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 30, 2006
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission file number 000-19914
COTT CORPORATION
(Exact name of registrant as specified in its charter)
CANADA NONE
(State or Other Jurisdiction of Incorporation (IRS Employer Identification No.)
or Organization)
207 QUEEN'S QUAY WEST, SUITE 340,
TORONTO, ONTARIO, CANADA M5J 1A7
4211 W. BOY SCOUT BOULEVARD, SUITE 290
TAMPA, FLORIDA, UNITED STATES 33607
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (416) 203-3898
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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COMMON SHARES WITHOUT NOMINAL OR NEW YORK STOCK EXCHANGE
PAR VALUE
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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. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (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 June 30, 2006 (based on the closing sale price of the registrant's common stock as reported on the New York Stock Exchange on June 30, 2006) was $929,031,671.
(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 19, 2007 was 71,749,630.
TABLE OF CONTENTS
PAGE
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PART I
Item 1 Business..................................................................................................... 5
Item 1A Risk factors................................................................................................. 9
Item 1B Unresolved staff comments.................................................................................... 13
Item 2 Properties................................................................................................... 13
Item 3 Legal proceedings............................................................................................ 13
Item 4 Submission of matters to a vote of security holders.......................................................... 14
Supplemental Item Part I - Executive officers of Cott Corporation............................................ 15
PART II
Item 5 Market for the registrant's common equity and related shareowner matters .................................... 17
Item 6 Selected financial data ..................................................................................... 19
Item 7 Management's discussion and analysis of financial condition and results of operations ....................... 20
Item 7A Quantitative and qualitative disclosures about market risk .................................................. 33
Item 8 Financial statements and supplementary data
Report of management.................................................................................... 34
Report of independent registered public accounting firm................................................. 35
Consolidated Statements of (Loss) Income for fiscal years ended 2006, 2005 and 2004..................... 37
Consolidated Balance Sheets as of the 2006 and 2005 fiscal year end..................................... 38
Consolidated Statements of Shareowners' Equity for the 2006, 2005 and 2004 fiscal year end.............. 39
Consolidated Statements of Cash Flows for the 2006, 2005 and 2004 fiscal year end....................... 40
Notes to the Consolidated Financial Statements for the 2006, 2005 and 2004 fiscal year end.............. 41
Quarterly Financial Information......................................................................... 58
Item 9 Changes in and disagreements with accountants on accounting and financial disclosure......................... 59
Item 9A Controls and procedures...................................................................................... 59
PART III
Item 10 Directors and executive officers............................................................................. 61
Item 11 Executive compensation....................................................................................... 61
Item 12 Security ownership of certain beneficial owners and management and related shareowner matters................ 61
Item 13 Certain relationships and related transactions............................................................... 61
Item 14 Principal accountant fees and services ...................................................................... 61
PART IV
Item 15 Exhibits and financial statement schedules .................................................................. 62
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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 2006, 2005 and 2004 corresponds to our fiscal years ended December 30, 2006, December 31, 2005, and January 1, 2005, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive proxy statement for the 2007 Annual and Special Meeting of Shareowners, to be filed within 120 days of December 30, 2006, 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 applicable Canadian securities legislation and include, but are not limited to, statements that relate to projections of sales, earnings, earnings per share, cash flows, capital expenditures or other financial items, discussions of estimated future revenue enhancements and cost savings. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. Generally, words such as "anticipate", "believe", "continue", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "should" and similar terms and phrases are used to identify forward-looking statements in this report and in the documents incorporated in this report by reference. These forward-looking statements are made as of the date of this report.
Although we believe the assumptions underlying these forward-looking statements are reasonable, any of these assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions could be incorrect. Our operations involve risks and uncertainties, many of which are outside of our control, and any one or any combination of these risks and uncertainties could also affect whether the forward-looking statements ultimately prove to be correct.
The following are some of the factors that could affect our financial performance, including but not limited to sales, earnings and cash flows, or could cause actual results to differ materially from estimates contained in or underlying the forward-looking statements:
- changing nature of the North American business;
- our ability to successfully implement our cost reduction program, restore plant efficiencies and lower logistics and other costs;
- our ability to grow our business outside of North America, including in new geographic areas;
- our ability to expand our business to new channels and products;
- our ability to integrate new management and a new management structure;
- loss of key customers, particularly Wal-Mart, and the commitment of our customers to their own Cott-supplied beverage programs;
- increases in competitor consolidations and other marketplace competition, particularly among manufacturers of 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;
- fluctuations in the cost and availability of beverage ingredients and packaging supplies, and our ability to maintain favorable arrangements and relationships with our suppliers;
- our ability to pass on increased costs to our customers and the impact those increased prices could have on our volumes;
- unseasonably cold or wet weather, which could reduce demand for our beverages;
- our ability to protect the intellectual property inherent in new and existing products;
- adverse rulings, judgments or settlements in our existing litigation and regulatory reviews, and the possibility that additional litigation or regulatory reviews will be brought against us;
- product recalls or changes in or increased enforcement of the laws and regulations that affect our business;
- currency fluctuations that adversely affect the exchange between the U.S. dollar on one hand and the pound sterling, the Canadian dollar, the Mexican peso and other currencies on the other;
- changes in tax laws and interpretations of tax laws;
- changes in consumer tastes and preferences and market demand for new and existing products and our ability to develop new products that appeal to changing consumer tastes;
- 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.
NON-GAAP FINANCIAL MEASURES
In this Annual Report on Form 10-K for the year ended December 30, 2006, we use the non-GAAP measure cash flow from operations after capital expenditures. We believe this measure is useful to our investors because it measures cash we are able to generate after considering the investments required to maintain or expand our capital base. A reconciliation to cash provided by operating activities is presented on page 23 of this Annual Report on Form 10-K.
PART I
ITEM 1.
BUSINESS
OUR COMPANY
We operate our business in North America through our indirect wholly owned subsidiary, Cott Beverages Inc., in the United States and through Cott Corporation in Canada. We operate our International business (as defined below) through several subsidiaries including our indirect wholly owned subsidiary, Cott Beverages Ltd., in the U.K. and Europe, and through an indirect 90% owned subsidiary, Cott Embotelladores de Mexico, S.A. de C.V., in Mexico. References throughout this report to North America or our North American business mean, unless otherwise indicated, Canada and the United States. References throughout this report to International mean, unless otherwise indicated, U.K., Europe, Mexico and Asia as well as our Royal Crown International business.
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 offices are located at 207 Queen's Quay West, Suite 340, Toronto, Ontario, Canada M5J 1A7 and 4211 W. Boy Scout Boulevard, Suite 290, Tampa, Florida, United States 33607.
PRINCIPAL MARKETS AND PRODUCTS
We are one of the world's largest non-alcoholic beverage companies and the world's largest retailer brand soft drink provider. Based on industry information, we estimate that we produce (either directly or through third party manufacturers with whom we have co-packing agreements) approximately 68% of all retailer brand carbonated soft drinks sold in North America. We produce directly 55% of those sold in the U.K. In addition to carbonated soft drinks, our product lines include clear, sparkling flavored waters, juice-based products, bottled water, energy drinks and ready-to-drink teas. During the year ended December 30, 2006, approximately 93% of all of the beverages we sell in North America and the U.K., measured in 8-ounce equivalent cases, are under customer controlled retailer brands, and the remainder are sold under brand names that we either own or license from others. Eight-ounce equivalent cases is a standard industry measure equaling 24 8-ounce servings (192 U.S. fluid ounces), and does not equate to physical cases. Sales of carbonated soft drinks including sparkling flavored waters and energy drinks represented approximately 83% of our sales volume in 8-ounce equivalent cases. Sales of bottled water represented 8% of our sales volume in 8-ounce equivalent cases. The balance of 9% represented sales of ready-to-drink teas, still flavored waters and other non-carbonated beverages.
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.
From 2002 to 2005, we expanded our production and distribution capabilities in North America and International through a series of acquisitions totaling $250.1 million.
NORTH AMERICAN REALIGNMENT AND COST REDUCTION ACTIVITIES
In September 2005 we announced our plan to realign the management of our Canadian and U.S. businesses to a North American basis, rationalize product offerings, eliminate underperforming assets and increase focus on high potential accounts.
In conjunction with the North American realignment plan, we closed our Lachine, Quebec ("Lachine") juice plant in February 2006 and in March 2006 we closed our Columbus, Ohio ("Columbus") soft drink plant and warehouse to bring production capacity in line with the needs of our customers.
On July 27, 2006, we announced the realignment of the management of our U.K. and Europe business, our Mexican business, our Royal Crown International business and our business in Asia to an International basis, to focus on customer management, channel development, sales and marketing.
On October 26, 2006, we announced the closures of our manufacturing plant in Elizabethtown, Kentucky ("Elizabethtown") and our manufacturing plant and warehouse in Wyomissing, Pennsylvania ("Wyomissing"). We ceased production at both plants on December 30, 2006, and reallocated production volume to other manufacturing sites in North America. The Wyomissing warehouse was still in operation as of December 30, 2006 and is expected to be closed in 2007.
FINANCIAL INFORMATION ABOUT SEGMENTS
For financial information about segments and geographic areas, see note 23 to the consolidated financial statements, found on pages 56 to 57 of this Annual Report on Form 10-K.
MANUFACTURING AND DISTRIBUTION
Approximately 94% 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 the customer's distribution centers or directly to retail locations.
Subject to the terms and conditions of the applicable policies, we are insured against product liability claims and product recalls that could result from the injury, illness or death of consumers using our products, contamination of our products, or damage to or mislabeling of our products. 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
In addition to water, the principal raw materials required to produce our products are polyethylene terephthalate ("PET") bottles, caps and PET preforms, aluminum 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 5 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. This contract included a cap on aluminum prices, which expired in December 2006. In 2007, the price paid for aluminum has increased significantly to reflect world pricing. While we currently expect aluminum prices to decrease through 2007, the degree of the price decline and the timing are uncertain. As with our annual supply contracts, we must either renegotiate these long-term supply agreements with the incumbent suppliers when they expire or find alternative sources for supply.
We rely upon our ongoing relationships with 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 believe there is adequate supply of the ingredients and packaging materials used to produce or package our products.
The majority of our ingredient and packaging supply contracts allow our suppliers to alter the prices they charge us based on changes in the costs of the underlying commodities. Aluminum for cans, resin for PET bottles, preforms and caps and high fructose corn syrup ("HFCS") 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. HFCS has a history of volatile price changes. We typically purchase HFCS requirements for North America under 12 month contracts and have locked in the majority of our requirements for the year. Our HFCS prices will be up significantly in 2007 over prior year and we expect this trend to continue in the future, as a result of growing demand for corn-related products.
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.
TRADE SECRETS, COPYRIGHTS, TRADEMARKS AND LICENSES
We sell the majority of our beverages under retailer brands to customers who own the trademarks associated with those products. We also own registrations, or applications to register, various trademarks that are important to our worldwide business, including Cott(R) and Orient Emporium Tea Co.(TM) in the U.S., Canada and the U.K., Stars & Stripes(R), Vess(R), Vintage(R), So Clear(R), Top Pop(R), and City Club(R) in the U.S., Red Rain(TM) and Red Rave(TM) in the U.S. and Canada, Red Rooster(R), Benshaws(R) and the H2 family of brands in the U.K., and RC(R) in more than 100 countries outside of North America. Moreover, we are licensed to use certain trademarks, including Carters(R) in the U.K., Jarritos(R) in Mexico, and RC(R) in certain regions of Canada. The licences to which we are a party are of varying terms, including some which are perpetual. Trademark ownership is generally of indefinite duration when marks are properly maintained in commercial use.
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. 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, copyrights, trade secrets and proprietary "know-how." We also closely monitor the use of our trademarks and vigorously pursue any party that infringes on our trademarks, using all available legal remedies.
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 revenue 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 International. For the year ended December 30, 2006, sales to Wal-Mart Stores, Inc. and its affiliates (collectively, "Wal-Mart") accounted for approximately 38% of total revenue. Wal-Mart was the only customer that accounted for more that 10% of our total revenue in that period. For the same period, our top ten customers accounted for approximately 60% of total revenue. We expect that sales of our products to a limited number of customers will continue to account for a high percentage of revenue for the foreseeable future. The loss of Wal-Mart, or customers which in the aggregate represent a significant portion of our revenue, would have a material adverse effect on our operating results and cash flows.
COMPETITION
Generally, carbonated soft drinks compete against all forms of liquid beverages, including water, teas, coffees and juice-based beverages, for consumers' shopping preferences.
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 84% of the aggregate take-home volume of carbonated soft drink sales in the combined North American, U.K. and Mexican 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.
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.
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
The conduct of our business, and the production, distribution, sale, labeling, safety, transportation and use of many of our products are subject to various federal, state, provincial, local and foreign laws and regulations.
As a producer of beverages, we must comply with various federal, state, provincial, local and foreign laws relating to production, packaging, quality, labeling and distribution, including, in the U.S., those of the federal Food, Drug and Cosmetic Act, the Fair Packaging and Labeling Act, the Federal Trade Commission Act, the Nutrition Labeling and Education Act and California Proposition 65. 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, the Comprehensive Environmental Response, Compensation, and Liability Act, the Resource Conservation and Recovery Act, the Federal Motor Carrier Safety Act, laws governing equal employment opportunity, customs and foreign trade laws and regulations, laws relating to the maintenance of fuel storage tanks, laws relating to water consumption and treatment, and various other federal statutes and regulations.
Our operations are also subject to extensive regulations administered by the U.S. Environmental Protection Agency, which pertain to the discharge of materials into the environment and the handling and disposition of wastes. Failure to comply with these regulations can have serious consequences, including civil and administrative penalties.
We do not expect to make any material expenditures in connection with environmental remediation and compliance. However, as discussed below, changes in how the Ontario Ministry of the Environment enforces the Ontario Environmental Protection Act could result in us having to make material expenditures for environmental compliance.
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 30, 2006, we had approximately 3,163 employees, of whom an estimated 2,204 were located in North America and 959 were located in International. Included in the 2,204 employees in North America, 352 are from the Elizabethtown and Wyomissing plants and the Wyomissing warehouse. The majority of these employees completed their employment as of December 31, 2006 and the remainder are expected to depart by July 2007. We have entered into numerous collective bargaining agreements that we believe contain terms that are typical in the beverage industry. As these agreements expire, we believe they can be renegotiated on terms satisfactory to us. We consider our relations with employees to be good.
AVAILABILITY OF INFORMATION AND OTHER MATTERS
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge from our website at www.cott.com, when such reports are available on the Securities and Exchange Commission's 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 at the time made such certification to the NYSE as of May 8, 2006.
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 59.
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. This risk is increased by current trends in the North American beverage market, which are indicating a significant consumer shift away from carbonated soft drinks. To address these trends and the increasing price competition in the beverage market resulting from them, we have instituted a significant cost reduction program to position our company as the low cost provider of retailer brand soft drinks. If we are unable to achieve the objectives of this program, our business may be negatively impacted.
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 revenue 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 International. Sales to our top customer in 2006 and 2005 accounted for 38% and 40% respectively of our total revenue, and sales to the top ten customers in 2006 and 2005 were 60% and 65%, respectively. We expect that sales of our products to a limited number of customers will continue to account for a high percentage of our revenue in the foreseeable future. The loss of any significant customer, or customers which in the aggregate represent a significant portion of our revenue, could have a material adverse effect on our operating results and cash flows. At December 30, 2006, we have $115.7 million of customer relationships recorded as an intangible asset. The permanent loss of any customer included in the intangible asset would result in impairment in the value of the intangible asset.
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 prices they charge us based on changes in the costs of the underlying commodities that are used to produce them. Aluminum for cans and ends, resin for PET bottles, preforms and caps 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.
In 2006, most aluminum buyers, including ourselves, were protected by price caps keeping the price paid below world prices. However, the cap on aluminum in our contract with CCS expired in December 2006, and in 2007, the price paid for aluminum has increased significantly to reflect world pricing. While we currently expect aluminum prices to decrease through 2007, the degree of the price decline and the timing are uncertain. Resin prices have increased significantly in recent years but are expected to be down slightly in 2007 as compared with 2006 levels. HFCS has a history of volatile price changes. We typically purchase HFCS requirements for North America under 12 month contracts and have locked in the majority of our requirements for the year. Our HFCS prices will be up significantly in 2007 over prior year and we expect this trend to continue in the future, as a result of growing demand for corn-related products.
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 are able to pass these costs on to our customers through price increases, the impact those increases could have on our volumes is uncertain.
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.
In addition to water, the principal raw materials required to produce our products are PET bottles, caps and preforms, aluminium 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 5 years, and therefore we are assured of a supply of those key packaging supplies and ingredients for a longer period of time. CCS supplies aluminum cans and ends under a contract expiring on December 31, 2011. The contract provides that CCS will supply all of our aluminum can and end requirements worldwide, subject to certain exceptions. This contract included a cap on aluminum prices, which expired in December 2006. In 2007, the price paid for aluminum has increased significantly to reflect world pricing. While we currently expect aluminum prices to decrease through 2007, the degree of the price decline and the timing are uncertain. As with our annual supply contracts, we must either renegotiate these long-term supply agreements with the incumbent suppliers when they expire or find alternative sources for supply.
We rely upon our ongoing relationships with our key suppliers to support our operations. We believe that we will be able to either renegotiate contracts with these suppliers when they expire or, alternatively, if we are unable to renegotiate contracts with our key suppliers, we believe that
we could replace them. We could, however, incur higher ingredient and packaging supply costs in renegotiating contracts with existing suppliers or replacing those suppliers or we could experience temporary dislocations in our ability to deliver products to our customers, either of which could have a material adverse effect on our results of operations.
In addition, 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.
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 our expanding operations, including 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 expand our business in new channels and markets and with new beverage offerings, including 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. If attractive acquisition opportunities are not available, we may not continue to acquire businesses and product lines. Furthermore, the businesses or product lines that we acquire or align with may not be integrated successfully into our business or prove profitable. A key element of our strategy is the expansion of our business outside North America. In addition to the foregoing factors, our ability to expand our business in foreign countries is also dependent on, and may be limited by, our ability to comply with the laws of the various jurisdictions in which we may operate, as well as changes in local government regulations and policies in such jurisdictions.
WE COULD BE LIABLE FOR INJURY, ILLNESS OR DEATH CAUSED BY CONSUMPTION OF OUR PRODUCTS.
We may be liable to our customers and/or consumers 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.
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. While we own certain of the trademarks used to identify our beverages, other trademarks are used through license from third parties or by permission from our retailer brand customers. 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;
- 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 30, 2006, we had $80.4 million of rights and $18.1 million of trademarks recorded as intangible assets.
OTHERS MAY ALLEGE THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN THE DIVERSION OF ATTENTION AND RESOURCES FROM OUR BUSINESS OPERATIONS.
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.
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.
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, the pound sterling and the Mexican peso, on the other hand. Our operations outside of the U.S. accounted for approximately 35% of our 2006 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 is $225.0 million. 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 30, 2006, total borrowings under these facilities were $109.2 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.
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. If we are unable to refinance our indebtedness on terms that are favorable to us 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. These facilities contain cross default provisions. If we are in default under one facility, default is triggered under the other facility. As of December 30, 2006, total borrowings under these facilities were $109.2 million. If we breach the covenants and such non-compliance is not waived by the lenders, 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. We are in compliance with our covenants as of December 30, 2006. Our financial covenants are calculated and determined at the end of each quarter. We expect that we will not maintain compliance with the total leverage ratio financial covenant set forth in our senior secured credit facilities in the first quarter of 2007 and accordingly, we are in discussions with our lenders to change that financial covenant. We believe we can reach agreement with our lenders on a new covenant that is acceptable to us. Since a covenant default in our senior secured credit facilities would result in a default in our unsecured senior subordinated notes due in 2011, our notes due in 2011 would, in the event of such default, become currently due and accordingly, classified as a current liability. If our lenders do not agree to amend the covenant on terms that are acceptable to us, our lenders could terminate our facilities and we would have to replace them. Should our credit facilities and 2011 notes become currently due, we may have to incur additional fees and higher interest costs to replace them.
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.
CHANGES IN THE LEGAL AND REGULATORY ENVIRONMENT IN THE JURISDICTIONS IN WHICH WE OPERATE COULD INCREASE OUR COSTS OR REDUCE OUR REVENUES.
As a producer of beverages, we must comply with various federal, state, provincial, local and foreign laws relating to production, packaging, quality, labeling and distribution, including, in the U.S., those of the federal Food, Drug and Cosmetic Act, the Fair Packaging and Labeling Act, the Federal Trade Commission Act, the Nutrition Labeling and Education Act and California Proposition 65. 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 Labour Standards Act, the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Resource Conservation and Recovery Act, the federal Motor Carrier Safety Act, laws governing equal employment opportunity, customs and foreign trade laws and regulations, laws relating to the maintenance of fuel storage tanks, laws relating to water consumption and treatment, and various other federal statutes and regulations. These laws and regulations may change as a result of political, economic, or social events. Such regulatory changes may include changes in food and drug laws, laws related to advertising, accounting standards, taxation requirements, competition laws and environmental laws, including laws relating to the regulation of water rights and treatment. Changes in laws, regulations or government policy and related interpretations may alter the environment in which we do business, which may impact our results or increase our costs or liabilities.
WE ARE NOT IN COMPLIANCE WITH THE REQUIREMENTS OF THE ONTARIO ENVIRONMENTAL PROTECTION ACT ("EPA") AND, IF THE ONTARIO GOVERNMENT SEEKS TO ENFORCE THOSE REQUIREMENTS OR IMPLEMENTS MODIFICATIONS TO THEM, WE COULD BE ADVERSELY AFFECTED.
Certain regulations under the EPA provide that a minimum percentage of a bottler's soft drink sales within specified areas in Ontario must be made in refillable containers. The penalty for non-compliance is a fine, which for companies ranges from $50,000 per day on which the offense occurs or continues for the first conviction to $100,000 per day for each subsequent conviction, although such fines may be increased to equal the amount of monetary benefit acquired by the offender as a result of the commission of the offense. We, and we believe other industry participants, are currently not in compliance with the requirements of the EPA. Ontario is not enforcing the EPA at this time, but if it chose to enforce the EPA in the future, we could incur fines for non-compliance and the possible prohibition of sales of soft drinks in non-refillable containers in Ontario.
We estimate that approximately 4% of our sales would be affected by the possible limitation on sales of soft drinks in non-refillable containers in Ontario if the Ontario Ministry of the Environment initiated an action to enforce the provisions of the EPA against us.
In April 2003, the Ontario Ministry of the Environment proposed to revoke these regulations in favor of new mechanisms under the Ontario Waste Diversion Act to enhance diversion from disposal of carbonated soft drink containers. On December 22, 2003, the Ontario provincial government approved the implementation of the Blue Box Program plan under the Ministry of Environment Waste Diversion Act. The Program requires those parties who are brand owners or licensees of rights to brands which are manufactured, packaged or distributed for sale in Ontario to contribute to the net cost of the Blue Box Program. We generally manufacture, package and distribute products for and on behalf of third party customers. Therefore, we do not believe that we will be responsible for direct costs of the Program. However, our customers may attempt to pass these costs, or a portion of them, onto us. We do not believe that the costs for which we may ultimately be responsible under this Program will have a material adverse effect on our results of operations; however, we cannot guarantee this outcome. The Blue Box Program does not revoke any of the regulations mentioned above under the EPA regarding refillable containers, although the industry anticipates that they will be reversed in the future.
WE IDENTIFIED MATERIAL WEAKNESSES IN OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING IN FISCAL 2006. FAILURE TO REMEDIATE THE MATERIAL WEAKNESSES COULD NEGATIVELY IMPACT OUR BUSINESS.
We concluded that material weaknesses existed in our internal controls over financial reporting as of December 30, 2006. In response to the identified material weaknesses, we, with oversight from our Audit Committee, are focused on improving our internal controls over financial reporting and remedying the identified material weaknesses, through implementing new controls and policies and ensuring that all controls and policies are followed.
Our policies require periodic inventory counts and detailed reconciliation procedures to ensure the completeness, accuracy and existence of inventory. In addition, we have procedures in place to ensure appropriate valuation of inventory and credit notes. We plan on monitoring adherence to our policies by assigning appropriate personnel to undertake responsibility for these controls. We have also begun implementing a functional reporting structure intended to ensure appropriate segregation of duties.
We have recently hired a Chief Manufacturing and Supply Chain Officer who is responsible for the global procurement function. We will implement processes to ensure that our policy that all contracts be appropriately
authorized and that appropriate review for accounting of contracts takes place on a timely basis is followed.
We believe that these corrective actions will remediate the material weaknesses identified above. We will continue to monitor the effectiveness of these actions and will make any changes and take such other actions that we deem appropriate given the circumstances.
If we fail to remediate these material weaknesses, or if our internal controls over financial reporting required under Section 404 of the Sarbanes-Oxley Act are inadequate in the future, it could negatively impact our business and the price of our common stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
As of the end of 2006, we operated 15 beverage production facilities in North America, 11 of which we owned and four of which we leased. We also operate our global concentrate manufacturing facility in Columbus, Georgia, which we own. Internationally, we operated five beverage production facilities, 4 of which we owned and one of which we leased.
Total square footage of our production facilities is approximately 2,094,776 in the U.S., 931,050 in Canada; 871,218 in the U.K.; and 111,278 in Mexico. This square footage does not include separate offsite warehouses. Lease terms for non-owned beverage production facilities expire between 2007 and 2019.
The beverage production facilities and square footage amounts noted above do not include the owned facility in Elizabethtown or leased facilities in Columbus and Wyomissing, all of which were closed as of December 30, 2006.
ITEM 3.
LEGAL PROCEEDINGS
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.
The defendants, including us, brought and argued a summary trial application in January 2006. On June 2, 2006, the British Columbia Supreme Court granted the summary trial application, which resulted in the dismissal of the plaintiffs' action against us and the other defendants. On June 26, 2006, the plaintiffs appealed the dismissal of their action to the British Columbia Court of Appeal. We, together with the other defendants, are defending the appeal, which we expect to be heard in the next eight to twelve months. It is too early to assess the chances of success of the appeal.
