters will not have a material adverse effect on our financial position or results from operations. In January 2005, we were named as one of many defendants in a class action suit alleging the unauthorized use by the defendants of container deposits and the imposition of recycling fees on consumers. In February 2005 similar class action claims were filed in a number of other Canadian provinces. The litigation is at a very preliminary stage and the merits of the case have not been determined. d) We had $4.9 million in standby letters of credit outstanding as of December 31, 2005 ($4.0 million -- January 1, 2005). e) The Office of Fair Trading in the U.K. has referred the Macaw Acquisition to the Competition Commission for further investigation. The Competition Commission ruling is expected in May 2006. We expect that the transaction will be approved but we cannot guarantee this outcome. However, if the Competition Commission rules against us, we may be required to divest ourselves of all or part of this business. 57 NOTE 23 Segment Reporting We produce, package and distribute retailer brand and branded bottled and canned soft drinks to regional and national grocery, mass-merchandise and wholesale chains in North America, the U.K. & Europe and International business segments. The International segment includes our Mexican business, our Royal Crown International business and our business in Asia. The concentrate assets, sales and related expenses have been included in the Corporate & Other segment. For comparative purposes, segmented information has been restated to conform to the way we currently manage our beverage business. BUSINESS SEGMENTS
DECEMBER 31, 2005 ---------------------------------------------------------------- NORTH UNITED KINGDOM CORPORATE AMERICA & EUROPE INTERNATIONAL & OTHER TOTAL -------- -------------- ------------- --------- -------- (IN MILLIONS OF U.S. DOLLARS) External sales $1,428.0 $251.9 $71.6 $ 3.8 $1,755.3 Depreciation and amortization 54.3 11.5 1.4 3.0 70.2 Unusual items - note 2 Restructuring and other 3.0 -- -- 0.2 3.2 Goodwill impairment 5.9 -- -- -- 5.9 Other asset impairments 27.1 (0.2) -- 0.7 27.6 Other unusual items -- 0.8 -- -- 0.8 Operating income (loss) before unusual items 62.5 13.7 10.8 (13.6) 73.4 Property, plant and equipment 266.2 109.4 10.3 8.3 394.2 Goodwill 74.1 66.6 4.5 5.1 150.3 Intangibles and other assets 136.0 26.3 1.1 97.0 260.4 Total assets 709.4 307.7 83.1 71.2 1,171.4 Additions to property, plant and equipment 62.3 9.7 1.5 2.3 75.8 Goodwill acquired -- 69.4 -- -- 69.4
January 1, 2005 ---------------------------------------------------------------- North United Kingdom Corporate America & Europe International & Other Total -------- -------------- ------------- --------- -------- (IN MILLIONS OF U.S. DOLLARS) External sales $1,388.5 $194.3 $61.2 $ 2.3 $1,646.3 Depreciation and amortization 48.5 8.2 1.2 2.1 60.0 Unusual items (1.5) 0.4 -- 0.2 (0.9) Operating income (loss) before unusual items 130.6 12.7 10.4 (9.0) 144.7 Property, plant and equipment 227.9 68.7 9.6 7.5 313.7 Goodwill 79.1 -- 4.6 5.1 88.8 Intangibles and other assets 182.7 3.9 1.2 88.3 276.1 Total assets 720.4 135.6 84.7 81.3 1,022.0 Additions to property, plant and equipment 41.2 4.9 1.6 2.6 50.3 Acquisition of production capacity 3.8 -- -- -- 3.8
January 3, 2004 ---------------------------------------------------------------- North United Kingdom Corporate America & Europe International & Other Total -------- -------------- ------------- --------- -------- (IN MILLIONS OF U.S. DOLLARS) External sales $1,207.7 $166.6 $42.1 $ 1.4 $1,417.8 Depreciation and amortization 41.3 7.3 0.7 1.7 51.0 Unusual Items (1.8) -- -- -- (1.8) Operating income (loss) 144.3 7.7 5.7 (7.0) 150.7 Property, plant and equipment 210.4 66.7 9.2 7.0 293.3 Goodwill 71.9 -- 4.6 5.1 81.6 Intangibles and other assets 180.1 1.1 1.4 84.2 266.8 Total assets 643.3 126.7 77.6 61.2 908.8 Additions to property, plant and equipment 23.6 7.0 6.1 2.9 39.6
Total assets under the Corporate & Other caption include the elimination of intersegment receivables and investments. For the year ended December 31, 2005, sales to Wal-Mart accounted for 40% (2004 -- 40%, 2003 -- 42%) of our total sales. 58 Credit risk arises from the potential default of a customer in meeting its financial obligations with us. Concentrations of credit exposure may arise with a group of customers which have similar economic characteristics or that are located in the same geographic region. The ability of such customers to meet obligations would be similarly affected by changing economic, political or other conditions. We are not currently aware of any facts that would create a material credit risk. Revenues by geographic area are as follows:
DECEMBER 31, January 1, January 3, 2005 2005 2004 ------------ ---------- ---------- (IN MILLIONS OF U.S. DOLLARS) United States $1,251.3 $1,221.8 $1,035.8 Canada 201.2 189.5 191.0 United Kingdom 244.4 186.9 160.2 Other countries 58.4 48.1 30.8 -------- -------- -------- $1,755.3 $1,646.3 $1,417.8 ======== ======== ========
Revenues are attributed to countries based on the location of the plant. Property, plant and equipment, goodwill, and intangibles and other assets by geographic area are as follows:
DECEMBER 31, January 1, 2005 2005 ------------ ---------- (IN MILLIONS OF U.S. DOLLARS) United States $491.7 $508.9 Canada 98.2 86.3 United Kingdom 202.3 72.5 Other countries 12.7 10.9 ------ ------ $804.9 $678.6 ====== ======
NOTE 24 Differences Between United States and Canadian Accounting Principles and Practices These consolidated financial statements have been prepared in accordance with U.S. GAAP, which differ in certain respects from those principles and practices that we would have followed had our consolidated financial statements been prepared in accordance with Canadian GAAP. (a) Under U.S. GAAP, we have elected not to record compensation expense for options issued to employees with an exercise price equal to the market value of the options. Under Canadian GAAP, effective January 1, 2004, stock options issued to employees subsequent to January 1, 2002 are recognized in net income based on their fair value. As a result, compensation expense of $7.2 million ($7.5 million - January 1, 2005), $9.7 million ($10.0 million - January 1, 2005) net of tax of $2.5 million ($2.5 million - January 1, 2005), was recorded in 2005. This policy was adopted on a retroactive basis with no restatement of comparative figures and as a result $5.6 million was charged to opening retained earnings as at January 3, 2004. Contributed surplus of $25.2 ($15.5 million - January 1, 2005) was recorded to reflect the charge for unexercised options. Share capital of $1.8 million was recorded to reflect the options exercised for the year ending January 1, 2005. The options exercised during the year ended December 31, 2005 were granted prior to January 1, 2002. (b) Under U.S. GAAP, costs of start-up activities and organization costs are expensed as incurred. Under Canadian GAAP these costs, if they meet certain criteria, can be capitalized and amortized over the future benefit period. (c) Under U.S. GAAP, the adoption of the U.S. dollar in 1998 as the presentation and reporting currency was implemented retroactively, such that prior period financial statements are translated under the current rate method using the foreign exchange rates in effect on those dates. Under Canadian GAAP, the change in presentation and reporting currency was implemented by translating all prior year financial statement amounts at the foreign exchange rate on January 31, 1998. As a result, there is a difference in the share capital, retained earnings and cumulative translation adjustment amounts under Canadian GAAP as compared to U.S. GAAP. Under Canadian GAAP, these differences would have been reported in the consolidated statements of income, consolidated balance sheets, consolidated statements of shareowners' equity and consolidated statements of cash flow as follows: CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 January 1, 2005 ------------------- ------------------- U.S. CANADIAN U.S. Canadian GAAP GAAP GAAP GAAP -------- -------- -------- -------- (IN MILLIONS OF U.S. DOLLARS) Property, plant & equipment (b) $ 394.2 $ 394.2 $ 313.7 $ 314.1 Goodwill (b) 150.3 150.8 88.8 89.3 Total assets 1,171.4 1,171.9 1,022.0 1,023.9 Deferred income taxes (a),(b) 53.5 47.0 51.0 47.2 Total liabilities 667.0 660.5 540.9 537.1 Capital stock (a),(c) 291.4 263.9 287.0 259.5 Contributed Surplus (a) -- 25.2 -- 15.5 Retained earnings (a), (b), (c) 186.2 153.1 161.6 135.9 Accumulated other comprehensive income (c) 4.3 46.7 8.7 52.1 Total shareowners' equity 481.9 488.9 457.3 463.0 -------- -------- -------- --------
59 CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the years ended ---------------------------- DECEMBER January January 31, 2005 1, 2005 3, 2004 -------- ------- ------- (IN MILLIONS OF U.S. DOLLARS) Net income under U.S. GAAP $24.6 $ 78.3 $77.4 Cost of sales (b) (0.4) (0.4) (0.4) Stock compensation expense (a) (9.7) (10.0) -- Recovery of income taxes (a),(b) 2.7 2.7 0.2 ----- ------ -- Net income under Canadian GAAP $17.2 $ 70.6 $77.2 ===== ====== ===== NET INCOME (LOSS) PER COMMON SHARE, CANADIAN GAAP Basic $0.24 $ 0.99 $1.11 Diluted $0.24 $ 0.98 $1.09 ===== ====== =====
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended ---------------------------- DECEMBER January January 31, 2005 1, 2005 3, 2004 -------- ------- ------- (IN MILLIONS OF U.S. DOLLARS) Cash provided by operating activities U.S. GAAP $129.1 $102.7 $142.7 Net income (a), (b) (7.4) (7.7) (0.2) Depreciation & amortization (b) 0.4 0.4 0.4 Deferred income taxes (a), (b) (2.7) (2.7) (0.2) Other non-cash items (a) 9.7 10.0 -- ------ ------ ------ Cash provided by operating activities Canadian GAAP $129.1 $102.7 $142.7 ====== ====== ======
60 COTT CORPORATION QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
YEAR ENDED DECEMBER 31, 2005 -------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL --------- ------- ------- ------- -------- (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) Sales $395.5 $492.7 $469.9 $397.2 $1,755.3 Cost of sales 339.5 412.0 404.5 349.8 1,505.8 ------ ------ ------ ------ -------- Gross profit 56.0 80.7 65.4 47.4 249.5 Selling, general and administrative expenses 36.9 35.5 34.2 32.0 138.6 Unusual items Restructuring -- -- 2.0 1.2 3.2 Asset impairments (0.2) -- 23.7 10.0 33.5 Other -- -- -- 0.8 0.8 ------ ------ ------ ------ -------- Operating income 19.3 45.2 5.5 3.4 73.4 ------ ------ ------ ------ -------- Net income (loss) $ 8.3 $ 25.0 $ (1.8) $ (6.9) $ 24.6 ====== ====== ====== ====== ======== Per share data: Net income (loss) per common share Basic $ 0.12 $ 0.35 $(0.03) $(0.10) $ 0.34 Diluted $ 0.12 $ 0.35 $(0.03) $(0.10) $ 0.34 ------ ------ ------ ------ --------
YEAR ENDED JANUARY 1, 2005 -------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL --------- ------- ------- ------- -------- (IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) Sales $370.9 $463.7 $442.4 $369.3 $1,646.3 Cost of sales 300.5 378.2 371.4 312.5 1,362.6 ------ ------ ------ ------ -------- Gross profit 70.4 85.5 71.0 56.8 283.7 Selling, general and administrative expenses 38.7 34.1 33.3 32.0 138.1 Unusual items Asset impairments -- (0.5) (0.2) 1.6 0.9 ------ ------ ------ ------ -------- Operating income 31.7 51.9 37.9 23.2 144.7 ------ ------ ------ ------ -------- Net income $ 15.4 $ 29.4 $ 22.1 $ 11.4 $ 78.3 ====== ====== ====== ====== ======== Per share data: Net income per common share Basic $ 0.22 $ 0.41 $ 0.31 $ 0.16 $ 1.10 Diluted $ 0.21 $ 0.41 $ 0.31 $ 0.16 $ 1.09 ------ ------ ------ ------ --------
61 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) are effective, based on their evaluation of these controls and procedures as of the end of the period covered by this report. There have been no changes in our internal controls or in other factors during the quarter ended December 31, 2005 that could materially affect, or are likely to materially affect, our controls over financial reporting. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: - pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; - provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and - provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Based on our assessment, we determined that, as of December 31, 2005, our internal control over financial reporting is effective based on those criteria. Our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on pages 41 and 42. 62 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by this item regarding directors is incorporated by reference to, and will be contained in, the "Election of Directors" section of our definitive proxy statement for the 2006 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 31, 2005. The information required by this item regarding audit committee financial expert disclosure is incorporated by reference to, and will be contained in, the "Appointment of Auditors" section of our definitive proxy statement for the 2006 Annual and Special Meeting of Shareowners. The information required by this item regarding executive officers appears as the Supplemental Item in Part I. The Audit Committee of our Board of Directors is an "audit committee" for the purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The members of the Audit Committee are Philip B. Livingston (Chairman), W. John Bennett and Andrew Prozes. We have adopted a Code of Ethics applicable to our Chief Executive Officer, Chief Financial Officer and principal accounting officer and certain other employees. We intend to disclose any amendment to, or waiver from, any provision of the Code by posting such information on our Internet website, www.cott.com. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The information required by this item is incorporated by reference to, and will be contained in, the "Section 16(a) Beneficial Ownership Reporting Compliance" section of our definitive proxy statement for the 2006 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 31, 2005. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to, and will be contained in, the "Executive Compensation" section of our definitive proxy statement for the 2006 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 31, 2005. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREOWNER MATTERS The information required by this item is incorporated by reference to, and will be contained in, the "Principal Shareowners," the "Security Ownership of Directors and Management" and "Equity Compensation Plan Information" sections of our definitive proxy statement for the 2006 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 31, 2005. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to, and will be contained in, the "Certain Relationships and Related Transactions" section of our definitive proxy statement for the 2006 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 31, 2005. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to, and will be contained in, the "Appointment of Auditors" section of our definitive proxy statement for the 2006 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 31, 2005. 63 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 1. FINANCIAL STATEMENTS: The consolidated financial statements are included in Item 8 of this Annual Report on Form 10-K. 2. FINANCIAL STATEMENT SCHEDULES: Schedule II -- Valuation and Qualifying Accounts Schedule III -- Consolidating Financial Statements All other schedules called for by the applicable SEC accounting regulations are not required under the related instructions or are inapplicable and, therefore, have been omitted. 64 3. EXHIBITS:
NUMBER DESCRIPTION ------ ----------- 2.1 Agreement Relating to the Sale and Purchase of the Whole of the Issued Share Capital of Macaw (Holdings) Limited, dated August 10, 2005, between Andrew Cawthray and Others and Martyn Rose and Cott Beverages Limited (incorporated by reference to Exhibit 2.1 to our Form 8-K dated August 16, 2005). 3.1 Articles of Incorporation of Cott Corporation (incorporated by reference to Exhibit 3.1 to our Form 10-K filed March 31, 2000). 3.2 By-laws of Cott Corporation (incorporated by reference to Exhibit 3.2 to our Form 10-K filed March 8, 2002). 4.1 Subscription Agreement dated as of June 12, 1998 for Cott Corporation's (as issuer) Convertible Participating Voting Second Preferred Shares, Series 1 (incorporated by reference to Exhibit 4.2 to our Form 10-K filed March 31, 2000). 4.2 Letter Agreement dated as of November 3, 1999, regarding standstill provisions between Cott Corporation and the Thomas H. Lee Company (incorporated by reference to Exhibit 4.3 to our Form 10-K filed March 31, 2000). 4.3 Indenture dated as of December 21, 2001, between Cott Beverages Inc. (as issuer) and HSBC Bank USA (as trustee) (incorporated by reference to Exhibit 4.3 to our Form 10-K filed March 8, 2002). 4.4 Registration Rights Agreement dated as of December 21, 2001, among Cott Beverages Inc., the Guarantors named therein and Lehman Brothers Inc., BMO Nesbitt Burns Corp. and CIBC World Markets Corp. (incorporated by reference to Exhibit 4.4 to our Form 10-K filed March 8, 2002). 10.1 (1) Supply Agreement, dated December 21,1998, between Wal-Mart Stores, Inc. and Cott Beverages USA, Inc. (now "Cott Beverages Inc.") (incorporated by reference to Exhibit 10.3 to our Form 10-K filed March 31, 2000). 10.2 (2) Employment Agreement of Mark Benadiba dated September 28, 2005 (filed herewith). 10.3 (2) Employment Agreement of B. Clyde Preslar dated July 22, 2005 (incorporated by reference to Exhibit 10.2 to our Form 10-Q filed November 10, 2005). 10.4 (2) Employment Agreement of John K. Sheppard dated March 11, 2004 (incorporated by reference to Exhibit 10.4 to our Form S-3/A filed on June 18, 2004). 10.5 (2) Amended 1999 Executive Incentive Share Compensation Plan effective January 3,1999 (incorporated by reference to Exhibit 10.9 to our Form 10-K filed March 20, 2001). 10.6 (2) 2000 Executive Incentive Share Compensation Plan effective January 2, 2001 (incorporated by reference to Exhibit 10.10 to our Form 10-K filed March 20, 2001). 10.7 (2) 2001 Executive Incentive Share Compensation Plan effective January 2, 2002 (incorporated by reference to Exhibit 10.10 to our Form 10-K filed March 8, 2002). 10.8 (2) 2002 Executive Incentive Share Compensation Plan effective January 2, 2003 (incorporated by reference to Exhibit 10.11 to our Form 10-K filed March 17, 2003). 10.9 (2) Second Canadian Employee Share Purchase Plan effective January 2, 2001 (incorporated by reference to Exhibit 10.11 to our Form 10-K filed March 20, 2001). 10.10 (1) Supply Agreement executed November 11, 2003, effective January 1, 2002 between Crown Cork & Seal Company, Inc. and Cott Corporation (incorporated by reference to Exhibit 10.14 to our Form 10-Q/A filed August 5, 2004). 10.11 (2) Share Purchase Plan for Non-employee Directors effective November 1, 2003 (incorporated by reference to Exhibit 10.15 to our Form 10-K filed March 18, 2004). 10.12 (2) Cott Corporation Executive Investment Share Purchase Plan (incorporated by reference to Exhibit 10.14 to our Form 10-K filed March 16, 2005). 10.13 (2) Restated 1986 Common Share Option Plan of Cott Corporation/Corporation Cott as amended through October 20, 2004 (incorporated by reference to Exhibit 10.15 to our Form 10-K filed March 16, 2005).