In February 2005, similar class action claims, 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. The claims which were filed in Quebec have since been discontinued.
We are investigating this matter; 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 2006.
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 19, 2007, and the positions and offices that each of them holds.
NAME AND MUNICIPALITY OF RESIDENCE OFFICE AGE PERIOD SERVED AS OFFICER ---------------------------------- ------ --- ------------------------ BRENT D. WILLIS Tampa, Florida Chief Executive Officer 46 2006 to present JOHN DENNEHY Tampa, Florida President, North America 45 2005 to present WYNN WILLARD Tampa, Florida President, International 48 2006 to present THOMAS J. ARRUFO Tampa, Florida Chief Information & Shared Services Officer 48 2007 to present TINA DELL'AQUILA Chief Financial Officer, Vice President, Controller & Toronto, Ontario Assistant Secretary 44 1998 to present RICHARD DOBRY Tampa, Florida Chief Manufacturing & Supply Chain Officer 50 2006 to present ABILIO GONZALEZ Tampa, Florida Chief People Officer 46 2006 to present MARK R. HALPERIN Chief Legal & Corporate Development Officer and Corporate Toronto, Ontario Secretary 49 1995 to present |
During the last five years, the above persons have been engaged in their principal occupations or in other executive capacities with us except as follows:
- from August 2004 to May 2006, Brent D. Willis was Zone President for the Asia Pacific region of InBev, the world's largest brewer by volume. From September 2003 to August 2004, he served as Chief Commercial Officer of InBev and, prior to September 2003, he was Chief Marketing and Sales Officer of InBev;
- John Dennehy has held several management positions since joining Cott in 2001. From October 2005 to August 2006, he was Senior Vice President, North American Sales and Marketing. From October 2002 to October 2005, he was Vice President, Business Development and prior to October 2002, he was General Manager, Northeast Retailer Brands, LLC, a 51% owned indirect subsidiary of Cott;
- prior to joining Cott, Wynn Willard was Chief Executive Officer of New World Pasta Company, a dry pasta manufacturer in the U.S. and Canada, which sought bankruptcy protection in May 2004, during Mr. Willard's tenure. Prior to New World Pasta Company, he was Senior Vice President and Chief Marketing Officer of Hershey Foods Corporation, a maker of confectionary products;
- from June 2006 to February 2007, Thomas J. Arrufo was Chief Information Officer for the PMSI division of AmerisourceBergen Corporation, a pharmaceutical and integrated workers compensation service company. From January 2003 to June 2006, he was President of the Regatta Group, LLC, a provider of interactive, experiential leadership and team building events and sailing charters. Prior to January 2003, he was Chief Information Officer and Vice-President, Energy Services for NiSource Inc., a natural gas and electricity provider in the U.S.;
- from April 2004 to October 2006, Richard Dobry was President, Americas Supply for Diageo, plc, a premium alcohol beverage business. Prior to April 2004, he was Senior Vice President, Supply Chain at Tropicana Products, Inc. the juice beverages subsidiary of PepsiCo; and
- prior to joining Cott, Abilio Gonzalez was General Manager, Global Talent Acquisition and Engagement and Microsoft Business Division at Microsoft Corporation ("Microsoft"). From September 2003 to November 2004 he was General Manager, HR Microsoft Productivity and Business Solutions for Microsoft. Prior to September 2003, he was Corporate Vice President, Human Resources of Panamco LLC,
a Latin American beverage manufacturer. Prior to July 2002, he was Global Head, Human Resources Research & Development for Novartis AG, a global pharmaceutical company.
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 30, 2006 and December 31, 2005.
TORONTO STOCK EXCHANGE (C$)
2006 2005
--------------- ----------------
High Low High Low
----- ----- ----- -----
January 1 - March 31 16.95 13.02 31.41 28.79
April 1 - June 30 17.40 14.37 30.09 26.50
July 1 - September 30 20.15 13.76 31.45 20.31
October 1 - December 31 19.75 15.10 20.51 16.10
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NEW YORK STOCK EXCHANGE (U.S.$)
2006 2005
--------------- ----------------
High Low High Low
----- ----- ----- -----
January 1 - March 31 14.62 11.31 25.26 23.55
April 1 - June 30 15.73 12.68 24.26 21.12
July 1 - September 30 18.03 12.16 25.93 17.40
October 1 - December 31 17.32 13.21 17.51 13.58
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As of February 19, 2007, we had 690 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 19, 2007 was C$17.17 on the TSX and on February 16, 2007 was $14.74 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 persons 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."
SECURITIES TO BE ISSUED UNDER EQUITY COMPENSATION PLANS
Under the 1986 Common Share Option Plan, as amended, we reserved 14 million shares for future issuance. The number of securities available for future issuance as of December 30, 2006 were as follows:
Number of securities to be issued upon exercise of outstanding
options (IN THOUSANDS) 2,696
Weighted average exercise price of outstanding options C$ 29.65
Number of securities available for future issuance under the
stock option plan (IN THOUSANDS) 5,661
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No new shares are issued for any other share-based compensation plan.
SHAREOWNER RETURN PERFORMANCE GRAPH
The following graph shows changes over our past five fiscal years in the value of C$100, assuming reinvestment of dividends, invested in: (i) our common shares; (ii) the Toronto Stock Exchange's S&P/TSX Composite Index; and (iii) a peer group of publicly traded companies in the bottling industry comprised of Coca-Cola Enterprises Inc., Coca-Cola Bottling Co. Consolidated, National Beverage Corp., Pepsi Bottling Group Inc. and PepsiAmericas Inc. The closing price of Cott's common shares as of December 29, 2006 on the Toronto Stock Exchange was C$16.69 and on the New York Stock Exchange was $14.31.
[LINE GRAPH]
DATE DECEMBER 29, DECEMBER 28, JANUARY 3, JANUARY 1, DECEMBER 31, DECEMBER 30,
2001 2002 2004 2005 2005 2006
----------------------- ------------ ------------ --------------- --------------- ----------------- ------------
Cott Common Shares 100 110.08 144.56 117.78 68.37 66.23
TSX/S&P Composite Index 100 87.56 110.96 127.03 157.68 184.89
Peer Group 100 109.30 111.59 118.68 119.60 128.42
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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 30, December 31, January 1, January 3, December 28,
2006 (1) 2005 (2) 2005 (3) 2004 (4) 2002 (5)
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) (52 WEEKS) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
------------------------------------------------------- ------------ ------------ ---------- ---------- ------------
REVENUE $ 1,771.8 $ 1,755.3 $ 1,646.3 $ 1,417.8 $ 1,198.6
Cost of sales 1,554.9 1,505.8 1,362.6 1,141.0 965.7
Selling, general and administrative 176.1 138.6 138.1 126.1 110.2
Loss (gain) on disposal of property, plant and equipment -- 1.5 (0.3) (0.1) --
Restructuring, asset impairments and other charges
Restructuring 20.5 3.2 -- -- --
Asset impairments 15.4 33.5 0.9 1.8 --
Other 2.6 0.8 -- -- --
----------- ------------ ---------- ---------- -----------
OPERATING INCOME 2.3 71.9 145.0 149.0 122.7
----------- ------------ ---------- ---------- -----------
(Loss) Income from continuing operations (17.5) 24.6 78.3 77.4 48.7
Cumulative effect of change in accounting principle -- -- -- -- (44.8)
----------- ------------ ---------- ---------- -----------
NET (LOSS) INCOME $ (17.5) $ 24.6 $ 78.3 $ 77.4 $ 3.9
=========== ============ ========== ========== ===========
(LOSS) INCOME PER SHARE - BASIC
(Loss) Income from continuing operations $ (0.24) $ 0.34 $ 1.10 $ 1.12 $ 0.75
Cumulative effect of change in accounting principle $ -- $ -- $ -- $ -- $ (0.69)
Net (loss) income $ (0.24) $ 0.34 $ 1.10 $ 1.12 $ 0.06
=========== ============ ========== ========== ===========
(LOSS) INCOME PER SHARE - DILUTED
(Loss) Income from continuing operations $ (0.24) $ 0.34 $ 1.09 $ 1.09 $ 0.69
Cumulative effect of change in accounting principle $ -- $ -- $ -- $ -- $ (0.64)
Net (loss) income $ (0.24) $ 0.34 $ 1.09 $ 1.09 $ 0.06
=========== ============ ========== ========== ===========
Total assets $ 1,139.5 $ 1,179.1 $ 1,030.3 $ 908.8 $ 785.4
Current maturities of long-term debt 2.0 0.8 0.8 3.3 16.5
Long-term debt 275.2 272.3 272.5 275.7 339.3
Shareowners' equity 488.7 481.9 457.3 345.1 218.2
----------- ------------ ---------- ---------- -----------
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Under the 1986 Common Share Option Plan, as amended, we have reserved 14 million shares for future issuance.
(2) 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.
(3) 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.
(4) During the year we acquired the retailer brand business of Quality Beverage Brands, L.L.C.
(5) 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.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are one of the world's largest non-alcoholic beverage companies and the world's largest retailer brand soft drink provider.
Trends of increasing commodity costs and consumers shifting towards non-carbonated beverages continued in 2006. As a result, we persisted with our efforts to increase long-term financial performance by improving our operating performance, enhancing our sales focus, reducing costs and realigning our organization.
In October 2006 we announced the closures of our manufacturing plant in Elizabethtown and our manufacturing plant and warehouse facilities in Wyomissing. We ceased production at both plants on December 30, 2006, and reallocated production volume to other manufacturing sites in North America. The Wyomissing warehouse was still in operation as of December 30, 2006 and is expected to be closed in 2007. As part of our previously announced 2005 North American realignment we closed our juice plant in Lachine effective February 2006 and we closed our manufacturing plant and warehouse in Columbus effective March 2006.
In 2006, we recorded $38.5 million in pre-tax restructuring, asset impairments and other charges, including restructuring charges of $20.5 million, asset impairments of $15.4 million and other charges of $2.6 million.
Our net loss in 2006 was $17.5 million or $0.24 per diluted share, compared with our net income of $24.6 million or $0.34 per diluted share in 2005. The decrease resulted from:
- the highly competitive environment in the North American carbonated soft drinks ("CSD") industry;
- higher raw materials and packaging costs in the earlier part of 2006 that were not passed on to customers;
- higher fixed costs relating to increased production capacity from our new Fort Worth, Texas plant, partially offset by savings at plants closed earlier in the year;
- decreased gross profit due to accelerated depreciation and amortization and inventory writedowns resulting from the closures of Wyomissing and Elizabethtown and rationalizing SKUs;
- the impact on gross profit of an inventory loss arising from the receivership of our U.K. resin supplier;
- in 2005, we recorded a gain of $5.4 million for the high fructose corn syrup ("HFCS") settlement;
- increased selling, general and administrative costs due to share-based compensation, higher incentive compensation expense and executive transition costs; and
- increased interest expense due to the financing of our August 2005 acquisition of 100% of the outstanding shares of Macaw (Holdings) Limited (now known as Cott Nelson (Holdings) Limited, the parent company of Macaw (Soft Drinks) Limited (now known as Cott (Nelson) Limited) (the "Macaw Acquisition").
2006 VERSUS 2005
RESULTS OF OPERATIONS
2006 2005
-------------------- --------------------
MILLIONS PERCENT MILLIONS PERCENT
OF OF
OF DOLLARS REVENUE OF DOLLARS REVENUE
---------- ------- ---------- -------
Revenue $ 1,771.8 100.0% $ 1,755.3 100.0%
Cost of sales 1,554.9 87.8% 1,505.8 85.8%
---------- ----- ---------- -----
Gross margin 216.9 12.2% 249.5 14.2%
SG&A 176.1 9.9% 138.6 7.9%
Loss on disposal of property, plant
and equipment -- -- 1.5 0.1%
Restructuring, asset impairments
and other 38.5 2.2% 37.5 2.1%
---------- ----- ---------- -----
Operating income 2.3 0.1% 71.9 4.1%
Other expense 0.1 -- (0.7) --
Interest expense 32.2 1.8% 28.8 1.7%
Minority interest 3.8 0.2% 4.5 0.3%
---------- ----- ---------- -----
(Loss) income before
income taxes (33.8) (1.9)% 39.3 2.2%
Income taxes (16.3) (0.9)% 14.7 0.8%
---------- ----- ---------- -----
Net (loss) income $ (17.5) (1.0)% $ 24.6 1.4%
---------- ----- ---------- -----
Depreciation & amortization $ 86.8 4.9% $ 70.2 4.0%
---------- ----- ---------- -----
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REVENUE
Revenue in 2006 was $1,771.8 million, an increase of 0.9% from $1,755.3 million in 2005. As shown in the following table, revenue decreased 5% when the impact of acquisitions and foreign exchange are excluded. Total case volume in 8-ounce equivalents was 1,233.5 million in 2006, up 3% from 1,201.4 million in 2005.
NORTH INTER-
COTT(1) AMERICA NATIONAL
------ ------- --------
Change in revenue $ 16.5 $ (88.6) $ 103.6
Impact of acquisitions (79.6) -- (79.6)
Impact of foreign exchange (21.5) (14.5) (6.9)
------ ------- -------
Change excluding acquisitions &
foreign exchange $(84.6) $(103.1) $ 17.1
------ ------- -------
Percentage change excluding
acquisitions & foreign
exchange (5%) (7%) 5%
------ ------- -------
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(1) Cott includes North America, International and Corporate & other
In North America, our revenue was $1,339.4 million in 2006, a decrease of 6% from 2005. Excluding the impact of foreign exchange, revenue decreased by 7% from 2005. Case volume in 8-ounce equivalents decreased by 9% in 2006. The volume decrease was driven by weakness in the North American carbonated soft drinks segment and product and customer rationalization. The decrease was also due to a structural change in our business arrangement with one of our self-manufacturing customers. The related revenues are now in the form of concentrates rather than filled beverages, which lowers our revenue but has minimal earnings impact.
The international segment includes our U.K. and Europe business, our Mexican business, our Royal Crown International business and our business in Asia. Revenue from this segment was $427.1 million in 2006, an increase of 32% when compared with revenue of $323.5 million in 2005. Case volume in 8-ounce equivalents increased by 20% in 2006. The growth was due to the inclusion of Macaw's results for the entire year, as well as strong base business growth in the U.K. which was up 8% year-over-year. Mexico also reported strong growth of 22% year-over-year, primarily as a result of broadening distribution within non-supermarket channels. Excluding the impact of the Macaw Acquisition, revenue increased 7%. Excluding the impact of the Macaw Acquisition and foreign exchange, revenue increased 5%.
COST OF SALES
Cost of sales was $1,554.9 million or 87.8% of revenue, a 2 percentage point increase from $1,505.8 million or 85.8% of revenue in 2005. Variable costs represented 88% of total cost of sales in 2006, down from 89% in 2005, largely as a result of the capacity addition in 2005, which increased fixed costs. Major elements of these variable costs included ingredient and packaging costs, which increased fixed costs. fees paid to third party manufacturers and distribution costs.
NORTH
Increase (decrease) COTT AMERICA INTERNATIONAL
------------------- ---- ------- --------------
Volume impact (6)% (9)% 7%
Ingredients & packaging costs 2% 2% 1%
Acquisitions 3% -- 19%
Plant closures 1% 1% --
U.K. supplier receivership 1% -- 3%
Foreign exchange 1% 1% 2%
Other 1% 1% 2%
-- -- --
Total cost of sales change 3% (4)% 34%
-- ---- -----
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As noted from the above table, the increase in total cost of sales over 2005 was 3%. Ingredients and packaging costs have increased by 2% primarily due to higher packaging materials costs, including PET bottles and cans. Acquisitions added 3% to our cost of sales as we included the costs of Macaw for the entire year. As a result of our decision to close Wyomissing and Elizabethtown, we changed the useful lives of the related property, plant and equipment and customer relationships. As a result, we recorded $13.2 million in accelerated depreciation and amortization and writedowns of spare parts inventory as plant closure costs causing a 1% increase in cost of sales. The receivership of our U.K. resin supplier and foreign exchange both contributed 1% increases. Other costs increased 1% as a result of added production capacity, partially offset by the fixed cost savings of the closure of Lachine and Columbus earlier in the year. In addition, in 2005, cost of sales was reduced by the proceeds from the HFCS litigation settlement. The above increases were partially offset by a 6% decrease related to lower sales volume.
GROSS PROFIT
Gross profit was 12.2% of revenue for 2006, down from 14.2% in 2005 mainly due to plant closure costs of $13.2 million described above and the receivership of our U.K. resin supplier that resulted in a loss of $9.0 million, while in the prior year we recorded a gain of $5.4 million for the HFCS settlement. In addition, fixed costs were higher this year due to the full year impact of the capacity addition from our new Fort Worth, Texas plant in 2005.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A was $176.1 million in 2006, up $37.5 million from $138.6 million in 2005. As a percentage of revenue, SG&A increased to 9.9% for 2006, up from 7.9% in 2005. Excluding the impact of acquisitions and foreign exchange, SG&A was up $29.1 million from 2005 primarily due to share-based compensation, higher incentive compensation expense and executive transition costs.
SHARE-BASED COMPENSATION
Effective January 1, 2006, we adopted Statement of Financial Accounting Standard ("SFAS 123R") Share-Based Payments, using the modified prospective approach and therefore have not restated results for prior periods. Under the modified prospective approach, share-based compensation expense for the year ended December 30, 2006 includes compensation expense for all share-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Share-based compensation expense for all share-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. We recognize these compensation costs net of a forfeiture rate on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three years. We estimated the forfeiture rate for fiscal 2006 based on our historical experience with forfeitures during the preceding three fiscal years. For the period ending December 30, 2006, net loss includes compensation expense of $11.4 million, or $8.4 million net of tax of $3.0 million, or $0.12 per basic and diluted share. There is no effect on cash from operating or financing activities from the adoption of SFAS 123R. Had compensation expense for the plans been determined based on the fair value at the date of grant for the year ended December 31, 2005 our income before taxes would have been $29.5 million, income tax expense would have been $12.2 million and net income would have been $17.3 million or $0.24 per basic share and diluted share as described in note 18 to our consolidated financial statements.
Total compensation cost related to non-vested awards not yet recognized is $5.2 million. The weighted average period over which this is expected to be recognized is 0.9 year.
During the second quarter of 2006, our shareowners approved and adopted two new compensation plans for 2006 and future periods, the Performance Share Unit ("PSUs") Plan and the Share Appreciation Rights ("SARs") Plan. These plans are designed to attract, maintain and motivate key employees while promoting the long-term financial success of our business.
During the year ended December 30, 2006, a total of 0.6 million PSUs at a fair value of $6.9 million (C$8.0 million) were granted to employees of our Company and its subsidiaries. These are the number of units and value that are expected to be issued based on an assumption that certain performance targets will be achieved. The performance targets are not market based and therefore, the amount of expense per unit is fixed. The number of units and value can vary from 0 to 150% of the expected numbers noted above depending on meeting the performance target. Subject to the terms of the PSU plan, these units will vest on December 27, 2008. Compensation costs of $1.2 million were recognized in selling, general and administrative expenses in the period ended December 30, 2006. As of December 30, 2006, there was approximately $5.7 million of unearned compensation costs relating to the grant that is expected to be recognized on a straight-line basis over a period of 29 months.
During the year ended December 30, 2006, a total of 0.5 million SARs at a fair value of $1.7 million were granted to employees of our Company and its subsidiaries. The fair value of the SARs grant is estimated on the date of grant using the Black-Scholes option pricing model. Subject to the terms of the SAR plan, these units will vest on July 26, 2009 and October 25, 2009. Compensation costs of $0.3 million were recognized in selling, general and administrative expenses in the period ended December 30, 2006. As of December 30, 2006, there was $1.5 million of unearned compensation costs relating to the grant that is expected to be recognized on a straight-line basis over a period of three years.
In addition, share-based awards with a total fair value of $4.1 million were granted to our new Chief Executive Officer under the terms of his employment agreement. As of December 30, 2006, $0.9 million was recorded as compensation expense and there was $3.2 million of unearned compensation expected to be recognized on a straight-line basis over a period of three years.
RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES
In 2006, we recorded restructuring, asset impairments and other charges of $38.5 million before taxes. Restructuring, asset impairments and other charges were $37.5 million before tax in 2005 and were primarily related to our North American operations.
RESTRUCTURING - In September 2005 we announced a plan to realign the management of our Canadian and U.S. businesses to a North American basis. In conjunction with this plan, we closed Lachine in February 2006 and in March 2006 we closed Columbus to bring production capacity in line with the needs of our customers.
On July 27, 2006, we announced the realignment of the management of our U.K. and Europe business, our Mexican business, our Royal Crown International business and our business in Asia to an International basis, to focus on customer management, channel development, sales and marketing.
In October 2006, as a result of our plans to reduce costs, we announced the closures of Elizabethtown and
Wyomissing. We ceased production at both plants on December 30, 2006, and reallocated production volume to other manufacturing sites in North America. The Wyomissing warehouse was still in operation as of December 30, 2006 and is expected to be closed in 2007.
During 2006, we recorded $8.7 million of restructuring charges for severance and contract termination costs relating to the closures of Columbus and Lachine. We also recorded $5.6 million of restructuring charges for severance costs relating to the closures of Elizabethtown and Wyomissing. The remaining restructuring costs of $6.2 million include $5.5 million of severances and other costs resulting from consolidation of selling and administrative functions and $0.7 million relates to consulting fees incurred in connection with restructuring activities.
ASSET IMPAIRMENTS - During 2006, we recorded $1.7 million of asset impairments, including property, plant and equipment of $1.3 million, information technology software of $0.2 million and a customer relationship asset of $0.2 million relating to the closures of Columbus and Lachine. We also recorded $14.2 million of asset impairments relating to property, plant and equipment due to the closures of Elizabethtown and Wyomissing. These charges were partially offset by a $0.5 million recovery from the sale of other assets.
OTHER - Other charges of $2.6 million in 2006 relate primarily to legal and consulting fees for the U.K. Competition Commission review of the Macaw Acquisition in the U.K. On April 28, 2006, we received final clearance of the Macaw Acquisition from the Competition Commission.
In 2005, we recorded restructuring charges of $3.2 million, asset impairments of $33.5 million and other charges of $0.8 million. Included in asset impairments of $33.5 million was an impairment loss of $20.0 million with respect to customer relationships resulting from declining sales and margins relating to certain customers.
OPERATING INCOME
Operating income was $2.3 million in 2006 including restructuring, asset impairments and other charges of $38.5 million, as compared with $71.9 million in 2005 which included restructuring, asset impairments and other charges of $37.5 million.
INTEREST EXPENSE
Net interest expense was $32.2 million in 2006, up 11.8% from $28.8 million in 2005, largely due to the financing of the Macaw acquisition of 2005.
INCOME TAXES
We recorded an income tax recovery of $16.3 million in 2006, or an effective tax rate of 48.2%, as compared with an income tax provision of $14.7 million, or an effective rate of 37.4%, in 2005. Since we do business in three main jurisdiction with different tax rates, our effective tax rate is impacted by the jurisdiction in which income is earned or losses incurred. During the year, there was a $5.3 million increase in the reserve related to a change in management's estimates of tax liabilities. This increase in reserve was partially offset by a $3.5 million decrease in the valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash flow from operations after capital expenditures in 2006 was $61.3 million, after capital expenditures of $48.1 million, as compared to 2005 in which cash flow from operations after capital expenditures was $44.3 million after capital expenditures of $84.8 million. We use cash flow from operations after capital expenditures to measure cash we are able to generate after considering the investments required to maintain or expand our capital base. A reconciliation to cash provided by operating activities is presented below:
2006 2005
------ -------
Cash provided by operating activities $109.4 $ 129.1
Additions to property, plant & equipment (35.1) (75.8)
Additions to intangibles and other
assets (13.0) (9.0)
------ -------
Cash flow from operations after capital
expenditures $ 61.3 $ 44.3
------ -------
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Cash flow from operations after capital expenditures increased in 2006 mainly due to a decrease in capital spending by $36.7 million.
INVESTING ACTIVITIES
CAPITAL EXPENDITURES - Our capital expenditures were $35.1 million in 2006 as compared with $75.8 million in 2005. In 2005, we completed construction of a new beverage manufacturing facility in Fort Worth, Texas. Total cost for the Fort Worth facility in 2005 was $30.7 million. In 2006, we spent $7.1 million relating to Fort Worth. There were no similar major projects in 2006.
OTHER INVESTING ACTIVITIES - Other investing activities relate primarily to additions to information technology assets included in intangibles and other assets.
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 - We maintain committed senior secured credit facilities for financing in North America, the U.K. and Mexico expiring on March 31, 2010.
The 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., Cott (Nelson) 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.
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.
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 30, 2006 credit of $110.6 million was available after borrowings of $109.2 million, comprised of 55.7 million pounds sterling, and standby letters of credit of $5.2 million. The weighted average interest rate was 6.63% on these facilities as of December 30, 2006, as compared to 5.83% as of December 31, 2005.
SECURITIZATIONS - Our principal U.S. operating subsidiaries maintain a receivables securitization facility under which they agreed to sell substantially all of their receivables generated from their ordinary course of operations to a 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 and certain other financial institutions in exchange for cash. These transfers 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 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 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 payable on the unused portion of the facility. The level of the facility fee is dependent on financial covenants. As of December 30, 2006, $41.3 million of eligible receivables, net of reserves, were available for purchase under this facility. There were no borrowings on this facility at December 30, 2006.
SENIOR SUBORDINATED NOTES - We also have outstanding 8% senior subordinated notes, which are due in 2011. As of December 30, 2006, 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 30, 2006 was $277.2 million, compared with $273.1 million at the end of 2005. Long-term debt in 2006 and 2005 consisted of 8% senior subordinated notes with a stated face value of $275.0 million and in 2006 capital leases of $5.9 million ($2.6 million - December 31, 2005).
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, as defined in the credit agreement, 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 2006, our leverage ratio was 3.0 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 30, 2006 it was 2.6 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 3.7 to 1.0 as of December 30, 2006. 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 are in compliance with our covenants as of December 30, 2006. Our financial covenants are calculated and determined at the end of each quarter. We expect that we will not maintain compliance with the total leverage ratio financial covenant set forth in our senior secured credit facilities in the first quarter of 2007 and accordingly, we are in discussions with our lenders to change that financial covenant. We believe we can reach agreement with our lenders on a new covenant that is acceptable to us, although there can be no assurance that we will. Since a covenant default in our senior secured credit facilities would result in a default in our unsecured senior subordinated notes due in 2011, our notes due in 2011 would, in the event of such default, become currently due and accordingly, classified as a current liability. If our lenders do not agree to amend the covenant on terms that are acceptable to us, our lenders could terminate our facilities and we would have to replace them. Should our credit facilities and 2011 notes become currently due, we may have to incur additional fees and higher interest costs to replace them.
CAPITAL STRUCTURE
In 2006, shareowner's equity increased by $6.8 million from 2005. Shareowners' equity decreased as a result of net loss of $17.5 million. This decrease was offset by an increase in additional paid-in-capital of $11.4 million from the recording of share-based compensation expense, a $12.8 million foreign currency translation gain on the net assets of self-sustaining foreign operations and a $0.4 million change in the unrealized loss on cash flow hedges. 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 2006 and we are not expecting to change this policy in 2007 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 30, 2006:
Payments due by period
---------------------------------------------
Less than Years Years After 5
(IN MILLIONS) Total 1 Year 2-3 4-5 years
------------------ ------- --------- ------- ------- -------
2011 notes $ 275.0 $ -- $ -- $ 275.0 $ --
Interest
expense (1) 146.6 33.8 65.8 47.0 --
Operating leases 101.4 17.3 24.8 17.1 42.2
Capital leases 5.9 2.0 3.3 0.5 0.1
Purchase
obligations (2) 211.5 96.4 36.3 31.6 47.2
------- ------- ------- ------- ------
$ 740.4 $ 149.5 $ 130.2 $ 371.2 $ 89.5
------- ------- ------- ------- ------
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(2) 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 revenue, net of sales returns, 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 our 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.
Although we accept returns of products from our customers occasionally, such returns, historically, have not been material.
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 $158.4 million and rights of $80.4 million on our balance sheet at December 30, 2006.
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.
We measure the fair value of reporting units using discounted future cash flow. Because the business is assumed to continue in perpetuity, the discounted future cash flow includes a terminal value. The long-term growth assumptions incorporated into the discounted cash flow calculation reflect our long-term view of the market and the discount rate is based on our weighted average cost of capital. Each year we re-evaluate the assumptions used to reflect changes in the business environment. Based on the evaluation performed this year, we determined that the fair values of our reporting units exceeded their carrying value and that as a result the second step of the impairment test was not required.
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 $115.7 million at December 30, 2006. Customer relationships are amortized on a straight-line basis for the period over which we expect to receive economic benefits. We review the estimated useful life of these intangible assets annually unless it is required more frequently because of a triggering event. During fiscal 2006, we changed the estimated useful life of two customer relationship assets relating to the closures of Wyomissing and Elizabethtown and recorded accelerated amortization of $2.4 million.
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. We also periodically review the estimated useful life of these assets. In 2006, we recorded impairment losses of $15.9 million relating to long-lived assets of the Elizabethtown, Wyomissing, Columbus, and Lachine facilities in restructuring, asset impairments and other. We also changed the estimated useful life of two customer relationship assets and property, plant and equipment resulting in $2.4 million in accelerated amortization and $8.2 million in accelerated depreciation respectively resulting from the closures of Wyomissing and Elizabethtown.
RESTRUCTURING CHARGES
Over the last two years we have undertaken restructuring activities which resulted in provisions for severance and lease terminations. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives and, as a result, there may be additional charges or adjustments for changes in estimates of amounts previously expensed as well as charges for new restructuring activities.
SHARE-BASED COMPENSATION
Effective January 1, 2006, we adopted Statement of Financial Accounting Standard ("SFAS") 123R, Share-Based Payments, using the modified prospective approach and therefore have not restated results for prior periods. Under this prospective approach, share-based compensation expense for the year ended December 30, 2006 includes compensation expense for all share-based compensation awards granted, prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Share-based compensation expense for all share-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. We recognized these compensation costs net of a forfeiture rate on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three years. We estimated the forfeiture rate for fiscal 2006 based on our historical experience with forfeitures during the preceding three fiscal years.
The fair value of each option and share appreciation rights grant is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions are based on three factors: risk-free interest rate, expected term and expected volatility. The risk-free interest rate is based
on the implied yield available on zero coupon Government of Canada bond with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. The expected stock price volatility is based on a combination of historical volatility of our stock and the implied volatility of our traded options.
In 2006, we also awarded performance share units to our employees as part of our two new long-term incentive plans. The number of units ultimately earned by our employees will depend on our performance over a three year performance cycle and accordingly the compensation expense will vary depending on our estimate of the number of units which will ultimately vest. We review our performance against these targets and will adjust the compensation expense to reflect our best estimate of the number of units we expect to vest. These performance targets are not market based and therefore, the expense per unit is fixed.
INVENTORY COSTS
Effective January 1, 2006, we adopted SFAS 151, Inventory Costs. The statement requires that the allocation of fixed production overheads to inventory be based on the normal capacity of the production facilities. Unallocated overheads resulting from abnormally low production and certain other costs are to be recognized as an expense in the period in which they are incurred. There was no material impact from the adoption of this standard.
INCOME TAXES
We regularly review the recognized and unrecognized deferred income tax assets to determine whether or not a valuation allowance is required. Management continues to believe that it is more likely than not that the deferred tax asset of $17.5 million in respect of Canada will not be realized and has retained a valuation allowance for this amount. An increase in reserves of $5.3 million partially offset the decrease 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 $11.7 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. Although we are currently the subject of audits by taxation authorities in various jurisdictions, including Canada and the United States, and while the liabilities, if any, resulting from these audits are not determinable at this time, we do not believe that the resolution of these audits will have a material adverse effect on our financial position.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes." FIN 48 is an interpretation of FASB Statement No. 109 "Accounting for Income Taxes." We will adopt FIN 48 for our interim period ending March 31, 2007. This interpretation prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that we have taken or expect to take in our tax returns. We are currently evaluating the impact of the new standard on our financial statements. Any adjustment required to increase or decrease our tax liabilities as a result of adopting the new standard will be accounted for as an adjustment to opening retained earnings as of December 30, 2006. We will recognize interest and penalties relating to unrecognized tax benefits within income tax expense. As of December 30, 2006, we have recognized an income tax reserve of $10.3 million relating to uncertain tax positions we have taken. Although we are currently the subject of audits by taxation authorities in various jurisdictions, including Canada and the United States, we do not believe that the resolution of these audits will have a material adverse affect on our financial position.
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 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 30, 2006. 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 this assessment, we determined that, as of December 30, 2006, our internal control over financial reporting was not effective due to the existence of material weaknesses. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
We did not maintain effective controls over the completeness, accuracy, valuation and existence of inventory held by a supplier to our U.K. business and the valuation of credit notes due from that supplier. In addition, we did not maintain appropriate segregation of duties because an employee of our U.K. business negotiated and entered into purchase contracts while maintaining overall responsibility for the accounting for these transactions without appropriate review or monitoring. These control deficiencies could result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. As a result of the receivership of our U.K. supplier of which we were advised subsequent to year-end, we identified an adjustment of $9 million that was recorded in the financial statements for the year ended December 30, 2006.
We did not maintain effective internal controls over our procurement process, specifically the authorization and approval of contracts and timely communication of contracts to appropriate accounting personnel to evaluate their accounting treatment. These control deficiencies could affect financial statement balances of inventory, prepaids, property, plant and equipment and related depreciation, accounts payable and capital lease obligations and could result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.
Our assessment of the effectiveness of our internal control over financial reporting as of December 30, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears on pages 34 and 35.
PLAN FOR REMEDIATION OF MATERIAL WEAKNESSES
In response to the identified material weaknesses, we, with oversight from our Audit Committee, are focused on improving our internal controls and remedying the identified material weaknesses, through implementing new controls and policies and ensuring that all our controls and policies are followed.
Our policies require periodic inventory counts and detailed reconciliation procedures to ensure the completeness, accuracy and existence of inventory. In addition, we have procedures in place to ensure appropriate valuation of inventory and credit notes. We plan on monitoring adherence to our policies by assigning appropriate personnel to undertake responsibility for these controls. We have also begun implementing a functional reporting structure intended to ensure appropriate segregation of duties.
We have recently hired a Chief Manufacturing and Supply Chain Officer who is responsible for the global procurement function. We will implement processes to ensure that our policy that all contracts be appropriately authorized and that appropriate review for accounting of contracts takes place on a timely basis is followed.
We believe that these corrective actions will remediate the material weaknesses identified above. We will continue to monitor the effectiveness of these actions and will make any changes and take such other actions that we deem appropriate given the circumstances.
2005 VERSUS 2004
RESULTS OF OPERATIONS
2005 2004
------------------- --------------------
MILLIONS PERCENT MILLIONS PERCENT
OF OF OF OF
DOLLARS REVENUE DOLLARS REVENUE
---------- ------- ----------- -------
Revenue $ 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%
Loss/(gain) on sale of property,
plant and equipment 1.5 0.1% (0.3) --
Restructuring, asset impairments and
other 37.5 2.1% 0.9 --
--------- ----- ---------- -----
Operating income 71.9 4.1% 145.0 8.8%
Other expense (0.7) -- 0.2 --
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%
========= ===== ========== =====
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REVENUE
Revenue in 2005 was $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 revenue in 2005 as compared with 2004. As shown in the following table, revenue 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, volume was up 1%.
NORTH INTER-
COTT(1) AMERICA NATIONAL
------ ------- --------
Change in revenue $109.0 $ 39.5 $ 68.0
Impact of acquisitions 55.5 17.7 37.8
Impact of foreign exchange 14.0 13.8 0.2
------ ------ -------
Change excluding acquisitions & foreign exchange $ 39.5 $ 8.0 $ 30.0
------ ------ -------
Percentage change excluding acquisitions & foreign
exchange 2% 1% 12%
------ ------ -------
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(1) Cott includes North America, International and Corporate & other.
In North America, our revenue was $1,428.0 million in 2005, an increase of 3% from 2004. Excluding acquisitions and the impact of foreign exchange, revenue 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 category and was offset by selling price increases implemented in response to higher raw material costs.
The international segment includes U.K., Europe, Mexico, Royal Crown International and Asia. In the U.K and Europe, our revenue was $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, revenue 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. Revenue from Mexico, Royal Crown International and Asia was $71.6 million in 2005, an increase of 17% when compared with revenue of $61.2 million in 2004. Excluding foreign exchange, revenue increased 14%. Revenue 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 revenue, a 3 percentage point increase from $1,362.6 million or 82.8% of revenue 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.
NORTH INTER-
Increase (decrease) COTT AMERICA NATIONAL
------------------- ---- ------- --------
Volume impact (1)% (3)% 11%
Ingredients & packaging costs 5% 5% --
Product mix 1% 1% --
Acquisitions 4% 2% 17%
Depreciation & other fixed costs 1% 1% 1%
Foreign exchange 1% 1% --
Other -- -- 1%
-- -- --
Total cost of sales change 11% 7% 30%
== == ==
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The increase in total cost of sales as a percent of revenue reflects an increase in ingredients and packaging costs as well as higher fixed costs. Ingredients and packaging cost increases were impacted by high fructose corn syrup, PET bottles and cans cost. Higher fixed costs resulted 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 those increases. In 2005, cost of sales was reduced by the proceeds from the HFCS litigation settlement.
GROSS PROFIT
Gross profit was 14.2% of revenue 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 was $138.6 million in 2005, up slightly from $138.1 million in 2004. As a percentage of revenue, 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.
RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER
In 2005, we recorded restructuring, asset impairments and other charges of $37.5 million before tax. Restructuring, asset impairments and other charges 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.
Asset impairment charges relating to the realignment included $9.3 million for the closure of the Columbus 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.
OTHER - Other costs of $0.8 million in 2005 relate primarily to legal fees for the U.K. Office of Fair Trading and Competition Commission reviews of the Macaw Acquisition in the U.K. On April 28, 2006, we received final clearance of the Macaw Acquisition from the Competition Commission.
OPERATING INCOME
Operating income was $73.4 million in 2005 including restructuring, asset impairments and other charges of $37.5 million, as compared with $144.7 million in 2004 which included a writedown of an investment 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.
OUTLOOK
While we expect continued decline in the carbonated soft drinks industry in the North American Food and Mass Channels, energy drinks and non-carbonated beverages, including bottled water, sports drinks and ready-to-drink teas, are showing strong growth. However, the impact of higher retail prices on CSD industry volumes, as beverage manufacturers pass through significant commodity cost increases, is uncertain.
Ingredients and packaging costs represent a significant portion of our cost of sales. Most of these costs are subject to global and regional commodity cost trends. Our three biggest commodities are aluminum, resin and HFCS. In 2006, most aluminum buyers, including ourselves, were protected by price caps keeping the price paid below world prices. However, the cap on aluminum in our contract with CCS expired in December 2006, and in 2007, the price paid for aluminum has increased significantly to reflect world pricing. While we currently expect aluminum prices to decrease through 2007, the degree of the price decline and the timing are uncertain. Resin prices have increased significantly in recent years but are expected to be down slightly in 2007 as compared with 2006 levels. HFCS has a history of volatile price changes. We typically purchase HFCS requirements for North America under 12 month contracts and have locked in the majority of our requirements for the year. Our HFCS prices will be up significantly in 2007 over prior year and we expect this trend to continue in the future, as a result of growing demand for corn-related products.
To be successful in this environment, we will need to continue to cover all raw material cost increases with pricing, work to strategically reduce costs, aggressively improve the efficiency of our overall supply chain including bottled water profitability, increase our penetration into the non-carbonated beverages category and expand further into international markets.
Our strategy for creating and sustaining long-term growth and profitability is based on three key strategic priorities: 1) being the lowest cost producer; 2) becoming the retailers' best partner; and 3) building and sustaining an innovation pipeline.
Our cost reduction program includes initiatives to optimize assets, reduce fixed costs and implement world-class efficiencies, the adoption of a sub-zero based budgeting system, optimization of selling, general and administrative expenses, further centralization of procurement and suppliers, ongoing SKU rationalization and optimization of all capital investments. In addition, we intend to drive revenue and volume growth by focusing on in-store merchandising and display, penetration of new, high-margin beverage segments, expansion of our business to new, high-margin channels, and expansion to new global customers and geographies.
To support the Company's long-term growth, we have restructured our organization under two business units responsible for North America and International. These two business units are focused on customer management, channel development, sales and marketing and are supported by six centralized functions: 1) People; 2) Manufacturing & Supply Chain; 3) Finance; 4) Legal; 5) Information Technology & Shared Services and 6) Communications. The new organizational structure is designed to leverage our strengths in addressing growth opportunities while driving efficiencies throughout the Company.
Since September 29, 2005 through the end of our 2006 fiscal year, we have recorded pretax charges of $86.0 million relating to our previously announced North American realignment, various cost reduction programs and relating to impairments of customer relationship intangible assets. These amounts are part of our estimated $115 to $125 million in total charges related to cost reduction. This range was revised from the initially announced range of $60 to $80 million, as a result of additional plant closures, office consolidation and organizational streamlining. In the near term, it is reasonably possible that additional charges for exit costs and severances relating to our cost reduction programs will be in the range of $29 million to $39 million.
Our business strategy, while focused on driving improved performance in our North American core portfolio with current customers, also involves continued expansion of our business outside North America. We continue to view Mexico as a strong long-term growth opportunity and are working closely with our customers to grow the retailer brand beverage segment in this market and expand into new channels and product segments. Our U.K. division intends to continue to enhance its performance through product innovation and expansion in aseptic products with the installation of a second aseptic production line in our Nelson facility in the spring of 2007.
We have already taken significant costs out of the business but there is more we can do. We have made good early progress in expanding into new channels, new products and new customers, especially internationally. It takes time to see the benefits of these initiatives, but we expect them to positively impact the business and our financial results in 2007 and beyond.
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 35% of 2006 revenue and 29% of 2005 revenue, and are concentrated principally in the U.K., Canada and Mexico. Our debt instruments, including debt of
55.7 million pounds sterling are related to the U.K. operations. 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 consisted of monthly foreign exchange options to buy U.S. dollars at fixed rates per Canadian dollar and matured at various dates through December 28, 2006. The fair market value of the foreign exchange options, if any, is included in prepaid expenses and other assets.
At December 30, 2006 there are no hedges outstanding. We recorded a $0.4 million decrease in the unrealized loss in other comprehensive income in 2006 relating to options maturing during the year.
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.
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 30, 2006 was 7.58%.
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 30, 2006. 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 30, 2006.
DEBT OBLIGATIONS
------------------------------
WEIGHTED AVERAGE
INTEREST RATE FOR
(IN MILLIONS OF US DOLLARS) FIXED RATE DEBT MATURING
--------------------------- ---------- ------------------
DEBT MATURING IN:
2007 $ 2.0 5.3%
2008 2.0 5.3%
2009 1.4 5.4%
2010 0.5 5.2%
2011 275.0 8.0%
---------- ---
Total $ 280.9 7.9%
---------- ---
Fair Value $ 287.1
----------
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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 & Touche LLP to provide internal audit services including monitoring and reporting on the adequacy of and compliance with internal controls, in accordance with their approved annual internal audit plan. 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.
For the year ended December 30, 2006, we identified material weaknesses in the areas of procurement, segregation of duties and inventory. In response to the identified material weaknesses, we, with oversight from our Audit Committee, are focused on improving our internal controls over financial reporting and remedying the identified material weaknesses, through implementing new controls and policies and ensuring that all our controls and policies are followed. The material weaknesses are disclosed on "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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 30, 2006 and December 31, 2005 and the audit of the January 1, 2005 financial statements, is included in this Annual Report. We used PricewaterhouseCoopers LLP for audit and tax compliance services in 2006 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/ Brent D. Willis ----------------------------------------------------- Brent D. Willis Chief Executive Officer February 19, 2007 /s/ Tina Dell'Aquila ----------------------------------------------------- Tina Dell'Aquila Chief Financial Officer, Vice President, Controller & Assistant Secretary February 19, 2007 |
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREOWNERS OF COTT CORPORATION:
We have completed integrated audits of Cott Corporation's December 30, 2006, December 31, 2005 and January 1, 2005 consolidated financial statements and of its internal control over financial reporting as of December 30, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
In our opinion, the consolidated financial statements 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 30, 2006 and December 31, 2005 and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statements schedules appearing under Item 15 of Form 10-K present fairly, in all material respects, the information set 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 financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the Company adopted Statement of Financial Accounting Standard ("SFAS") 123(R), Share-Based Payments which changed its method of accounting for stock-based compensation. In addition, the Company adopted SFAS 151, Inventory Costs, which changed its method of accounting for fixed production overheads.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Also, we have audited 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 did not maintain effective internal control over financial
reporting as of December 30, 2006, because of the effects of material weaknesses
relating to the Company not maintaining effective control over i) completeness,
accuracy, valuation and existence of inventory and segregation of duties, and
ii) procurement, specifically the authorization and approval of contracts and
timely communication of contracts to evaluate their accounting treatment, based
on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (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 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.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management's assessment.
1. The Company did not maintain effective controls over the completeness, accuracy, valuation and existence of inventory held by a supplier at the United Kingdom division and the valuation of credit notes due from that supplier. The Company did not maintain appropriate segregation of duties because an employee of the United Kingdom division negotiated and entered into purchase contracts while maintaining overall responsibility for the accounting for these transactions without appropriate review or monitoring.
2. The Company did not maintain effective internal controls over the procurement process, specifically the authorization and approval of contracts and timely communication of contracts to appropriate accounting personnel to evaluate their accounting treatment. These control deficiencies could affect financial statement balances of inventory, prepaids, property, plant and equipment and related depreciation, accounts payable and capital lease obligations.
Each of these control deficiencies could result in a misstatement of the Company's financial statement accounts and disclosures balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that each of these control deficiencies constitutes a material weakness. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the December 30, 2006 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements.
In our opinion, management's assessment that the Company did not maintain effective internal control over financial reporting as of December 30, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the COSO. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 30, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO.
/s/ PricewaterhouseCoopers LLP --------------------------------------- PricewaterhouseCoopers LLP Chartered Accountants Toronto, Ontario February 19, 2007 |
COTT CORPORATION
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
For the years ended
--------------------------------------
DECEMBER 30, December 31, January 1,
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) 2006 2005 2005
------------ ------------ ----------
REVENUE $ 1,771.8 $ 1,755.3 $ 1,646.3
Cost of sales 1,554.9 1,505.8 1,362.6
----------- ----------- ---------
GROSS PROFIT 216.9 249.5 283.7
Selling, general and administrative expenses 176.1 138.6 138.1
Loss (gain) on disposal of property, plant and equipment -- 1.5 (0.3)
Restructuring, asset impairments and other charges - note 2
Restructuring 20.5 3.2 --
Asset impairments 15.4 33.5 0.9
Other 2.6 0.8 --
----------- ----------- ---------
OPERATING INCOME 2.3 71.9 145.0
Other expense (income), net - note 3 0.1 (0.7) 0.2
Interest expense, net - note 4 32.2 28.8 26.0
Minority interest 3.8 4.5 4.0
----------- ----------- ---------
(LOSS) INCOME BEFORE INCOME TAXES AND EQUITY LOSS (33.8) 39.3 114.8
Income taxes - note 5 (16.3) 14.7 35.8
Equity loss -- -- 0.7
NET (LOSS) INCOME - note 6 $ (17.5) $ 24.6 $ 78.3
=========== =========== =========
PER SHARE DATA - note 7
NET (LOSS) INCOME PER COMMON SHARE
Basic $ (0.24) $ 0.34 $ 1.10
Diluted $ (0.24) $ 0.34 $ 1.09
|
The accompanying notes are an integral part of these consolidated financial statements.
COTT CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, December 31,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 13.4 $ 21.7
Accounts receivable - note 8 187.0 190.1
Income taxes recoverable 16.6 1.0
Inventories - note 9 131.2 144.2
Prepaid expenses and other assets - note 10 10.3 9.5
Deferred income taxes - note 5 11.7 7.3
----------- ------------
370.2 373.8
PROPERTY, PLANT AND EQUIPMENT - note 11 360.2 394.2
GOODWILL - note 12 158.4 150.3
INTANGIBLES AND OTHER ASSETS - note 13 250.7 260.4
DEFERRED INCOME TAXES - note 5 -- 0.4
----------- ------------
$ 1,139.5 $ 1,179.1
=========== ============
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings - note 14 $ 107.7 $ 157.9
Current maturities of long-term debt - note 15 2.0 0.8
Accounts payable and accrued liabilities - note 16 186.5 182.5
Deferred income taxes - note 5 -- 0.2
----------- ------------
296.2 341.4
LONG-TERM DEBT - note 15 275.2 272.3
DEFERRED INCOME TAXES - note 5 58.5 61.0
----------- ------------
629.9 674.7
----------- ------------
MINORITY INTEREST 20.9 22.5
SHAREOWNERS' EQUITY
CAPITAL STOCK - note 17
Common shares - 71,749,630 (2005 - 71,711,630) shares issued 273.4 273.0
RESTRICTED SHARES - note 18 (0.7) --
ADDITIONAL PAID-IN-CAPITAL 29.8 18.4
RETAINED EARNINGS 168.7 186.2
ACCUMULATED OTHER COMPREHENSIVE INCOME 17.5 4.3
----------- ------------
488.7 481.9
----------- ------------
$ 1,139.5 $ 1,179.1
=========== ============
|
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 |
COTT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
NUMBER OF ACCUMULATED
COMMON ADDITIONAL OTHER
SHARES COMMON ESTRICTED PAID-IN- RETAINED COMPREHENSIVE TOTAL
(IN MILLIONS OF U.S. DOLLARS) (IN THOUSANDS) SHARES SHARES CAPITAL EARNINGS INCOME EQUITY
-------------- ------ --------- ---------- -------- ------------- ------
Balance at January 3, 2004 70,259 $255.2 $ -- $ 12.7 $ 83.3 $ (6.1) $345.1
Options exercised, including tax benefit
of $4.9 million - note 18 1,181 14.2 -- 4.9 -- -- 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
------ ------ --------- ---------- ------- ------------ ------
-- -- -- -- 78.3 14.8 93.1
------ ------ --------- ---------- ------- ------------ ------
Balance at January 1, 2005 71,440 269.4 -- $ 17.6 161.6 8.7 457.3
Options exercised, including tax benefit
of $0.8 million - note 18 272 3.6 -- 0.8 -- -- 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
------ ------ --------- ---------- ------- ------------ ------
-- -- -- -- 24.6 (4.4) 20.2
------ ------ --------- ---------- ------- ------------ ------
Balance at December 31, 2005 71,712 273.0 -- $ 18.4 186.2 4.3 481.9
Options exercised, including tax benefi
of nil 38 0.4 -- -- -- -- 0.4
Restricted shares - note 18 -- -- (0.7) -- -- -- (0.7)
Share-based compensation -- -- -- 11.4 -- -- 11.4
Comprehensive income - note 6
Currency translation adjustment -- -- -- -- -- 12.8 12.8
Change in unrealized loss on cash
flow hedges - note 10 -- -- -- -- -- 0.4 0.4
Net loss -- -- -- -- (17.5) -- (17.5)
------ ------ --------- ---------- ------- ------------ ------
-- -- -- -- (17.5) 13.2 (4.3)
------ ------ --------- ---------- ------- ------------ ------
BALANCE AT DECEMBER 30, 2006 71,750 $273.4 $ (0.7) $ 29.8 $ 168.7 $ 17.5 $488.7
====== ====== ========= ========== ======= ============ ======
|
The accompanying notes are an integral part of these consolidated financial statements.