65
NUMBER DESCRIPTION ------ ----------- 10.14 (2) Letter Agreement with Frank E. Weise III, dated April 28, 2004 (incorporated by reference to Exhibit 10.5 to our Form S-3/A filed on June 18, 2004). 10.15 (1) Amendment to Supply Agreement between Crown Cork & Seal USA, Inc. (successor to Crown Cork & Seal Company, Inc.) and Cott Corporation, dated December 23, 2004 (incorporated by reference to Exhibit 10.17 to our Form 10-K filed March 16, 2005). 10.16 (2) Employment Agreement of Mark R. Halperin dated July 14, 2000 (incorporated by reference to Exhibit 10.7 to our Form 10-K filed March 8, 2002) (including Confidentiality & Restrictive Covenants (incorporated by reference to Exhibit 10.19 to our Form 10-K filed March 16, 2005)). 10.17 (2) Employment Agreement of Colin Walker, dated August 20, 1998 (incorporated by reference to Exhibit 10.20 to our Form 10-K filed March 16, 2005). 10.18 (1) Credit Agreement, dated as of March 31, 2005, by and among Cott Corporation, Cott Beverages Inc., Cott Beverages Limited, and Cott Embotelladores de Mexico, S.A. de C.V., as Borrowers, the Lenders referred to herein, Wachovia Bank, National Association, as Administrative Agent and Security Trustee, Bank of Montreal, as Syndication Agent, and HSBC Bank Canada, Cooperatieve Centrale Raiffeisen-BoerenleenBank B.A., "Rabobank International", New York Branch, each as a Documentation Agent, Wachovia Capital Markets, LLC as a Lead Arranger and the Sole Book Manager, BMO Nesbitt Burns, as a Lead Arranger (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed May 12, 2005). 10.19 (1) Receivables Purchase Agreement, dated as of April 1, 2005, among Cott USA Receivables Corporation, Cott Beverages Inc., Park Avenue Receivables Company, LLC, the financial institutions from time to time parties to the agreement, and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed May 12, 2005). 10.20 First Amendment, Consent and Joinder Agreement, dated August 10, 2005, by and among Cott Corporation, Cott Beverages Inc., Cott Beverages Limited, Macaw (Soft Drinks) Limited, Cott Embotelladores de Mexico, S.A. de C.V., certain Cott Corporation subsidiaries, the Lenders specified therein and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.1 to our Form 8-K dated August 16, 2005). 10.21 (2) Employment Agreement of Tina Dell'Aquila dated May 25, 2005 and confidentiality undertaking dated October 27, 1998 (filed herewith). 13.1 Annual Report to Shareowners for the year ended December 31, 2005 (filed herewith). 14.1 Code of Business Conduct and Ethics (filed herewith). 14.2 Code of Ethics for Senior Officers (filed herewith). 21.1 List of Subsidiaries of Cott Corporation (filed herewith). 23.1 Consent of Independent Registered Public Accounting Firm (filed herewith). 31.1 Certification of the President and Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2005 (filed herewith). 31.2 Certification of the Executive Vice President and Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2005 (filed herewith). 32.1 Certification of the President and Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2005. 32.2 Certification of the Executive Vice President and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2005.
(1) Document is subject to request for confidential treatment. (2) Indicates a management contract or compensatory plan. 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Cott Corporation /s/ John K. Sheppard - ------------------------------------- John K. Sheppard President & Chief Executive Officer Date: March 6, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ John K. Sheppard Date: March 6, 2006 - ------------------------------------- John K. Sheppard President & Chief Executive Officer /s/ B. Clyde Preslar Date: March 6, 2006 - ------------------------------------- B. Clyde Preslar Executive Vice President & Chief Financial Officer (Principal Financial Officer) /s/ Tina Dell'Aquila Date: March 6, 2006 - ------------------------------------- Tina Dell'Aquila Vice President, Controller & Assistant Secretary (Principal Accounting Officer) /s/ Colin J. Adair Date: March 6, 2006 - ------------------------------------- Colin J. Adair Director /s/ W. John Bennett Date: March 6, 2006 - ------------------------------------- W. John Bennett Director /s/ Serge Gouin Date: March 6, 2006 - ------------------------------------- Serge Gouin Director /s/ Stephen H. Halperin Date: March 6, 2006 - ------------------------------------- Stephen H. Halperin Director /s/ Betty Jane Hess Date: March 6, 2006 - ------------------------------------- Betty Jane Hess Director /s/ Philip B. Livingston Date: March 6, 2006 - ------------------------------------- Philip B. Livingston Director /s/ Christine A. Magee Date: March 6, 2006 - ------------------------------------- Christine A. Magee Director /s/ Andrew Prozes Date: March 6, 2006 - ------------------------------------- Andrew Prozes Director /s/ Donald G. Watt Date: March 6, 2006 - ------------------------------------- Donald G. Watt Director /s/ Frank E. Weise Date: March 6, 2006 - ------------------------------------- Frank E. Weise Chairman, Director 67 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 2005 --------------------------------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT Description BEGINNING OF YEAR COSTS AND EXPENSES OTHER ACCOUNTS DEDUCTION END OF YEAR - ----------- ----------------- ------------------ -------------- --------- ----------- RESERVES DEDUCTED IN THE BALANCE SHEET FROM THE ASSETS TO WHICH THEY APPLY Allowances for losses on: Accounts receivables $(12.1) $ (0.5) $(0.1) $4.9 $ (7.8) Inventories (6.8) (1.0) (0.5) 0.7 (7.6) Intangibles and other assets (0.4) -- -- 0.4 -- Deferred income tax assets -- (21.0) -- -- (21.0) ------ ------ ----- ---- ------ $(19.3) $(22.5) $(0.6) $6.0 $(36.4) ====== ====== ===== ==== ======
Year ended January 1, 2005 --------------------------------------------------------------------------------- Balance at Charged to Charged to Balance at Description Beginning of Year Costs and Expenses Other Accounts Deduction End of Year - ----------- ----------------- ------------------ -------------- --------- ----------- RESERVES DEDUCTED IN THE BALANCE SHEET FROM THE ASSETS TO WHICH THEY APPLY Allowances for losses on: Accounts receivables $ (6.8) $(6.5) $ -- $1.2 $(12.1) Inventories (7.2) 0.1 (0.2) 0.5 (6.8) Intangibles and other assets (0.6) 0.2 -- -- (0.4) ------ ----- ----- ---- ------ $(14.6) $(6.2) $(0.2) $1.7 $(19.3) ====== ===== ===== ==== ======
Year ended January 3, 2004 --------------------------------------------------------------------------------- Balance at Charged to Charged to Balance at Description Beginning of Year Costs and Expenses Other Accounts Deduction End of Year - ----------- ----------------- ------------------ -------------- --------- ----------- RESERVES DEDUCTED IN THE BALANCE SHEET FROM THE ASSETS TO WHICH THEY APPLY Allowances for losses on: Accounts receivables $ (3.4) $(3.6) $(0.7) $0.9 $ (6.8) Inventories (6.7) (0.6) (1.3) 1.4 (7.2) Intangibles and other assets (1.1) -- 0.5 -- (0.6) ------ ----- ----- ---- ------ $(11.2) $(4.2) $(1.5) $2.3 $(14.6) ====== ===== ===== ==== ======
68 SCHEDULE III -- CONSOLIDATING FINANCIAL STATEMENTS Cott Beverages Inc., our wholly owned subsidiary, has entered into financing arrangements that are guaranteed by Cott Corporation and certain other wholly owned subsidiaries (the "Guarantor Subsidiaries"). Such guarantees are full, unconditional and joint and several. The following supplemental financial information sets forth on an unconsolidated basis, our balance sheets, statements of income and cash flows for Cott Corporation, Cott Beverages Inc., Guarantor Subsidiaries and our other subsidiaries (the "Non-guarantor Subsidiaries"). The balance sheets, statements of income and cash flows for Cott Beverages Inc. have been adjusted retroactively to include Concord Beverage Company, Concord Holdings GP and Concord Holdings LP that were amalgamated with Cott Beverages Inc. on December 29, 2001. The supplemental financial information reflects our investments and those of Cott Beverages Inc. in their respective subsidiaries using the equity method of accounting. CONSOLIDATING STATEMENTS OF INCOME
For the year ended December 31, 2005 ---------------------------------------------------------------------------------------- Cott Cott Guarantor Non-guarantor Elimination Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated ----------- -------------- ------------ ------------- ----------- ------------ (IN MILLIONS OF U.S. DOLLARS) SALES $214.3 $1,140.4 $310.4 $119.6 $(29.4) $1,755.3 Cost of sales 183.3 979.8 271.5 100.6 (29.4) 1,505.8 ------ -------- ------ ------ ------ -------- GROSS PROFIT 31.0 160.6 38.9 19.0 -- 249.5 Selling, general and administrative expenses 35.5 73.9 21.1 8.1 -- 138.6 Unusual items 4.8 31.9 0.8 -- -- 37.5 ------ -------- ------ ------ ------ -------- OPERATING INCOME (LOSS) (9.3) 54.8 17.0 10.9 -- 73.4 Other expense (income), net (0.3) 10.7 (1.6) (8.0) -- 0.8 Interest expense (income), net (0.1) 32.6 (5.1) 1.4 -- 28.8 Minority interest -- -- -- 4.5 -- 4.5 ------ -------- ------ ------ ------ -------- INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY INCOME (LOSS) (8.9) 11.5 23.7 13.0 -- 39.3 Income taxes (0.8) (8.6) (4.3) (1.0) -- (14.7) Equity income (loss) 34.3 8.5 13.8 -- (56.6) -- ------ -------- ------ ------ ------ -------- NET INCOME $ 24.6 $ 11.4 $ 33.2 $ 12.0 $(56.6) $ 24.6 ====== ======== ====== ====== ====== ========
69 CONSOLIDATING BALANCE SHEETS
As of December 31, 2005 ---------------------------------------------------------------------------------------- Cott Cott Guarantor Non-guarantor Elimination Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated ----------- -------------- ------------ ------------- ----------- ------------ (IN MILLIONS OF U.S. DOLLARS) ASSETS CURRENT ASSETS Cash $ 8.8 $ -- $ 6.3 $ 6.6 $ -- $ 21.7 Accounts receivable 35.6 26.5 70.2 103.2 (44.4) 191.1 Inventories 18.8 76.6 43.6 5.2 -- 144.2 Prepaid expenses and other assets 1.3 2.2 4.7 1.3 -- 9.5 ------ ------- ------- ------ --------- -------- 64.5 105.3 124.8 116.3 (44.4) 366.5 Property, plant and equipment 53.0 195.6 135.1 10.5 -- 394.2 Goodwill 23.5 46.0 80.8 -- -- 150.3 Intangibles and other assets 17.0 164.1 38.4 40.9 -- 260.4 Due from affiliates 60.8 60.0 168.8 41.9 (331.5) -- Investments in subsidiaries 395.2 75.4 62.6 137.8 (671.0) -- ------ ------- ------- ------ --------- -------- $614.0 $ 646.4 $ 610.5 $347.4 $(1,046.9) $1,171.4 ====== ======= ======= ====== ========= ======== LIABILITIES CURRENT LIABILITIES Short-term borrowings $ -- $ 10.4 $ 137.5 $ 10.0 $ -- $ 157.9 Current maturities of long-term debt -- 0.8 -- -- -- 0.8 Accounts payable and accrued liabilities 36.7 109.6 63.6 17.0 (44.4) 182.5 ------ ------- ------- ------ --------- -------- 36.7 120.8 201.1 27.0 (44.4) 341.2 Long-term debt -- 272.3 -- -- -- 272.3 Due to affiliates 95.4 115.8 58.1 62.2 (331.5) -- Deferred income taxes 31.0 17.4 5.1 -- 53.5 ------ ------- ------- ------ --------- -------- 132.1 539.9 276.6 94.3 (375.9) 667.0 ------ ------- ------- ------ --------- -------- Minority interest -- -- -- 22.5 -- 22.5 SHAREOWNERS' EQUITY Capital stock Common shares 291.4 275.8 599.5 175.0 (1,050.3) 291.4 Retained earnings (deficit) 186.2 (169.3) (181.4) (3.4) 354.1 186.2 Accumulated other comprehensive income (loss) 4.3 -- (84.2) 59.0 25.2 4.3 ------ ------- ------- ------ --------- -------- 481.9 106.5 333.9 230.6 (671.0) 481.9 ------ ------- ------- ------ --------- -------- $614.0 $ 646.4 $ 610.5 $347.4 $(1,046.9) $1,171.4 ====== ======= ======= ====== ========= ========
70 CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended December 31, 2005 ---------------------------------------------------------------------------------------- Cott Cott Guarantor Non-guarantor Elimination Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated ----------- -------------- ------------ ------------- ----------- ------------ (IN MILLIONS OF U.S. DOLLARS) OPERATING ACTIVITIES Net income $ 24.6 $ 11.4 $ 33.2 $ 12.0 $(56.6) $ 24.6 Depreciation and amortization 11.6 35.9 17.6 5.1 -- 70.2 Amortization of financing fees -- 0.3 0.2 0.3 -- 0.8 Deferred income taxes 0.5 (7.3) 0.4 (0.1) -- (6.5) Minority interest -- -- -- 4.5 -- 4.5 Equity loss, net of distributions (34.3) (2.2) (0.6) -- 37.1 -- Asset impairments 4.4 29.3 (0.2) -- -- 33.5 Other non-cash items 0.4 3.4 (0.9) 0.1 -- 3.0 Net change in non-cash working capital 48.1 42.7 (54.5) (37.3) -- (1.0) ------ ------ ------- ------ ------ ------- Cash provided by (used in) operating activities 55.3 113.5 (4.8) (15.4) (19.5) 129.1 ------ ------ ------- ------ ------ ------- INVESTING ACTIVITIES Additions to property, plant and equipment (11.8) (47.0) (15.4) (1.6) -- (75.8) Acquisitions -- -- (135.1) -- -- (135.1) Advances to affiliates (14.9) 0.1 9.9 -- 4.9 -- Investment in subsidiaries (15.0) -- (15.0) -- 30.0 -- Other investing activities (9.8) 4.3 (0.3) (1.0) -- (6.8) ------ ------ ------- ------ ------ ------- Cash used in investing activities (51.5) (42.6) (155.9) (2.6) 34.9 (217.7) ------ ------ ------- ------ ------ ------- FINANCING ACTIVITIES Payments of long-term debt -- (0.9) -- -- -- (0.9) Short-term borrowings (0.1) (56.1) 138.0 10.0 -- 91.8 Advances from affiliates (13.2) 3.2 15.0 (0.1) (4.9) -- Distributions to subsidiary minority shareowner -- -- -- (5.8) -- (5.8) Issue of common shares 3.6 -- 15.0 15.0 (30.0) 3.6 Financing costs -- (3.8) -- -- -- (3.8) Dividends paid -- (13.2) -- (6.3) 19.5 -- Other financing activities 0.1 (0.1) (0.4) -- -- (0.4) ------ ------ ------- ------ ------ ------- Cash provided by (used in) financing activities (9.6) (70.9) 167.6 12.8 (15.4) 84.5 ------ ------ ------- ------ ------ ------- Effect of exchange rate changes on cash (0.1) -- (0.6) (0.1) -- (0.8) ------ ------ ------- ------ ------ ------- NET INCREASE (DECREASE) IN CASH (5.9) -- 6.3 (5.3) -- (4.9) CASH, BEGINNING OF YEAR 14.7 -- -- 11.9 -- 26.6 ------ ------ ------- ------ ------ ------- CASH, END OF YEAR $ 8.8 $ -- $ 6.3 $ 6.6 $ -- $ 21.7 ====== ====== ======= ====== ====== =======
71 CONSOLIDATING STATEMENTS OF INCOME
For the year ended January 1, 2005 ---------------------------------------------------------------------------------------- Cott Cott Guarantor Non-guarantor Elimination Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated ----------- -------------- ------------ ------------- ----------- ------------ (IN MILLIONS OF U.S. DOLLARS) SALES $208.3 $1,113.5 $250.7 $107.2 $ (33.4) $1,646.3 Cost of sales 172.9 919.0 214.9 89.2 (33.4) 1,362.6 ------ -------- ------ ------ ------- -------- GROSS PROFIT 35.4 194.5 35.8 18.0 -- 283.7 Selling, general and administrative expenses 35.8 75.4 19.1 7.8 -- 138.1 Unusual items 1.3 -- (0.4) -- -- 0.9 ------ -------- ------ ------ ------- -------- OPERATING INCOME (LOSS) (1.7) 119.1 17.1 10.2 -- 144.7 Other expense (income), net 0.5 1.1 (1.9) 0.2 -- (0.1) Interest expense (income), net (0.2) 32.9 (6.6) (0.1) -- 26.0 Minority interest -- -- -- 4.0 -- 4.0 ------ -------- ------ ------ ------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND EQUITY INCOME (LOSS) (2.0) 85.1 25.6 6.1 -- 114.8 Income taxes 2.7 (34.1) (3.8) (0.6) -- (35.8) Equity income (loss) 77.6 9.3 55.1 -- (142.7) (0.7) ------ -------- ------ ------ ------- -------- NET INCOME $ 78.3 $ 60.3 $ 76.9 $ 5.5 $(142.7) $ 78.3 ====== ======== ====== ====== ======= ========
72 CONSOLIDATING BALANCE SHEETS
As of January 1, 2005 ---------------------------------------------------------------------------------------- Cott Cott Guarantor Non-guarantor Elimination Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated ----------- -------------- ------------ ------------- ----------- ------------ (IN MILLIONS OF U.S. DOLLARS) ASSETS CURRENT ASSETS Cash $ 14.7 $ -- $ -- $ 11.9 $ -- $ 26.6 Accounts receivable 52.2 109.3 49.4 12.9 (39.5) 184.3 Inventories 20.9 72.4 24.6 4.9 -- 122.8 Prepaid expenses and other assets 3.0 3.3 3.0 0.4 -- 9.7 ------ ------- ------- ------ --------- -------- 90.8 185.0 77.0 30.1 (39.5) 343.4 Property, plant and equipment 48.3 162.0 93.6 9.8 -- 313.7 Goodwill 22.8 51.8 14.2 -- -- 88.8 Intangibles and other assets 11.6 203.7 16.8 44.0 -- 276.1 Due from affiliates 47.0 4.7 151.1 41.9 (244.7) -- Investments in subsidiaries 354.0 74.2 47.1 133.3 (608.6) -- ------ ------- ------- ------ --------- -------- $574.5 $ 681.4 $ 399.8 $259.1 $ (892.8) $1,022.0 ====== ======= ======= ====== ========= ======== LIABILITIES CURRENT LIABILITIES Short-term borrowings $ -- $ 66.5 $ 4.9 $ -- $ -- $ 71.4 Current maturities of long-term debt -- 0.8 -- -- -- 0.8 Accounts payable and accrued liabilities 31.7 82.5 52.4 18.1 (39.5) 145.2 ------ ------- ------- ------ --------- -------- 31.7 149.8 57.3 18.1 (39.5) 217.4 Long-term debt -- 272.5 -- -- -- 272.5 Due to affiliates 80.4 112.6 44.7 7.0 (244.7) -- Deferred income taxes 5.1 38.1 7.6 0.2 -- 51.0 ------ ------- ------- ------ --------- -------- 117.2 573.0 109.6 25.3 (284.2) 540.9 ------ ------- ------- ------ --------- -------- Minority interest -- -- -- 23.8 -- 23.8 SHAREOWNERS' EQUITY Capital stock Common shares 287.0 275.8 587.2 147.6 (1,010.6) 287.0 Retained earnings (deficit) 161.6 (167.4) (214.6) (4.2) 386.2 161.6 Accumulated other comprehensive income (loss) 8.7 -- (82.4) 66.6 15.8 8.7 ------ ------- ------- ------ --------- -------- 457.3 108.4 290.2 210.0 (608.6) 457.3 ------ ------- ------- ------ --------- -------- $574.5 $ 681.4 $ 399.8 $259.1 $ (892.8) $1,022.0 ====== ======= ======= ====== ========= ========
73 CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended January 1, 2005 ---------------------------------------------------------------------------------------- Cott Cott Guarantor Non-guarantor Elimination Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated ----------- -------------- ------------ ------------- ----------- ------------ (IN MILLIONS OF U.S. DOLLARS) OPERATING ACTIVITIES Net income $ 78.3 $ 60.3 $ 76.9 $ 5.5 $(142.7) $ 78.3 Depreciation and amortization 9.5 31.2 14.3 5.0 -- 60.0 Amortization of financing fees -- 0.7 -- -- -- 0.7 Deferred income taxes (0.8) 8.9 2.8 (1.8) -- 9.1 Minority interest -- -- -- 4.0 -- 4.0 Equity income, net of distributions (68.7) (3.3) (50.6) -- 123.3 0.7 Non-cash unusual items 1.5 -- -- -- -- 1.5 Other non-cash items 1.2 (1.2) 0.7 0.1 -- 0.8 Net change in non-cash working capital (36.8) (27.2) 0.5 11.1 -- (52.4) ------ ------ ------ ------ ------- ------ Cash provided by (used in) operating activities (15.8) 69.4 44.6 23.9 (19.4) 102.7 ------ ------ ------ ------ ------- ------ INVESTING ACTIVITIES Additions to property, plant and equipment (4.8) (34.4) (9.0) (2.1) -- (50.3) Acquisitions -- (34.6) -- -- -- (34.6) Acquisition of production capacity -- (3.8) -- -- -- (3.8) Advances to affiliates 13.9 0.1 (21.1) -- 7.1 -- Investment in subsidiaries (15.0) -- -- -- 15.0 -- Other investing activities (4.8) 2.6 (2.9) 0.4 -- (4.7) ------ ------ ------ ------ ------- ------ Cash used in investing activities (10.7) (70.1) (33.0) (1.7) 22.1 (93.4) ------ ------ ------ ------ ------- ------ FINANCING ACTIVITIES Payments of long-term debt -- (1.3) (1.9) (0.3) -- (3.5) Short-term borrowings -- (5.6) (1.4) -- -- (7.0) Advances from affiliates 12.8 21.5 (27.1) (0.1) (7.1) -- Distributions to subsidiary minority shareowner -- -- -- (5.9) -- (5.9) Issue of common shares 14.3 -- 15.0 -- (15.0) 14.3 Dividends paid -- (13.3) -- (6.1) 19.4 -- Other financing activities -- -- (0.4) -- -- (0.4) ------ ------ ------ ------ ------- ------ Cash provided by (used in) financing activities 27.1 1.3 (15.8) (12.4) (2.7) (2.5) ------ ------ ------ ------ ------- ------ Effect of exchange rate changes on cash 0.7 -- 0.7 -- -- 1.4 ------ ------ ------ ------ ------- ------ NET INCREASE (DECREASE) IN CASH 1.3 0.6 (3.5) 9.8 -- 8.2 CASH, BEGINNING OF YEAR 13.4 (0.6) 3.5 2.1 -- 18.4 ------ ------ ------ ------ ------- ------ CASH, END OF YEAR $ 14.7 $ -- $ -- $ 11.9 $ -- $ 26.6 ====== ====== ====== ====== ======= ======
74 CONSOLIDATING STATEMENTS OF INCOME
For the year ended January 3, 2004 ---------------------------------------------------------------------------------------- Cott Cott Guarantor Non-guarantor Elimination Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated ----------- -------------- ------------ ------------- ----------- ------------ (IN MILLIONS OF U.S. DOLLARS) SALES $231.6 $937.6 $216.0 $84.6 $ (52.0) $1,417.8 Cost of sales 189.2 744.8 188.4 70.6 (52.0) 1,141.0 ------ ------ ------ ----- ------- -------- GROSS PROFIT 42.4 192.8 27.6 14.0 -- 276.8 Selling, general and administrative expenses 35.2 63.5 20.5 6.9 -- 126.1 Unusual items 2.0 (0.2) -- -- -- 1.8 ------ ------ ------ ----- ------- -------- OPERATING INCOME (LOSS) 5.2 129.5 7.1 7.1 -- 148.9 Other expense (income), net 0.7 4.5 (5.3) 0.6 -- 0.5 Interest expense (income), net (0.2) 32.7 (5.0) -- -- 27.5 Minority interest -- -- -- 3.2 -- 3.2 ------ ------ ------ ----- ------- -------- INCOME BEFORE INCOME TAXES AND EQUITY INCOME (LOSS) 4.7 92.3 17.4 3.3 -- 117.7 Income taxes (1.4) (36.0) (2.7) -- -- (40.1) Equity income (loss) 74.1 8.7 59.5 -- (142.5) (0.2) ------ ------ ------ ----- ------- -------- NET INCOME $ 77.4 $ 65.0 $ 74.2 $ 3.3 $(142.5) $ 77.4 ====== ====== ====== ===== ======= ========
75 CONSOLIDATING BALANCE SHEETS
As of January 3, 2004 ----------------------------------------------------------------------------------- Cott Cott Beverages Guarantor Non-guarantor Elimination Corporation Inc. Subsidiaries Subsidiaries Entries Consolidated ----------- --------- ------------ ------------- ----------- ------------ (IN MILLIONS OF U.S. DOLLARS) ASSETS CURRENT ASSETS Cash $ 13.4 $ (0.6) $ 3.5 $ 2.1 $ -- $ 18.4 Accounts receivable 46.6 89.2 40.1 13.5 (40.6) 148.8 Inventories 16.3 54.1 20.1 3.9 -- 94.4 Prepaid expenses 1.9 1.2 1.8 0.6 -- 5.5 ------ ------ ------ ------ ------- ------ 78.2 143.9 65.5 20.1 (40.6) 267.1 Property, plant and equipment 50.7 140.4 92.8 9.4 -- 293.3 Goodwill 21.2 46.1 14.3 -- -- 81.6 Intangibles and other assets 7.6 195.7 15.7 47.8 -- 266.8 Due from affiliates 57.5 4.8 115.0 41.9 (219.2) -- Investments in subsidiaries 252.2 76.0 5.0 124.5 (457.7) -- ------ ------ ------ ------ ------- ------ $467.4 $606.9 $308.3 $243.7 $(717.5) $908.8 ====== ====== ====== ====== ======= ====== LIABILITIES CURRENT LIABILITIES Short-term borrowings $ -- $ 72.2 $ 5.9 $ -- $ -- $ 78.1 Current maturities of long-term debt -- 1.1 1.9 0.3 -- 3.3 Accounts payable and accrued liabilities 47.0 80.9 44.3 8.9 (40.6) 140.5 ------ ------ ------ ------ ------- ------ 47.0 154.2 52.1 9.2 (40.6) 221.9 Long-term debt -- 275.7 -- -- -- 275.7 Due to affiliates 65.9 91.1 55.0 7.2 (219.2) -- Deferred income taxes 9.4 24.4 6.7 -- -- 40.5 ------ ------ ------ ------ ------- ------ 122.3 545.4 113.8 16.4 (259.8) 538.1 ------ ------ ------ ------ ------- ------ Minority interest -- -- -- 25.6 -- 25.6 SHAREOWNERS' EQUITY Capital stock Common shares 267.9 275.8 543.3 167.7 (986.8) 267.9 Retained earnings (deficit) 83.3 (214.3) (291.6) (3.6) 509.5 83.3 Accumulated other comprehensive income (6.1) -- (57.2) 37.6 19.6 (6.1) ------ ------ ------ ------ ------- ------ 345.1 61.5 194.5 201.7 (457.7) 345.1 ------ ------ ------ ------ ------- ------ $467.4 $606.9 $308.3 $243.7 $(717.5) $908.8 ====== ====== ====== ====== ======= ======