COTT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
--------------------------------------
DECEMBER 30, December 31, January 1,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005 2005
------------ ------------ ----------
OPERATING ACTIVITIES
Net (loss) income $ (17.5) $ 24.6 $ 78.3
Depreciation and amortization 86.8 70.2 60.0
Amortization of financing fees 1.1 0.8 0.7
Share-based compensation - note 18 11.4 -- --
Deferred income taxes - note 5 (6.6) (6.5) 9.1
Minority interest 3.8 4.5 4.0
Loss (gain) on disposal of property, plant and equipment -- 1.5 (0.3)
Equity loss -- -- 0.7
Asset impairments 15.4 33.5 1.5
Other non-cash items 12.0 1.5 1.1
Net change in non-cash working capital - note 19 3.0 (1.0) (52.4)
----------- ----------- ---------
Cash provided by operating activities 109.4 129.1 102.7
INVESTING ACTIVITIES
Additions to property, plant and equipment (35.1) (75.8) (50.3)
Additions to intangibles and other assets (13.0) (9.0) (10.1)
Proceeds from disposition of property, plant and equipment 1.6 2.2 5.4
Acquisitions - note 20 -- (135.1) (34.6)
Acquisition of production capacity -- -- (3.8)
----------- ----------- ---------
Cash used in investing activities (46.5) (217.7) (93.4)
FINANCING ACTIVITIES
Payments of long-term debt (1.0) (0.9) (3.5)
Short-term borrowings (65.9) 91.8 (7.0)
Distributions to subsidiary minority shareowner (5.4) (5.8) (5.9)
Issue of common shares 0.4 3.6 14.3
Financing costs -- (3.8) --
Other financing activities 0.6 (0.4) (0.4)
----------- ----------- ---------
Cash (used in) provided by financing activities (71.3) 84.5 (2.5)
----------- ----------- ---------
Effect of exchange rate changes on cash 0.1 (0.8) 1.4
----------- ----------- ---------
NET (DECREASE) INCREASE IN CASH (8.3) (4.9) 8.2
----------- ----------- ---------
CASH, BEGINNING OF YEAR 21.7 26.6 18.4
----------- ----------- ---------
CASH, END OF YEAR $ 13.4 $ 21.7 $ 26.6
=========== =========== =========
|
The accompanying notes are an integral part of these consolidated financial statements.
COTT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED 2006, 2005 AND 2004
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
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes." FIN 48 is an interpretation of FASB Statement No. 109 "Accounting for Income Taxes." We will adopt FIN 48 for our interim period ending March 31, 2007. This interpretation prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements uncertain tax positions that we have taken or expect to take in our tax returns. We are currently evaluating the impact of the new standard on our financial statements. Any adjustment required to increase or decrease our tax liabilities as a result of adopting the new standard will be accounted for as an adjustment to opening retained earnings as of December 30, 2006. We will recognize interest and penalties relating to unrecognized tax benefits within income tax expense. As of December 30, 2006, we have recognized an income tax reserve of $10.3 million relating to uncertain tax positions we have taken. Although we are currently the subject of audits by taxation authorities in various jurisdictions, including Canada and the United States, we do not believe that the resolution of these audits will have a material adverse affect on our financial position.
REVENUE RECOGNITION
We recognize revenue, net of sales returns, 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. Although we accept returns of products from our customers occasionally, such returns, historically, have not been material.
SALES INCENTIVES
We participate in various incentive programs with our customers including volume based incentives, promotional allowance incentives and contractual rebate incentives. Sales incentives are deducted in arriving at sales. Sales incentives, based on our customers achieving volume targets or remaining loyal for a period of time, are accrued as the incentives are earned and are 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
We record all other expenses not charged to production as general and administrative expenses.
SHARE-BASED COMPENSATION
Effective January 1, 2006, we adopted Statement of Financial Accounting Standard ("SFAS") 123R, Share-Based Payments, using the modified prospective approach and therefore have not restated results for prior periods. Under the modified prospective approach, share-based compensation expense for the year ended December 30, 2006 includes compensation expense for all share-based compensation awards granted, prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Share-based compensation expense for all share-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. We recognized these compensation costs net of a forfeiture rate on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three years. We estimated the forfeiture rate for fiscal 2006 based on our historical experience with forfeitures during the preceding three fiscal years. For the year ended December 30, 2006, net loss includes compensation expense of $11.4 million, or $8.4 million net of tax recovery of $3.0 million, or $0.12 per basic and diluted share. Had compensation expense for the plans been determined based on the fair value at the date of grant for the year ended December 31, 2005 our income before taxes would have been $29.5 million, income tax expense would have been $12.2 million and net income would have been $17.3 million or $0.24 per basic and diluted share as described in note 18.
Upon adoption of SFAS 123R, we used the long form method for calculating the tax effect of share-based compensation. Under this method, we determine the beginning balance of additional paid-in-capital related to the tax effects of the employee share-based compensation as if we had adopted the recognition provisions of SFAS 123 since its effective date of January 1, 1995. On an ongoing basis, additional paid-in-capital is adjusted by the tax impact related to the difference between the amount deducted for tax purposes and the compensation cost for accounting purposes. Where the tax deduction exceeds book compensation cost, an increase in additional paid-in-capital is recorded. Where the tax deduction is less than book compensation cost, a reduction in additional paid-in-capital is recorded to the extent there is an accumulated balance or charged to income tax expense if a shortfall remains after the accumulated additional paid-in-capital is brought to zero.
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.
Effective January 1, 2006, we adopted SFAS 151, Inventory Costs. The statement requires that the allocation of fixed production overheads to inventory be based on the normal capacity of the production facilities. Unallocated overheads resulting from abnormally low production and certain other costs are to be recognized as an expense in the period in which they are incurred. There was no material impact from the adoption of this standard.
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 5 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 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.
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
Restructuring, Asset Impairments and Other Charges
For the years ended
-------------------------------------------
DECEMBER 30, December 31, January 1,
2006 2005 2005
------------ ------------ ----------
(IN MILLIONS OF U.S. DOLLARS)
Restructuring $ 20.5 $ 3.2 $ --
Asset impairments 15.4 33.5 0.9
Other 2.6 0.8 --
------------ ------------ ----------
$ 38.5 $ 37.5 $ 0.9
============ ============ ==========
|
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, we closed our Lachine, Quebec juice plant ("Lachine") in February 2006 and in March 2006 we closed our Columbus, Ohio soft drink plant and warehouse ("Columbus") to bring production capacity in line with the needs of our customers.
On July 27, 2006, we announced the realignment of the management of our U.K. and Europe business, our Mexican business, our Royal Crown International business and our business in Asia to an International basis, to focus on customer management, channel development, sales and marketing.
In addition, on October 26, 2006, we announced the closures of our manufacturing plant in Elizabethtown, Kentucky ("Elizabethtown") and our manufacturing plant and warehousing operations in Wyomissing, Pennsylvania ("Wyomissing"). We ceased production at both plants on December 30, 2006, and have reallocated production volume to other manufacturing sites in North America. The Wyomissing warehouse was still in operation as of December 30, 2006, and is expected to be closed in 2007.
YEAR ENDED DECEMBER 30, 2006
The following table sets out our restructuring, asset impairments and other charges on a segmented basis for the year ended December 30, 2006.
For the year ended December 30, 2006
-------------------------------------
North Inter-
(IN MILLIONS OF U.S. DOLLARS) America national Corporate Total
----------------------------- ------- -------- --------- -----
Restructuring $ 15.6 $ 0.7 $ 4.2 $ 20.5
Asset impairments 15.3 -- 0.1 15.4
Other -- 2.6 -- 2.6
------- ------ ------- -------
$ 30.9 $ 3.3 $ 4.3 $ 38.5
======= ====== ======= =======
|
RESTRUCTURING - We recorded restructuring charges of $20.5 million including $14.7 million for severance and contract termination costs relating to the closures of Columbus, Lachine, Elizabethtown and Wyomissing, $0.9 million of other severance costs relating to sales and marketing employees and $4.2 million for severance relating to organizational streamlining. The remaining restructuring cost of $0.7 million relates to consulting fees incurred in connection with restructuring activities.
The following table is a summary of our cash restructuring charges for the year ended December 30, 2006:
Balance at Charged to Payments Balance at
(IN MILLIONS OF January 1, Costs and made during December
U.S. DOLLARS) 2006 Expenses the year 30, 2006
--------------- ---------- ---------- ----------- ----------
Severance and
termination
benefits $ 1.0 $ 12.1 $ (7.7) $ 5.4
Contract loss -- 7.7 (0.4) 7.3
Other -- 0.7 (0.7) --
-------- -------- --------- --------
$ 1.0 $ 20.5 $ (8.8) $ 12.7
======== ======== ========= ========
|
ASSET IMPAIRMENTS - We recorded an impairment loss of $15.4 million, which is comprised of charges of $14.2 million for the writedown of property, plant and equipment related to the closures of Elizabethtown and Wyomissing, $1.6 million for the writedown of property, plant and equipment, customer list and information technology software related to the closure of Columbus and $0.1 million for the writedown of property, plant and equipment relating to Lachine, net of a $0.5 million recovery from the sale of other assets.
OTHER - Other unusual items includes primarily legal and consulting fees relating to the United Kingdom ("U.K.") Competition Commission review of our acquisition of 100% of the shares of Macaw (Holdings) Limited (now known as Cott Nelson (Holdings) Limited), the parent company of Macaw (Soft Drinks) Limited (now known as Cott (Nelson) Limited) (the "Macaw Acquisition") in the U.K. On April 28, 2006, we received final clearance of the Macaw Acquisition from the Competition Commission.
We are currently evaluating various actions to reduce costs and are developing detailed plans which may result in additional exit and other costs being incurred. In the near term, we expect to incur additional charges relating to contract termination costs associated with the closure of Elizabethtown and Wyomissing. Since September 29, 2005 through the end of the year ended December 30, 2006, we have recorded pre-tax charges of $86.0 million relating to our previously announced North American realignment, cost reduction programs and impairments of customer relationship intangible assets, of which $20.0 million was recorded in 2005 relating to customer relationship impairment. In connection with the plant and warehouse closures announced on October 26, 2006, we have recorded pre-tax charges of $30.4 million, of which $10.6 million relates to accelerated depreciation and amortization recorded in cost of sales and $14.2 million in impairment charges relating to property, plant and equipment and intangible assets, and the remainder relates to contract termination costs and severance costs for the termination of approximately 350 employees. The remainder of these costs will be taken in the first half of 2007. These amounts are part of the estimated $115 to $125 million in charges for cost reduction programs including additional plant closures, office consolidation and organizational streamlining. This range was revised from the initially announced $60 to $80 million in charges associated with the North American realignment plan and other asset impairments. In the near term, it is reasonably possible that additional charges for exit costs and severances relating to our cost reduction programs will be in the range of $29 million to $39 million.
We may also rationalize products and production capacity further but have not yet completed our analysis nor have we completed our detailed plans. Accordingly, the ultimate amount of any asset impairment charges or change in useful lives of assets that may result is uncertain. It is reasonably possible that our estimates of future cash flows or the useful lives, or both, related to certain equipment and intangibles will be significantly reduced in the near term. As a result, the
carrying value of the related assets may also be reduced materially in the near term.
YEAR ENDED DECEMBER 31, 2005
The following table sets out our restructuring, asset impairments and other charges on a segmented basis for the year ended December 31, 2005.
For the year ended December 31, 2005
-------------------------------------
(IN MILLIONS OF North Inter-
U.S. DOLLARS) America national Corporate Total
------- -------- --------- -------
Restructuring $ 3.0 $ -- $ 0.2 $ 3.2
Asset impairments 33.0 (0.2) 0.7 33.5
Other -- 0.8 -- 0.8
------- ------- --------- -------
$ 36.0 $ 0.6 $ 0.9 $ 37.5
======= ======= ========= =======
|
RESTRUCTURING - Restructuring charges for the year ended December 31, 2005 are comprised of severance and contract termination costs relating to the North American realignment plan.
The following table is a summary of our cash restructuring charges for the year ended December 30, 2005:
Balance at Charged to Payments Balance at
(IN MILLIONS OF January 2, Costs and made during December 31,
U.S. DOLLARS) 2005 Expenses the year 2005
--------------- ---------- ---------- ----------- ------------
Severance and
termination
benefits $ -- $ 2.6 $ (1.6) $ 1.0
Contract loss -- 0.6 (0.6) --
------- ------- --------- -------
$ -- $ 3.2 $ (2.2) $ 1.0
======= ======= ========= =======
|
ASSET IMPAIRMENTS - Asset impairments for the year ended December 31, 2005 are comprised of writedown of a customer relationship intangible asset of $20.0 million as well as writedown of property, plant and equipment of $7.1 million and goodwill of $5.9 million in connection with the closure of our Lachine, Quebec juice plant and our Columbus, Ohio soft drink plant.
OTHER - Other costs of $0.8 million relate primarily to legal fees for the U.K Office of Fair Trading and Competition Commission reviews of the Macaw Acquisition.
YEAR ENDED JANUARY 1, 2005
During the year ended January 1, 2005 asset impairment charges were $0.9 million, including a charge of $1.5 million relating to provision for a note due from an equity investee.
NOTE 3
Other Expense (Income), Net
For the years ended
---------------------------------------
DECEMBER 30, December 31, January 1,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005 2005
----------------------------- ------------ ------------ ----------
Foreign exchange (gain) loss $ (0.1) $ (0.5) $ 0.7
Other 0.2 (0.2) (0.5)
-------- ------- -------
$ 0.1 $ (0.7) $ 0.2
======== ======= =======
|
NOTE 4
Interest Expense, Net
For the years ended
----------------------------------------
DECEMBER 30, December 31, January 1,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005 2005
------------------------------ ------------ ------------ ----------
Interest on long-term debt $ 23.0 $ 23.1 $ 23.3
Other interest expense 10.3 6.2 3.2
Interest income (1.1) (0.5) (0.5)
-------- ------- -------
$ 32.2 $ 28.8 $ 26.0
======== ======= =======
|
Interest paid during the year was approximately $32.1 million ($27.2 million - December 31, 2005; $25.0 million - January 1, 2005).
NOTE 5
Income Taxes
Income (loss) before income taxes and equity loss consisted of the following:
For the years ended
--------------------------------------------
DECEMBER 30, December 31, January 1,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005 2005
----------------------------- ------------ ------------ ----------
Canada $ 7.3 $ (10.2) $ (1.9)
Outside Canada (41.1) 49.5 116.7
--------- --------- ----------
$ (33.8) $ 39.3 $ 114.8
========= ========= ==========
|
Provision for income taxes consisted of the following:
For the years ended
-------------------------------------------
(IN MILLIONS OF U.S. DECEMBER 30, December 31, January 1,
DOLLARS) 2006 2005 2005
-------------------- ------------ ------------ ----------
CURRENT
Canada $ -- $ 0.2 $ 0.1
Outside Canada (9.7) 21.0 26.6
--------- --------- ----------
$ (9.7) $ 21.2 $ 26.7
--------- --------- ----------
DEFERRED
Canada $ 0.4 $ 0.8 $ (1.5)
Outside Canada (7.0) (7.3) 10.6
--------- --------- ----------
$ (6.6) $ (6.5) $ 9.1
--------- --------- ----------
PROVISION (RECOVERY) FOR
INCOME TAXES $ (16.3) $ 14.7 $ 35.8
========= ========= ==========
|
Income taxes paid during the year were $7.7 million ($14.3 million - December 31, 2005; $27.3 million - January 1, 2005).
The following table reconciles income taxes calculated at the basic Canadian corporate rates with the income tax provision:
For the years ended
--------------------------------------
(IN MILLIONS OF U.S. DECEMBER 30, December 31, January 1,
DOLLARS) 2006 2005 2005
-------------------- ------------ ------------ ----------
Income tax provision based
on Canadian statutory rates $ (11.6) $ 13.6 $ 39.8
Foreign tax rate differential (7.0) (4.6) (1.7)
(Decrease) increase in
valuation allowance (3.5) 21.0 (0.6)
Increase (reduction) to
reserve 5.3 (19.3) (2.0)
Non-deductible and other
items 0.5 4.0 0.3
--------- ------- ------
Provision for income taxes $ (16.3) $ 14.7 $ 35.8
========= ======= ======
|
As a result of a change in our estimated tax liabilities, we increased our reserve by $5.3 million.
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 30, December 31,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005
----------------------------- ------------ ------------
DEFERRED TAX ASSETS
Loss carryforwards $ 1.0 $ 12.4
Property, plant and equipment 16.1 8.3
Liabilities and reserves 11.5 7.5
Other 0.6 0.5
--------- --------
29.2 28.7
Valuation allowance (17.5) (21.0)
--------- --------
11.7 7.7
--------- --------
DEFERRED TAX LIABILITIES
Property, plant and equipment 31.4 45.5
Intangible assets 16.3 10.7
Other 10.8 5.0
--------- --------
58.5 61.2
--------- --------
NET DEFERRED TAX LIABILITY $ (46.8) $ (53.5)
========= ========
|
As of December 30, 2006, operating loss carryforwards primarily attributed to U.S. state tax, of $10.4 million are available to reduce future taxable income. These losses expire as follows:
(IN MILLIONS OF U.S. DOLLARS)
2007 $ --
2008 --
2009 --
2010 1.1
2011 0.3
2012 9.0
-------
$ 10.4
=======
|
Although we are currently the subject of audits by taxation authorities in various jurisdictions, including Canada and the United States, and while the ultimate resolution of these audits is not determinable at this time, we do not believe that the resolution of these audits will have a material adverse effect on our financial position.
NOTE 6
Other Comprehensive (Loss) Income
For the years ended
--------------------------------------
DECEMBER 30, December 31, January 1,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005 2005
----------------------------- ------------ ------------ ----------
Net (loss) income $ (17.5) $ 24.6 $ 78.3
Foreign currency translation
gain (loss) 12.8 (5.0) 15.8
Change in unrealized loss on
cash flow hedges 0.4 0.6 (1.0)
--------- --------- -------
$ (4.3) $ 20.2 $ 93.1
========= ========= =======
|
NOTE 7
(Loss) Income per Common Share
Basic net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is calculated using the weighted average number of common shares outstanding adjusted to include the effect, if dilutive, 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 December January
(IN THOUSANDS) 30, 2006 31, 2005 1, 2005
-------------- -------- -------- -------
Weighted average number of
shares outstanding -- basic 71,726 71,628 71,006
Dilutive effect of stock
options 47 272 1,065
------ ------ ------
Adjusted weighted average
number of shares
outstanding -- diluted 71,773 71,900 72,071
====== ====== ======
|
At December 30, 2006, options to purchase 2,333,964 (December 31, 2005 -- 4,102,864; January 1, 2005 -- 1,493,000) shares of common stock at a weighted average exercise price of C$31.98 (December 31, 2005 -- 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 30, December 31,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005
------------------------------- ------------ ------------
Trade receivables $ 177.9 $ 178.7
Allowance for doubtful accounts (5.0) (7.8)
Other 14.1 19.2
--------- ---------
$ 187.0 $ 190.1
========= =========
|
NOTE 9
Inventories
DECEMBER 30, December 31,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005
------------------------------- ------------ ------------
Raw materials $ 52.2 $ 63.9
Finished goods 61.5 62.9
Other 17.5 17.4
---------- ---------
$ 131.2 $ 144.2
========== =========
|
In December 2006, a $9 million inventory loss was recorded as a result of the receivership of our U.K. resin supplier.
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 consisted of monthly foreign exchange options to buy U.S. dollars at fixed rates per Canadian dollar and pound sterling and matured at various dates through December 28, 2006.
At December 30, 2006, there are no hedges outstanding. We recorded a $0.4 million decrease in the unrealized loss in other comprehensive income in 2006 relating to options maturing during the year.
As of 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 had been included in prepaid expenses and other assets at December 31, 2005 and the unrealized loss of $0.4 million was recorded in comprehensive income, reflecting a $0.6 million decrease in the unrealized loss in comprehensive income in 2005.
NOTE 11
Property, Plant and Equipment
DECEMBER 30, 2006 December 31, 2005
-------------------------------- --------------------------------
ACCUMULATED Accumulated
(IN MILLIONS OF U.S. DOLLARS) COST DEPRECIATION NET Cost Depreciation Net
----------------------------- -------- ------------ -------- -------- ------------ --------
Land $ 22.5 $ -- $ 22.5 $ 20.6 $ -- $ 20.6
Buildings 122.7 33.1 89.6 119.0 27.7 91.3
Machinery and equipment
Owned 476.6 255.2 221.4 480.8 229.1 251.7
Capital leases 7.8 1.9 5.9 3.5 0.9 2.6
Plates and film 25.6 15.8 9.8 23.1 14.0 9.1
Leasehold improvements 16.7 7.6 9.1 21.4 4.7 16.7
Furniture and fixtures 12.8 10.9 1.9 12.4 10.2 2.2
-------- ---------- -------- -------- ------- --------
$ 684.7 $ 324.5 $ 360.2 $ 680.8 $ 286.6 $ 394.2
======== ========== ======== ======== ======= ========
|
Depreciation expense for fiscal 2006 was $61.8 million ($49.8 million -- December 31, 2005; $41.7 million -- January 1, 2005).
NOTE 12
Goodwill
DECEMBER 30, December 31,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005
-------------------------------------- ------------ ------------
Balance at beginning of year $ 150.3 $ 88.8
Acquisitions -- note 20 -- 69.4
Impairment losses recognized -- note 2 -- (5.9)
Foreign exchange 8.6 (2.0)
Other (0.5) --
------- --------
Balance at end of year $ 158.4 $ 150.3
======= ========
|
NOTE 13
Intangibles and Other Assets
DECEMBER 30, 2006 December 31, 2005
------------------------------ --------------------------------
ACCUMULATED Accumulated
(IN MILLIONS OF U.S. DOLLARS) COST AMORTIZATION NET Cost Amortization Net
---------------------------------- ------ ------------ -------- -------- ------------ --------
INTANGIBLES
Not subject to amortization
Rights $ 80.4 $ -- $ 80.4 $ 80.4 $ -- $ 80.4
Subject to amortization
Customer relationships - note 2 165.7 50.0 115.7 166.7 40.1 126.6
Trademarks 29.4 11.3 18.1 29.0 9.3 19.7
Information technology 57.0 32.8 24.2 49.1 24.1 25.0
Other 3.6 1.2 2.4 3.6 1.0 2.6
------ -------- -------- -------- --------- --------
255.7 95.3 160.4 248.4 74.5 173.9
------ -------- -------- -------- --------- --------
336.1 95.3 240.8 328.8 74.5 254.3
------ -------- -------- -------- --------- --------
OTHER ASSETS
Financing costs 4.8 2.3 2.5 4.6 1.2 3.4
Other 11.2 3.8 7.4 5.4 2.7 2.7
------ -------- -------- -------- --------- --------
16.0 6.1 9.9 10.0 3.9 6.1
------ -------- -------- -------- --------- --------
$352.1 $ 101.4 $ 250.7 $ 338.8 $ 78.4 $ 260.4
====== ======== ======== ======== ========= ========
|
Amortization expense of intangibles was $24.6 million ($20.0 million - December 31, 2005; $17.8 million - January 1, 2005). Amortization of intangibles includes $8.8 million ($6.4 million - December 31, 2005; $6.2 million - January 1, 2005) relating to information technology assets.
The estimated amortization expense for intangibles over the next five years is:
(IN MILLIONS OF U.S. DOLLARS)
2007 $ 20.0
2008 20.0
2009 24.0
2010 13.2
2011 13.2
---------
$ 90.4
=========
|
NOTE 14
Short-Term Borrowings
Short-term borrowings include bank overdrafts, and borrowings under our credit facilities and receivables securitization facility.
We maintain committed senior secured credit facilities that provide for financing in North America, the U.K. and Mexico expiring on March 31, 2010.
The 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 and are comprised of two separate facilities:
(1) a $220.0 million multicurrency facility for our North American and U.K. operations, and
(2) a $5.0 million Mexican facility.
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 under certain conditions.
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 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 30, 2006, credit of $110.6 million was available after borrowings of $109.2 million (55.7 million pounds sterling) and standby letters of credit of $5.2 million. The weighted average interest rate was 6.63% on these facilities as of December 30, 2006 (5.83% - December 31, 2005).
Our principal U.S. operating subsidiaries maintain a receivables securitization facility under which they agreed to sell substantially all of their receivables generated from their ordinary course operations, to our 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 and certain other financial institutions in exchange for cash. These transfers 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 lenders. 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 30, 2006, $41.3 million of eligible receivables, net of reserves, were available for purchase. There were no balances outstanding under the receivables facility as of December 30, 2006. The weighted average interest rate on borrowings under the receivables facility was 5.08% as of December 31, 2005.
We are in compliance with our covenants as of December 30, 2006. Our financial covenants are calculated and determined at the end of each quarter. We expect that we will not maintain compliance with the total leverage ratio financial covenant set forth in our senior secured credit facilities in the first quarter of 2007 and accordingly, we are in discussions with our lenders to change that financial covenant. We believe we can reach agreement with our lenders on a new covenant that is acceptable to us, although there can be no assurance that we will. Since a covenant default in our senior secured credit facilities would result in a default in our unsecured senior subordinated notes due in 2011, our notes due in 2011 would, in the event of such default, become currently due and accordingly, classified as a current liability. If our lenders do not agree to amend the covenant on terms that are acceptable to us, our lenders could terminate our facilities and we would have to replace them. Should our credit facilities and 2011 notes become currently due, we may have to incur additional fees and higher interest costs to replace them.
NOTE 15
Long-Term Debt
DECEMBER 30, December 31,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005
----------------------------------- ------------ ------------
Senior subordinated unsecured notes
at 8% due 2011 (a) $ 271.3 $ 270.5
Capital leases & other 5.9 2.6
--------- ----------
277.2 273.1
Less current maturities (2.0) (0.8)
--------- ----------
$ 275.2 $ 272.3
========= ==========
|
DECEMBER 30, December 31,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005
----------------------------- ------------ ------------
Face value $ 275.0 $ 275.0
Discount (3.7) (4.5)
---------- ----------
$ 271.3 $ 270.5
========== ==========
|
b) Long-term debt payments required in each of the next five years and thereafter are as follows:
(IN MILLIONS OF U.S. DOLLARS)
2007 $ 2.0
2008 2.0
2009 1.4
2010 0.5
2011 275.0
Thereafter --
----------
$ 280.9
==========
|
We are in compliance with our covenants as of December 30, 2006. Our financial covenants are calculated and determined at the end of each quarter. We expect that we will not maintain compliance with the total leverage ratio financial covenant set forth in our senior secured credit facilities in the first quarter of 2007 and accordingly, we are in discussions with our lenders to change that financial covenant. We believe we can reach agreement with our lenders on a new covenant that is acceptable to us, although there can be no assurance that we will. Since a covenant default in our senior secured credit facilities would result in a default in our unsecured senior subordinated notes due in 2011, our notes due in 2011 would, in the event of such default, become currently due and accordingly, classified as a current liability. If our lenders do not agree to amend the covenant on terms that are acceptable to us, our lenders could terminate our facilities and we would have to replace them. Should our credit facilities and 2011 notes become currently due, we may have to incur additional fees and higher interest costs to replace them.
NOTE 16
Accounts Payable and Accrued Liabilities
DECEMBER 30, December 31,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005
------------------------------ ------------ ------------
Trade payables $ 89.8 $ 112.6
Accrued compensation 27.7 14.7
Accrued sales incentives 23.9 27.6
Accrued interest 1.2 1.8
Restructuring - note 2 12.7 1.0
Payroll, sales and other taxes 13.3 8.9
Other accrued liabilities 17.9 15.9
---------- ----------
$ 186.5 $ 182.5
========== ==========
|
NOTE 17
Capital Stock
Our authorized capital stock consists of an unlimited number of common shares.
NOTE 18
Share-based Compensation
As of December 30, 2006, we had three share-based compensation plans, which are described below. The share-based compensation plans have been approved by shareholders.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, using the modified prospective approach and therefore have not restated prior years' results. Under the modified prospective approach, share-based compensation expense for the year ended December 30, 2006 includes compensation expense for all share-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS 123. Share-based compensation expense for all share-based compensation awards granted after January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. We recognize these compensation costs net of a forfeiture rate on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three years. We estimated the forfeiture rate for the year ended December 30, 2006 based on our historical experience with forfeitures during the preceding three fiscal years. For the year ended December 30, 2006, net income includes compensation expense of $11.4 million, or $8.4 million net of tax recovery of $3.0 million ($0.12 per basic and diluted
share). There is no effect on cash from operating or financing activities from the adoption of SFAS 123R.
The table below summarizes the compensation expense for the year ended December 30, 2006 and the unrecognized compensation expense on non-vested awards at that date. This compensation expense was recorded in selling, general and administrative expenses.
UNRECOGNIZED
COMPENSATION COMPENSATION
(IN MILLIONS OF U.S. DOLLARS) EXPENSE EXPENSE
----------------------------- ------------ ------------
Stock options $ 9.7 $ 5.2
Performance share units 1.2 5.7
Share appreciation rights 0.3 1.4
Other 0.2 0.7
-------- ----------
Total $ 11.4 $ 13.0
======== ==========
|
The fair value of each option and share appreciation rights grant is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions are based on three factors: risk-free interest rate, expected term and expected volatility. The risk-free interest rate is based on the implied yield available on zero coupon Government of Canada bond with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. The expected stock price volatility is based on a combination of historical volatility of our stock and the implied volatility of our traded options.
COMMON SHARE OPTION PLAN
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. When options are exercised we issue new shares. As a result, these options are dilutive to our shareowners.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R. Prior to adopting SFAS 123R, we accounted for our share-based payment awards using the intrinsic value method under APB 25. Under APB 25, we did not record compensation expense for common share options as awards under this plan were granted with exercise prices equal to the closing price for our common stock on the Toronto Stock Exchange on the last day of trading immediately before the date of award.
The pro forma table below reflects net earnings and basic and diluted net earnings per share as if a fair value based method had been applied to all awards, as follows:
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE December January 1,
AMOUNTS) 31, 2005 2005
---------------------------------------------- -------- ----------
NET INCOME
As reported $ 24.6 $ 78.3
Proforma compensation expense, net of tax
(December 31, 2005 -- $2.5 million;
January 1, 2005 -- $2.9 million) (7.3) (8.6)
------- -------
Pro forma $ 17.3 $ 69.7
======= =======
NET INCOME PER SHARE -- BASIC
As reported $ 0.34 $ 1.10
Pro forma $ 0.24 $ 0.98
NET INCOME PER SHARE -- DILUTED
As reported $ 0.34 $ 1.09
Pro forma $ 0.24 $ 0.97
|
The pro forma compensation expense has been tax effected to the extent it relates to stock options granted to employees in jurisdictions where the related benefits are deductible for income tax purposes.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
December 31, January 1,
2005 2005
------------ -------------
Risk-free interest rate 3.3% - 3.9% 3.3% - 3.9%
Average expected life (years) 4 4
Expected volatility 40.0% 40.0% - 45.0%
Expected dividend yield -- --
---------- ------------
|
There were no options granted during the year ended December 30, 2006. The weighted average fair value of options granted in 2005 and 2004 at fair market value was $9.55 per option and $15.96 per option respectively.
Option activity was as follows:
WEIGHTED AGGREGATE
WEIGHTED AVERAGE INTRINSIC
SHARES AVERAGE REMAINING VALUE
(IN EXERCISE CONTRACTUAL (C$)(IN
THOUSANDS) PRICE (C$) TERM THOUSANDS)
---------- ---------- ----------- ----------
Balance at
January 3, 2004 4,067 $ 22.90
Granted 1,539 $ 40.70
Exercised (1,181) $ 16.06
Forfeited or
expired (219) $ 31.22
----- --------
Balance at
January 1, 2005 4,206 $ 30.90 5.1 $ 11,584
Granted 1,309 $ 29.07
Exercised (272) $ 15.65
Forfeited or
expired (639) $ 33.23
----- --------
Balance at December
31, 2005 4,605 $ 30.69 4.8 $ 1,099
Exercised (38) $ 13.61
Forfeited or
expired (1,871) $ 32.53
----- -------- --- --------
BALANCE AT
DECEMBER 30, 2006 2,696 $ 29.65 3.6 $ 746
===== ======== === ========
VESTED AND EXPECTED TO
VEST AT DECEMBER 30,
2006(1) 2,630 $ 29.60 4.6 $ 746
===== ======== === ========
EXERCISABLE AT
DECEMBER 30, 2006 2,034 $ 28.59 4.3 $ 746
===== ======== === ========
|
The aggregate intrinsic value amounts in the table above represent the difference between the closing price of our common stock on December 29, 2006, which was C$16.69 (December 30, 2005 - C$17.23; December 31, 2004 - C$29.68), and the exercise price, multiplied by the number of in-the-money stock options as of the same date. The total intrinsic value of stock options exercised during the year ended December 30, 2006 was $0.1 million (December 31, 2005 - $0.4 million; January 1, 2005 - $16.1 million).
Total compensation cost related to non-vested awards not yet recognized is $5.2 million. The weighted average period over which this is expected to be recognized is 0.9 year. The total fair value of shares that vested during the year ended December 30, 2006 was $10.4 million.
Outstanding options at December 30, 2006 are as follows:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Range of Number Remaining Weighted Number Weighted
Exercise Outstanding Contractual Average Exercisable Average
Prices (IN Life Exercise (IN Exercise
(C$) THOUSANDS) (Years) Price (C$) THOUSANDS) Price (C$)
---------- ----------- ----------- ---------- ----------- ----------
$5.95 -
$16.10 112 1.3 $ 10.08 112 $ 10.08
$16.68 -
$24.25 472 2.3 $ 17.93 414 $ 17.67
$26.00 -
$33.30 1,458 4.0 $ 29.89 1,112 $ 30.13
$35.21 -
$43.64 654 4.3 $ 40.93 398 $ 40.90
----- --- -------- ----- --------
2,696 3.6 $ 29.65 2,034 $ 28.59
===== === ======== ===== ========
|
NEW LONG-TERM INCENTIVE PLANS
During the second quarter of 2006, our shareowners approved and adopted two new long-term incentive plans for 2006 and future periods, the Performance Share Unit ("PSU Plan") and the Share Appreciation Rights Plan ("SAR Plan").
PSU Plan
Under the PSU Plan, performance share units ("PSUs") may be granted to employees of our Company and its subsidiaries. The value of an employee's award under our PSU Plan will depend on (i) our performance over a three-year performance cycle; and (ii) the market price of our common shares at the time of vesting. The performance targets are not market based. Performance targets will be established annually by the Human Resources and Compensation Committee of the Board of Directors. PSUs granted will vest over a term not to exceed three fiscal years.
At the start of each performance cycle, we will establish three tiers of performance goals for our Company to achieve over the three-year period: a minimum threshold level, a target level and an outstanding performance level. A target number of PSUs for each participant will be established at the beginning of each three-year performance cycle. Each PSU represents the right, on vesting, to receive one Company common share. If performance over the three-year performance cycle falls below the threshold level, no PSUs will vest.
Throughout the performance cycle, there are no dividends paid to participants on the PSUs, and holders do not have the right to vote the common shares represented by their PSUs. Following the vesting of a participant's PSUs, we will contribute cash to an independent trust to be used for the purpose of purchasing an equivalent number of our common shares on the New York Stock Exchange at the prevailing market price. The common shares purchased by
the trustee will then be registered in the name of the participant and delivered to the participant upon his or her request.
No shares are issued from treasury and the PSU Plan is not dilutive to our shareowners.
SAR Plan
Under the SAR Plan, share appreciation rights ("SARs") may be granted to employees and directors of our Company and its subsidiaries. SARs will typically vest on the third anniversary of the grant date. On vesting, each SAR will represent the right to be paid the difference, if any, between the price of our common shares on the date of grant and their price on the SAR's vesting date. Payments in respect of vested in-the-money SARs will be made in the form of our common shares purchased on the open market by an independent trust with cash contributed by us. If our share price on the date of vesting is lower than on the date of grant, no payment will be made in respect of those vested SARs. Prior to vesting, there are no dividends paid on the share appreciation rights, and holders do not have the right to vote the common shares represented by their SARs.
No shares are issued from treasury and the SAR Plan is not dilutive to our shareowners.
We recognize the compensation cost of the PSUs and SARs based on the fair value of the grant. We recognize these compensation costs net of a forfeiture rate on a straight-line basis over the requisite service period of the award, which is generally the vesting term of three years. Compensation cost of the PSUs may vary depending on management's estimates of the probability of the performance measures being achieved and the number of PSUs expected to vest.
During the period ended December 30, 2006, the PSU activity was as follows:
Total Value
Number of Target value Total Value (IN MILLIONS
PSUs (IN per PSU (C$ - IN OF U.S.
THOUSANDS) (C$) MILLIONS) DOLLARS)
---------- ------------ ----------- ------------
Granted
October 25,
2006 25 $ 18.58 $ 0.5 $ 0.4
August 1, 2006 38 14.98 0.6 0.5
July 26, 2006 438 14.21 6.2 5.3
May 16, 2006 98 17.05 1.7 1.5
--- -------- ------- -------
598 $ 14.90 8.9 7.7
Forfeited (67) $ 14.21 (0.9) (0.8)
--- -------- ------- -------
BALANCE AT
DECEMBER 30, 2006 531 $ 14.99 $ 8.0 $ 6.9
=== ======== ======= =======
|
The number of PSUs granted and target values per PSU noted above are based on an assumption that our performance target will be achieved. The number of units and target values can vary from 0 to 150% depending on the level of performance achieved relative to the performance target. Subject to the terms of the PSU plan, the vesting date for the above PSUs granted will be December 27, 2008.
The target value per PSU noted above was determined based on the closing market price of our common shares on the Toronto Stock Exchange on the last trading day prior to the grant date. Compensation costs of $1.2 million were recognized in selling, general and administrative expenses in the period ended December 30, 2006. As of December 30, 2006 there was approximately $5.7 million of unearned compensation relating to the grant that is expected to be recognized on a straight-line basis over a period of 29 months.
We granted 458,050 units of SARs on July 26, 2006 and 6,750 units on October 25, 2006 at a fair value of $1.7 million to our employees. Subject to the terms of the SAR plan, the vesting date for these units will be July 26, 2009 and October 25, 2009, respectively. Compensation costs of $0.3 million were recognized in selling, general and administrative expenses in the period ended December 30, 2006. As of December 30, 2006 there was $1.4 million of unearned compensation relating to the grant that is expected to be recognized on a straight-line basis over a period of three years.
The fair value of the SARs grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
DECEMBER 30, 2006
-----------------
Risk-free interest rate 5.05%
Average expected life (years) 4
Expected volatility 33.9%
Expected dividend yield --
----
|
OTHER SHARE BASED COMPENSATION
During the second quarter of 2006, Brent Willis, our Chief Executive Officer, received a net cash award of $0.9 million at commencement of employment to purchase shares of the Company. At the end of September 30, 2006, Mr. Willis purchased a total of 62,484 common shares of the Company with the net cash award received. The purchased shares must be held for a minimum of three years and must be transferred to the Company (or as the Company may otherwise direct) for no additional consideration on a prorated basis if the service condition of three years is not met. This award is recognized as compensation expense over the vesting period. As of December 30, 2006, $0.2 million was expensed as compensation expense and the remaining balance is classified as restricted shares which is a reduction in shareowners' equity. In addition, 204,000
common shares with a fair value of $3.2 million, which vest over three years, have been granted to Mr. Willis. Compensation costs of $0.7 million were recognized in selling, general and administrative expenses in the period ended December 30, 2006 with respect to this grant. As of December 30, 2006 there was $2.5 million of unearned compensation relating to the grant that is expected to be recognized on a straight-line basis over a period of three years.
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
--------------------------------------
(IN MILLIONS OF DECEMBER 30, December 31, January 1,
U.S. DOLLARS) 2006 2005 2005
--------------- ------------ ------------ ----------
Decrease (increase) in
accounts receivable $ 9.9 $ (5.0) $ (21.3)
Decrease (increase) in
inventories 15.2 (15.4) (22.8)
(Increase) decrease in
prepaid expenses 0.5 0.5 (4.8)
(Decrease) increase in accounts
payable and accrued liabilities (22.6) 18.9 (3.5)
------- ------- -------
$ 3.0 $ (1.0) $ (52.4)
======= ======= =======
|
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. There were no acquisitions in the year ended December 30, 2006.
The total purchase prices of the acquisitions and equity investments were allocated as follows based on the fair value of the net assets:
(IN MILLIONS OF December 31, January 1,
U.S. DOLLARS) 2005 2005
--------------- ------------ ----------
Current assets $ 23.2 $ 6.0
Property, plant and equipment 50.1 19.3
Customer relationships 24.9 6.8
Trademarks -- 0.8
Goodwill 69.4 5.7
-------- --------
167.6 38.6
-------- --------
Current liabilities 22.0 4.0
Deferred taxes 10.5 --
-------- --------
PURCHASE PRICE $ 135.1 $ 34.6
======== ========
|
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 U.K. 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.
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.
NOTE 21
Benefit Plans
Cott primarily maintains defined contribution retirement plans covering qualifying employees. The total expense with respect to these plans was $6.5 million for the year
ended December 30, 2006 ($5.6 million - December 31, 2005; $5.6 million -- January 1, 2005).
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)
-----------------------------
2007 $ 17.3
2008 13.4
2009 11.4
2010 10.2
2011 6.9
Thereafter 42.2
-----------
$ 101.4
===========
|
Operating lease expenses were:
(IN MILLIONS OF U.S. DOLLARS) ----------------------------- Year ended December 30, 2006 $ 17.8 Year ended December 31, 2005 $ 17.6 Year ended January 1, 2005 $ 11.9 |
b) As of December 30, 2006, we had commitments for capital expenditures of approximately $7.3 million and commitments for inventory of approximately $41.4 million. In addition, we have certain contracts with suppliers and co-packers which would require us to pay an aggregate of $0.8 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. On June 2, 2006, the British Columbia Supreme Court granted the summary trial application, which resulted in the dismissal of the plaintiffs' action against us and the other defendants. The plaintiffs appealed the dismissal, and we and the other defendants are defending the appeal, which we expect to be heard in the next eight to twelve months. It is too early to assess the chances of success of the appeal. In February 2005 similar class action claims were filed in a number of other Canadian provinces. The claims which were filed in Quebec have since been discontinued.
d) We had $5.2 million in standby letters of credit outstanding as of December 30, 2006 ($4.9 million -- December 31, 2005).
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 and International business segments. The International segment includes our United Kingdom business, our European business, our Mexican business, our Royal Crown International business and our business in Asia. The Other in the Corporate & Other segment represents the concentrate manufacturing plant assets, sales and related expenses. For comparative purposes, segmented information has been restated to conform to the way we currently manage our beverage business.
BUSINESS SEGMENTS
DECEMBER 30, 2006
--------------------------------------------------
NORTH CORPORATE
(IN MILLIONS OF U.S. DOLLARS) AMERICA INTERNATIONAL & OTHER TOTAL
----------- ------------- --------- -----------
External revenue $ 1,339.4 $ 427.1 $ 5.3 $ 1,771.8
Depreciation and amortization 64.0 17.5 5.3 86.8
Restructuring, asset impairments and other charges - note 2
Restructuring 15.6 0.7 4.2 20.5
Asset impairments 15.3 -- 0.1 15.4
Other -- 2.6 -- 2.6
Operating income (loss) 26.1 23.3 (47.1) 2.3
Property, plant and equipment 227.9 124.9 7.4 360.2
Goodwill 74.1 79.2 5.1 158.4
Intangibles and other assets 118.1 34.2 98.4 250.7
Total assets 626.0 421.3 92.2 1,139.5
Additions to property, plant and equipment 26.4 7.7 1.0 35.1
|
December 31, 2005
--------------------------------------------------
North Corporates
(IN MILLIONS OF U.S. DOLLARS) America International Other Total
----------- ------------- ---------- -----------
External revenue $ 1,428.0 $ 323.5 $ 3.8 $ 1,755.3
Depreciation and amortization 54.3 12.9 3.0 70.2
Restructuring, asset impairments and other charges - 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 -- 0.8 -- 0.8
Operating income (loss) 61.1 24.5 (13.7) 71.9
Property, plant and equipment 266.2 119.7 8.3 394.2
Goodwill 74.1 71.1 5.1 150.3
Intangibles and other assets 136.0 27.4 97.0 260.4
Total assets 709.4 390.8 78.9 1,179.1
Additions to property, plant and equipment 62.3 11.2 2.3 75.8
Goodwill acquired -- 69.4 -- 69.4
|
January 1, 2005
--------------------------------------------------
North Corporate
(IN MILLIONS OF U.S. DOLLARS) America International & Other Total
----------- ------------- --------- -----------
External revenue $ 1,388.5 $ 255.5 $ 2.3 $ 1,646.3
Depreciation and amortization 48.5 9.4 2.1 60.0
Restructuring, asset impairments and other charges - note 2 (1.5) 0.4 0.2 (0.9)
Operating income (loss) 130.9 23.1 (9.0) 145.0
Property, plant and equipment 227.9 78.3 7.5 313.7
Goodwill 79.1 4.6 5.1 88.8
Intangibles and other assets 182.7 5.1 88.3 276.1
Total assets 720.4 220.3 81.3 1,022.0
Additions to property, plant and equipment 41.2 6.5 2.6 50.3
Acquisition of production capacity 3.8 -- -- 3.8
|
Total assets under the Corporate & Other caption include the elimination of intersegment receivables and investments.
For the year ended December 30, 2006, sales to Wal-Mart accounted for 38% (2005 -- 40%, 2004 -- 40%) of our total sales.
Credit risk arises from the potential default of a customer in meeting its financial obligations with us. Concentrations of credit exposure may arise with a group of customers which have similar economic characteristics or that are located in the same geographic region. The ability of such customers to meet obligations would be similarly affected by changing economic, political or other conditions. We are not currently aware of any facts that would create a material credit risk.
Revenues by geographic area are as follows:
DECEMBER 30, December 31, January 1,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005 2005
----------------------------- ------------ ------------ ----------
United States $ 1,159.1 $ 1,251.3 $1,221.8
Canada 208.9 201.2 189.5
United Kingdom 332.1 244.4 186.9
Other countries 71.7 58.4 48.1
------------ ------------ ----------
$ 1,771.8 $ 1,755.3 $ 1,646.3
============ ============ ==========
|
Revenues are attributed to countries based on the location of the plant.
Property, plant and equipment by geographic area are as follows:
DECEMBER 30, December 31,
(IN MILLIONS OF U.S. DOLLARS) 2006 2005
----------------------------- ------------ ------------
United States $ 181.5 $ 216.8
Canada 53.8 57.7
United Kingdom 114.9 109.4
Other countries 10.0 10.3
---------- ----------
$ 360.2 $ 394.2
========== ==========
|
COTT CORPORATION
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
YEAR ENDED DECEMBER 30, 2006
----------------------------------------------
FIRST SECOND THIRD FOURTH
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER TOTAL
-------------------------------------------------------- ------- ------- ------- ------- --------
Revenue $ 394.2 $ 502.0 $475.5 $400.1 $1,771.8
Cost of sales 341.5 429.7 413.5 370.2 1,554.9
------- ------- ------ ------ --------
Gross profit 52.7 72.3 62.0 29.9 216.9
Selling, general and administrative expenses 39.9 48.7 40.8 46.7 176.1
Loss (gain) on disposal of property, plant and equipment 0.1 (0.1) -- -- --
Restructuring, asset impairments and other charges
Restructuring 1.6 0.2 9.4 9.3 20.5
Asset impairments (recoveries) 1.4 (0.1) (0.1) 14.2 15.4
Other 2.0 0.6 -- -- 2.6
------- ------- ------ ------ --------
Operating income (loss) 7.7 23.0 11.9 (40.3) 2.3
------- ------- ------ ------ --------
Net (loss) income $ (2.1) $ 7.6 $ 6.6 $(29.6) $ (17.5)
======= ======= ====== ====== ========
Per share data:
Net (loss) income per common share
Basic $ (0.03) $ 0.11 $ 0.09 $(0.41) $ (0.24)
Diluted $ (0.03) $ 0.11 $ 0.09 $(0.41) $ (0.24)
|
YEAR ENDED DECEMBER 31, 2005
----------------------------------------------
FIRST SECOND THIRD FOURTH
(IN MILLIONS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER TOTAL
-------------------------------------------------------- ------- ------- ------- ------- --------
Revenue $ 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
(Gain) loss on disposal of property, plant and equipment (0.7) 0.5 -- 1.7 1.5
Restructuring, asset impairments and other charges
Restructuring -- -- 2.0 1.2 3.2
Asset (recovery) impairments (0.2) -- 23.7 10.0 33.5
Other -- -- -- 0.8 0.8
------- ------- ------ ------ --------
Operating income 20.0 44.7 5.5 1.7 71.9
------- ------- ------ ------ --------
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
|
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. We performed an evaluation, under the supervision and participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report due to the reasons described in "Management's Report on Internal Control 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-15(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 30, 2006. 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 this assessment, we determined that, as of December 30, 2006, our internal control over financial reporting was not effective due to the existence of material weaknesses. A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
We did not maintain effective controls over the completeness, accuracy, valuation and existence of inventory held by a supplier to our U.K. business and the valuation of credit notes due from that supplier. In addition, we did not maintain appropriate segregation of duties because an employee of our U.K. business negotiated and entered into purchase contracts while maintaining overall responsibility for the accounting for these transactions without appropriate review or monitoring. These control deficiencies could result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. As a result of the receivership of our U.K. supplier of which we were advised subsequent to year-end, we identified an adjustment of $9 million that was recorded in the financial statements for the year ended December 30, 2006.
We did not maintain effective internal controls over our procurement process, specifically the authorization and approval of contracts and timely communication of contracts to appropriate accounting personnel to evaluate their accounting treatment. These control deficiencies could affect financial statement balances of inventory, prepaids, property, plant and equipment and related depreciation,
accounts payable and capital lease obligations and could result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.
Our assessment of the effectiveness of our internal control over financial reporting as of December 30, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears on pages 35 and 36.
PLAN FOR REMEDIATION OF MATERIAL WEAKNESSES
In response to the identified material weaknesses, we, with oversight from our Audit Committee, are focused on improving our internal controls and remedying the identified material weaknesses through implementing new controls and polices and ensuring that all our controls and policies are followed.
Our policies require periodic inventory counts and detailed reconciliation procedures to ensure the completeness, accuracy and existence of inventory. In addition, we have procedures in place to ensure appropriate valuation of inventory and credit notes. We plan on monitoring adherence to our policies by assigning appropriate personnel to undertake responsibility for these controls. We have also begun implementing a functional reporting structure intended to ensure appropriate segregation of duties.
We have recently hired a Chief Manufacturing and Supply Chain Officer who is responsible for the global procurement function. We will implement processes to ensure that our policy that all contracts be appropriately authorized and that appropriate review for accounting of contracts takes place on a timely basis is followed.
We believe that these corrective actions will remediate the material weaknesses identified above. We will continue to monitor the effectiveness of these actions and will make any changes and take such other actions that we deem appropriate given the circumstances.
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 2007 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 30, 2006. The information required by this item regarding audit committee financial expert disclosure is incorporated by reference to, and will be contained in, the "Corporate Governance" section of our definitive proxy statement for the 2007 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 Audit Committee charter is posted on our website at www.cott.com. The members of the Audit Committee are Philip B. Livingston (Chairman), W. John Bennett and Andrew Prozes. The Board of Directors has determined that our Audit Committee has a financial expert, Philip B. Livingston, an independent director.