76 CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended January 3, 2004 ----------------------------------------------------------------------------------- Cott Cott Beverages Guarantor Non-guarantor Elimination Corporation Inc. Subsidiaries Subsidiaries Entries Consolidated ----------- --------- ------------ ------------- ----------- ------------ (IN MILLIONS OF U.S. DOLLARS) OPERATING ACTIVITIES Net income $ 77.4 $ 65.0 $ 74.2 $ 3.3 $(142.5) $ 77.4 Depreciation and amortization 8.4 24.7 13.5 4.4 -- 51.0 Amortization of financing fees -- 1.7 -- -- -- 1.7 Deferred income taxes 1.2 5.8 2.6 -- -- 9.6 Minority interest -- -- -- 3.2 -- 3.2 Equity income, net of distributions (74.1) (4.1) (46.5) -- 124.9 0.2 Other non-cash items 2.8 (1.3) 0.5 1.4 -- 3.4 Net change in non-cash working capital 4.2 8.2 (18.6) 2.4 -- (3.8) ------ ------ ------ ----- ------- ------- Cash provided by operating activities 19.9 100.0 25.7 14.7 (17.6) 142.7 ------ ------ ------ ----- ------- ------- INVESTING ACTIVITIES Additions to property, plant and equipment (8.7) (17.4) (8.4) (5.1) -- (39.6) Acquisitions and equity investments -- (50.0) 0.4 (0.2) -- (49.8) Notes receivable (2.5) -- -- -- -- (2.5) Advances to affiliates (5.2) (0.1) (25.5) -- 30.8 -- Investment in subsidiaries (18.0) -- -- -- 18.0 -- Other investing activities 4.2 (10.6) (2.2) (1.3) -- (9.9) ------ ------ ------ ----- ------- ------- Cash used in investing activities (30.2) (78.1) (35.7) (6.6) 48.8 (101.8) ------ ------ ------ ----- ------- ------- FINANCING ACTIVITIES Payments of long-term debt -- (89.5) (0.5) (0.2) -- (90.2) Short-term borrowings (2.6) 55.6 2.8 -- -- 55.8 Advances from affiliates 13.7 24.5 (7.4) -- (30.8) -- Distributions to subsidiary minority shareowner -- -- -- (4.1) -- (4.1) Issue of common shares 12.3 -- 18.0 -- (18.0) 12.3 Dividends paid -- (13.1) -- (4.5) 17.6 -- Other financing activities -- -- (0.4) -- -- (0.4) ------ ------ ------ ----- ------- ------- Cash provided by (used in) financing activities 23.4 (22.5) 12.5 (8.8) (31.2) (26.6) ------ ------ ------ ----- ------- ------- Effect of exchange rate changes on cash 0.3 -- 0.5 -- -- 0.8 ------ ------ ------ ----- ------- ------- NET INCREASE (DECREASE) IN CASH 13.4 (0.6) 3.0 (0.7) -- 15.1 CASH, BEGINNING OF YEAR -- -- 0.5 2.8 -- 3.3 ------ ------ ------ ----- ------- ------- CASH, END OF YEAR $ 13.4 $ (0.6) $ 3.5 $ 2.1 $ -- $ 18.4 ====== ====== ====== ===== ======= =======
77 EX-10.2 2 o30438exv10w2.txt EX-10.2 EXHIBIT 10.2 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT made with effect as of the 28th day of September, 2005 BETWEEN: COTT CORPORATION (the "CORPORATION") -and- MARK BENADIBA (the "EXECUTIVE") WHEREAS the Corporation currently employs the Executive and the Executive wishes to continue to be employed by the Corporation. AND WHEREAS the Corporation and the Executive are parties to an amended and restated employment agreement dated October 15, 2003 and counter-signed by the Executive on October 23, 2003 (the "2003 Employment Agreement"). AND WHEREAS the Corporation and the Executive wish to terminate the 2003 Employment Agreement as of the Effective Date (as defined below), and have negotiated terms and conditions for a fixed-term period of employment. AND WHEREAS the Corporation and the Executive have agreed to formalize the terms and conditions agreed between them which will, as of the Effective Date, govern the Executive's employment with the Corporation, all as set out in this Agreement, and which will amend, supersede and replace any previous employment agreement between the Corporation and the Executive (including, without limitation, the 2003 Employment Agreement). NOW THEREFORE in consideration of the mutual covenants and promises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the Corporation and the Executive, the parties hereby covenant and agree as follows: ARTICLE I - DEFINITIONS AND INTERPRETATION 1.1 Definitions. For the purposes of this Agreement, the following words and phrases shall have the following meanings: (a) "AFFILIATE" has the same meaning as given to such word in the Securities Act (Ontario), as amended or replaced from time to time. -2- (b) "AGREEMENT" means this agreement, including any schedules hereto, as amended, supplemented, or modified in writing from time to time. (c) "BENEFITS" means those benefits and perquisites as described in Section 5.2 and in which the Executive is participating as at the Date of Termination but, for greater certainty, excludes any share option, share purchase, equity, profit-sharing, bonus, or other incentive plans or entitlements. (d) "BOARD" means the Board of Directors of the Corporation. (e) "BUSINESS" means the business of manufacturing, selling, or distributing non-alcoholic beverages or any other line of business actively carried on by the Corporation or in the Corporation's active contemplation to the knowledge of the Executive as at the Date of Termination, including, without limitation, the business carried on by any Affiliate. (f) "COMPENSATION" shall mean the aggregate of the Executive's annual base salary and annual automobile allowance as at the Date of Termination, plus the Executive's target annual incentive bonus (such annual incentive bonus being capped at 100%) but, for greater certainty, excludes any retention or extraordinary bonuses, share option, share purchase, equity, profit-sharing, or long-term incentive plans, awards or entitlements. (g) "CONFIDENTIAL INFORMATION" means information disclosed or accessible to the Executive or acquired by the Executive as a result of his employment with the Corporation and which is not in the public domain or otherwise required to be publicly disclosed by applicable law and includes, but is not limited to, information relating to the Corporation's or any of its Affiliates' current, future or proposed products/services or development of new or improved products/services, marketing strategies, sales or business plans, the names and information about the Corporation's past, present and prospective customers and clients, technical data, records, reports, presentation materials, interpretations, forecasts, test results, formulae, projects, research data, personnel data, budgets, unpublished financial statements, Innovations, and any other information received by the Corporation from third parties pursuant to an obligation of confidentiality. (h) "DATE OF TERMINATION" means the date of cessation of the Executive's employment without regard to any notice of termination, pay in lieu of notice of termination, severance or other damages and, for greater certainty, shall mean the earliest of the following dates: (i) the expiry of the Term; (ii) the date of the Executive's death; or (iii) the date set out in any written notice of termination/resignation delivered by the Corporation or the Executive to the other party. -3- (i) "EFFECTIVE DATE" means the effective date of this Agreement as set forth above, that is, September 28, 2005. (j) "INNOVATIONS" means any: (i) processes, machines and compositions of matter; (ii) inventions and improvements (whether or not protectable under patent laws); (iii) techniques, ideas, concepts and programs; (iv) works of authorship and information fixed in any tangible medium, including source code for software, (whether or not protectable under copyright laws) and all moral rights therein; (v) mask works or integrated circuit topography; (vi) trademarks, trade names, trade dress and trade secrets and know-how (whether or not protectable under trade secret laws); (vii) other subject matter protectable under patent, copyright, mask work, trademark, trade secret or other similar laws; or (viii) any derivative works, improvements, renewals, extensions, continuations, divisionals, continuations in part, or continuing patent applications relating to any Innovation. (k) "JUST CAUSE" means: (i) the wilful and continued failure by the Executive substantially to perform his duties with the Corporation (other than a failure resulting from his incapacity due to physical or mental illness) after a written demand for substantial performances delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed his duties, and the Executive has failed to correct such failure to perform his duties within thirty (30) days after such written demand is delivered to him; or (ii) the wilful engaging by the Executive in conduct that is demonstrably and materially injurious to the Corporation, monetarily or otherwise, provided that no act or failure to act on the Executive's part shall be deemed "wilful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Corporation (l) "SEVERANCE PERIOD" shall mean the period commencing on the Date of Termination and ending twenty-four (24) months thereafter. -4- (m) "TERRITORY" means: (i) Canada; (ii) every state or possession of the United States of America; and (iii) every country in which the Corporation or any of its Affiliates maintain an office and actively carry on the Business ARTICLE II - TERM 2.1 Fixed Term. This Agreement shall commence on the Effective Date and this Agreement and the Executive's employment shall be for a maximum fixed term of three (3) years ending on September 27, 2008 (the "Term"), subject to earlier termination of the Executive's employment in accordance with Article VI below. At the end of the Term, this Agreement and the Executive's employment are wholly and automatically at an end without notice or further obligation by the Corporation to the Executive other than amounts or benefits earned and accrued by the Executive and payable by the Corporation up to such expiry date. The parties each acknowledge that there is no representation, warranty, covenant or commitment to renew or extend the Term or the Executive's employment beyond the expiry of the Term. 2.2 Consultancy: Notwithstanding Section 2.1 above, at the end of the Term and effective as of the day following up the expiry of the Term, the Corporation and the Executive shall enter into a consultancy agreement substantially including the terms and conditions and in the form attached as Schedule "A" to this Agreement. ARTICLE III - EMPLOYMENT AND POSITION 3.1 Position. Subject to the terms and conditions set out in this Agreement, the Corporation hereby agrees to employ the Executive, and the Executive hereby agrees to serve the Corporation, in the position of Executive Vice President, or such other position as may be assigned to the Executive by the Corporation's President and Chief Executive Officer or the Board but provided that such position is of at least equivalent stature and level of responsibilities within the Corporation. 3.2 Executive's Covenant. The Executive represents and warrants to the Corporation that he is free to enter this Agreement and that he is not subject to any obligation or restriction (statutory, contractual, or at common law) which would prevent or interfere with the performance of all of his obligations hereunder. 3.3 Place of Employment. The Executive shall provide his duties and services to the Corporation at its office in Toronto, Ontario, or at such other place or places within the greater Toronto area as the Corporation may determine from time-to-time. The Executive's place, of employment will not be moved outside of the greater Toronto area without his consent. The Executive acknowledges that, in the ordinary course of business and in carrying out his duties for the Corporation, he will have customary business travel obligations. -5- ARTICLE IV - DUTIES 4.1 Full-Time. The Executive's position with Corporation is a full-time one. Therefore, throughout the duration of his employment, the Executive shall devote his full working time and attention to the business and affairs of the Corporation, acting in the best interests of the Corporation at all times. The Executive shall not, during his employment with the Corporation, accept nor hold any position as an officer, director, employee, consultant, or any like position for or on behalf of any entity without the prior written approval of the Corporation, which approval may be withheld in its sole discretion. 4.2 Duties; Reporting. Reporting to and subject to the general direction of the Corporation's President and Chief Executive Officer or as may otherwise be designated by the Board (but provided that the Executive shall always report to the most senior management executive officer of the Corporation), the Executive shall perform such other duties and responsibilities consistent with such position as may be assigned to him by the Corporation's President and Chief Executive Officer or the Board from time-to-time. The Executive shall perform all duties in accordance with the charter documents and by-laws of the Corporation, the instructions of the Corporation's President and Chief Executive Officer and the Board, and all of the Corporation's policies and codes of conduct, rules and regulations in effect from time to time. In addition to the duties and responsibilities associated with his position, the Executive shall perform such other duties and responsibilities consistent with the position as may be assigned to him by the Corporation's President and Chief Executive Officer or the Board from time to time. The Corporation's President and Chief Executive Officer or the Board retain full authority to change the Executive's duties and responsibilities and reporting relationships (but provided that the Executive shall always report to the most senior management executive officer of the Corporation) and to assign new duties and responsibilities provided that such changes do not result in a diminution of the scope or dignity of the Executive's overall duties and responsibilities. 4.3 Compliance. Recognizing the Corporation's commitment to achieving the highest standards of openness and accountability, the Executive shall raise, in a prompt manner, any good faith concerns he has regarding the conduct of the Corporation's business or compliance with the Corporation's financial, legal or reporting obligations. Such good faith concerns should be brought first to the attention of the Corporation's President and Chief Executive Officer or to the Board. ARTICLE V - COMPENSATION AND BENEFITS 5.1 Signing Bonus. As an inducement to the Executive to sign this Agreement and in full and final satisfaction of all of the Executive's payments, benefits, rights and entitlements due or payable under the 2003 Employment Agreement, the Corporation shall pay to the Executive a signing bonus of $1,000,000.00, such payment to be made on a lump sum basis within ten (10) business days of the execution of this Agreement by the Executive. 5.2 Base Salary. During his employment, the Corporation shall pay the Executive a base salary of $500,000.00 annually, paid in such instalments and at such times and in the same manner as the Corporation pays its other senior executives generally, but not less than monthly. The Executive's base salary will be reviewed annually by the Human Resources and -6- Compensation Committee (or as may otherwise be delegated by the Board) for consideration of an increase, if appropriate, in its discretion. 5.3 Benefits. During his employment, the Executive shall be eligible to participate in all benefits and all perquisites (including medical, prescription, dental, disability, life, AD&D and travel insurance), provided by the Corporation on the same basis as similarly situated senior executives of the Corporation employed in Canada, but excluding the Corporation's President and Chief Executive Officer, as such plans and policies may be amended from time-to-time. The Executive acknowledges and agrees that the benefits and perquisites made available to him (including group insurance) are subject to change in the Corporation's sole discretion, and further, any entitlement of the Executive is subject to and shall be governed by the terms and conditions of any written policies, plans, programs or contracts. 5.4 Automobile. During his employment, the Corporation shall pay to the Executive an annual automobile allowance in accordance with the Corporation's policy as it may be amended from time-to-time. 5.5 Vacation. For each year of employment during the Term, the Executive shall accrue vacation in accordance with the Corporation's vacation policy for management, currently five (5) weeks' paid vacation per calendar year, such vacation to extend for such periods and to be taken at such intervals as shall be appropriate and consistent with the proper performance of the Executive's duties and as agreed upon between the Executive and the Corporation. To the extent permitted by applicable law, accumulated vacation time or pay may not be carried forward except with the prior approval of the Board. 5.6 Annual Bonus Incentive. For each year of employment during the Term, the Executive shall be eligible for an annual bonus incentive with a target bonus award of $575,000.00 (at 100%), and a potential maximum award based on exceeding achievements of $1,150,000.00 (at 200%). The Executive's annual bonus incentive shall include the following components, terms and conditions: (a) Objectives (including all performance thresholds, targets and maximum goals) will be set annually by the Human Resources and Compensation Committee (or as may otherwise be delegated by the Board). (b) The level of achievement of all objectives will be evaluated by the Human Resources and Compensation Committee (or as may otherwise be delegated by the Board) as soon as possible following each fiscal year. (c) Subject to Sections 6.3 and 6.4 below, bonuses, if any, shall be earned only upon completion of the relevant fiscal year of the Corporation and shall be payable after completion of the Corporation's audited financial statements for such fiscal year. 5.7 Reimbursement of Expenses. Upon presentation of proper receipts or other proof of expenditure and subject to such reasonable guidelines or limitations provided by the Corporation from time to time, the Corporation shall reimburse the Executive for all reasonable and necessary expenses actually incurred by the Executive directly in connection with the business affairs of the Corporation and the performance of his duties hereunder. The Executive shall comply with -7- such reasonable limitations and reporting requirements with respect to such expenses as the Board may establish from time to time. 5.8 Continuation of Benefits. All benefits, stock options and annual bonus incentives to which the Executive was entitled immediately prior to the execution of this Agreement shall, unless otherwise replaced or set out in this Agreement, continue without loss or change as of the Effective Date. For greater certainty, all grants of stock options to the Executive shall be governed by the applicable plans and policies, specifically including and without limitation, the Restated 1986 Common Share Option Plan of the Corporation, as they may be amended from time-to-time. 5.9 No Other Entitlements. The Executive is not entitled to any other payment, benefit, perquisite, allowance or entitlement other than as specifically set out in this Agreement or as otherwise agreed to in writing and signed by the Corporation and the Executive. ARTICLE VI - TERMINATION OF EMPLOYMENT 6.1 Early Termination. Notwithstanding any other provision in this Agreement, the Executive's employment may be terminated at any time as follows: (a) Death. This Agreement and the Executive's employment shall automatically terminate upon the death of the Executive. (b) Just Cause. The Corporation may terminate this Agreement and the Executive's employment at any time forthwith for any Just Cause. (c) Without Just Cause. The Corporation may terminate this Agreement and the Executive's employment at any time without Just Cause and for any reason or no reason whatsoever by providing written notice to the Executive specifying the effective Date of Termination (which may be forthwith). (d) Resignation. The Executive may terminate this Agreement and his employment at any time by providing written notice to the Board specifying the effective date of termination (such date being not less than three (3) months and not more than six (6) months after the date of the Executive's written notice). The Corporation may elect to deem any date prior to the date specified in the notice as the Date of Termination. 6.2 Termination for Just Cause or Resignation. If this Agreement and the Executive's employment is terminated pursuant to subsections 6.1(b) or 6.1(d) above, then the Corporation shall pay to the Executive an amount equal to the base salary and vacation pay earned by and payable to the Executive up to the Date of Termination and the Executive shall have no entitlement to any further notice of termination, payment in lieu of notice of termination, severance, or any damages whatsoever. Participation in all bonus plans (specifically including all short and long term incentive plans) or other stock option, equity, or profit participation plans terminates immediately upon the Date of Termination and the Executive shall not be entitled to any additional bonus or incentive award, pro rata or otherwise, except as may have been owing to him for the Corporation's fiscal year immediately preceding the Date of Termination. -8- 6.3 Termination by Reason of Death. If this Agreement and the Executive's employment is terminated pursuant to subsections 6.1(a) above, then the Corporation shall pay to the Executive an amount equal to the base salary and vacation pay earned by and payable to the Executive up to the Date of Termination and the Executive shall have no entitlement to any further notice of termination, payment in lieu of notice of termination, severance, or any damages whatsoever. Participation in all bonus plans (specifically including all short and long term incentive plans) or other stock option, equity, or profit participation plans terminates immediately upon the Date of Termination, but the Corporation shall pay to the Executive his bonus or incentive entitlements (if any) calculated pro rata for the period up to the Date of Termination based on achievement of the bonus incentive target to such date, such payment(s) being made immediately if the amount can be readily determined but, in any event, no later than thirty (30) days following the completion of the audited financial statements for the fiscal year in which the Date of Termination occurs. 