The Audit Committee has reviewed and discussed the audited financial statements with management and has had discussions with the independent accountants on matters required under Auditing Standard No. 61. The Audit Committee has received written disclosures and the letter from the independent accountants required by ISB No. 1 and has discussed with the independent accountants their independence. The Audit Committee has recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 10-K.
All of our directors, officers and employees must comply with our Code of Business Conduct and Ethics. In addition, our Chief Executive Officer, Chief Financial Officer and principal accounting officer and certain other employees have a further obligation to comply with our Code of Ethics for Senior Officers. Our Code of Business Conduct and Ethics and our Code of Ethics for Senior Officers are posted on our website, www.cott.com, and we intend to disclose any amendment to, or waiver from, any provision of these codes by posting such information on our website.
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 2007 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 30, 2006.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to, and will be contained in, the "Compensation of Executive Officers" section of our definitive proxy statement for the 2007 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 30, 2006.
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 2007 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 30, 2006.
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 2007 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 30, 2006.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to, and will be contained in, the "Auditors" section of our definitive proxy statement for the 2007 Annual and Special Meeting of Shareowners, which will be filed within 120 days after December 30, 2006.
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.
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 Amalgamation of Cott Corporation (filed herewith).
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) 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).
10.3(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).
10.4(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).
10.5(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).
10.6(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).
10.7(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).
10.8(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).
10.9(2) Cott Corporation Executive Investment Share Purchase Plan
(incorporated by reference to Exhibit 10.14 to our Form 10-K
filed March 16, 2005).
10.10(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).
10.11(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).
10.12(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).
|
NUMBER DESCRIPTION
---------- -----------------------------------------------------------------
10.13(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)).
10.14(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).
10.15(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).
10.16 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).
10.17(2) Employment Agreement of Tina Dell'Aquila dated May 25, 2005 and
confidentiality undertaking dated October 27, 1998 (incorporated
by reference to Exhibit 10.21 to our Form 10-K dated March 6,
2006).
10.18(2) Employment Agreement between Cott Corporation and Brent D. Willis
dated May 16, 2006 (incorporated by reference to Exhibit 10.1 to
our Form 10-Q dated August 10, 2006).
10.19(2) Termination Letter Agreement between Cott Corporation and John K.
Sheppard dated May 13, 2006 (incorporated by reference to Exhibit
10.2 to our Form 10-Q dated August 10, 2006).
10.20(2) Cott Corporation Performance Share Unit Plan (incorporated by
reference to Exhibit 10.3 to our Form 10-Q dated August 10,
2006).
10.21(2) Cott Corporation Share Appreciation Rights Plan (incorporated by
reference to Exhibit 10.4 to our Form 10-Q dated August 10,
2006).
10.22(2) Termination Letter Agreement between Cott Corporation and Mark
Benadiba dated August 2, 2006 (incorporated by reference to
Exhibit 10.1 to our Form 10-Q dated November 9, 2006).
10.23(2) Termination Letter Agreement between Cott Corporation and Andrew
J. Murfin dated August 2, 2006 (incorporated by reference to
Exhibit 10.2 to our Form 10-Q dated November 9, 2006).
10.24(2) Termination Letter Agreement between Cott Corporation and Colin
Walker dated August 8, 2006 (incorporated by reference to Exhibit
10.3 to our Form 10-Q dated November 9, 2006).
10.25(2) Employment Agreement between Cott Corporation and Wynn A. Willard
dated August 23, 2006 (incorporated by reference to Exhibit 10.4
to our Form 10-Q dated November 9, 2006).
10.26(2) Employment Agreement between Cott Corporation and John Dennehy
dated September 12, 2006 (incorporated by reference to Exhibit
10.5 to our Form 10-Q dated November 9, 2006).
10.27(2) Employment Offer Letter between Cott Corporation and Rick Dobry
dated September 21, 2006 and modification dated October 24, 2006
(incorporated by reference to Exhibit 10.6 to our Form 10-Q dated
November 9, 2006).
10.28(2) Employment Agreement between Cott Corporation and Abilio Gonzales
dated August 1, 2006 (incorporated by reference to Exhibit 10.7
to our Form 10-Q dated November 9, 2006).
10.29(2) Termination Letter Agreement between Cott Corporation and B.
Clyde Preslar dated as of December 13, 2006 (filed herewith).
|
NUMBER DESCRIPTION
---------- -----------------------------------------------------------------
10.30(2) Employment Agreement between Cott Corporation and Tina
Dell'Aquila dated February 21, 2007 (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 Chief Executive Officer pursuant to section
302 of the Sarbanes-Oxley Act of 2002 for the year ended December
30, 2006 (filed herewith).
31.2 Certification of the Chief Financial Officer, Vice President,
Controller & Assistant Secretary pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 for the year ended December 30, 2006
(furnished herewith).
32.1 Certification of the Chief Executive Officer pursuant to section
906 of the Sarbanes-Oxley Act of 2002 for the year ended December
30, 2006 (furnished herewith).
32.2 Certification of the Chief Financial Officer, Vice President,
Controller & Assistant Secretary pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 for the year ended December 30, 2006
(furnished herewith).
|
(2) Indicates a management contract or compensatory plan.
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/ Brent D. Willis ---------------------------- Brent D. Willis Chief Executive Officer Date: February 28, 2007 |
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/ Brent D. Willis Date: February 28, 2007 ------------------------------ Brent D. Willis Chief Executive Officer /s/ Tina Dell'Aquila Date: February 28, 2007 ------------------------------ Tina Dell'Aquila Chief Financial Officer, Vice President, Controller & Assistant Secretary (Principal Financial Officer & Principal Accounting Officer) /s/ Colin J. Adair Date: February 28, 2007 ------------------------------ Colin J. Adair Director /s/ W. John Bennett Date: February 28, 2007 ------------------------------ W. John Bennett Director /s/ George A. Burnett Date: February 28, 2007 ------------------------------ George A. Burnett Director /s/ Serge Gouin Date: February 28, 2007 ------------------------------ Serge Gouin Director /s/ Stephen H. Halperin Date: February 28, 2007 ------------------------------ Stephen H. Halperin Director /s/ Betty Jane Hess Date: February 28, 2007 ------------------------------ Betty Jane Hess Director /s/ Philip B. Livingston Date: February 28, 2007 ------------------------------ Philip B. Livingston Director /s/ Christine A. Magee Date: February 28, 2007 ------------------------------ Christine A. Magee Director /s/ Andrew Prozes Date: February 28, 2007 ------------------------------ Andrew Prozes Director /s/ Donald G. Watt Date: February 28, 2007 ------------------------------ Donald G. Watt Director /s/ Frank E. Weise Date: February 28, 2007 ------------------------------ Frank E. Weise Chairman, Director |
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 30, 2006
-----------------------------------------------------------------------------------
Charged to Charged to
Balance at Reduction Costs and Other Balance at End of
Description Beginning of Year of Sales Expenses Accounts Deduction Year
------------------ ----------------- --------- ----------- ---------- --------- -----------------
RESERVES DEDUCTED IN THE BALANCE SHEET FROM
THE ASSETS TO WHICH THEY APPLY
Allowances for losses on:
Accounts receivables $ (7.8) $ -- $ (1.8) $ -- $ 4.6 $ (5.0)
Inventories (7.6) -- (1.9) -- 0.2 (9.3)
Deferred income tax assets (21.0) -- 3.5 -- -- (17.5)
Accrued sales incentives (27.6) (45.9) -- -- 49.6 (23.9)
----------------- --------- ----------- ---------- --------- -----------------
$ (64.0) $ (45.9) $ (0.2) $ -- $ 54.4 $ (55.7)
================= ========= =========== ========== ========= =================
|
YEAR OF ENDED DECEMBER 31, 2005
-----------------------------------------------------------------------------------
Charged to Charged to
Balance at Reduction Costs and Other Balance at End of
Description Beginning of Year of Sales Expenses Accounts Deduction 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)
Accrued sales incentives (24.9) (55.4) -- -- 52.7 (27.6)
----------------- --------- ----------- ---------- --------- -----------------
$ (44.2) $ (55.4) $ (22.5) $ (0.6) $ 58.7 $ (64.0)
================= ========= =========== ========== ========= =================
|
YEAR ENDED JANUARY 1, 2005
-----------------------------------------------------------------------------------
Charged to Charged to
Balance at Reduction Costs and Other Balance at End of
Description Beginning of Year of Sales Expenses Accounts Deduction 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)
Accrued sales incentives (24.2) (46.6) -- -- 45.9 (24.9)
----------------- --------- ----------- ---------- --------- -----------------
$ (38.8) $ (46.6) $ (6.2) $ (0.2) $ 47.6 $ (44.2)
================= ========= =========== ========== ========= =================
|
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 30, 2006
--------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------------------------------- ----------- -------------- ------------- -------------- ------------ ------------
REVENUE $ 229.7 $ 1,091.8 $ 396.0 $ 126.9 $ (72.6) $ 1,771.8
Cost of sales 188.4 968.3 360.4 110.4 (72.6) 1,554.9
----------- -------------- ------------- -------------- ------------ ------------
GROSS PROFIT 41.3 123.5 35.6 16.5 -- 216.9
Selling, general and administrative
expenses 34.1 94.6 36.9 10.5 -- 176.1
Loss on disposal of property, plant &
equipment (0.5) 0.6 (0.1) --
Restructuring, asset impairments and
other charges
Restructuring 2.1 16.8 1.4 0.2 20.5
Asset Impairments (recovery) (0.2) 15.6 -- -- 15.4
Other -- -- 2.6 -- -- 2.6
----------- -------------- ------------- -------------- ------------ ------------
OPERATING INCOME (LOSS) 5.8 (4.1) (5.2) 5.8 -- 2.3
Other expense (income), net (0.1) 9.2 (1.9) (5.6) (1.5) 0.1
Interest expense (income), net (0.2) 31.4 1.1 (0.1) -- 32.2
Minority interest -- -- -- 3.8 -- 3.8
----------- -------------- ------------- -------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY INCOME (LOSS) 6.1 (44.7) (4.4) 7.7 1.5 (33.8)
Income taxes -- (18.4) 0.3 8.5 (6.7) (16.3)
Equity (loss) income (23.6) (9.9) (10.9) -- 44.4 --
----------- -------------- ------------- -------------- ------------ ------------
NET INCOME (LOSS) $ (17.5) $ (36.2) $ (15.6) $ (0.8) $ 52.6 $ (17.5)
=========== ============== ============= ============== ============ ============
|
CONSOLIDATING BALANCE SHEETS
As of December 30, 2006
--------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
--------------------------------------- ------------- ------------- ------------- -------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 1.8 $ 4.9 $ 1.2 $ 5.5 $ -- $ 13.4
Accounts receivable 37.2 24.6 85.0 84.3 (44.1) 187.0
Income taxes recoverable 0.2 15.1 1.5 (0.2) -- 16.6
Inventories 21.6 71.6 33.0 5.0 -- 131.2
Prepaid expenses and other assets 1.5 3.2 4.6 1.0 -- 10.3
Deferred income taxes -- 10.3 0.2 1.2 -- 11.7
------------ ------------- ------------- -------------- ------------ ------------
62.3 129.7 125.5 96.8 (44.1) 370.2
Property, plant and equipment 49.5 172.5 128.0 10.2 -- 360.2
Goodwill 23.5 46.0 88.9 -- -- 158.4
Intangibles and other assets 14.9 155.4 43.9 36.5 -- 250.7
Due from affiliates 102.5 36.2 190.8 41.9 (371.4) --
Investments in subsidiaries 377.8 59.9 38.3 137.8 (613.8) --
------------ ------------- ------------- -------------- ------------ ------------
$ 630.5 $ 599.7 $ 615.4 $ 323.2 $ (1,029.3) $ 1,139.5
============ ============= ============= ============== ============ ============
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings $ -- $ -- $ 107.7 $ -- $ -- $ 107.7
Current maturities of long-term debt -- 2.0 -- -- -- 2.0
Accounts payable and accrued
liabilities 33.8 108.4 65.3 24.6 (45.6) 186.5
------------ ------------- ------------- -------------- ------------ ------------
33.8 110.4 173.0 24.6 (45.6) 296.2
Long-term debt -- 275.2 -- -- -- 275.2
Due to affiliates 108.0 124.7 99.9 38.8 (371.4) --
Deferred income taxes -- 26.4 22.5 9.6 -- 58.5
------------ ------------- ------------- -------------- ------------ ------------
141.8 536.7 295.4 73.0 (417.0) 629.9
------------ ------------- ------------- -------------- ------------ ------------
Minority interest -- -- -- 20.9 -- 20.9
SHAREOWNERS' EQUITY
Capital stock
Common shares 273.4 275.8 615.1 175.0 (1,065.9) 273.4
Restricted shares (0.7) -- -- -- -- (0.7)
Additional paid-in capital 29.8 -- -- -- -- 29.8
Retained earnings (deficit) 168.7 (212.8) (201.0) (5.2) 418.9 168.7
Accumulated other comprehensive income
(loss) 17.5 -- (94.1) 59.5 34.6 17.5
------------ ------------- ------------- -------------- ------------ ------------
488.7 63.0 320.0 229.3 (612.3) 488.7
------------ ------------- ------------- -------------- ------------ ------------
$ 630.5 $ 599.7 $ 615.4 $ 323.2 $ (1,029.3) $ 1,139.5
============ ============= ============= ============== ============ ============
|
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended December 30, 2006
--------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
------------------------------------- ------------- ------------- ------------- -------------- ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ (17.5) $ (36.2) $ (15.6) $ (0.8) $ 52.6 $ (17.5)
Depreciation and amortization 12.3 40.2 29.2 5.1 -- 86.8
Amortization of financing fees 0.1 0.2 0.5 0.3 -- 1.1
Share-based compensation 11.4 -- -- -- 11.4
Deferred income taxes -- (6.4) (1.3) 7.8 (6.7) (6.6)
Minority interest -- -- -- 3.8 -- 3.8
Loss on disposal of property, plant &
equipment (0.5) 0.6 (0.1) -- -- --
Equity loss, net of distributions 23.6 15.5 24.3 -- (63.4) --
Asset impairments (0.2) 15.6 -- -- -- 15.4
Other non-cash items (0.1) 7.9 4.1 0.1 -- 12.0
Net change in non-cash working capital 18.3 7.2 (25.8) 4.8 (1.5) 3.0
------------ ------------- ------------- -------------- ------------ ------------
Cash provided by (used in) operating
activities 47.4 44.6 15.3 21.1 (19.0) 109.4
------------ ------------- ------------- -------------- ------------ ------------
INVESTING ACTIVITIES
Additions to property, plant and
equipment (3.7) (20.3) (10.1) (1.0) -- (35.1)
Additions to intangible and other assets (4.2) (3.9) (4.9) -- -- (13.0)
Proceeds from disposal of property,
plant & equipment 0.7 0.6 0.3 -- -- 1.6
Advances to affiliates (47.7) 0.1 (8.8) -- 56.4 --
------------ ------------- ------------- -------------- ------------ ------------
Cash (used in) provided by investing
activities (54.9) (23.5) (23.5) (1.0) 56.4 (46.5)
------------ ------------- ------------- -------------- ------------ ------------
FINANCING ACTIVITIES
Payments of long-term debt -- (1.0) -- -- -- (1.0)
Short-term borrowings -- (10.4) (45.5) (10.0) -- (65.9)
Advances from affiliates -- 8.8 47.7 (0.1) (56.4) --
Distributions to subsidiary minority
shareowner -- -- -- (5.4) -- (5.4)
Issue of common shares 0.4 -- -- -- -- 0.4
Dividends paid -- (13.4) -- (5.6) 19.0 --
Other financing activities -- (0.2) 0.8 -- -- 0.6
------------ ------------- ------------- -------------- ------------ ------------
Cash provided by (used in) financing
activities 0.4 (16.2) 3.0 (21.1) (37.4) (71.3)
------------ ------------- ------------- -------------- ------------ ------------
Effect of exchange rate changes on cash 0.1 -- 0.1 (0.1) -- 0.1
------------ ------------- ------------- -------------- ------------ ------------
NET (DECREASE) INCREASE IN CASH (7.0) 4.9 (5.1) (1.1) -- (8.3)
CASH, BEGINNING OF YEAR 8.8 -- 6.3 6.6 -- 21.7
------------ ------------- ------------- -------------- ------------ ------------
CASH, END OF YEAR $ 1.8 $ 4.9 $ 1.2 $ 5.5 $ -- $ 13.4
============ ============= ============= ============== ============ ============
|
CONSOLIDATING STATEMENTS OF INCOME
For the year ended December 31, 2005
--------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
------------------------------------ ------------- ------------- ------------- -------------- ------------ ------------
REVENUE $ 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
Loss on disposal of property, plant &
equipment 0.3 2.1 (0.9) -- -- 1.5
Restructuring, asset impairments and
other charges
Restructuring 0.4 2.8 -- -- -- 3.0
Asset impairments 4.4 29.1 -- -- -- 33.7
Other -- -- 0.8 -- -- 0.8
------------ ------------- ------------- -------------- ------------ ------------
OPERATING (LOSS) INCOME (9.6) 52.7 17.9 10.9 -- 71.9
Other (income) expense, net (0.6) 8.6 (0.7) (8.0) -- (0.7)
Interest (income) expense, net (0.1) 32.6 (5.1) 1.4 -- 28.8
Minority interest -- -- -- 4.5 -- 4.5
------------ ------------- ------------- -------------- ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES AND
EQUITY INCOME (LOSS) (8.9) 11.5 23.7 13.0 -- 39.3
Income taxes 0.8 7.1 9.1 5.2 (7.5) 14.7
Equity income (loss) 34.3 8.5 13.8 -- (56.6) --
------------ ------------- ------------- -------------- ------------ ------------
NET INCOME (LOSS) $ 24.6 $ 12.9 $ 28.4 $ 7.8 $ (49.1) $ 24.6
============ ============= ============= ============== ============ ============
|
CONSOLIDATING BALANCE SHEETS
As of December 31, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------ ------------- ------------
ASSETS
CURRENT ASSETS
Cash $ 8.8 $ -- $ 6.3 $ 6.6 $ -- $ 21.7
Accounts receivable 35.6 26.5 70.2 103.2 (44.4) 191.1
Inventories 18.8 76.6 43.6 5.2 -- 144.2
Prepaid expenses and other assets 1.3 2.2 4.7 1.3 -- 9.5
Deferred income taxes -- 6.7 (0.2) 0.8 -- 7.3
----------- ------------- ------------ ------------ ------------- ------------
64.5 112.0 124.6 117.1 (44.4) 373.8
Property, plant and equipment 53.0 195.6 135.1 10.5 -- 394.2
Goodwill 23.5 46.0 80.8 -- -- 150.3
Intangibles and other assets 17.0 164.1 38.4 40.9 -- 260.4
Due from affiliates 60.8 60.0 168.8 41.9 (331.5) --
Investments in subsidiaries 395.2 75.4 62.6 137.8 (671.0) --
Deferred income taxes -- -- 0.4 -- -- 0.4
----------- -------------- ------------ ------------ ------------- ------------
$ 614.0 $ 653.1 $ 610.7 $ 348.2 $ (1,046.9) $ 1,179.1
=========== ============== ============ ============ ============= ============
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings $ -- $ 10.4 $ 137.5 $ 10.0 $ -- $ 157.9
Current maturities of long-term debt -- 0.8 -- -- -- 0.8
Accounts payable and accrued
liabilities 36.7 109.6 63.6 17.0 (44.4) 182.5
Deferred income taxes -- -- 0.1 0.1 -- 0.2
----------- -------------- ------------ ------------ ------------- ------------
36.7 120.8 201.2 27.1 (44.4) 341.4
Long-term debt -- 272.3 -- -- -- 272.3
Due to affiliates 95.4 115.8 58.1 62.2 (331.5) --
Deferred income taxes -- 29.0 27.3 4.7 -- 61.0
----------- -------------- ------------ ------------ ------------- ------------
132.1 537.9 286.6 94.0 (375.9) 674.7
----------- -------------- ------------ ------------ ------------- ------------
Minority interest -- -- -- 22.5 -- 22.5
SHAREOWNERS' EQUITY
Capital stock
Common shares 273.0 275.8 599.5 175.0 (1,050.3) 273.0
Additional paid-in capital 18.4 -- -- -- -- 18.4
Retained earnings (deficit) 186.2 (160.6) (191.2) (2.3) 354.1 186.2
Accumulated other comprehensive
income (loss) 4.3 -- (84.2) 59.0 25.2 4.3
----------- -------------- ------------ ------------ ------------- ------------
481.9 115.2 324.1 231.7 (671.0) 481.9
----------- -------------- ------------ ------------ ------------- ------------
$ 614.0 $ 653.1 $ 610.7 $ 348.2 $ (1,046.9) $ 1,179.1
=========== ============== ============ ============ ============= ============
|
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended December 31, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------ ------------- ------------
OPERATING ACTIVITIES
Net income $ 24.6 $ 12.9 $ 28.4 $ 7.8 $ (49.1) $ 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 (8.8) 5.2 4.1 (7.5) (6.5)
Minority interest -- -- -- 4.5 -- 4.5
Loss on disposal of property,
plant & equipment 0.3 2.1 (0.9) -- -- 1.5
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 0.1 1.3 -- 0.1 -- 1.5
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)
Additions to intangible and other
assets (9.6) 3.7 (2.1) (1.0) -- (9.0)
Acquisitions -- -- (135.1) -- -- (135.1)
Proceeds from disposal of property,
plant & equipment (0.2) 0.6 1.8 -- -- 2.2
Advances to affiliates (14.9) 0.1 9.9 -- 4.9 --
Investment in subsidiaries (15.0) -- (15.0) -- 30.0 --
----------- -------------- ------------ ------------ ------------- ------------
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 (used in) provided by 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 (DECREASE) INCREASE 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
=========== ============== ============ ============ ============= ============
|
CONSOLIDATING STATEMENTS OF INCOME
For the year ended January 1, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------ ------------- ------------
REVENUE $ 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
Loss on disposal of property,
plant & equipment -- (0.2) (0.1) -- -- (0.3)
Restructuring, asset impairments and
other charges 1.3 -- (0.4) -- -- 0.9
----------- -------------- ------------ ------------ ------------- ------------
OPERATING (LOSS) INCOME (1.7) 119.3 17.2 10.2 -- 145.0
Other expense (income), net 0.5 1.3 (1.8) 0.2 -- 0.2
Interest (income) expense, net (0.2) 32.9 (6.6) (0.1) -- 26.0
Minority interest -- -- -- 4.0 -- 4.0
----------- -------------- ------------ ------------ ------------- ------------
(LOSS) INCOME BEFORE INCOME TAXES
AND EQUITY INCOME (LOSS) (2.0) 85.1 25.6 6.1 -- 114.8
Income taxes (2.7) 35.5 8.3 2.2 (7.5) 35.8
Equity income (loss) 77.6 9.3 55.1 -- (142.7) (0.7)
----------- -------------- ------------ ------------ ------------- ------------
NET INCOME (LOSS) $ 78.3 $ 58.9 $ 72.4 $ 3.9 $ (135.2) $ 78.3
=========== ============== ============ ============ ============= ============
|
CONSOLIDATING BALANCE SHEETS
As of January 1, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------ ------------- ------------
ASSETS
CURRENT ASSETS
Cash $ 14.7 $ -- $ -- $ 11.9 $ -- $ 26.6
Accounts receivable 52.2 109.3 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
Deferred income taxes -- 7.7 0.6 -- -- 8.3
----------- -------------- ------------ ------------ ------------- ------------
90.8 192.7 77.6 30.1 (39.5) 351.7
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 $ 689.1 $ 400.4 $ 259.1 $ (892.8) $ 1,030.3
=========== ============== ============ ============ ============= ============
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 37.2 17.0 -- -- 59.3
----------- -------------- ------------ ------------ ------------- ------------
117.2 572.1 119.0 25.1 (284.2) 549.2
----------- -------------- ------------ ------------ ------------- ------------
Minority interest -- -- -- 23.8 -- 23.8
SHAREOWNERS' EQUITY
Capital stock
Common shares 269.4 275.8 587.2 147.6 (1,010.6) 269.4
Additional paid-in-capital 17.6 -- -- -- -- 17.6
Retained earnings (deficit) 161.6 (158.8) (223.4) (4.0) 386.2 161.6
Accumulated other comprehensive
income (loss) 8.7 -- (82.4) 66.6 15.8 8.7
----------- -------------- ------------ ------------ ------------- ------------
457.3 117.0 281.4 210.2 (608.6) 457.3
----------- -------------- ------------ ------------ ------------- ------------
$ 574.5 $ 689.1 $ 400.4 $ 259.1 $ (892.8) $ 1,030.3
=========== ============== ============ ============ ============= ============
|
CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended January 1, 2005
----------------------------------------------------------------------------------------
Cott Cott Guarantor Non-guarantor Elimination
(IN MILLIONS OF U.S. DOLLARS) Corporation Beverages Inc. Subsidiaries Subsidiaries Entries Consolidated
----------- -------------- ------------ ------------ ------------- ------------
OPERATING ACTIVITIES
Net income $ 78.3 $ 58.9 $ 72.4 $ 3.9 $ (135.2) $ 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) 10.3 7.3 (0.2) (7.5) 9.1
Minority interest -- -- -- 4.0 -- 4.0
Gain on disposal of property, plant &
equipment -- (0.2) (0.1) -- -- (0.3)
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 (1.0) 0.8 0.1 -- 1.1
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)
Additions to intangible and other
assets (6.7) (0.5) (3.3) 0.4 -- (10.1)
Acquisitions -- (34.6) -- -- -- (34.6)
Acquisition of production capacity -- (3.8) -- -- -- (3.8)
Proceeds from disposal of property,
plant & equipment 1.9 3.1 0.4 -- -- 5.4
Advances to affiliates 13.9 0.1 (21.1) -- 7.1 --
Investment in subsidiaries (15.0) -- -- -- 15.0 --
----------- -------------- ------------ ------------ ------------- ------------
Cash (used in) provided by 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
=========== ============== ============ ============ ============= ============
|
EXHIBIT 3.1
Industry Canada Industrie Canada CERTIFICATE CERTIFICAT OF AMALGAMATION DE FUSION CANADA BUSINESS LOI CANADIENNE SUR CORPORATIONS ACT LES SOCIETES PAR ACTIONS COTT CORPORATION CORPORATION COTT 440482-3 ------------------------------------- ---------------------------------------- Name of corporation-Denomination Corporation number-Numero de la societe de la societe I hereby certify that the above-named Je certifie que la societe susmentionnee corporation resulted from an est issue d'une fusion, en vertu de amalgamation, under section 185 of l'article 185 de la Loi canadienne sur the Canada Business Corporations Act, les societes par actions, des societes of the corporations set out in the dont les denominations apparaissent dans attached articles of amalgamation. les statuts de fusion ci-joints. /s/ Richard G. Shaw December 31, 2006 / le 31 decembre 2006 ------------------------------------- Richard G. Shaw Date of Amalganation - Date de fusion Director - Directeur Canada |
Industry Canada Industrie Canada FORM 9 FORMULAIRE 9
ARTICLES OF AMALGAMATION STATUTS DE FUSION
(SECTION 185) (ARTICLE 185)
Canada Business Lol canadienne sur les
Corporations Act societes par actions
-------------------------------------------------------------------------------------------------------------------------
1 -- Name of the Amalgamated Corporation Denomination sociale de la societes issue de la fusion
COTT CORPORATION
CORPORATION COTT
--------------------------------------------------------------------------------------------------------------------------
2 -- The province or territory in Canada where the La province ou le territoire au Canada ou se situera le
registered office is to be situated siege social
Province of Quebec
--------------------------------------------------------------------------------------------------------------------------
3 -- The classes and any maximum number of shares that Categories et tout nombre maximal d'actions que la societe est
the corporation is authorized to issue autorisee a emettre
The annexed Schedule A is incorporated in this
form.
--------------------------------------------------------------------------------------------------------------------------
4 -- Restrictions, if any, on share transfers Restrictions sur le tranefert des actions, s'il y a lieu
None
--------------------------------------------------------------------------------------------------------------------------
5 -- Number (or minimum and maximum number) of Nombre (ou nombre minimal et maximal) d'administrateurs
directors
Such number not greater than fifteen nor less than three as the board of directors may determine.
--------------------------------------------------------------------------------------------------------------------------
6 -- Restrictions, if any, on business the corporation Limites imposees a l'activite commerciale de la societe,
may carry on s'il y a lieu
None
--------------------------------------------------------------------------------------------------------------------------
7 -- Other provisions, if any Autres dispositions, s'il y a lieu
The annexed Schedule "B" is incorporated In this
form.
--------------------------------------------------------------------------------------------------------------------------
8 -- The amalgamation has been approved pursuant to La fusion a ete approuvee en accord avec l'article ou la
that section or subsection of the Act which paragraphe de la Loi indique ci-apres
is indicated as follows:
[ ] 183
[X] 184(1)
[ ] 184(2)
--------------------------------------------------------------------------------------------------------------------------
9 -- Name of the amalgamating
corporations Denomination Corporation No.
sociale des societes N degrees de la Title Tel. No.
fusionnantes societe Signature Date Titre N degrees de tel.
--------------------------------------------------------------------------------------------------------------------------
Cott Corporation 3706800 /s/ Mark. R. Halperin 19 Dec. 06 Corporate 416.203.5604
Corporation Cott Secretary
--------------------------------------------------------------------------------------------------------------------------
Cott Revelstoke Ltd. 3984419 /s/ Mark. R. Halperin 19 Dec. 06 Secretary 416.203.5604
--------------------------------------------------------------------------------------------------------------------------
|
Canada
SCHEDULE "A" TO THE ARTICLES OF AMALGAMATION
OF
COTT CORPORATION
CORPORATION COTT
3. The classes and any maximum number of shares that the Corporation is authorized to issue:
The Corporation is authorized to issue an unlimited number of First Preferred Shares, issuable in series, an unlimited number of Second Preferred Shares, issuable in series and an unlimited number of common shares.
The rights, privileges, restrictions and conditions attaching to the First Preferred Shares, Second Preferred Shares and common shares are as follows:
1. FIRST PREFERRED SHARES
The first preferred shares shall, as a class, carry and be subject to the following rights, privileges, restrictions and conditions:
1.1 The first preferred shares may be issued at any time and from time to time in one or more series, each series to consist of such number of first preferred shares as may, before the issue thereof, be determined by resolution passed by the Board of Directors of the Corporation. The number of shares of any series may from time to time be increased by the Board of Directors of the Corporation upon compliance with the same conditions as are applicable to the issue of shares of a new series.
1.2 The Board of Directors of the Corporation shall, subject as hereinafter provided and subject to the provisions of the Canada Business Corporations Act, fix, by resolution duly passed before the issue of the first preferred shares of each series, the designation, rights, privileges, restrictions and conditions to be attached to the first preferred shares of such series, including, but without in any way limiting or restricting the generality of the foregoing:
(i) provisions, if any, with respect to the rights of the holders of the first preferred shares of such series to receive notice of or to attend any meeting of the shareholders of the Corporation or to vote at any such meeting;
(ii) whether any dividends shall be payable on the first preferred shares of such series and, if dividends are to be payable thereon, the rate, amount or method of calculation of preferential dividends, whether fixed or fluctuating, whether cumulative or non-cumulative, whether such dividends are payable in money or by the issue of fully paid shares of the Corporation, the currency or currencies of payment, the date or dates and places of payment of preferential dividends and the date or dates from which such preferential dividends shall accrue;
(iii) the rights of the Corporation if any, to purchase or redeem the first preferred shares of such series, and the purchase or redemption price or the method of calculating the same, and the terms and conditions of any such purchase or redemption;
(iv) provisions, if any, with respect to the rights of the holders of the first preferred shares of such series to tender such shares to the Corporation for purchase by the Corporation and to oblige the Corporation to make such purchase;
(v) the conversion rights, if any;
(vi) the terms and conditions of any share purchase plan or sinking fund with respect to the first preferred shares of such series; and
(vii) the restrictions, if any, respecting payment of dividends on the second preferred shares, the common shares or on any other shares of the Corporation ranking junior to the first preferred shares;
the whole subject to articles of amendment setting forth the designation, rights, privileges, restrictions and conditions to be attached to the first preferred shares of such series and the issue of a certificate of amendment in respect thereof.
1.3 The first preferred shares shall, with respect to the payment of dividends, be entitled to preference over the second preferred shares, the common shares and over any other shares of the Corporation ranking junior to the first preferred shares, and no dividends (other than stock dividends payable in shares of the Corporation ranking junior to the first preferred shares) shall at any time be declared or paid or set apart for payment on the second preferred shares, the common shares or on any other shares of the Corporation ranking junior to the first preferred shares, nor shall the Corporation call for redemption or purchase any of the first preferred shares (less than the total number of first preferred shares then outstanding) or any shares of the Corporation ranking junior to the first preferred shares unless at the date of such declaration or call for redemption or purchase, as the case may be, all cumulative dividends up to and including the dividend payment for the last completed period for which such cumulative dividends shall be payable shall have been declared and paid or set apart for payment in respect of each series of cumulative first preferred shares then issued and outstanding and any declared and unpaid noncumulative dividends shall have been paid or set apart for payment in respect of each series of non-cumulative first preferred shares then issued and outstanding.
1.4 In the event of the liquidation, dissolution or winding up of the Corporation or other distribution of assets of the Corporation among shareholders for the purpose of winding up its affairs, the holders of the first preferred shares shall be entitled to receive, before any amount shall be paid to, or any property or assets of the Corporation distributed among, the holders of the second preferred shares, the common shares or any other shares of the Corporation ranking junior to the first preferred shares, (i) the amount paid up on such first preferred shares, together with, in the case of cumulative first preferred shares, all unpaid cumulative dividends (which for such purpose shall be calculated as if such cumulative dividends were accruing from day to day for the period from the expiration of the last period for which cumulative dividends have been paid up to and including the date of distribution) and, in the case of non-cumulative first preferred shares, all declared and unpaid non-cumulative dividends, and (ii) if such liquidation, dissolution, winding up or distribution shall be voluntary, an additional amount equal to the premium, if any, which would have been payable on the redemption of said first preferred shares respectively if they had been called for redemption by the Corporation on the date of distribution
and, if said first preferred shares could not be redeemed on such date, then an additional amount equal to the greatest premium, if any, which would have been payable on the redemption of said first preferred shares respectively. After payment to the holders of the first preferred shares of the amounts so payable to them, they shall not be entitled to share in any further distribution of the property or assets of the Corporation.
1.5 The first preferred shares of each series shall rank on a parity with the first preferred shares of every other series with respect to the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or other distribution of assets of the Corporation among shareholders for the purpose of winding up its affairs, provided, however, that in case such assets are insufficient to pay in full the amount due on all the first preferred shares, then such assets shall be applied firstly, to the payment equally and rateably of an amount equal to the amount paid up on the first preferred shares of each series and the premium thereon, if any, and, secondly, pro rata in the payment of accrued and unpaid cumulative dividends and declared and unpaid non-cumulative dividends.
1.6 The holders of the first preferred shares shall not, as such, be entitled as of right to subscribe for, or to purchase or receive the whole or any part of any issue of any shares, or of any bonds, debentures or other securities of the Corporation now or hereafter authorized, otherwise than in accordance with the exercise of the conversion rights, if any, which may from time to time attach to any series of first preferred shares.
1.7 The provisions contained in Section 1.1 to 1.6 inclusive, and in this
Section 1.7 may be repealed or amended in whole or in part by articles of
amendment and the issue of a certificate of amendment in respect thereof, but
only with the prior approval of the holders of the first preferred shares given
as hereinafter specified in addition to any other approval required under the
Canada Business Corporations Act.
The approval of the holders of the first preferred shares as to any and all matters hereinbefore referred to may be given in writing by a resolution signed by all the holders of the first preferred shares or by resolution passed by not less than two-thirds (2/3) of the votes cast at a meeting of the holders of the first preferred shares duly called for the purpose at which meeting, when originally held, the holders of not less than a majority of the outstanding first preferred shares are present in person or represented by proxy in accordance with the by-laws of the Corporation. If at any such meeting, the holders of a majority of the outstanding first preferred shares are not present in person or represented by proxy within thirty (30) minutes after the time fixed for the meeting, then the meeting shall be adjourned to such date, being no less than fifteen (15) days later, and to such time and place as may be fixed by the chairman of the meeting and, at such adjourned meeting, the holders of first preferred shares present in person or represented by proxy, whether or not they hold more or less than a majority of all first preferred shares then outstanding, may transact the business for which the meeting was originally called, and a resolution duly passed thereat by not less than two-thirds (2/3) of the votes cast at such adjourned meeting shall constitute the approval of the holders of the first preferred shares hereinbefore mentioned. Notice of any such original meeting of the holders of the first preferred shares shall be given not less than twenty-one (21) days nor more than fifty (50) days prior to the date fixed for such meeting and shall state the nature of the business to be transacted and the text
of any resolution to be submitted to the meeting. Notice of any such adjourned meeting shall be given: (i) not less than seven (7) days prior to the date fixed for such adjourned meeting, if the original meeting was adjourned by one or more adjournments for an aggregate of less than thirty (30) days, but it shall not be necessary to state in such notice the business for which the adjourned meeting is called or the text of any resolution to be submitted to the adjourned meeting, and (ii) as required by the Canada Business Corporations Act, if the original meeting was adjourned by one or more adjournments for an aggregate of thirty (30) days or more. The formalities to be observed with respect to the giving of notice of any such original meeting or adjourned meeting or any other meeting of the holders of first preferred shares and the conduct thereof shall be those from time to time prescribed in the by-laws of the Corporation with respect to meetings of shareholders or in the laws governing the Corporation.
If the repeal or amendment of the provisions hereinbefore contained affects the rights of the holders of first preferred shares of any series in a manner different from that in which the rights of the holders of first preferred shares of any other series are affected, then such repeal or amendment shall, in addition to being approved by the holders of the first preferred shares as hereinabove set forth, be approved by the holders of the first preferred shares of such series so affected, and the provisions of this Section 1.7 shall apply, mutatis mutandis, with respect to the giving of such approval.
Any meeting of the holders of the outstanding first preferred shares may be held at any time and for any purpose, without notice, if all holders of first preferred shares entitled to vote at the meeting waive notice of the meeting in writing. For the purpose of waiver of notice, the words "in writing" shall, without limitation, include the sending of a telegram, telex, cable or any other form of written communication by a shareholder. Any holder of first preferred shares may waive notice of any meeting either before or after the meeting is held.
Irregularities in the notice or in the giving thereof as well as the accidental omission to give notice of any meeting to, or the non-receipt of any notice by, any holder of first preferred shares, shall not invalidate any action taken at any meeting.
At any meeting of the holders of first preferred shares without distinction as to series, each holder of first preferred shares shall be entitled to 1/25 of a vote for each $1 (with the Canadian dollar and the United States dollar being deemed to be at par for the purposes of this Section 1.7) paid up on each first preferred share held by him. At any meeting of the holders of first preferred shares of any particular series, each holder shall be entitled to one (1) vote in respect of each first preferred share of such series held by him.
2. SECOND PREFERRED SHARES
The second preferred shares shall, as a class, rank as to the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding up of the Corporation or other distribution of assets of the Corporation among shareholders for the purpose of winding up its affairs, after the first preferred shares and shall carry and be subject to the following rights, privileges, restrictions and conditions:
2.1 The second preferred shares may be issued at any time and from time to time in one or more series, each series to consist of such number of second preferred shares as may, before the issue thereof, be determined by resolution passed by the Board of Directors of the Corporation. The number of shares of any series may from time to time be increased by the Board of Directors of the Corporation upon compliance with the same conditions as are applicable to the issue of shares of a new series.
2.2 The Board of Directors of the Corporation shall, subject as hereinafter provided and subject to the provisions of the Canada Business Corporations Act, fix, by resolution duly passed before the issue of the second preferred shares of each series, the designation, rights, privileges, restrictions and conditions to be attached to the second preferred shares of such series, including, but without in any way limiting or restricting the generality of the foregoing:
(i) provisions, if any, with respect to the rights of the holders of the second preferred shares of such series to receive notice of or to attend any meeting of the shareholders of the Corporation or to vote at any such meeting;
(ii) whether any dividends shall be payable on the second preferred shares of such series and, if dividends are to be payable thereon, the rate, amount or method of calculation of preferential dividends, whether fixed or fluctuating, whether cumulative or non-cumulative, whether such dividends are payable in money or by the issue of fully paid shares of the Corporation, the currency or currencies of payment, the date or dates and places of payment of preferential dividends and the date or dates from which such preferential dividends shall accrue;
(iii) the rights of the Corporation, if any, to purchase or redeem the second preferred shares of such series, and the purchase or redemption price or the method of calculating the same, and the terms and conditions of any such purchase or redemption;
(iv) provisions, if any, with respect to the rights of the holders of the second preferred shares of such series to tender such shares to the Corporation for purchase by the Corporation and to oblige the Corporation to make such purchases;
(v) the conversion rights, if any;
(vi) the terms and conditions of any share purchase plan or sinking fund with respect to the second preferred shares of such series; and
(vii) the restrictions, if any, respecting payment of dividends on the common shares or on any other shares of the Corporation ranking junior to the second preferred shares;
the whole subject to articles of amendment setting forth the designation, rights, privileges, restrictions and conditions to be attached to the second preferred shares of such series and the issue of a certificate of amendment in respect thereof, and subject to the provisions now or hereafter attaching to the first preferred shares as a class or to any series thereof.
2.3 The second preferred shares shall, with respect to the payment of dividends, be entitled to preference over the common shares and over any other shares of the Corporation ranking junior to the second preferred shares, but shall be subject to the prior rights in respect of the payment of dividends attaching to the first preferred shares, and no dividends (other than stock dividends payable in shares of the Corporation ranking junior to the second preferred shares) shall at any time be declared or paid or set apart for payment on the common shares or on any other shares of the Corporation ranking junior to the second preferred shares, nor shall the Corporation call for redemption or purchase any of the second preferred shares (less than the total number of second preferred shares then outstanding) or any shares of the Corporation ranking junior to the second preferred shares unless at the date of such declaration or call for redemption or purchase as the case may be, all cumulative dividends up to and including the dividend payment for the last completed period for which such cumulative dividends shall be payable shall have been declared and paid or set apart for payment in respect of each series of cumulative second preferred shares then issued and outstanding and any declared and unpaid non-cumulative dividends shall have been paid or set apart for payment in respect of each series of non-cumulative second preferred shares then issued and outstanding.
2.4 In the event of the liquidation, dissolution or winding up of the Corporation or other distribution of assets of the Corporation among shareholders for the purpose of winding up its affairs, the holders of the second preferred shares shall be entitled to receive, subject to prior payment in full to the holders of the first preferred shares of all amounts payable in such circumstances on the first preferred shares but before any amount shall be paid to, or any property or assets of the Corporation distributed among, the holders of the common shares or any other shares of the Corporation ranking junior to the second preferred shares, (i) the amount paid up on such second preferred shares, together with, in the case of cumulative second preferred shares, all unpaid cumulative dividends (which for such purpose shall be calculated as if such cumulative dividends were accruing from day to day for the period from the expiration of the last period for which cumulative dividends have been paid up to and including the date of distribution) and, in the case of non-cumulative second preferred shares, all declared and unpaid non-cumulative dividends, and (ii) if such liquidation, dissolution, winding up or distribution shall be voluntary, an additional amount equal to the premium, if any, which would have been payable on the redemption of said second preferred shares respectively if they had been called for redemption by the Corporation on the date of distribution and, if said second preferred shares could not be redeemed on such date, then an additional amount equal to the greatest premium, if any, which would have been payable on the redemption of said second preferred shares respectively. After payment to the holders of the second preferred shares of the amounts so payable to them, they shall not be entitled to share in any further distribution of the property or assets of the Corporation.
2.5 The second preferred shares of each series shall rank on a parity with the second preferred shares of every other series with respect to the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, or other distribution of assets of the Corporation among shareholders for the purpose of winding up its affairs, provided, however, that in case such assets are insufficient to pay in full the amount due on all the second preferred shares, then such assets shall be applied, firstly, to the payment equally and rateably of an amount equal to the amount paid up on the second preferred shares of each series and the premium thereon, if any, and,
secondly, pro rata in the payment of accrued and unpaid cumulative dividends and declared and unpaid non-cumulative dividends.
2.6 The holders of the second preferred shares shall not, as such, be entitled as of right to subscribe for, or to purchase or receive the whole or any part of any issue of any shares, or of any bonds, debentures or other securities of the Corporation now or hereafter authorized, otherwise than in accordance with the exercise of the conversion rights, if any, which may from time to time attach to any series of second preferred shares.
2.7 The provisions contained in Sections 2.1 to 2.6 inclusive, and in this
Section 2.7 may be repealed or amended in whole or in part by articles of
amendment and the issue of a certificate of amendment in respect thereof, but
only with the prior approval of the holders of the second preferred shares given
as hereinafter specified in addition to any other approval required under the
Canada Business Corporations Act.
The approval of the holders of the second preferred shares as to any and all matters hereinbefore referred to may be given in writing by a resolution signed by all the holders of the second preferred shares or by resolution passed by not less than two-thirds (2/3) of the votes cast at a meeting of the holders of the second preferred shares duly called for the purpose at which meeting, when originally held, the holders of not less than a majority of the outstanding second preferred shares are present in person or represented by proxy in accordance with the by-laws of the Corporation. If at any such meeting, the holders of a majority of the outstanding second preferred shares are not present in person or represented by proxy within thirty (30) minutes after the time fixed for the meeting, then the meeting shall be adjourned to such date, being no less than fifteen (15) days later, and to such time and place as may be fixed by the chairman of the meeting and, at such adjourned meeting, the holders of second preferred shares present in person or represented by proxy, whether or not they hold more or less than a majority of all second preferred shares then outstanding, may transact the business for which the meeting was originally called, and a resolution duly passed thereat by not less than two-thirds (2/3) of the votes cast at such adjourned meeting shall constitute the approval of the holders of the second preferred shares hereinbefore mentioned. Notice of any such original meeting of the holders of the second preferred shares shall be given not less than twenty-one (21) days or more than fifty (50) days prior to the date fixed for such meeting and shall state the nature of the business to be transacted and the text of any resolution to be submitted to the meeting. Notice of any such adjourned meeting shall be given: (i) not less than seven (7) days prior to the date fixed for such adjourned meeting, if the original meeting was adjourned by one or more adjournments for an aggregate of less than thirty (30) days, but it shall not be necessary to state in such notice the business for which the adjourned meeting is called or the text of any resolution to be submitted to the adjourned meeting, and (ii) as required by the Canada Business Corporations Act, if the original meeting was adjourned by one or more adjournments for an aggregate of thirty (30) days or more. The formalities to be observed with respect to the giving of notice of any such original meeting or adjourned meeting or any other meeting of the holders of second preferred shares and the conduct thereof shall be those from time to time prescribed in the by-laws of the Corporation with respect to meetings of shareholders or in the laws governing the Corporation.
If the repeal or amendment of the provisions hereinbefore contained affects the rights of the holders of second preferred shares of any series in a manner different from that in which the
rights of the holders of second preferred shares of any other series are affected, then such repeal or amendment shall, in addition to being approved by the holders of the second preferred shares as hereinabove set forth, be approved by the holders of the second preferred shares of such series so affected, and the provisions of this Section 2.7 shall apply, mutatis mutandis, with respect to the giving of such approval.
Any meeting of the holders of the outstanding second preferred shares may be held at any time and for any purpose, without notice, if all holders of second preferred shares entitled to vote at the meeting waive notice of the meeting in writing. For the purpose of waiver of notice, the words "in writing" shall, without limitation, include the sending of a telegram, telex, cable or any other form of written communication by a shareholder. Any holder of second preferred shares may waive notice of any meeting either before or after the meeting is held.
Irregularities in the notice or in the giving thereof as well as the accidental omission to give notice of any meeting to, or the non-receipt of any notice by, any holder of second preferred shares, shall not invalidate any action taken at any meeting.
At any meeting of the holders of second preferred shares without distinction as to series, each holder of second preferred shares shall be entitled to 1/25 of a vote for each $1 (with the Canadian dollar and the United States dollar being deemed to be at par for the purposes of this Section 2.7) paid up on each second preferred share held by him. At any meeting of the holders of second preferred shares of any particular series, each holder shall be entitled to one (1) vote in respect of each second preferred share of such series held by him.
3. COMMON SHARES
The common shares shall, as a class, carry and be subject to the following rights, privileges, restrictions and conditions:
3.1 Each common share of the Corporation shall entitle the holder thereof to one
(1) vote at all meetings of shareholders of the Corporation (except meetings at
which only holders of another specified class or series of shares are entitled
to vote).
3.2 Subject to the prior rights with respect to the payment of dividends attaching to the first preferred shares, the second preferred shares and to any other class of shares of the Corporation which rank prior to the common shares, the holders of the common shares shall be entitled to receive, as and when declared by the Board of Directors of the Corporation, dividends which may be paid in money, property or by the issue of fully paid shares of the Corporation.
3.3 In the event of the liquidation, dissolution or winding up of the Corporation or other distribution of assets of the Corporation among shareholders for the purpose of winding up its affairs, subject to the rights, privileges, restrictions and conditions attached to the first preferred shares and the second preferred shares, either as a class or series, and to any other class or series of shares of the Corporation which rank prior to the common shares, the common shares shall entitle the holders thereof to receive the remaining property of the Corporation.
3.4 Notwithstanding the provisions attaching to the common shares, the Corporation may at any time and from time to time amend the Articles of the Corporation to
(i) effect an exchange, reclassification or cancellation of all or part of the common shares;
(ii) create a new class of shares equal or superior to the common shares; or
(iii) increase any maximum number of authorized shares of any class of shares having rights or privileges equal or superior to the common shares,
without in any of such cases the holders of the common shares being entitled to vote separately thereon as a class; provided, however, that the holders of common shares shall always be entitled to vote in any of such cases in accordance with Section 3.1 hereof.