6.4 Termination Without Just Cause. If this Agreement and the Executive's employment is terminated by the Corporation without Just Cause pursuant to subsection 6.1(c) above, then the following provisions shall apply: (a) The Corporation shall pay to the Executive an amount equal to the base salary, car allowance, and vacation pay earned by him and payable to him up to the Date of Termination. (b) Participation in all bonus plans (specifically including all short and long term incentive plans) stock option, equity, or profit participation plans terminates immediately upon the Date of Termination. However, the Corporation shall pay to the Executive his bonus (if any) calculated pro rata for the period up to the Date of Termination based on achievement of the annual bonus incentive target to such date, such payment(s) being made immediately if the amount can be readily determined but, in any event, not later than thirty (30) days following the completion of the audited financial statements for the fiscal year in which the Date of Termination occurs. (c) The Corporation shall pay to the Executive, or as he may direct, severance in an amount equivalent to two (2) times the Compensation (for greater certainty, such severance being no less than Cdn.$2,150,000.00), payable in a lump sum within ten (10) business days following the Date of Termination. (d) To the extent that the Corporation may do so legally and in compliance with its plans and policies in existence from time to time, the Corporation shall continue all Benefits for the Severance Period, provided that, if the Corporation cannot continue any particular Benefit, then the Corporation shall reimburse the Executive for all reasonable expenses incurred by him to replace such Benefit for an equivalent duration. 6.5 No Mitigation. The Executive shall not be required to mitigate damages by seeking other employment or otherwise, nor shall any amount provided for under this Agreement be reduced in any respect in the event that the Executive shall secure or not reasonably pursue alternative employment following the termination of the Executive's employment with the Corporation, -9- provided that, to the extent that the Executive substantially replaces any Benefit(s) following the Date of Termination, the Executive shall advise the Corporation forthwith and the Corporation shall be no longer be required to continue any Benefit(s) which has been so replaced by the Executive. 6.6 Release. The parties agree that the provisions of this Article VI are fair and reasonable and that the payments, benefits and entitlements included in Section 6.4 hereof are reasonable estimates of the damages which will be suffered by the Executive in the event of the termination of this Agreement and of his employment with the Corporation and shall not be construed as a penalty. The Executive acknowledges and agrees that the payments pursuant to this Article VI shall be in full satisfaction of all terms of termination of his employment, including termination pay and severance pay pursuant to the Employment Standards Act, 2000 (Ontario), as amended from time to time, the minimum provisions of which are deemed incorporated into this Agreement and which shall prevail to the extent greater. Except as otherwise provided in this Article VI, the Executive shall not be entitled to any further notice of termination, payment in lieu of notice of termination, severance, damages, or any additional compensation whatsoever. As a condition precedent to any payment of benefits pursuant to subsections 6.4(b), (c), or (d) hereof (but provided that the Corporation has complied with its obligations under this Agreement), the Executive shall deliver a full and final release from all actions or claims, known and unknown, in connection with the Executive's employment with the Corporation or the termination thereof in favour of the Corporation, its Affiliates, and all of their respective officers, directors, trustees, shareholders, employees, attorneys, insurers and agents, such release to be in a form satisfactory to the Corporation. No payment or benefits under subsections 6.4(b), (c) or (d) shall be made until such release has been signed and returned by the Executive and any right of revocation under applicable law has expired. 6.7 Resignation as Director and Officer. The Executive covenants and agrees that, upon any termination of this Agreement and of his employment, howsoever caused, he shall forthwith tender his resignation from all offices, directorships and trusteeships then held by the Executive at the Corporation or any of the Affiliates, such resignation to be effective upon the Date of Termination. If the Executive fails to resign as set out above, the Executive will be deemed to have resigned from all such offices, directorships and trusteeships and the Corporation is hereby authorized by the Executive to appoint any person in the Executive's name and on the Executive's behalf to sign any documents or do anything necessary or required to give effect to such resignation. 6.8 Return of Property. All equipment, keys, pass cards, credit cards, software, material, data, written correspondence, memoranda, communication, reports, or other documents or property pertaining to the business of the Corporation used or produced by the Executive in connection with his employment, or in his possession or under his control, shall at all times remain the property of the Corporation. The Executive shall return all property of the Corporation in his possession or under his control in good condition forthwith upon any request by the Corporation or upon any of the termination of this Agreement and of the Executive's employment (regardless of the reason for such termination). -10- ARTICLE VII - CONFIDENTIALITY 7.1 Protection of Confidential Information. While employed by the Corporation and following the termination of this Agreement and the Executive's employment (regardless of the reason for any termination), the Executive shall not, directly or indirectly, in any way use or disclose to any person any Confidential Information except as provided for herein. The Executive agrees and acknowledges that the Confidential Information of the Corporation is the exclusive property of the Corporation to be used exclusively by the Executive to perform the Executive's duties and fulfil his obligations to the Corporation and not for any other reason or purpose. Therefore, the Executive agrees to hold all such Confidential Information in trust for the Corporation and the Executive further confirms and acknowledges his fiduciary duty to use his best efforts to protect the Confidential Information, not to misuse such information, and to protect such Confidential Information from any misuse, misappropriation, harm or interference by others in any manner whatsoever. The Executive agrees to protect the Confidential Information regardless of whether the information was disclosed in verbal, written, electronic, digital, visual or other form, and the Executive hereby agrees to give notice immediately to the Corporation of any unauthorized use or disclosure of Confidential Information of which he becomes aware. The Executive further agrees to assist the Corporation in remedying any such unauthorized use or disclosure of Confidential Information. In the event that the Executive is requested or required to disclose to third parties any Confidential Information or any memoranda, opinions, judgments or recommendations developed from the Confidential Information, the Executive will, prior to disclosing such Confidential Information, provide the Corporation with prompt notice of such request(s) or requirement(s) so that the Corporation may seek appropriate legal protection or waive compliance with the provisions of this Agreement. The Executive will not oppose action by, and will cooperate with the Corporation to obtain legal protection or other reliable assurance that confidential treatment will be accorded the Confidential Information. 7.2 Corporate Opportunities. Any business opportunities related in any way to the business and affairs of the Corporation or any of its Affiliates which become known to the Executive during his employment hereunder shall be fully disclosed and made available to the Corporation and shall not be appropriated by Executive under any circumstance without the written consent of the Corporation. ARTICLE VIII - PROPRIETARY RIGHTS 8.1 Innovations. The Executive understands, acknowledges, and agrees that all Innovations which the Executive, solely or jointly with others, conceives, reduces to practice, creates, derives, develops or makes in the course of or in connection with the Executive's employment with the Corporation shall, to the maximum extent allowed by applicable law, belong solely to the Corporation and all such Innovations which constitute works of authorship shall be "works made in the course of employment" pursuant to the Copyright Act (Canada), as amended and "works for hire" under the Copyright Act (U.S.). The Executive shall promptly disclose to the Corporation in writing any and all Innovations, conceived, reduced to practice, created, derived, developed or made in the course of or otherwise in connection with the Executive's employment with the Corporation, whether alone or with others, and whether during regular working hours or through the use of facilities and properties of the Corporation or otherwise which may in any way relate to the business of the Corporation. -11- 8.2 Assignment of Innovations. The Executive hereby assigns and agrees to assign to the Corporation or such other party as the Corporation may designate all of the Executive's right, title, and interest (including but not limited to patent rights and copyrights) in and to all Innovations and all related patents, patent applications, copyright and copyright applications, and does hereby waive all moral rights, if any, that the Executive may have therein in favour of the Corporation or such other party as the Corporation may designate and, at the Corporation's request, the Executive agrees to provide whatever assistance the Corporation (or such other party, as the case may be) may require to register, record, perfect, or otherwise secure the Corporation's (or such other party's, as the case may be) rights in the Innovations. The Executive hereby irrevocably appoints and designates the Corporation and its duly authorized officers and agents as his agents and attorneys-in-fact to act for and in the Executive's behalf and instead of the Executive, to execute such documents and to take such actions as the Corporation believes are necessary to effect the foregoing assignment. ARTICLE IX - RESTRICTIVE COVENANTS 9.1 Non-Competition: The Executive covenants that he will not (without prior written consent of the Corporation) at any time during the Term, during the consultancy referred to in Section 2.2 above, or during the twenty-four (24) month period following the date the Executive ceases to be an employee of the Corporation or other termination of this Agreement (regardless of who initiated the termination and whether with or without Just Cause), directly or indirectly, anywhere within the Territory, either individually or in partnership, jointly or in conjunction with any other person, firm, association, syndicate, company or corporation, whether as agent, shareholder, employee, consultant, or in any manner whatsoever, engage in, carry on or otherwise be concerned with, be employed by, associated with or in any other manner connected with, or have any interest in, manage, advise, lend money to, guarantee the debts or obligations of, render services or advice to, permit the Executive's name, or any part thereof to be used or employed in connection with, in whole or in part, any business the same or similar to or in competition with that of the Business. 9.2 Non-Solicitation. The Executive covenants that he will not (without prior written consent of the Corporation) at any time during the Term, during the consultancy referred to in Section 2.2 above, or during the twenty-four (24) month period following the date the Executive ceases to be an employee of the Corporation or other termination of this Agreement (regardless of who initiated the termination and whether with or without Just Cause), directly or indirectly, either individually or in partnership, jointly or in conjunction with any other person, firm, association, syndicate, company or corporation, whether as agent, shareholder, employee, consultant, or in any manner whatsoever: (a) solicit or entice away, or endeavour to solicit or entice away from the Corporation, employ, or otherwise engage (as an employee, independent contractor or otherwise) any person who is employed or engaged by the Corporation (including, for greater certainty, any Affiliate) as at the Date of Termination or who was so employed or engaged within the twelve (12) month period preceding such date; or (b) for any purpose competitive with the Business, canvass, solicit or approach for orders, or cause to be canvassed or solicited or approached for orders, or accept -12- any business or patronage from any person or entity who is or which is a customer, client, supplier, licensee or business relation of the Corporation (including, for greater certainty, any Affiliate) as at the Date of Termination or within the twelve (12) month period preceding such date; or (c) induce or attempt to induce any customer, client, supplier, licensee or business relationship of the Corporation (including, for greater certainty, any Affiliate) to cease doing business with the Corporation. 9.3 Passive Investments. Nothing in this Agreement shall prohibit or restrict the Executive from holding or becoming beneficially interested in up to one percent (1%) of any class of securities in any corporation provided that such class of securities are listed on a recognized stock exchange in Canada or the United States. ARTICLE X - REMEDIES 10.1 Remedy. The Executive acknowledges and agrees that he is employed in a fiduciary capacity, with obligations of trust and loyalty owed by him to the Corporation. Accordingly, the Executive agrees that the restrictions in Article VII, Article VIII and Article IX are reasonable in the circumstances of the Executive's employment and that the business and affairs of the Corporation cannot be properly protected from the adverse consequences of the actions of the Executive other than by the restrictions set forth in this Agreement. If any of the restrictions are determined to be unenforceable as going beyond what is reasonable in the circumstances for the protection of the interests of the Corporation but would be valid, for example, if the scope of their time periods or geographic areas were limited, the parties consent to the court making such modifications as may be required and such restrictions shall apply with such modifications as may be necessary to make them valid and effective. 10.2 Injunctions, Etc. The Executive acknowledges and agrees that in the event of a breach of the covenants, provisions and restrictions in Article VII, Article VIII and Article IX by the Executive, the Corporation's remedy in the form of monetary damages will be inadequate. Therefore, the Corporation shall be and is hereby authorized and entitled, in addition to all other rights and remedies available to it, to apply to a court of competent jurisdiction for interim and permanent injunctive relief and an accounting of all profits and benefits arising out of such breach without the necessity of posting a bond or other security. 10.3 Survival. Each and every provision of Article I, Article VII, Article VIII and Article IX, and Article X shall survive the termination of this Agreement or the Executive's employment hereunder (regardless of the reason for such termination). ARTICLE XI - TERMINATION OF 2003 EMPLOYMENT AGREEMENT 11.1 2003 Employment Agreement. The Corporation and the Executive agree that the 2003 Employment Agreement is terminated and of no further force or effect as of this Effective Date. The Executive confirms that he has received all of the payments, benefits, perquisites, allowances and entitlements due or payable to him pursuant to the 2003 Employment Agreement and that the Corporation has no further obligations to the Executive in this regard, including any payments, benefits perquisites, allowances or entitlements which would have arisen in connection with the termination of the 2003 Employment Agreement. -13- ARTICLE XII - GENERAL CONTRACT TERMS 12.1 Recitals. The Corporation and the Executive represent and warrant to each other that the Recitals set out above are true. 12.2 Currency. All amounts payable pursuant to this Agreement are expressed in and shall be paid in Canadian currency. 12.3 Withholding. All amounts paid or payable and all benefits, perquisites, allowances or entitlements provided to the Executive under this Agreement are subject to applicable taxes and withholdings. Accordingly, the Corporation shall be entitled to deduct and withhold from any amount payable to the Executive hereunder such sums that the Corporation is required to withhold pursuant to any federal, provincial, state, local or foreign withholding or other applicable taxes or levies. Notwithstanding the foregoing, the Executive acknowledges and agrees that he is solely responsible for all tax liability arising from his receipt of any payments, benefits, perquisites, allowances or entitlements as set out in this Agreement. 12.4 Rights and Waivers. All rights and remedies of the parties are separate and cumulative, and none of them, whether exercised or not, shall be deemed to be to the exclusion of any other rights or remedies or shall be deemed to limit or prejudice any other legal or equitable rights or remedies which either of the parties may have. 12.5 Waiver. Any purported waiver of any default, breach or non-compliance under this Agreement is not effective unless in writing and signed by the party to be bound by the waiver. No waiver shall be inferred from or implied by any failure to act or delay in acting by a party in respect of any default, breach or non-observance or by anything done or omitted to be done by the other party. The waiver by a party of any default, breach or non-compliance under this Agreement shall not operate as a waiver of that party's rights under this Agreement in respect of any continuing or subsequent default, breach or non-observance (whether of the same or any other nature). 12.6 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of the prohibition or unenforceability and shall be severed from the balance of this Agreement, all without affecting the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 12.7 Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be properly given if personally delivered, delivered by facsimile transmission (with confirmation of receipt) or mailed by prepaid registered mail addressed as follows: to the Corporation at: 207 Queen's Quay West Suite 340 Toronto, ON M5J 1A7 Facsimile No. (416) 203-6207 Attention: Chair -14- the Executive at: 25 Parkwood Avenue Toronto, ON M4V 2W9 or the last address in the Corporation's records or to such other address as the parties may from time to time specify by notice given in accordance herewith. Any notice so given shall be conclusively deemed to have been given or made on the day of delivery, if personally delivered, or if delivered by facsimile transmission or mailed as aforesaid, upon the date shown on the facsimile confirmation of receipt or on the postal return receipt as the date upon which the envelope containing such notice was actually received by the addressee. 12.8 Time of Essence. Time shall be of the essence of this Agreement in all respects. 12.9 Successors and Assigns. This Agreement shall inure to the benefit of, and be binding on, the parties and their respective heirs, administrators, executors, successors and permitted assigns. The Corporation shall have the right to assign this Agreement to any of its Affiliates or to any successor (whether direct or indirect, by purchase, amalgamation, arrangement, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation. The Executive by the Executive's signature hereto expressly consents to such assignment and, provided that such successor agrees to assume and be bound by the terms and conditions of this Agreement, all references to the "Corporation" hereunder shall include its successor. The Executive shall not assign or transfer, whether absolutely, by way of security or otherwise, all or any part of the Executive's rights or obligations under this Agreement without the prior consent of the Corporation, which may be arbitrarily withheld. 12.10 Amendment. No amendment of this Agreement will be effective unless made in writing and signed by the parties. 12.11 Entire Agreement. This Agreement (together with the plans and policies referred to herein) constitutes the entire agreement between the parties pertaining to the subject matter of this Agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written. There are no conditions, warranties, representations or other agreements between the parties in connection with the subject matter of this Agreement (whether oral or written, express or implied, statutory or otherwise) except as specifically set out in this Agreement. 12.12 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable in that Province and shall be treated, in all respects, as an Ontario contract. 12.13 Headings. The division of this Agreement into Sections and the insertion of headings are for convenience or reference only and shall not affect the construction or interpretation of this Agreement. 12.14 Independent Legal Advice. The parties acknowledge that prior to executing this Agreement they have each had the opportunity to obtain independent legal advice and that they -15- fully understand the nature of this Agreement and that they are entering into this Agreement voluntarily. 12.15 Ambiguities. As each party and its legal counsel has participated in the review and revision of this Agreement, any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Agreement. IN WITNESS WHEREOF this Agreement has been signed by the parties hereto under seal with effect on the date set out above. SIGNED, SEALED AND DELIVERED IN THE PRESENCE OF COTT CORPORATION Per: /s/ Colin D. Walker ----------------------------------- Title SVP Per: /s/ John K. Sheppard ----------------------------------- Title President & CEO /s/ J. Pacheco ) /s/ Mark Benadiba - -------------------------------------) -------------------------------- Witness ) MARK BENADIBA l/s EXHIBIT 10.2 SCHEDULE "A" TO THE EXECUTIVE EMPLOYMENT AGREEMENT MADE AS OF NOVEMBER ____, 2005 INDEPENDENT CONTRACTOR AGREEMENT THIS AGREEMENT made with effect as of the 28th of September, 2008. BETWEEN: COTT CORPORATION (hereinafter called "Cott") - and - MARK BENADIBA, of the City of Toronto (hereinafter called the "Contractor") WHEREAS the Contractor has been an employee of Cott pursuant to a fixed term contract, such fixed-term employment contract to expire and employment to cease on September 27, 2008; AND WHEREAS Cott and the Contractor have negotiated an arrangement on the terms and conditions set out herein whereby the Contractor will be available to provide consulting services from time-to-time as requested by and for the benefit of Cott subsequent to the expiry of the fixed-term employment contract and cessation of the Contractor's employment; AND WHEREAS the terms set out in this Agreement shall be effective from September 28, 2008 (the "Effective Date") and the Contractor shall be entitled to payment in accordance with the payment terms set out herein; NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, the parties hereto intending to be legally bound, do hereby agree as follows: 1. CONSULTING SERVICES: Commencing on the Effective Date, Cott agrees to retain the Contractor (who agrees to be retained by Cott) as a consultant to provide such consulting services as requested by and for the benefit of Cott or its affiliates from time-to-time and as more specifically described in Appendix "1" attached hereto (the "Consulting Services"). The Consulting Services shall be performed at Cott's premises or at such other locations in Toronto, Canada, Tampa Bay, Florida, or such other mutually agreeable locations, or for the benefit of such customers, suppliers or organizations as Cott may direct. The Contractor is expected to observe all existing and future rules and regulations as identified to him by Cott. 2. TERM: The Consulting Services and the Contractor's availability therefor shall commence on the Effective Date and shall continue thereafter for a fixed period of two -2- (2) years ending on September 27, 2010 (the "Term"). Unless specifically renewed or extended in writing signed by Cott and the Contractor this Agreement shall be wholly and automatically terminated without further payment obligation from Cott at the expiry of the Term. The Contractor specifically acknowledges that Cott is under no obligation to renew or extend this Agreement. 3. CONSULTING FEES: In order to maintain the Contractor's availability to perform the Consulting Services during the Term, Cott shall pay to the Contractor an annual retainer, inclusive of all taxes, during the Term of Cdn. $125,000.00 (the "Retainer"). The Retainer will include up to 75 business days of performance of the Consulting Services per year during the Term if and when required by Cott. The Retainer shall be paid in equal monthly instalments commencing on the Effective Date and the Contractor shall provide invoices on a monthly basis as a condition of payment. There shall be no other fees due or payable to the Contractor during the Term except as may be specifically agreed in writing and signed by Cott. The Contractor acknowledges that he is not eligible for any vacation pay or employee benefits or perquisites from Cott pursuant to this Agreement. Cott makes no representations as to any minimum level of Consulting Services that will be required of the Contractor nor any minimum level of compensation beyond the agreed rate of the Retainer. 4. BINDING THE CORPORATION: During the Term, the Contractor shall not, without the prior written consent of Cott, enter into any contract or commitment in the name of or on behalf of Cott nor bind Cott in any respect whatsoever. 5. EXPENSES: The parties shall be responsible for their own expenses, except that the Contractor will be reimbursed in accordance with Cott's policy for all business and travel expenses and provided appropriate receipts, invoices, etc., are supplied. Cott will provide administrative support to the extent practicable in order to facilitate the provision of the Consulting Services. 6. INDEPENDENT CONTRACTOR: The parties acknowledge and agree that in performing the Consulting Services, the Contractor is not an employee of Cott but is performing services as an independent contractor. To the extent required by law, the Contractor agrees to register for and include a GST registration number on all invoices and shall report and pay all taxes, employment insurance, Canada Pension Plan or similar contributions as are required by law. The Contractor acknowledges and agrees that Cott shall not be required to make any deductions or contributions (including employment insurance, Canada Pension Plan, workers' compensation, employer health tax or similar levies) in respect of his engagement. The Contractor shall: (a) be responsible to report to the proper authorities and pay all taxes, employment insurance contributions, Canada Pension Plan contributions, employer health tax, workers' compensation premiums, goods and services tax, or any other levies or taxes for which the Contractor may be liable at law in respect of any payments to him from Cott; -3- (b) where required by the Workplace Safety & Insurance Act, register for coverage and maintain all contributions and assessments required on an up-to-date basis, paying all of them as required; and (c) indemnify and save Cott and its directors, officers and employees harmless from all liabilities, damages, fines, interest or penalties which any of them may incur arising out of or relating to any breach by the Contractor of this Agreement (including negligent performance of the Consulting Services) or any failure by the Contractor to make any payments, withholdings, deductions or remittances as may be required by law to be made by him. 7. CONFIDENTIALITY: Unless required by law to do so, the Contractor shall not disclose to any person and shall not use for his own purposes or for any purposes other than for the benefit of Cott any confidential or proprietary information concerning Cott or any such information the Contractor acquired in relation to any of the businesses of Cott (including its affiliates customers, suppliers, or employees). This paragraph 7 shall apply before and subsequent to the termination of this Agreement, howsoever caused, provided that it shall not apply to the extent that such confidential information is publicly available without breach of any obligation by the Contractor hereunder. 8. PROPRIETARY INFORMATION: All reports, research, working papers, data, procedures, computer programs (including source code and documentation), and other material or information produced or created in the performance of the services by the Contractor, or by any agent, employee, or sub-contractor of the Contractor, for the use of Cott, or to fulfill any requirement under this Agreement (all of which are hereafter called the "Property") shall be assigned to and constitute the sole property of Cott and may not be published or released without Cott's prior written consent. The Contractor agrees to deliver the Property and all copies thereof to Cott forthwith upon request. Upon termination of this Agreement, however caused, the Contractor will return to Cott all the Property belonging to Cott, including all confidential information, which may be in his possession. 9. OTHER SERVICES BY CONTRACTOR: The Contractor is free to offer services during the Term to any other person or entity except any time that the Contractor is required to provide Consulting Services to Cott and except to or on behalf of any other person or entity that carries on the business of manufacturing, selling, or distributing non-alcoholic beverages or any other line of business actively carried on by Cott or is in Cott's act of contemplation to the knowledge of the Contractor including, without limitation, the business carried on by any of Cott's affiliates or subsidiaries. 10. ASSIGNMENT: The Contractor agrees that this Agreement may be assigned by Cott to any of its affiliates, provided that such assignee expressly assumes all of Cott's obligations to the Contractor hereunder on a joint and several basis with Cott. Cott agrees that this Agreement may be assigned by the Contractor to any corporation or business entity of which the Contractor is an employee, provided that such assignee expressly assumes all of the Contractor's obligations to Cott hereunder on a joint and several basis with the Contractor, and further, provided that the Contractor shall perform the Consulting Services personally and without sub-contracting any of them. -4- 11. GENERAL: (a) The parties hereto covenant and agree to execute such instruments or other documents and to take such actions as they may deem necessary or desirable to give full effect to the terms and conditions of this Agreement. (b) The parties acknowledge that they have been afforded the opportunity to obtain independent legal advice with respect to this Agreement and they each confirm that they are acting of their own free will and not under duress nor undue influence. (c) This Agreement shall be interpreted and construed in accordance with the laws of the Province of Ontario, to which jurisdiction the parties attorn notwithstanding their current domicile or domicile in the future. (d) This Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, legal personal representatives, successors and assigns. (e) If any provision of this Agreement is held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not in any way be affected nor impaired but shall be enforced in accordance with their terms. (f) Except for those provisions in the Contractor's executive employment agreement with Cott that continue notwithstanding following the termination of such executive employment agreement (in particular, Article I, Article VII, Article VIII, Article IX and Article X thereof), which provisions shall continue in accordance with their terms, this Agreement represents the entire agreement between the parties with respect to the subject matter hereof, namely the terms and conditions of the provision of independent contract/consulting services by the Contractor to the Corporation, and cancels and supersedes any prior understandings and agreements between the parties with respect thereto. There are no other promises, representations nor inducements upon which the parties rely in entering into this Agreement other than as expressly set forth herein. (g) Any notice to be made or given in connection with this Agreement shall be made or given in writing and may be made by personal delivery or registered mail addressed to the recipient as follows: To the Contractor: Mark Benadiba 25 Parkwood Avenue Toronto, ON M4V 1A7 -5- To the Corporation: Cott Corporation 207 Queen's Quay West Suite 340 Toronto, ON M5J 1A7 Attention: Chair or such other address or individual as may be designated by notice by either party to the other. Any notice made or given by personal delivery shall be conclusively deemed to have been given on the day of actual delivery and if made or given by registered mail, on the third day, other than a Saturday, Sunday or statutory holiday in Ontario, following the deposit in the mail. (h) Nothing in this Agreement shall restrict Cott from retaining other independent contractors, consultants or employees to perform the same services or similar services as provided by the Contractor. (i) The parties represent and warrant to each other that the recitals set out above are true. IN WITNESS WHEREOF, the parties have executed this Agreement under seal as of the day and year first above written. COTT CORPORATION Per: /s/ Colin D. Walker ----------------------------------- Name: Colin D. Walker Title: SVP Per: /s/ John K. Sheppard ----------------------------------- Name: John K. Sheppard Title: President & CEO /s/ J. Pacheco ) /s/ Mark Benadiba l/s - -------------------------------------) ---------------------------------------- Witness ) MARK BENADIBA EXHIBIT 10.2 APPENDIX 1 DESCRIPTION OF CONSULTING SERVICES The consulting services shall include: - - meetings with Cott management, customers and suppliers; - - reasonable notice (at least five business days)of meetings to be provided by Cott to the Contractor; - - staff and team meetings - - strategy and planning meetings - - other support to be determined EX-10.21 3 o30438exv10w21.txt EX-10.21 Exhibit 10.21 (COTT LOGO) Cott Corporation 207 Queen's Quay West Suite 340 Toronto, Ontario M5J 1A7 Tel 416 203 3898 Fax 416 203 8171 TINA DELL'AQUILA HAND DELIVERED Wednesday, 25 May 2005 PRIVATE AND CONFIDENTIAL: TINA DELL'AQUILA Dear Tina Further to our recent discussions I am very pleased to be able to confirm to you in writing the following interim changes to your terms and conditions of employment. JOB TITLE: Interim Chief Financial Officer REPORTING MANAGER: John Sheppard-President & Chief Executive Officer EFFECTIVE DATE: Monday 2nd May 2005. SALARY: You will receive an additional payment of $10,000 per month (pro-rated for part months) less appropriate withholdings. Once the CFO is recruited this payment will continue for a further period of 3 months. BONUS: For the year 2005 your bonus eligibility percentage will be 65% of your base salary. TERMINATION: In the event that your employment is terminated by Cott for any reason other than just cause, Cott will provide you with a severance package equal to 18 months base salary, bonus guaranteed at 100% targeted payout, car allowance and benefits (excluding long and short term disability coverage and the out-of country benefits). This payment will be inclusive of any amounts to which you would otherwise be entitled at law and no other compensation or payments will be made to you in such event. In addition, the payment will be subject to you signing a release in form and content satisfactory to Cott at such time. All other existing terms and conditions remain the same. Tina, on a personal note I am looking forward to working more closely with you. Please contact me if you have any queries with regard to the above. In the meantime could you please sign one copy of this amendment to terms and conditions letter and pass back to Sher Zaman - HR. Yours sincerely /s/ John Sheppard - ------------------------------------ John Sheppard President & Chief Executive Officer I agree and accept the above amendments to my terms and conditions of employment. Signature: Dated: May 31, 2005 /s/ Tina Dell'Aquila - ------------------------------------ EXHIBIT 10.21 CONFIDENTIALITY UNDERTAKING TO: Cott Corporation ("Cott"), its subsidiaries, affiliates and associated companies (collectively and individually, the "Corporation") FROM: TINA DELL'AQUILA (the "Executive") FOR GOOD AND VALUABLE CONSIDERATION, including without limitation the Executive's employment with the Corporation and the wages and salary and other benefits received and to be received by the Executive in respect of such employment, and in particular, but without limitation, the grant to the Executive of options to purchase common shares of the Cott on September 14, 1998, the receipt and sufficiency of which consideration the Executive hereby acknowledges: 1. CONFIDENTIALITY The Executive acknowledges that in the course of carrying out, performing and fulfilling his obligations to the Corporation, the Executive has had and will have access to and has been and will be entrusted with information that would reasonably be considered confidential to the Corporation, the disclosure of which to competitors of the Corporation or to the general public, will be highly detrimental to the best interests of the Corporation. Such information ("Confidential Information") includes, without limitation, trade secrets, know-how, marketing plans and techniques, cost and pricing figures, customer lists, supplier lists, software, and information relating to employees, suppliers, customers and persons in contractual relationships with the Corporation. Except as may be required in the course of carrying out his duties to the Corporation, the Executive covenants and agrees that he will not disclose, so long as he is employed by the Corporation or at any time thereafter, any of such Confidential Information to any person, other than to the directors, officers, employees or agents of the Corporation that have a need to know such Confidential Information, nor shall the Executive use or exploit, directly or indirectly, such Confidential Information for any purpose other than for the purposes of the Corporation, nor will he disclose nor use for any purpose, other than for those of the Corporation any other information which he may acquire during his employment with respect to the business and affairs of the Corporation. Notwithstanding all of the foregoing, the Executive shall be entitled to disclose such Confidential Information if required pursuant to a subpoena or order issued by a court, arbitrator or governmental body, agency or official, provided that the Executive shall first have: i. notified the Corporation; ii. consulted with the Corporation on the advisability of taking steps to resist such requirements; and iii. if the disclosure is required or deemed advisable, cooperate with the Corporation in an attempt to obtain an order or other assurance that such Confidential Information will be accorded confidential treatment. 2. INVENTIONS The Executive acknowledges and agrees that all right, title and interest in and to any information, trade secrets, advances, discoveries, improvements, research materials and data bases made or conceived by the Executive prior to or during his employment relating to the business or affairs of the Corporation, shall belong exclusively to the Corporation. The Executive waives any and all moral rights he may have in respect of any such items and acknowledges that all of them shall be considered to be "works for hire" and owned by the Corporation. In connection with the foregoing, the Executive agrees to execute any assignments and/or acknowledgements as may be requested by the Corporation from time to time. 3. CORPORATE OPPORTUNITIES Any business opportunities related to the business of the Corporation which become known to the Executive during his employment must be fully disclosed and made available to the Corporation by the Executive, and the Executive agrees not to take or attempt to take any action if the result would be to divert from the Corporation any opportunity which is within the scope of its business. 4. PROPERTY Upon termination of the Executive's employment, for whatever reason, the Executive will return to the Corporation all property belonging to the Corporation, including without limitation, all Confidential Information, keys, manuals, customer lists, computer software and hardware, correspondence, files, records (howsoever maintained), money, cards and supplies which may be in the Executive's possession or control. 5. GENERAL PROVISIONS (a) The Executive acknowledges and agrees that in the event of a breach of the covenants, provisions and restrictions in this Undertaking, the Corporation's remedy in the form of monetary damages will be inadequate and that the Corporation shall be and is hereby authorized and entitled, in addition to all other rights and remedies available to it, to apply for and obtain from a court of competent jurisdiction interim and permanent injunctive relief and an accounting of all profits and benefits arising out of such breach. (b) The parties acknowledge that the restrictions in this Undertaking are reasonable in all of the circumstances. If any of the restrictions are determined to be unenforceable as going beyond what is reasonable in the circumstances for the protection of the interests of the Corporation but would be valid, for example, if the scope of their time periods or geographic areas were limited, the parties consent to the court making such modifications as may be required and such restrictions shall apply with such modifications as may be necessary to make them valid and effective. (c) Each and every provision of Sections 1, 2, 3, 4 and 5 shall survive the termination of the Executive's employment (regardless of the reason for such termination). (d) This Undertaking will be construed and interpreted in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. EXECUTED THIS 27 DAY OF OCTOBER, 1998. TINA DELL'AQUILA L/S - ------------------------------------ NAME: TINA DELL'AQUILA 2 EX-13.1 4 o30438exv13w1.txt EX-13.1 EXHIBIT 13.1 (PICTURE) (COTT LOGO) THE RIGHT FORMULA 2005 ANNUAL REPORT ABOUT COTT COTT CORPORATION IS ONE OF THE WORLD'S LARGEST RETAILER BRAND BEVERAGE PRODUCERS. COTT MANUFACTURES CARBONATED SOFT DRINKS AND OTHER NON-ALCOHOLIC BEVERAGES FOR LEADING SUPERMARKETS, MASS MERCHANDISERS, DRUG STORES AND CONVENIENCE STORES IN ITS CORE GEOGRAPHIES OF CANADA, THE UNITED STATES, THE UNITED KINGDOM AND MEXICO. THE COMPANY ALSO DEVELOPS FORMULAS AND SELLS CONCENTRATES TO BOTTLERS IN MORE THAN 60 COUNTRIES OUTSIDE NORTH AMERICA WHO PRODUCE THE RC(R) FAMILY OF SOFT DRINKS. COTT'S COMMITMENT TO CUSTOMER SERVICE IS SUPPORTED BY EXCEPTIONAL RESEARCH AND DEVELOPMENT, CONCENTRATE MANUFACTURING, 22 BEVERAGE MANUFACTURING PLANTS AND OVER 3,400 TALENTED EMPLOYEES.
SEGMENTED INFORMATION NORTH AMERICA U.K./EUROPE INTERNATIONAL - --------------------- ------------- ----------- ----------------- (includes Mexico, RC International) SALES BY SEGMENT $1,428 $252 $ 72 (in millions of U.S. dollars) NUMBER OF BEVERAGE 17 4 1 MANUFACTURING PLANTS NUMBER OF 2,497 723 264 EMPLOYEES
(PICTURE) 1 2005 Annual Report COTT CORPORATION FIVE YEAR HISTORICAL NET INCOME SUMMARY (in millions of U.S. dollars, except per share amounts)
YEARS ENDED(1) 05 04 03 02 01 - -------------- -------- -------- -------- -------- -------- Sales $1,755.3 $1,646.3 $1,417.8 $1,198.6 $1,090.1 Gross profit 14.2% 17.2% 19.5% 19.4% 17.2% Operating income(4) $ 73.4 $ 144.7 $ 148.9 $ 122.7 $ 93.3 EBITDA(3, 4) 138.3 200.1 196.0 164.2(2) 135.5 Cash flow from operations, after capital expenditures(2, 3) 53.3 52.4 103.1 67.3 57.6 Income from continuing operations(2) 24.6 78.3 77.4 58.3 39.9 Income from continuing operations per diluted share(2) 0.34 1.09 1.09 0.83 0.58 Working capital 25.3 126.0 45.2 56.9 55.7 Net debt to net debt plus equity(2) 45.9% 41.0% 49.5% 63.1% 65.4%
SALES (in millions of U.S. dollars) 05 $1,755.3 04 1,646.3 03 1,417.8 02 1,198.6 01 1,090.1 EBITDA(2, 3) (in millions of U.S. dollars) 05 $ 138.3 04 200.1 03 196.0 02 164.2 01 135.5 CASH FLOW FROM OPERATIONS AFTER CAPITAL EXPENDITURES(2) (in millions of U.S. dollars) 05 $ 53.3 04 52.4 03 103.1 02 67.3 01 57.6 INCOME FROM CONTINUING OPERATIONS PER DILUTED SHARE(2) (in U.S. dollars) 05 $ 0.34 04 1.09 03 1.09 02 0.83 01 0.58 (1) Any references to 2005, 2004, 2003, 2002 and 2001 correspond to the year-end dates indicated in the financial statements and notes of this Annual Report. (2) The December 28, 2002 results are as reported in 2002 based on U.S. GAAP in effect at that time. We adopted SFAS 145 retroactively in 2003. As a result of SFAS 145, income from continuing operations decreased $9.6 million or $0.14 per diluted share and operating cash flow decreased $10.6 million. For more information about the impact of SFAS 145, see note 3 to the consolidated financial statements of our 2003 Annual Report on Form 10-K filed with various regulatory authorities. (3) As defined in the Annual Report on Form 10-K, on page 16 of this Annual Report. (4) Includes unusual items. 2 COTT CORPORATION 2005 Annual Report LETTER TO SHAREOWNERS JOHN K. SHEPPARD, President & Chief Executive Officer FELLOW SHAREOWNERS In last year's Annual Report, I referred to the "great things in store" for Cott's valued shareowners, our customers and the men and women who are committed to our Company's future success. While the financial results of 2005 were disappointing, we remain focused on the long-term value prospects for our Company and we are confident that we have the right ingredients and the "right formula" to build on the strong foundation that has supported Cott's growth in the past. A great deal changed during 2005, both in the beverage industry and in our busi- ness. Unprecedented cost increases for ingredients and packaging put pressure on our margins and contributed to the challenges we experienced in meeting our financial expectations, despite our moves to recover those costs through pricing. While we grew total sales in the year, the continued shift in consumption toward bottled water and non-carbonated beverages also affected our earnings. In addition, higher fixed costs resulting from the capacity we added to our system to support future growth impacted our profitability. (PHOTO OF JOHN K. SHEPPARD) 3 2005 Annual Report COTT CORPORATION "WE REMAIN FOCUSED ON THE LONG-TERM VALUE PROSPECTS FOR OUR COMPANY AND WE ARE CONFIDENT THAT WE HAVE THE RIGHT INGREDIENTS AND THE "RIGHT FORMULA" TO BUILD ON THE STRONG FOUNDATION THAT HAS SUPPORTED COTT'S GROWTH IN THE PAST." Our business environment has changed and we must change with it. We began taking steps in 2005 that I believe are critical for our future. - - We realigned our Canadian and U.S. operations on a North American basis to leverage management expertise and supply chain efficiencies. - - We made changes in leadership throughout the organization that have brought us focus, continuity and experience to manage through our current challenges and leverage the opportunities ahead of us. - - In North America, we increased prices and laid the foundation for cost recovery pricing in the future. - - We made significant progress in implementing an enterprise resource planning tool, our core business management system that standardizes supply chain, finance and administrative systems in support of improved efficiencies and more effective, timely decision-making. These actions have contributed to a renewed sense of purpose and passion to bring about positive change for Cott. There will be a period of transition as we reposition our Company for longer-term profitability, but each and every member of my executive team is personally committed to taking the right actions and making the tough decisions necessary to help ensure Cott remains a leader in retailer brand beverages for years to come. In North America, Mark Benadiba's many years of Cott experience have allowed him to make great strides in driving a new approach to operations. He has empowered the men and women in our facilities to identify and implement the cost-saving opportunities they discover on the front lines. With my support, Mark has pushed forward tough decisions to close operations and take other significant steps to reduce costs throughout the organization. John Dennehy has streamlined the North American Sales and Marketing organization and opened a new chapter in Cott's relationships with our key customers, ensuring that we share a common vision of the future and are true partners in building the value of their retailer brand beverage programs. Jason Nichol continues to play a critical role overseeing business development and customer service for Wal-Mart. As part of our North American realignment, Jason now reports directly to me, reflecting the importance we place on servicing our largest customer. In the U.K. and Europe, Andy Murfin and his team continue to grow our business. Full-year 2005 sales for the division were up 30% and 11% when the impact of acquisitions and foreign exchange are excluded. While our purchase of Macaw Soft Drinks is in the final stages of review by the U.K. Competition Commission, we expect it to be approved and we plan to leverage Macaw's manufacturing capability and growth potential in the still, aseptic and dilute-to-taste beverage segments. Colin Walker has recently added responsibility for our business in Mexico and RC Cola International to his Corporate Resources role. While a small part of our total business, these operations delivered strong top and bottom line growth in 2005. In particular, Mexico continues to perform well with sales up 25% over 2004. As the concept of retailer brands takes hold in Mexico, we clearly see the long-term growth potential for Cott in such markets. I am grateful for the continued expertise and support of Mark Halperin, our General Counsel and Secretary. Mark's combination of business acumen and legal expertise contributes to the success of our businesses on a daily basis. As well, his leadership in our corporate governance has been critical throughout the past year. 4 COTT CORPORATION 2005 Annual Report FROM LEFT TO RIGHT STARTING AT THE TOP: (PICTURE OF MARK BENADIBA AND JOHN DENNEHY) MARK BENADIBA, Executive Vice President, North American Operations JOHN DENNEHY, Vice President, North American Sales & Marketing (PICTURE OF MARK R. HALPERIN) MARK R. HALPERIN, Senior Vice President, General Counsel & Secretary (PICTURE OF B. CLYDE PRESLAR) B. CLYDE PRESLAR, Executive Vice President & Chief Financial Officer (PICTURE OF JASON NICHOL) JASON NICHOL, Vice President, Business Development Wal-Mart (PICTURE OF ANDREW J. MURFIN, JOHN K. SHEPPARD AND COLIN D. WALKER) ANDREW J. MURFIN, Senior Vice President & Managing Director, Cott U.K. and Europe JOHN K. SHEPPARD, President & Chief Executive Officer COLIN D. WALKER, Senior Vice President, Corporate Resources 5 2005 Annual Report COTT CORPORATION "TO POSITION OUR COMPANY FOR PROFITABLE GROWTH IN THE YEARS TO COME WE MUST FOCUS OUR EFFORTS ON DRIVING IMPROVED MARGIN PERFORMANCE AND MAKING STRATEGIC ENTRIES INTO FAST-GROWING NON-CARBONATED BEVERAGE CATEGORIES." And finally, in August we welcomed Clyde Preslar as our new Chief Financial Officer. Clyde's many years of experience as CFO of Lance Inc., a U.S.-based manufacturer of both branded and retailer branded snack foods, have made him a superb addition to the executive team. His grasp of our business and his financial leadership will help steer us through this transition year and toward longer-term profitability. Together, we have set clear and simple priorities for the next three years. To position our Company for profitable growth in the future we must focus our efforts on driving improved margin performance and making strategic entries into fast-growing non-carbonated beverage categories. Details of the actions we intend to take to deliver on these priorities can be found in the pages to follow. These are straightforward goals that every member of the Cott team is focused on achieving. We know we must execute flawlessly, without excuses. We also know that we have a solid foundation to support us, a foundation built from years of servicing our customers with quality products at exceptional value. Cott continues to enjoy a leading share of retailer brand carbonated soft drink (CSD) sales in each of our key geographies - Canada, the U.S., the U.K. and Mexico - and retailer brands continue to gain momentum around the world. Globally, retailer brands grew at more than twice the rate of national brands across a wide range of grocery categories from 2004 to 2005. Last year, North American retailer brands held a 16% share of the grocery segment, still well below the U.K./Europe at 23%. However, the retailer brand growth rate in North America was 7%, outpacing the U.K./Europe at 4% and underlining our confidence in the future prospects for Cott. These trends were reflected in our own 2005 share performance in the U.S., where Cott maintained its CSD share while the total category declined. Our U.S. share has continued to grow into early 2006, despite a highly competitive environment. As we continue to deliver flavor and packaging innovation for our CSD products, we're confident in our ability to grow our core business while we pursue longer-term strategic penetration in non-carbonated beverage categories. As a fellow shareowner, I understand that results speak louder than words. The Cott management team has a clear understanding of the challenges it faces and what it will take to deliver results. Through the coming year, you will see us take the actions to drive long-term value creation for our shareowners. The formula is clear: - - Outstanding research and development that produces quality products and beverage innovation. - - The operational expertise, manufacturing facilities and infrastructure to support customer needs. - - A strong and experienced executive team leading a talented workforce. - - A commitment to our customers and the growth of their retailer brand programs. - - A sound strategic plan for the future. We have the right formula at the right time for our customers, our employees and, most importantly, our valued shareowners. /s/ John K. Sheppard - ------------------------------------- John K. Sheppard President & Chief Executive Officer 6 COTT CORPORATION 2005 Annual Report 2005 HIGHLIGHTS IMPORTANT STRATEGIC ACCOMPLISHMENTS DURING 2005 REFLECT THE UNDERLYING STRENGTH OF OUR BUSINESS AND OUR CONTINUING PROGRESS IN POSITIONING COTT FOR LONGER-TERM GROWTH AND PROFITABILITY. SERVICE TO OUR CUSTOMERS We put our customers at the center of everything we do, recognizing that our products play a significant role in the success of their overall retailer brand programs. In 2005, we were rewarded for our customer-centric focus with two notable recognitions. Supervalu Inc., a leader in the grocery retailing industry, named Cott Beverages USA as its "Supplier of the Year," acknowledging the positive impact of the resources and commitment we offer our customers. In addition, for the fifth consecutive year, Cott was named "Category Colonel" for retailer brand soft drinks by PLBuyers Magazine. The award recognizes manu- facturers who "are committed to quality and the establishment of true partnerships with retailers." REALIGNING NORTH AMERICA In September we announced a realignment of our Canadian and U.S. business units, consolidating into one streamlined North American operation. We undertook this important strategic initiative to leverage management strengths, create opportunities for supply chain efficiencies, and improve alignment with our customers' needs. The result is a new and more integrated approach to planning, sales, marketing, purchasing and operations across our entire North American business. We are taking costs out of our system and building the foundation to optimize our assets for future growth. (PICTURE) PRODUCTION AND WAREHOUSING in our new Fort Worth facility. STARTING OUT RIGHT In June, we began shipping from our new 550,000 square foot, state-of-the-art manufacturing facility in Fort Worth, Texas. With the latest technology and high-speed manufacturing capabilities, the plant produced 6.3 million cases in 2005, exceeding our start-up expectations and providing the foundation for accelerating our planned volume to 32 million cases in 2006. The addition of Fort Worth to our North American operations gives us the flexibility and capacity to better service our customers' needs. As the beverage industry evolves, our newest plant will help us continue to compete successfully well into the future. 7 2005 Annual Report COTT CORPORATION (PICTURE) ALL THE RAVE, our new energy drinks hit the Canadian market. ENERGIZED For the beverage industry as a whole, 2005 was marked by continued shifts in consumer trends towards alternative categories such as bottled water, sport beverages and energy drinks. In Canada, we demonstrated Cott's ability to react quickly to consumer trends and changing customer demands when a change in government regulations opened the door to a new opportunity. With a history of success in energy drinks in the U.K., we were able to accurately assess the opportunity and within weeks of the new regulations, our RED RAVE(TM) and red rain(R) products were being shipped nationwide, supported with retail sampling and couponing, and opening doors to new business in Canada. (PICTURE) NEW BOTTLE BLOWING MANUFACTURING EQUIPMENT increases flexibility and efficiency. RIGHT ON TRACK For the past three years, our U.K. business has delivered steady growth, benefiting from continuing retailer consolidation and consumers that have embraced retailer brand products. The growth trend continued in 2005 as the U.K. posted strong gains in both sales and profit from our two manufacturing facilities. Investment in a new still drinks production line and new bottle blowing equipment in the Kegworth plant expanded our capabilities in isotonics, iced teas and juice drinks and improved efficiency in small bottle packages. The investment contributed to volume growth for our U.K. division in 2005 coming from new customers and expanded business with existing customers, for both carbonated soft drinks and non-carbonated beverages. In August, we completed the largest acquisition in the Company's history with the purchase of Macaw (Soft Drinks) Ltd. At the time of the acquisition, Macaw was the largest privately-owned manufacturer of retailer brand soft drinks in the U.K. Its capabilities include aseptic production that will enhance our levels of innovation and service to customers. (PICTURE) WE'RE MANAGING THE BUSINESS more efficiently with our enterprise resource planning system. THE RIGHT INFORMATION Significant progress was made during 2005 on the rollout of our enterprise resource planning (ERP) system. Our ERP system is our core business management system that supports supply chain, finance and administrative functions on a single common platform. This transition requires disciplined focus and execution. By the end of 2005, we had completed 90% of the implementation. The benefits of improved process efficiency, data analysis and the elimination of non-value added activities will have a long-term positive impact on our business. 8 COTT CORPORATION 2005 Annual Report THE RIGHT FOCUS (PICTURE) STATE-OF-THE-ART MANUFACTURING in Forth Worth. AT COTT, OUR VISION IS TO BE THE LEADING RETAILER BRAND BEVERAGE SUPPLIER IN EACH OF OUR MARKETS AND KEY PRODUCT SEGMENTS. WE HAVE SET CLEAR AND SIMPLE PRIORITIES THAT PUT US ON THE RIGHT TRACK TO ACHIEVE THAT VISION. IMPROVE MARGINS 1 IMPLEMENT STRATEGIC PRICING TO RECOVER COSTS 2 LEVERAGE NORTH AMERICAN STRUCTURE FOR IMPROVED SUPPLY CHAIN EFFICIENCIES 3 OPTIMIZE OUR ASSET BASE 4 REDUCE FIXED COSTS AND OVERHEAD EXPENSES 5 IMPROVE WATER PROFITABILITY 9 2005 Annual Report COTT CORPORATION (PICTURE) WAREHOUSE storage of PET bottles. (PICTURE) FRUIT REFRESHERS(TM), our line of calorie-free, flavored waters. (PICTURE) READY FOR RETAIL, products are loaded directly onto our customers' trucks. POSITION COTT FOR GROWTH IN NON-CARBONATED BEVERAGES 1 STRATEGICALLY INCREASE OUR PENETRATION IN FAST-GROWING SEGMENTS SUCH AS ISOTONICS, ENHANCED OR FORTIFIED DRINKS, NEW AGE, ENERGY AND JUICE-BASED BEVERAGES 2 PURSUE OPPORTUNITIES THROUGH JOINT-VENTURES, CO-PACKING AGREEMENTS AND ACQUISITIONS 3 FOCUS RESEARCH AND DEVELOPMENT ON FAST-GROWING BEVERAGE SEGMENTS 4 STRENGTHEN KEY CUSTOMER RELATIONSHIPS THROUGH CATEGORY MANAGEMENT TO IDENTIFY EMERGING TRENDS 10 COTT CORPORATION 2005 Annual Report ACTIVE GOVERNANCE YOUR BOARD OF DIRECTORS IS COMMITTED TO STRONG GOVERNANCE PRACTICES AND THE ACCOUNTABILITY AND TRANSPARENCY THAT ALLOW US TO REPRESENT THE INTERESTS OF ALL SHAREOWNERS. FELLOW SHAREOWNERS 2005 was a year that tested your Company, your Board and your investment in Cott Corporation. Earnings did not meet our expectations, despite another year of record sales. Throughout this difficult year, the Cott Board of Directors played an active role in reviewing the challenges facing the Company. While the industry grappled with rising commodity costs and shifting consumer trends, Cott faced the added challenge of increased fixed costs as a result of adding capacity and delays in passing through price increases to cover costs. Your Board of Directors is committed to strong governance practices and the accountability and transparency that allow us to represent the interests of all shareowners. During 2005, the Board held eight meetings in which it reviewed management's progress in addressing the Company's challenges and developing the plans necessary to enhance shareowner value over the long term. In addition, three standing committees of the Board - the Audit Committee, Governance Committee and Human Resources and Compensation Committee - were active throughout the year in fulfilling their specific mandates and ensuring that Cott's actions were consistent with the policies and practices of an effective public company. John Sheppard and his team have identified two key priorities for Cott: improving margin performance and positioning the Company for growth in non-carbonated beverage segments. I am confident this is the right focus for your Company at this time. I want to take this opportunity to thank the Directors for their work during 2005. They have consistently represented your interests and they continue to work with management to ensure that the expectations for Cott's future are realistic, achievable and will result in long-term value creation for our fellow shareowners. /s/ Frank E. Weise III - ------------------------------------- Frank E. Weise III Chairman 11 2005 Annual Report COTT CORPORATION (PHOTO OF COLIN J. ADAIR) COLIN J. ADAIR, First Vice President and Investment Advisor at CIBC World Markets Inc. Board Member since 1986. (PHOTO OF W. JOHN BENNETT) W. JOHN BENNETT, Chairman and Trustee of Benvest New Look Income Fund. Board Member since 1998. (PHOTO OF SERGE GOUIN) SERGE GOUIN, Lead Independent Director. Chairman of Quebecor Media Inc. Board Member since 1986. (PHOTO OF STEPHEN H. HALPERIN) STEPHEN H. HALPERIN, Partner and Executive Committee member at Goodmans LLP. Board Member since 1992. (PHOTO OF BETTY JANE HESS) BETTY JANE HESS, Corporate Director. Board Member since 2004. (PHOTO OF PHILIP B. LIVINGSTON) PHILIP B. LIVINGSTON, Chief Financial Officer of Duff & Phelps LLC. Board Member since 2003. (PHOTO OF CHRISTINE A. MAGEE) CHRISTINE A. MAGEE, President of Sleep Country Canada Inc. Board Member since 2002. (PHOTO OF ANDREW PROZES) ANDREW PROZES, Global Chief Executive Officer of LexisNexis Group. Board Member since 2005. (PHOTO OF JOHN K. SHEPPARD) JOHN K. SHEPPARD, President & Chief Executive Officer of Cott. Board Member since 2003. (PHOTO OF DONALD G. WATT) DONALD G. WATT, Chairman and Chief Executive Officer of DW + Partners Inc. Board Member since 1992. (PHOTO OF FRANK E. WEISE III) FRANK E. WEISE III, Chairman of the Board. Operating Partner and Managing Director of J.W. Childs Associates, L.P. Board Member since 1998. INVESTOR INFORMATION PLANTS RESEARCH AND DEVELOPMENT CENTER Columbus, Georgia, U.S.A. CORPORATE HEADQUARTERS BLAIRSVILLE, Georgia, U.S.A. INVESTOR INFORMATION 207 Queen's Quay West, CALGARY, Alberta, Canada Tel: (416) 203-5662 Suite 340 (800) 793-5662 Toronto, Ontario COLUMBUS, Georgia, U.S.A. E-mail: investor_relations@cott.com M5J 1A7 (Concentrate Manufacturing) Website: www.cott.com Tel: (416) 203-3898 Fax:(416) 203-8171 CONCORDVILLE, Pennsylvania, U.S.A. PUBLICATIONS For copies of the Annual Report REGISTERED OFFICE ELIZABETHTOWN, Kentucky, U.S.A. or the SEC Form 10-K, visit 333 Avro Avenue our website, or contact us Pointe-Claire, Quebec FORT WORTH, Texas, U.S.A. at (800) 793-5662. H9R 5W3 KEGWORTH, Derbyshire, U.K. QUARTERLY BUSINESS RESULTS/COTT NEWS CANADIAN OFFICE Current investor information is 6525 Viscount Road MISSISSAUGA, Ontario, Canada available on our website at Mississauga, Ontario www.cott.com. L4V 1H6 NELSON, Lancashire, U.K. (Aseptic Manufacturing) TRANSFER AGENT & REGISTRAR MEXICO OFFICE (Carbonate and Dilute-to-Taste Computershare Trust Company Calle de los Palos #35 Manufacturing) of Canada San Pablo Xochimehuacan Puebla, Puebla POINTE-CLAIRE, Quebec, Canada AUDITORS C.P. 72014 PricewaterhouseCoopers LLP PONTEFRACT, West Yorkshire, U.K. RC COLA INTERNATIONAL ANNUAL GENERAL MEETING 1000 10th Avenue PUEBLA, Puebla, Mexico Columbus, Georgia Cott's 2006 Annual Meeting 31901 REVELSTOKE, British Columbia, Canada takes place on Thursday, April 20, 2006 at 8:30 a.m. UNITED KINGDOM & EUROPE OFFICE SAN ANTONIO, Texas, U.S.A. at the Glenn Gould Studio, Citrus Grove, Side Ley Canadian Broadcasting Centre, Kegworth, Derbyshire SAN BERNARDINO, California, U.S.A. 250 Front Street West, DE74 2FJ Toronto, Ontario, Canada. SCOUDOUC, New Brunswick, Canada UNITED STATES OFFICE STOCK EXCHANGE LISTINGS 4211 W. Boy Scout Boulevard SIKESTON, Missouri, U.S.A. Suite 290 (COT LISTED NYSE(R) LOGO) Tampa, Florida ST. LOUIS, Missouri, U.S.A. 33607 (BCB LISTED TSX LOGO) SURREY, British Columbia, Canada La version francaise est TAMPA, Florida, U.S.A. disponsible sur demande. WILSON, North Carolina, U.S.A. All trademarks are owned or licensed by Cott or WYOMISSING, Pennsylvania, U.S.A. its customers.
(PICTURE) OUR VALUES CUSTOMER-CENTRIC FOCUS Aligning all company resources to those of our customers (internal or external) in an effort to meet and exceed their expectations. DIVERSITY A unique business opportunity where we celebrate our differences, offer fresh approaches and new ideas and stand united by the commonality of Cott Values and Vision. CONTINUOUS IMPROVEMENT Quality and performance that improves customer satisfaction and the way we work together. Continuous Improvement is an integral part of everything we do. ACCOUNTABILITY AND INTEGRITY Taking ownership of our actions and decisions. Doing the right thing and adding value. (COTT LOGO) WWW.COTT.COM EX-14.1 5 o30438exv14w1.txt EX-14.1 EXHIBIT 14.1 POLICIES & PROCEDURES CODE OF BUSINESS CONDUCT AND ETHICS POLICY #1.04 Last Revised March 3, 2006 - -------------------------------------------------------------------------------- PURPOSE: Cott Corporation is committed to conducting business in a manner that follows the highest ethical standards and complies with all applicable laws. In order to help ensure that this commitment is met by Cott Corporation and all its subsidiaries (collectively, "Cott" or the "Company"), this Code of Business Conduct and Ethics (the "Code") has been adopted by Cott. This Code has been designed to help guide activities and behaviors in the conduct of the Company's business or as a representative of the Company. However, a code of conduct cannot be all encompassing and address every possible situation that might arise, nor can it replace the honest and ethical behavior of thoughtful directors, officers and employees. One must use good judgment at all times, and always act not only in the best interests of Cott but also in an honest and ethical manner. SCOPE: This Code applies to Cott's directors, officers and employees with respect to their dealings with or on behalf of Cott. Officers and employees will be collectively referred to in this Code as "Employees." All Employees are responsible for conducting themselves in compliance with this Code. In addition, all members of Cott's Board of Directors, in regard to their Cott duties, are responsible for conducting themselves in compliance with the provisions of this Code that apply to them. Some of the topics of this Code are addressed with more specificity in certain of Cott's other policies. Moreover, this Code does not address every policy applicable to Employees and directors of Cott. This Code is intended to contain general standards for conducting business as an Employee or director of Cott. Employees and directors are reminded of their obligations under Cott's other policies and should review these policies for more specific guidance. POLICY: 1. COMPLIANCE WITH LAWS Cott's business activities shall be conducted in compliance with all applicable laws and regulations (including insider trading laws as well as the rules of stock exchanges on which the Company's shares are traded), whether local, provincial, state, federal or foreign (collectively, as applicable, "laws"). In all situations, including those where there are no applicable legal principles or where there are unclear or conflicting laws, Cott's business will be conducted in such a manner that will not embarrass or pose a risk to the Company should the full facts be disclosed. In general, ignorance of the law is not a defence should such laws be contravened. Accordingly, Employees and directors must be aware of laws governing Cott and must ensure that their conduct is in compliance with all such laws. Guidance on specific questions can be obtained from Cott's General Counsel. POLICIES & PROCEDURES CODE OF BUSINESS CONDUCT AND ETHICS POLICY #1.04 Last Revised March 3, 2006 Page 2 of 8 The following are some general examples of laws and policies that must be observed. This list is not all encompassing. (A) FAIR COMPETITION -- Cott believes that unrestricted honest competition is essential to the operation of the free enterprise system. Collusive, anti-competitive discussions and/or agreements with competitors and others are prohibited. These include: agreements to fix prices or allocate or divide markets or customers; boycotting or refusing to deal with customers or suppliers, without good reason; or engaging in any other behavior that unlawfully restrains competition. In addition, discussing or exchanging information that is competitively sensitive, in particular with competitors, is prohibited. Examples of this type of information include prices, costs, marketing plans or studies and production plans and capabilities. Employees should consult first with Cott's General Counsel prior to having any discussion with a competitor. If any competitor initiates a discussion involving any of these subjects, the Employee must refuse to participate in the discussion and report the matter to Cott's General Counsel. Employees who participate in trade associations, or who have other routine contacts with competitors, must be especially careful not to divulge this type of information. Except in the case of the President and CEO, whose participation in such associations is accepted in their discretion, participation in such associations must have the prior approval of the following, as applicable: DIVISIONAL EMPLOYEES: A member of the Executive Council. CORPORATE EMPLOYEES: SVP Corporate Resources; General Counsel; CFO; or President & CEO EXECUTIVE COUNCIL: President & CEO Such approvals should be in writing and a copy sent to the applicable human resources department to be maintained with the employee's personnel file. Employees and directors should deal fairly with the Company's customers, suppliers, competitors, security holders and other employees, as applicable. No one should take unfair advantage of any others through misrepresentation or unfair business practices. (B) IMPROPER PAYMENTS / GIFTS AND GRATUITIES -- Fees, commissions, payments, gifts and gratuities of any kind shall be paid or received only for clearly stated, legitimate and lawful business purposes. Bribes, kickbacks, extraordinary commissions, payments or other consideration for the purchase of favored treatment by governments or government officials, other business organizations or individuals, including payments made by or to immediate family members (collectively, the "Improper Payments") are strictly prohibited. Employees may receive gifts, favors and services on behalf of Cott provided all of the following criteria are met: i) they cannot be Improper Payments; ii) they are occasionally received and are of a relatively minor value (under $100.00 (US)); POLICIES & PROCEDURES CODE OF BUSINESS CONDUCT AND ETHICS POLICY #1.04 Last Revised March 3, 2006 Page 3 of 8 iii) they are not paid in cash, bonds or negotiable securities; iv) they are made as a matter of general and accepted ethical business practice and are made in the ordinary course of business; and v) they do not contravene any laws or any known policies relating to gifts, favors and services of the provider. Employees may also accept an occasional meal or entertainment in connection with furthering Cott's interest, whether or not of nominal value as described above, but only if it would be appropriate to reciprocate in the future or if refusal would be discourteous and so long as the other criteria set forth above in (i) through (v) are satisfied. In addition, if it would be discourteous to refuse a gift that is not of a nominal amount, and which otherwise satisfies all of the criteria set forth above, it may be accepted but only if it is accepted on behalf of a recognized charity and is donated to that charity. Employees may furnish gifts, favors and services on behalf of Cott provided all of the following criteria are met: a) they cannot be Improper Payments; b) they are of relatively minor value (under $100.00 (US)); c) they are not paid in cash, bonds or negotiable securities; d) they are made as a matter of general and accepted ethical business practice and in the ordinary course of business; and e) they do not contravene any laws or any known policies relating to gifts, favors, services and entertainment of the recipient. Employees may also furnish an occasional meal or entertainment in connection with furthering Cott's interest, whether or not of nominal value as described above, so long as the other criteria set forth above in (a) through (e) are satisfied. (C) SUPPLIERS AND CONTRACTORS -- The selection of suppliers of goods or services to Cott will be based on objective criteria, including quality, price, service and overall benefit to Cott. Payments by Cott for goods and services shall be supported in all cases by invoices or other appropriate documentation reflecting the actual purpose of the payments. Payments may only be made to the people or businesses that supplied the goods or services, unless the contrary has been approved in advance pursuant to Section 5 of this Code. (D) DISCRIMINATION AND EQUAL OPPORTUNITY -- Cott believes that diversity among its Employees is critical to its success. Therefore, Cott seeks to recruit, develop and retain the most talented people from a diverse candidate pool. Advancement within Cott is based on merit. Cott is fully committed to equal employment opportunity and compliance with the letter and spirit of the full range of fair employment practices and non-discrimination laws in the countries in which it does business. This commitment applies to all stages of the employment relationship, including recruiting, hiring, training, evaluation, promotion, compensation and benefits, POLICIES & PROCEDURES CODE OF BUSINESS CONDUCT AND ETHICS POLICY #1.04 Last Revised March 3, 2006 Page 4 of 8 transfer, corrective action, discipline and termination. Cott also prohibits sexual and all other forms of personal harassment (including intimidation and offensive or abusive behavior) in the workplace. (E) BOOKS AND RECORDS -- Cott's books and records must reflect all business transactions in a complete, accurate and timely manner. Employees are responsible and accountable for the accurate reporting of all transactions in which they are directly involved. Accurate and reliable records are essential for Cott to meet its legal and financial obligations and to manage its business. Falsification of the Company's records in any form is a violation of this Code. No undisclosed or unrecorded funds or assets are permissible. No fund or transaction is to be concealed from management or Cott's internal or external auditors. Any questions in this regard should be directed to Cott's Chief Financial Officer or General Counsel. 2. CONFLICTS OF INTEREST A conflict of interest arises when one's personal or financial interest differs from his or her responsibilities to Cott. A conflict of interest could arise when an Employee or director takes actions or has interests that may make it difficult to perform Company duties in the best interests of the Company. It is impossible to catalogue all of the potential conflict of interest situations that may arise. Employees and directors are expected to use good judgment and common sense to avoid not only actual conflicts of interest but also the appearance of conflicts of interest. What follows are some examples of certain conflict of interest situations that must be avoided, unless special permission has been obtained in advance pursuant to Section 5 of this Code. This list is not all encompassing. (A) OUTSIDE ACTIVITIES/DIRECTORS -- A director may face a conflict of interest when he or she takes actions or has interests that may make it difficult to perform the director's duties for the Company objectively and effectively. Conflicts of interest may arise when a director, or a member of the director's immediate family, receives improper benefits because of the director's position with the Company. Except as authorized by Cott's Board of Directors, no outside director shall have a direct economic relationship with the Company. Company loans to, or guarantees of obligations of, directors and executive officers, as well as their immediate family members are prohibited. Any proposed affiliation with a for-profit enterprise or any proposed transaction, which has any relationship or involvement with Cott, and in which a director has a direct economic or beneficial interest shall be subject to review by the Corporate Governance Committee of the Board for potential conflicts. Since conflicts may not always be clear, the directors shall report any potential conflicts to, and are encouraged generally to consult with, the General Counsel. The General Counsel will then consult with the Chairman of the Board, or the full Board, as necessary. In addition, members of Cott's Board of Directors are expected to disclose to their fellow directors any personal interest they may have in a transaction that is brought to the Board for consideration and to excuse themselves from participation in any decision in which there is a conflict between their personal interests and the interests of Cott. POLICIES & PROCEDURES CODE OF BUSINESS CONDUCT AND ETHICS POLICY #1.04 Last Revised March 3, 2006 Page 5 of 8 (B) OUTSIDE ACTIVITIES/EMPLOYEES -- Every Employee has a duty to be free of outside interests, activities and influences that might: i) impair the exercise of an Employee's independent judgment, responsibility, initiative or efficiency in acting for Cott; or ii) expose an Employee and/or Cott to legal liability or public criticism; or iii) otherwise be harmful or detrimental to Cott's activities or reputation. The Employee's duty to remain free of conflicts of interest is a continuing obligation and Employees are to act in accordance with the highest standards of fairness, integrity and equity towards Cott. It must be recognized that interests or relationships that may have been unquestionably free of any source of potential conflict at one time may become sources of potential conflict as a result of changes completely independent of Cott. Cott expects that it shall receive from its Employees sufficient commitment and energies to ensure the satisfactory fulfillment of the Employee's job responsibilities. Cott does not object to Employees accepting a second job as long as the following conditions are met: (A) the second job does not interfere with the Employee's scheduled work hours, including assigned overtime or on-call duty; (B) the second job does not negatively affect the Employee's ability to perform the job requirements of the position adequately; and (C) the second job does not represent a conflict of interest. An Employee may be asked to accept a position as an officer or director of an outside business organization which does not represent a conflict of interest. Acceptance of such a position requires prior written approval pursuant to Section 5 of this Code. (C) COMPANY RESOURCES -- Employees and directors are prohibited from (i) taking for themselves personally business opportunities that are discovered through the use of Cott property, information or position; (ii) using Cott property, information or position for improper personal gain; and (iii) competing with Cott. All Employees and directors should protect the Company's assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company's profitability. All Company assets should be used for legitimate business purposes, and only incidentally (e.g. occasional personal phone calls) for personal use, and then otherwise strictly in accordance with this Code. Employees and directors are responsible for safeguarding and for proper utilization of the Company's tangible and intangible assets and those of its customers and suppliers under their control. Assets include cash, securities, business plans, customer information, supplier information, intellectual property, physical property (including telephones and computers) and services. Misappropriation of the Company's assets is a breach of duty to Cott and may constitute an act of fraud against the Company. Similarly, carelessness or waste in regard to the Company's assets is also a breach of a duty to Cott. (D) CONFLICTS AND BENEFICIAL INTEREST IN OUTSIDE CONCERNS -- Employees should notify the General Counsel and Senior Vice President, Corporate Resources if either they or members of their immediate families have POLICIES & PROCEDURES CODE OF BUSINESS CONDUCT AND ETHICS POLICY #1.04 Last Revised March 3, 2006 Page 6 of 8 or propose to have a direct or indirect personal interest in the business of a supplier, contractor, customer, competitor, joint venture partner or service provider of or to Cott or a company in which Cott has an equity or other investment. If the General Counsel or Senior Vice President, Corporate Resources determines that such relationship might give rise to a conflict of interest of the type described in Section 2 of this Code, then an approval in accordance with Section 5 of this Code shall be required. Such direct and indirect interests would include: i) the acquisition of a material equity or debt interest in any such entity; (any interest in such an entity, including a non-material interest, should be limited to those securities which are listed on a recognized securities exchange or those which are customarily bought and sold on a regulated over-the-counter market. In addition, such interests should be held as passive personal investments only and be limited to an amount a prudent individual would deem to be immaterial (in other words, never more than 1% of an entity's outstanding securities of the same class); or ii) a partnership interest, profit-sharing arrangement or creditor/debtor relationship with such concern; or iii) serving in any capacity including agent, representative, consultant, director, officer or employee for such concern; or iv) acceptance of a loan, advance, or other benefit from such concern other than loans or advances from banks or other lending institutions provided on a commercial basis. For purposes of this Code, "immediate family member" is defined as an employee's spouse (including common law), parents (including step), children (including step), brother/sister (including step), grandparents, grandchildren, brothers-in-law, sisters-in-law, father-in-law and mother-in-law. 3. CONFIDENTIAL AND INSIDE INFORMATION Employees and directors will, during the course of their relationship with Cott, have access to confidential information relating to the Company and its business. Confidential information includes all non-public information that might be of use to competitors or harmful to Cott or its customers if disclosed. Examples of confidential information include: (a) any competitive system, information or process; (b) non-public information about Cott's operations (including pricing and cost information), results, strategies and projections; (c) non-public information about Cott's business plans, business processes and client relationships; (d) non-public employee information; (e) non-public information received in the course of employment about customers and suppliers (as well as potential customers and suppliers); (f) non-public information about Cott's technology, systems and proprietary products; and (g) trade secrets (such as, for example, beverage formulas). During the course of their relationship with Cott, and continuing thereafter, Employees and directors must maintain and protect the confidentiality of confidential information they obtain or create in connection with their activities for or on behalf of Cott. Confidential information must not be POLICIES & PROCEDURES CODE OF BUSINESS CONDUCT AND ETHICS POLICY #1.04 Last Revised March 3, 2006 Page 7 of 8 disclosed to anyone (including other Cott personnel) who is not authorized to receive it nor has the need to know the information. The only exceptions are when such disclosure has been properly authorized by the customer or supplier or appropriate Cott personnel, or is required by applicable law or appropriate legal process. Any questions in this regard should be directed to Cott's General Counsel. Employees and directors must take precautionary measures to prevent unauthorized disclosure of Cott's confidential information. Confidential information should never be discussed in public places. Employees and directors should also ensure that business records and documents are produced, copied, faxed, filed, stored and discarded by means designed to minimize the risk that unauthorized persons might obtain access to confidential information. In addition, computers and work areas should be properly secured to prevent unauthorized access. An Employee or director who comes into possession of material non-public information may not execute any trade in the securities of the subject company without first consulting with the General Counsel, who will then determine whether such trade would violate Cott policy or applicable laws. 4. CODE ADMINISTRATION; INTERPRETATION Employees and directors will receive a copy of this Code at the time they join Cott and will thereafter receive periodic updates. Also, agents and consultants who are retained by Cott shall receive and be subject to this Code. In addition, this Code can be found on Cott's Intranet website. All Employees, directors, consultants or agents retained by Cott must have read this Code and understand its provisions. Failure to read this Code does not excuse anyone to whom this Code applies from the obligation to comply with the terms of this Code. Anyone who is unsure as to the proper interpretation of this Code or application of this Code to specific situations should direct their questions to and seek guidance from the General Counsel or the Senior Vice President, Corporate Resources. 5. APPROVALS Any two of the following individuals, Chief Executive Officer, President, Chief Financial Officer, General Counsel, and Senior Vice President Corporate Resources must review and approve in writing any circumstance requiring special permission, as described in the Code. Any request for approval shall be submitted in writing to the General Counsel. Copies of these approvals will be maintained and made available to auditors or investigators as required by applicable law. Waivers of any provision of this Code for executive officers or directors must be approved by the Cott Corporation Board of Directors or the Corporate Governance Committee and will be promptly disclosed to shareowners to the extent required by applicable laws or exchange requirements. This Code may only be amended by the Board. 6. COMPLIANCE REPORTING AND INVESTIGATION Employees and directors should take all responsible steps to prevent a Code violation, POLICIES & PROCEDURES CODE OF BUSINESS CONDUCT AND ETHICS POLICY #1.04 Last Revised March 3, 2006 Page 8 of 8 and should promptly report suspected Code violations to the General Counsel or Senior Vice President, Corporate Resources or through the procedures that have been established pursuant to the Company's Reportable Concerns Policy. The responsibility for administering the Code, investigating violations of the Code and determining corrective and disciplinary action rests with the General Counsel and the SVP Corporate Resources, or if the issue allegedly involves either of them, then with the CEO. Cott's Board of Directors or the Chairman of the Audit Committee in consultation with the General Counsel, will review complaints involving Cott's accounting, internal accounting controls, and auditing matters in accordance with Cott's Reportable Concerns policy. Confidentiality regarding those who make compliance reports and those potentially involved is maintained to the extent possible during a compliance investigation. Cott does not tolerate retribution, retaliation or adverse personnel action of any kind against anyone for good faith reporting of a potential violation of this Code. The General Counsel and Senior Vice President, Corporate Resources will periodically report violations of this Code that have been brought to their attention, as well as the corrective actions that have been taken, to Cott's Audit Committee. 7. DISCIPLINARY ACTION Failure to comply with this Code may result in disciplinary action which, depending on the seriousness of the matter, may include reprimand, probation, suspension, demotion or dismissal. 8. SUMMARY Remember that you are responsible for your actions. It is your responsibility to read and understand this Code. Ignorance of the provisions of this Code will not excuse you from the obligation to abide by them. Always use good judgement and when in doubt seek guidance or clarification and avoid doing anything that might cause you or the Company embarrassment if publicly disclosed. You can discuss any questions or concerns with your manager or Cott's General Counsel or Senior Vice President, Corporate Resources. ADOPTED: MARCH 2, 2004 REVISED: JUNE 1, 2004 FURTHER REVISED: MARCH 7, 2005, MARCH 3, 2006 EX-14.2 6 o30438exv14w2.txt EX-14.2 EXHIBIT 14.2 COTT CORPORATION CODE OF ETHICS FOR SENIOR OFFICERS POLICY: Cott Corporation is committed to conducting business in a manner that follows the highest ethical standards and complies with all applicable laws. In order to help ensure that this commitment is met by Cott Corporation and all its subsidiaries (collectively referred to in this document as "Cott" or the "Company") a Code of Business Conduct and Ethics has been adopted by Cott. In addition to the Code of Business Conduct and Ethics, Senior Officers (as defined below) also have an additional duty to comply with this Code of Ethics for Senior Officers (the "Code"). This Code applies to the Senior Officers of the Company The term "Senior Officer," as used in this Code, means Cott Corporation's Chief Executive Officer (i.e., the principal executive officer), Chief Financial Officer (i.e., the principal financial officer), Principal Accounting Officer, Controller and any other person who performs similar functions as well as Cott Corporation's Treasurer and Assistant Treasurer, and the senior financial officer in each of Cott's business units and divisions. While this Code provides general guidance for appropriate conduct and avoidance of conflicts of interest, it does not supersede specific policies that are set forth in other Company policy statements and, in particular, does not limit the duties and obligations that Senior Officers have under Cott's Code of Business Conduct and Ethics. PURPOSE: The purpose of this Code is to deter wrongdoing and to provide guidance to the Company's Senior Officers with regard to, and to promote, the following: - - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; - - full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the U.S. Securities and Exchange Commission ("SEC") and other securities regulatory authorities and in other public communications made by the Company; - - compliance with applicable governmental laws, rules and regulations; - - prompt internal reporting of violations of the Code; and - - accountability for adherence to the Code. Each day, you are faced with making decisions that will affect the Company's business. You are obligated to comply with the Code guidelines and should avoid even the appearance of unethical or unprofessional behavior. To that end, you should seek advice from the Company's General Counsel when faced with a situation that may violate or give the appearance of violating the Code, or any other Company policies, laws, rules or regulations. -2- I. HONEST AND ETHICAL CONDUCT The Company expects and requires ethical behavior from the Senior Officers. You owe a duty of loyalty to the Company and you are expected to act in the best interests of the Company. Further, you must engage in and promote honest and ethical conduct, including handling actual or apparent conflicts of interest in an ethical manner, and must act with honesty and integrity. II. CONFLICTS OF INTEREST A conflict of interest exists when your personal interests interfere with, or give the appearance of interfering with, the interests of the Company. In the best interests of the Company, you must avoid actual or apparent conflicts between your private interests and those of the Company, including receiving improper personal benefits as a result of your position. In addition, you should not use corporate assets, information, or your position for personal gain. Conflicts of interest may manifest themselves in many ways and may reach farther than just the person employed by the Company. In fact, many conflicts arise as a result of situations involving your family members. III. ACCURACY OF REPORTING A) GENERAL As a publicly traded company, the Company has a duty to comply with all applicable laws and regulations with respect to accuracy in the information it reports to the SEC and other securities regulatory authorities and communicates to the public. The Company's financial statements are relied upon both internally and externally by individuals making business or investment decisions. Accuracy and candor is critical to the financial health of the Company. Senior Officers must help to ensure that all of the Company's periodic reports and public statements contain full, fair, accurate, timely and understandable disclosure. Any Senior Officer who becomes aware of inaccuracies contained in the Company's reports and public statements, or material omissions from the Company's reports and public statements, shall immediately report such material inconsistencies or omissions to the Company's Audit Committee and the General Counsel. Senior Officers must act in good faith, responsibly with due care and diligence and not knowingly misrepresent, or cause others to misrepresent, facts about the Company to others whether within or outside the Company, including to the Company's directors and auditors, and to government regulators and self-regulatory organizations. B) FINANCIAL REPORTING OBLIGATIONS OF SENIOR OFFICERS As a Senior Officer, you are charged with the responsibility of ensuring that the financial statements, reports and other documents filed or submitted to the SEC and other applicable 3 securities regulatory authorities and other public communications made by the Company (collectively, "Reports and Public Documents") are accurate and fairly disclose the Company's assets, liabilities and other material transactions engaged in by the Company. You are responsible for the Reports and Public Documents meeting the following requirements: -3- - Reports and Public Documents must, in reasonable detail, accurately and fairly reflect the transactions engaged in by the Company and acquisitions and dispositions of the Company's assets. - Reports and Public Documents must not contain any untrue statement of material fact that would make the statements in the Reports and Public Documents misleading. - Financial reports must be prepared in accordance with, or reconciled to, Generally Accepted Accounting Principles and applicable rules, including the accounting rules of the SEC and other applicable securities regulatory authorities. - Reports and Public Documents must contain full, fair, accurate, timely and understandable disclosure. Furthermore, you are responsible for reporting any inaccuracies or mistakes in the Reports and Public Documents to the Chair of the Audit Committee and the General Counsel. Finally, you are required to respect the confidentiality of information acquired in the course of the performance of your responsibilities. IV. COMPLIANCE WITH LAWS, RULES AND REGULATIONS It is a critical component of the Company's philosophy that it engage in its business activities, and be perceived to engage in its business activities, in an ethical and legal manner. Therefore, all Senior Officers must comply with both the letter and spirit of laws, rules and regulations applicable to the Company's business. V. RESPONSIBILITY FOR REPORTING The Company has established a reporting system that requires Senior Officers to report violations of any of the policies set forth in this Code. These mandatory reporting obligations apply whether or not the reporting person was personally involved in the alleged violation of the policies set forth in this Code. Upon observing or learning of any violation of the policies set forth in this Code, Senior Officers may report violations to either the General Counsel or report via the procedures that have been established in the Company's Reportable Concerns Policy. If the Senior Officer believes that the matter cannot be, or has not been, timely or adequately addressed by the Company, then the Senior Officer shall report any matter arising under this Code to the Chair of the Audit Committee, and any other matter to the Chair of the Corporate Governance Committee. The Company shall use best efforts to keep any reports confidential and will not disclose such reports to anyone other than the Board, the Audit Committee or the Corporate Governance Committee as appropriate, the General Counsel, and outside legal counsel unless disclosure is required by law or this Code. All reports should contain as much specific detail as possible to allow the Company to conduct an investigation of the reported matter. Once the Company receives notice of a suspected violation of this Code, the Company shall promptly begin an investigation. Investigations arising with regards to conflicts of interest and -4- accuracy of reporting will be conducted by persons designated and supervised by the Audit Committee. Investigations arising under any other section of this Code will be conducted under the supervision of the General Counsel. Once a violation is found to exist, such individual shall be subject to disciplinary action as described in Section VI of this Code. The Company's Audit Committee has established a Reportable Concerns policy, which covers the receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, or auditing matters. This Policy will ensure the confidential and anonymous submission of concerns regarding questionable accounting or auditing matters. You may obtain a copy of this policy from the Company's intranet site. The Company will not discharge, demote, suspend, threaten, harass, or in any manner discriminate against any employee in the terms and conditions of employment based upon any lawful actions of such employee with respect to good faith reporting of complaints regarding Improper Activities or otherwise as specified in Section 806 of the Sarbanes Oxley Act of 2002. VI. COMPLIANCE; ADMINISTRATION As a condition of employment and continued employment, each Senior Officer must accept the responsibility of complying with the foregoing policies and acknowledge his or her receipt of the Code by executing the Acknowledgement attached hereto. The Company may, at any time and as frequently as the Company may deem advisable, request any Senior Officer to complete and submit a certification in the form designated by the Company pertaining to compliance with the policies set forth in this Code. A copy of the certification form is contained in this Code. Any Senior Officer who violates any of these policies is subject to disciplinary action including but not limited to suspension or termination of employment, and such other action, including legal action, as the Company believes to be appropriate under the circumstances. VII. AMENDMENTS; WAIVER The Company reserves the right to amend, waive or alter the policies set forth in this Code at any time. Amendments to the Code require the approval of the Board and waivers (including implicit waivers) of any provision of the Code require the approval of the Corporate Governance Committee. Unless the SEC rules and regulations otherwise provide, amendments and waivers of any provision of the Code applicable to Senior Officers must be promptly disclosed in accordance with SEC and NYSE regulations, including an explanation for the waiver. Waivers include, among other things, a material departure from a provision of this Code. Implicit waivers include the Company's failure to take action with respect to violations of Code provisions within a reasonable time following the Company's receipt of notice of the violation. ADOPTED: MARCH 2, 2004 REVISED: MARCH 3, 2006 EXHIBIT 14.2 ACKNOWLEDGEMENT I hereby acknowledge receipt of the Code of Ethics for Senior Officers (the "Code") of Cott Corporation. I have read the Code and understand and acknowledge that I may be subject to disciplinary action including, but not limited to suspension, dismissal, or any other action, including legal action, by Cott Corporation in the event of my violation of the Code. Date: ------------------------------- ---------------------------------------- Name ---------------------------------------- Signature ---------------------------------------- Title EXHIBIT 14.2 CODE OF ETHICS FOR SENIOR OFFICERS REPORTING FORM* The undersigned hereby certifies that he or she is not aware of any of the following: 1. Any violation of the Code of Ethics for Senior Officers (the "Code") of Cott Corporation by the undersigned; or 2. Any violation of the Code by anyone who is governed by the Code. Date: ------------------------------- ---------------------------------------- Name ---------------------------------------- Signature ---------------------------------------- Title - ---------- * Violations reported under the Reportable Concerns Policy are not covered by this Form. EX-21.1 7 o30438exv21w1.txt EX-21.1 . . . EXHIBIT 21.1 LIST OF SUBSIDIARIES OF COTT CORPORATION
Direct or Jurisdiction of Indirect Incorporation or Percentage Name of Subsidiary Organization Ownership - ------------------ ---------------- ---------- 1. Cott Holdings Inc. Delaware & Nova Scotia 100% 2. Cott USA Corp. Georgia 100% 3. Cott Beverages Inc.* Georgia 100% 4. Northeast Retailer Brands LLC Delaware 51% 5. Cott Vending Inc. Delaware 100% 6. Cott Beverages Wyomissing Inc. Pennsylvania 100% 7. CB Nevada Capital Inc. Nevada 100% 8. Interim BCB, LLC Delaware 100% 9. Northeast Finco Inc. Delaware 100% 10. Cott NE Holdings Inc. Delaware 100% 11. Cott USA Receivables Corp. Delaware 100% 12. BCB International Holdings Cayman Islands 100% 13. BCB European Holdings Cayman Islands 100% 14. Cott Retail Brands Limited United Kingdom 100% 15. Cott Europe Trading Limited United Kingdom 100% 16. Cott Beverages Limited United Kingdom 100% 17. Cott Ltd. United Kingdom 100% 18. Macaw (Holdings) Limited United Kingdom 100% 19. Macaw (Soft Drinks) Limited United Kingdom 100% 20. Cott Private Label Limited United Kingdom 100% 21. Cott Retail Brands Netherlands BV Netherlands 100%
Direct or Jurisdiction of Indirect Incorporation or Percentage Name of Subsidiary Organization Ownership - ------------------ ---------------- ---------- 22. 2011438 Ontario Ltd. Ontario 100% 23. 804340 Ontario Limited Ontario 100% 24. Cott Embotelladores de Mexico, S.A. de Mexico 90% C.V 25. Mexico Bottling Services, S.A. de C.V. Mexico 100% 26. Servicios Gerenciales de Mexico, S.A. Mexico 100% de C.V. 27. Cott do Brasil Industria, Comercio, Brazil 100% Importacao e Exportacao de Bebidas e Concentrados Ltda 28. Cott International Trading, Ltd. Barbados 100% 29. Cott International SRL Barbados 100% 30. Cott Investment, L.L.C. Delaware 100% 31. Cott Atlantic Company Nova Scotia 100% 32. Cott Revelstoke Ltd. Canada 100% 33. 967979 Ontario Limited Ontario 100% 34. 156775 Canada Inc. Canada 100%
Certain subsidiaries listed above; even if combined into one subsidiary, would not constitute a "significant subsidiary" within the meaning of Regulation S-X. * This entity also does business as Cott Beverages USA, Cott International, Cott Concentrates and RC Cola International, each of which is a division of Cott Beverages Inc. EX-23.1 8 o30438exv23w1.txt EX-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of COTT CORPORATION We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Number 333-122974), Form S-8 (File Number 333-108128), Form S-8 (File Number 333-56980), Form S-8 (File Number 333-05172), Form S-8 (File Number 033-84964), Form S-8 (File Number 033-72894) and Form S-3 (File Number 333-112092) of Cott Corporation of our report dated February 22, 2006 relating to the financial statements, management's assessment of the internal control over financial reporting and effectiveness of the internal control over financial reporting and financial statement schedules, which appears in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Chartered Accountants Toronto, Ontario March 6, 2006 EX-31.1 9 o30438exv31w1.txt EX-31.1 EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John K. Sheppard, certify that: 1. I have reviewed this annual report on Form 10-K of Cott Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ John K. Sheppard ---------------------------------------- John K. Sheppard President & Chief Executive Officer March 6, 2006 EX-31.2 10 o30438exv31w2.txt EX-31.2 EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, B. Clyde Preslar, certify that: 1. I have reviewed this annual report on Form 10-K of Cott Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ B. Clyde Preslar ---------------------------------------- B. Clyde Preslar Executive Vice President & Chief Financial Officer March 6, 2006 EX-32.1 11 o30438exv32w1.txt EX-32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. The undersigned, John K. Sheppard, President and Chief Executive Officer of Cott Corporation (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Annual Report on Form 10-K for the year ended December 31, 2005 (the "Report"). The undersigned hereby certifies that to the best of his knowledge: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. IN WITNESS WHEREOF, the undersigned has executed this certification as of the 6th day of March, 2006. /s/ John K. Sheppard ---------------------------------------- John K. Sheppard President & Chief Executive Officer March 6, 2006 EX-32.2 12 o30438exv32w2.txt EX-32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. The undersigned, B. Clyde Preslar, Executive Vice-President and Chief Financial Officer of Cott Corporation (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Annual Report on Form 10-K for the year ended December 31, 2005 (the "Report"). The undersigned hereby certifies that to the best of his knowledge: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. IN WITNESS WHEREOF, the undersigned has executed this certification as of the 6th day of March, 2006. /s/ B. Clyde Preslar ---------------------------------------- B. Clyde Preslar Executive Vice-President & Chief Financial Officer March 6, 2006 -----END PRIVACY-ENHANCED MESSAGE-----