SECOND PREFERRED SHARES, SERIES 1
The first series of Second Preferred Shares, designated as Convertible Participating Voting Second Preferred Shares Series 1 (the "Second Preferred Shares Series 1"), shall consist of an unlimited number of shares. The Second Preferred Shares Series 1 shall, in addition to the rights, privileges, restrictions and conditions attaching to the Second Preferred Shares as a class (collectively, the "Second Preferred Shares Class Provisions") carry and be subject to the following rights, privileges, restrictions and conditions (collectively, the "Second Preferred Shares Series 1 Provisions"):
1. INTERPRETATION
1.1 DEFINED TERMS
The following words and phrases whenever used in the Second Preferred Shares Series 1 Provisions shall have the following meanings, unless there be something in the context otherwise inconsistent therewith:
(a) "ADJUSTED CONVERSION VALUE" means $7.75 less:
(i) upon conversion occurring at the option of the Corporation;
(ii) after a Change-in-Control Transaction; or
(iii) after the exercise by the holders of their conversion privilege provided herein following delivery by the Corporation of the notice of redemption contemplated by section 5.1,
in each case, prior to the Fourth Anniversary Date, the Adjustment Amount;
(b) "ADJUSTED REDEMPTION PRICE" means:
(i) until the Fourth Anniversary Date, an amount equal to the sum of (A) $10.00 per Second Preferred Share Series 1, plus (B) the Redemption Premium per Second Preferred Share Series 1, plus (C) an amount equal to the Adjustment Amount multiplied by the number of common shares into
which such Second Preferred Share Series 1 would be convertible (assuming conversion at the option of the holders); and
(ii) from and after the Fourth Anniversary Date, an amount equal to the sum of (A) $10.00 per Second Preferred Share Series 1, plus (B) the Redemption Premium per Second Preferred Share Series 1, plus (C) any accrued but unpaid dividends thereon;
(c) "ADJUSTMENT AMOUNT" in respect of each Second Preferred Share Series 1 means, at the time of the applicable event giving rise to the calculation of the Adjustment Amount (the "Applicable Time"), an amount equal to (A) the U.S. Dollar Equivalent of the dividend paid per common share in the most recently completed fiscal quarter of the Corporation (calculated on the date of payment of the dividend) multiplied by (B) a number which is the sum of the number of common shares into which 4,000,000 Second Preferred Shares Series 1 would be convertible (assuming conversion prior to the Fourth Anniversary Date at the option of the Corporation) on each successive Adjustment Date set forth in the table contained in section 6.4(b)(i) following the Applicable Time until the Fourth Anniversary Date, divided by 5,161,290.3;
(d) "BUSINESS DAY" means a day other than a Saturday, a Sunday or any other day on which principal commercial banks are not permitted to be open in Toronto, Ontario;
(e) "CANADIAN DOLLAR EQUIVALENT" means, on any day, with respect to any amount in United States dollars, the equivalent amount in Canadian dollars, converted at the Bank of Canada's noon rate of exchange for that day;
(f) "CHANGE-IN-CONTROL TRANSACTION" means a transaction or series of related transactions as a result of which any person other than Thomas H. Lee Company, and its shareholders, officers, directors, affiliates, and entities controlled or administered by any of the foregoing acquire shares carrying, in the aggregate, more than 50% of the votes attaching to all voting shares in the capital of the Corporation;
(g) "CLOSING PRICE" with respect to any securities on any Trading Day shall mean the closing sale price on such day or, in case no such sale takes place on such Trading Day, the average of the reported closing bid and asked prices, in each case on the Recognized Exchange on which the highest volume of trading in such securities took place on that day or, if no trading in such securities took place on that day, on the prior Trading Day on which trading took place;
(h) "COMMON SHARES" shall mean common shares of the Corporation as such shares were constituted on the date of issuance of the Second Preferred Shares Series 1 and shares of any other class resulting from any reclassification or change of such shares;
(i) "COMMON EQUIVALENT REDEMPTION PRICE" means, as of any date, an amount per Second Preferred Share Series 1 equal to the amount which would have been distributable with respect to the number of common shares into which such Second Preferred Share Series 1 would be convertible as of such date had the Corporation been liquidated as of such date. Such Common Equivalent Redemption Price shall be based on the value of the Corporation on a liquidated basis and shall be as agreed upon by the Corporation and holders of the Second Preferred Shares Series 1 or, absent such agreement, within 15 days following the date on which the applicable event which gives rise to the valuation occurs, as determined by an independent appraiser selected by the Corporation, the fees and expenses of which appraiser shall be borne by the Corporation;
(j) "CONVERSION BASIS" has the meaning ascribed to it in section 6.1(a);
(k) "CONVERSION FACTOR" has the meaning ascribed to it in section 6.4(a);
(l) "CURRENT MARKET VALUE" means the U.S. Dollar Equivalent of the Closing Price of the common shares on the Recognized Exchange determined on the last Trading Day prior to the issuance of common shares (or other event in connection with which Current Market Value is to be determined) or, if no trading in the common shares took place on that day, on the prior Trading Day on which trading took place;
(m) "DIVIDEND PAYMENT DATE" means the first business day following the first day of each of the first and third fiscal quarters in each fiscal year of the Corporation commencing on or about six months following the Fourth Anniversary Date;
(n) "FOURTH ANNIVERSARY DATE" means July 7, 2002;
(o) "LIQUIDATION PREMIUM" means, at any time, an amount per Second Preferred Share Series 1 equal to the Conversion Factor less $10.00;
(p) "MAXIMUM COMMON SHARE NUMBER" means 7,688,508 common shares, or such greater number of common shares as may be permitted to be issued by all applicable regulatory authorities;
(q) "PUBLIC OFFERING" means a sale of common shares in the capital of the Corporation (or securities exchangeable for or convertible into such common shares) pursuant to a prospectus filed under applicable securities laws and underwritten by one or more independent underwriters, where the aggregate proceeds to the Corporation are at least U.S. $25,000,000, and not more than 25% of the shares are sold to any one purchaser or affiliated group of purchasers, other than underwriters;
(r) "RECOGNIZED EXCHANGE" means any recognized stock exchange on which the common shares are listed from time to time, and on which the highest aggregate volume of trading in the common shares has taken place over the applicable
period or on the applicable day, including, without limitation, the NASDAQ National Market, The Toronto Stock Exchange and The Montreal Exchange;
(s) "REDEMPTION PREMIUM" means, on any date, an amount per Second Preferred Share Series 1 equal to the Conversion Factor less $10.00;
(t) "SURVIVING PERSON" means the continuing or surviving person of a merger, consolidation or other continuation with the Corporation;
(u) "TRADING DAY" means, if the applicable security is listed or admitted for trading on a recognized stock exchange on which the common shares are listed from time to time, a day on which trades may be made thereon; and
(v) "U.S. DOLLAR EQUIVALENT" means, on any day, with respect to any amount in Canadian dollars, the equivalent amount in United States dollars, converted at the Bank of Canada's noon rate of exchange for that day.
1.2 CURRENCY
All amounts payable pursuant hereto shall be payable in lawful money of the United States of America.
1.3 NON-BUSINESS DAY
If any day on which any payment is to be made or action taken hereunder in connection with the Second Preferred Shares Series 1 is not a business day, then such payment shall be made or action taken on the next succeeding day that is a business day.
1.4 HEREIN, HERETO, ETC.
The words "herein", "hereto", "hereof' and similar words refer, unless the context clearly indicates the contrary, to the whole of the Second Preferred Shares Class Provisions and not to any particular section, clause or paragraph thereof.
1.5 NUMBER AND GENDER
Words importing the singular number only shall include the plural and vice versa, words importing the use of any gender shall include all genders, and words importing persons shall include firms and corporations and vice versa.
1.6 ADJUSTMENTS
Without limiting or duplicating the effect of section 6.4(b)(iii), all numbers of shares and dollar amounts used herein shall be adjusted appropriately to reflect any stock split, consolidation, combination, stock dividend or other form of recapitalization or restructuring occurring after the date hereof.
1.7 ACTIONS BY HOLDERS
Any action required or permitted to be taken hereunder by holders of Second Preferred Shares Series 1, including, without limitation, election to choose between or among alternative forms of payment, shall be deemed to be valid if approved or taken by holders of in excess of 50% in number of such shares then outstanding, and shall be binding upon all holders of Second Preferred Shares Series 1. In connection with the exercise by the holders of the option contemplated by section 5.1, if no approval is obtained in the manner contemplated by this section 1.7 within the thirty day period provided for in section 5.1, the holders shall be deemed to have elected to receive the Adjusted Redemption Price.
2. DIVIDENDS
2.1 CASH AND OTHER DIVIDENDS
(a) If and whenever the Corporation shall at any time or from time to time declare and pay a cash dividend on its outstanding common shares, then the holders of Second Preferred Shares Series 1 shall be entitled to receive from the Corporation, with respect to each Second Preferred Share Series 1 held, a preferential dividend equal in amount to one-half of the same dividend to be received by a holder of the number of common shares into which such Second Preferred Share Series 1 is convertible on the record date for such dividend (assuming conversion at the option of the holder), out of which any applicable withholding taxes will be withheld. Any such dividend shall be paid on the Second Preferred Shares Series 1 at the same time such dividend shall be paid on the common shares.
(b) The Corporation shall declare and pay any dividend to the holders of the Second Preferred Shares Series 1 contemplated by sections 6.5 and 7.2(c), out of which dividend amount applicable withholding taxes will be withheld.
2.2 PAID-IN-KIND DIVIDENDS
In addition to the dividends provided for in section 2.1, the holders of Second Preferred Shares Series 1 shall, from and after the Fourth Anniversary Date, be entitled to receive a cumulative preferential non-cash paid-in-kind dividend payable in additional Second Preferred Shares Series 1. Such dividend shall be payable on each Dividend Payment Date to the holders of record at the close of business on the third business day immediately preceding such Dividend Payment Date, and shall be at the rate of two and one-half percent (2 1/2 %) for each six months, compounded semi-annually, with daily accrual. With respect to the first dividend payable after the Fourth Anniversary Date, such dividend shall be paid on the number of Second Preferred Shares Series 1 outstanding on such Fourth Anniversary Date, and such dividends payable thereafter shall be paid on the number of such Second Preferred Shares Series 1 outstanding on the immediately-preceding Dividend Payment Date. Notwithstanding the foregoing:
(a) none of the dividends contemplated by this section 2.2 shall be payable until the holders of Second Preferred Shares Series 1 provide reasonably satisfactory evidence to the Corporation that the holders have paid or made provision for the
payment, within the applicable statutory time periods, of any applicable withholding taxes exigible in connection therewith; and
(b) any dividends contemplated by this section 2.2 which are not permitted to be paid by virtue of the maximum number of common shares into which the Second Preferred Shares Series 1 may be converted exceeding the Maximum Common Share Number shall be paid in cash at the rate of two and one-half (2 1/2 %) for each six months, compounded semi-annually, with daily accrual, based on the Adjusted Redemption Price, out of which any applicable withholding taxes will be withheld.
2.3 NO ADDITIONAL DIVIDENDS
The holders of the Second Preferred Shares Series 1 shall not be entitled to any dividends other than or in excess of the dividends provided for in this section 2.
3. LIQUIDATION, DISSOLUTION OR WINDING-UP
3.1 LIQUIDATION, DISSOLUTION OR WINDING-UP
In the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of assets of the Corporation among its shareholders for the purpose of winding up its affairs (in any case, a "Liquidation Event"), each holder of the Second Preferred Shares Series 1 in accordance with the Second Preferred Shares Class Provisions shall be entitled to receive the greater of:
(a) an amount equal to the sum of: (i) $10.00 per share, plus (ii) the Liquidation Premium per share, plus (iii) if the Liquidation Event occurs after the Fourth Anniversary Date, any accrued but unpaid dividend, before any amount shall be paid or any property or assets of the Corporation shall be distributed to the holders of the common shares or to the holders of any other shares ranking junior to the Second Preferred Shares Series 1 in any respect, out of which aggregate amount any applicable withholding taxes will be withheld; or
(b) pari passu and rateably with the holders of the common shares, the Common Equivalent Redemption Price per share, out of which any applicable withholding taxes will be withheld, and less the amount of any taxes required to be paid by the Corporation pursuant to Part VI.1 of the Income Tax Act (Canada) as a result of such payment to such holder.
After payment to the holders of the Second Preferred Shares Series 1 of the amount so payable to them, they shall not be entitled to share in any further distribution of the property or assets of the Corporation.
4. VOTING
4.1 WITH COMMON SHARES
So long as any Second Preferred Share Series 1 is outstanding, each holder thereof shall be entitled to vote at all meetings of the shareholders of the Corporation. With respect to any such vote, each holder of Second Preferred Shares Series 1 shall be entitled to the number of votes equal to the number of votes to which a holder of the number of common shares into which such Second Preferred Shares Series 1 are convertible on the record date for such vote is entitled (assuming conversion at the option of the holder).
5. REDEMPTION
5.1 REDEMPTION
Subject to section 5.2 and the provisions of the Canada Business Corporations Act, the Corporation, in the manner provided in the provisions attaching to the Second Preferred Shares as a class may, upon not less than 60 days' prior written notice, redeem all, but not less than all, of the then outstanding Second Preferred Shares Series 1 on payment for each share to be redeemed of an amount per share equal to, at the option of holders of the Second Preferred Shares Series 1 given within thirty days after receipt from the Corporation of its notice of proposed redemption, either:
(a) the Adjusted Redemption Price; or
(b) the Common Equivalent Redemption Price;
in either case out of which such payment any applicable withholding tax shall be withheld. If the holders elect to receive the Common Equivalent Redemption Price, the Corporation may, at its election, pay such amount either in cash or by issuing to such holders a number of common shares having a value, based on the average Closing Price over the fifteen consecutive Trading Days immediately preceding the date of redemption, equal to the Common Equivalent Redemption Price.
5.2 RESTRICTION ON REDEMPTION
The Corporation shall not be entitled to redeem any of the Second Preferred Shares Series 1 at any time prior to the Fourth Anniversary Date unless the common shares shall have traded, at any time since July 7, 1998, on a Recognized Exchange at a simple average Closing Price per share of not less than $13.00 (or, if applicable, the Canadian Dollar Equivalent thereof) during any 120 consecutive Trading Days prior to the date of the notice of redemption.
6. CONVERSION PRIVILEGE
6.1 RIGHT OF CONVERSION
(a) The Second Preferred Shares Series 1 shall, subject as hereinafter provided, be convertible into common shares on the following conversion basis (the
"Conversion Basis"), namely the number of common shares for each Second Preferred Share Series 1 converted shall be determined by dividing the Conversion Factor (as defined in section 6.4) in effect at the time of conversion by the Adjusted Conversion Value.
(b) The conversion provided for in section 6.1(a) may be effected by:
(i) any of the holders of Second Preferred Shares Series 1 at any time, and
(ii) the Corporation
(A) at any time prior to the Fourth Anniversary Date if the common shares shall have traded at any time, since July 7, 1998, on a Recognized Exchange at a simple average Closing Price per share of not less than $13.00 (or, if applicable, the Canadian Dollar Equivalent thereof) during any 120 consecutive Trading Days, and
(B) at any time or from time to time on or after the Fourth Anniversary Date.
6.2 CONVERSION BY HOLDER
(a) The conversion privilege herein provided for may be exercised by a holder of Second Preferred Shares Series 1 by notice in writing given to the transfer agent for the Second Preferred Shares Series 1 at any office for the transfer of the Second Preferred Shares Series 1 or to the Corporation at its registered office accompanied by the certificate or certificates representing Second Preferred Shares Series 1 in respect of which the holder thereof desires to exercise such right of conversion. Such notice shall be signed by such holder or his duly authorized attorney or agent and shall specify the number of Second Preferred Shares Series 1 which the holder desires to have converted. The transfer form on the certificate or certificates in question need not be endorsed, except in the circumstances hereinafter contemplated. If less than all the Second Preferred Shares Series 1 represented by a certificate or certificates accompanying any such notice are to be converted, the holder shall be entitled to receive, at the expense of the Corporation, a new certificate representing the Second Preferred Shares Series 1 comprised in the certificate or certificates surrendered as aforesaid which are not to be converted.
On any conversion of Second Preferred Shares Series 1, the share certificates for common shares of the Corporation resulting therefrom shall be issued in the name of the registered holder of the Second Preferred Shares Series 1 converted or in such name or names as such registered holder may direct in writing (either in the notice referred to above or otherwise); in any such case the transfer form on the back of the certificate in question shall be endorsed by the registered holder of the Second Preferred Shares Series 1 or his duly authorized attorney, with signature guaranteed in a manner satisfactory to the Corporation.
(b) In the case of any Second Preferred Shares Series 1 which may be called for redemption, the right of conversion thereof shall, notwithstanding anything herein contained, cease and terminate at the close of business on the business day immediately preceding the date fixed for redemption, provided, however, that if the Corporation shall fail to redeem such Second Preferred Shares Series 1 in accordance with the notice of redemption, the right of conversion shall thereupon be restored.
(c) Subject as hereinafter provided in this section 6.2(c), the right of a holder of Second Preferred Shares Series 1 to convert the same into common shares shall be deemed to have been exercised, and the registered holder of such Second Preferred Shares Series 1 (or any person or persons in whose name or names any such registered holder of Second Preferred Shares Series 1 shall have directed certificates representing common shares to be issued as provided in section 6.2(a)) shall be deemed to have become a holder of common shares of record of the Corporation for all purposes on the date of surrender of certificates representing the Second Preferred Shares Series 1 to be converted accompanied by notice in writing as provided in section 6.2(a), notwithstanding any delay in the delivery of certificates representing the common shares into which such Second Preferred Shares Series 1 have been converted.
6.3 CONVERSION BY CORPORATION
(a) In case the Corporation shall desire to exercise the right to cause conversion of the Second Preferred Shares Series 1 pursuant to section 6.1(a), it shall fix a date for conversion and it shall deliver by hand or mail or cause to be mailed a notice of such conversion at least 20 days prior to the date fixed for conversion to the holders of Second Preferred Shares Series 1 so to be converted at their last addresses as the same appear on the books of the Corporation. Such mailing shall be by ordinary mail. The notice, if delivered or mailed in the manner herein provided, shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to deliver or mail such notice by mail or any defect in the notice to the holder of the Second Preferred Shares Series 1 designated for conversion shall not affect the validity of the proceedings for the conversion of any other shares of Second Preferred Shares Series 1.
Each such notice shall specify the date fixed for conversion, the number of common shares into which each Second Preferred Share Series 1 is to be converted, the place or places for surrender of certificates representing such Second Preferred Shares Series 1 and that such common shares will be delivered upon presentation and surrender of certificates representing such Second Preferred Shares Series 1. If the notice of conversion is delivered prior to the Fourth Anniversary Date, such notice shall be accompanied by a certificate of an officer of the Corporation certifying that the common shares have traded at any time since July 7, 1998, on a Recognized Exchange at a simple average Closing Price per share of not
less than $13.00 (or, if applicable, the Canadian Dollar Equivalent thereof) during any consecutive 120 Trading Days.
(b) As promptly as practicable upon receipt of such notice of conversion, each holder of any shares of Second Preferred Shares Series 1 shall surrender the certificate or certificates for such shares of Second Preferred Shares Series 1, duly endorsed, at a place designated for such surrender along with instructions regarding the name or names (with address) in which the certificate or certificates for common shares which shall be issuable on such conversion. Each such share surrendered for conversion shall, unless the shares issuable on conversion are to be issued in the same name as the registration of such share of Second Preferred Shares Series 1, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Corporation duly executed by, the holder or his duly authorized attorney, with signature guaranteed in a manner satisfactory to the Corporation.
As promptly as practicable after satisfaction of the requirements for surrender set forth above, the Corporation shall issue and shall deliver to such holder at the address designated in such instructions a certificate or certificates for the number of full shares issuable upon the conversion of such shares in accordance with the provisions of this section 6 and a cheque or cash in respect of any fractional interest in respect of a common share arising upon such conversion, as provided in this section 6.
Each conversion shall be deemed to have been effected as to any such certificate on the date on which the requirements set forth above in this section 6.3(b) have been satisfied as to such certificate, and the person in whose name any certificate or certificates for common shares shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; provided however, that any such surrender on any date when the share transfer books of the Corporation shall be closed shall constitute the person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding day on which such share transfer books are open, but such conversion shall be at the Conversion Factor in effect on the date upon which such Second Preferred Shares Series 1 shall have been surrendered.
6.4 CONVERSION FACTOR
(a) The initial conversion factor shall be $10.00 (herein called the "Conversion Factor") subject to adjustment as provided in this section 6.4.
(b) The Conversion Factor shall be adjusted from time to time by the Corporation as follows:
(i) Subject to sections 6.4(b)(ii), (iii) and (iv), the Conversion Factor shall be adjusted semi-annually at the rate of 2.5% for each six-month period,
compounded semi-annually with daily accrual, until the Fourth Anniversary Date, as follows:
Adjustment Date Conversion Factor
--------------- -----------------
January 7, 1999 $10.25
July 7, 1999 $10.51
January 7, 2000 $10.77
July 7, 2000 $11.04
January 7, 2001 $11.31
July 7, 2001 $11.60
January 7, 2002 $11.89
Fourth Anniversary Date $12.18
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For greater certainty, from and after the Fourth Anniversary Date, the Conversion Factor shall be $12.18.
(ii) If conversion occurs prior to the Fourth Anniversary Date, either, (A) at the option of the Corporation pursuant to section 6.1(b)(ii), (B) within 90 days following a Change-in-Control Transaction, or (C) following receipt from the Corporation of a notice of redemption pursuant to section 5.1, the Conversion Factor shall be $12.18, as adjusted by sections 6.4(b)(iii) and (iv);
(iii) If and whenever the outstanding common shares shall be subdivided into a greater number of common shares or a stock dividend is declared in respect of common shares, the Conversion Factor in effect at the opening of business on the day following the day upon which such subdivision or stock dividend becomes effective shall be proportionately increased, and conversely, in case the outstanding common shares shall be combined into a smaller number of common shares, the Conversion Factor in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision, stock dividend or combination becomes effective;
(iv) If and whenever the Corporation issues common shares (other than (A) pursuant to the exercise of employee stock options, (B) as consideration in connection with acquisitions approved by the Corporation's board of directors, or (C) in a Public Offering) at a gross sale or offering price which is less than 100% of the Current Market Value thereof, the Conversion Factor shall be adjusted to the result obtained by multiplying the Conversion Basis in effect immediately prior to the date of such issuance by a fraction:
(1) the numerator of which shall be the number of common shares outstanding immediately after such issuance; and
(2) the denominator of which shall be the sum of:
(A) the number of common shares outstanding immediately prior to such issuance; and
(B) the number of shares equal to the quotient obtained by dividing
(x) the aggregate consideration received pursuant to such issuance by
(y) the Current Market Value per common share
and by multiplying the number thereby determined by $7.75.
(c) Notwithstanding section 6.4(b), no adjustment in the Conversion Factor shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this section 6.4(c) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this section 6.4 shall be made by the Corporation and shall be made to the nearest cent or to the nearest one one-hundredth of a share, as the case may be.
No adjustment need be made for rights to purchase common shares pursuant to a Corporation plan for reinvestment of dividends or interest.
(d) In any case in which this section 6.4 provides that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of such event (i) issuing to the holder of any Second Preferred Share Series 1 converted after such record date and before the occurrence of such event the additional common shares issuable upon such conversion by reason of the adjustment required by such event over and above the common shares issuable upon such conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of any fraction pursuant to section 6.10.
6.5 EFFECT OF RECLASSIFICATION
(a) In the event of any reclassification or change of outstanding common shares (other than a change as a result of a subdivision or combination) (a "Reclassification"), each Second Preferred Share Series 1 then outstanding shall thereafter be convertible into the kind and amount of shares and other securities or properties receivable upon such reclassification or change by a holder of a number of common shares issuable upon conversion of such Second Preferred Share Series 1, provided that such Second Preferred Shares Series 1 shall not be convertible into any property that would cause such Second Preferred Share Series 1 to be a "short term preferred share" (as defined by the Income Tax Act (Canada)). If, pursuant hereto, any property would otherwise be distributable
which would cause such Second Preferred Share Series 1 to be a "short term preferred share", such property shall be paid as a dividend-in-kind on the day immediately prior to conversion.
(b) Notwithstanding anything contained herein to the contrary, the
Corporation will not effect any Reclassification unless, prior to the
consummation hereof, (i) the Surviving Person thereof shall assume, by
written instrument mailed to each holder of Second Preferred Shares
Series 1 if such shares are held by 50 or fewer holders or groups of
affiliated holders or to each transfer agent for the Second Preferred
Shares Series 1 if such shares are held by a greater number of
holders, the obligation to deliver such holder such shares or other
securities or properties or pay a dividend of such other properties
with respect to or in exchange for common shares to which, in
accordance with the foregoing provisions, such holder is entitled, and
(ii) proper provision is made to ensure that the holder of Second
Preferred Shares Series 1 will be entitled to receive the benefits
afforded by this section 6.5. Such written instrument should provide
for adjustments which shall be as nearly as equivalent as may be
practicable to the adjustments provided for in this section 6.5.
The above provisions of this section shall similarly apply to successive reclassifications and changes.
(c) If at any time or from time to time the Corporation takes any action that would result in a Reclassification, the Corporation shall cause to be mailed to each holder of Second Preferred Shares Series 1 at his address appearing on the books of the Corporation, as promptly as possible but in any event at least 15 days prior to the applicable date hereinafter specified, a notice stating the date on which such Reclassification is expected to become effective or occur and the date as of which it is expected that holders of record of common shares shall be entitled to exchange their common shares for securities or other property deliverable upon such Reclassification. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such Reclassification. Neither the failure to give such notice nor any defect therein shall affect the legality or validity of such Reclassification.
(d) If this section 6.5 applies to any event or occurrence, the adjustments provided for in section 6.4 shall not apply to such event or occurrence.
6.6 TRANSFER OR SIMILAR TAXES ON SHARES ISSUED
The issue of share certificates on conversions of Second Preferred Shares Series 1 shall be made without charge to the converting holder of Second Preferred Shares Series 1 for any security transfer or similar tax in respect of the issue thereof. The Corporation shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issue and delivery of shares in any name other than that of the holder of any Second Preferred Shares Series 1 converted, and the Corporation shall not be required to issue or deliver any such share certificate unless and until the person or persons requesting the issue
thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid.
6.7 SHARES TO BE FULLY PAID
The Corporation covenants that all common shares which may be issued upon conversion of Second Preferred Shares Series 1 will, upon issue, be fully paid and non-assessable by the Corporation and free from all transfer or similar taxes as described in section 6.6, liens and charges with respect to the issue thereof.
6.8 REPORTS AS TO ADJUSTMENTS
Upon any adjustment of the Conversion Factor then in effect and any increase or decrease in the number of common shares issuable upon the operation of the conversion set forth in this section 6, then, and in each such case, the Corporation shall promptly deliver to the transfer agent for the Second Preferred Shares Series 1 and the transfer agent for the common shares, a certificate signed by an officer of the Corporation setting forth in reasonable detail the event requiring the adjustment and the method by which such adjustment was calculated and specifying the Conversion Factor then in effect following such adjustment and the increased or decreased number of shares issuable upon the conversion set forth in this section 6. The Corporation shall also promptly after the making of such adjustment cause its independent public accountants to give written notice to the registered holders of the Second Preferred Shares Series 1 at the address of each holder as shown on the books of the Corporation maintained by the transfer agent thereof, which notice shall state the Conversion Factor then in effect, as adjusted, and the increased or decreased number of shares issuable upon the exercise of the right of conversion granted by this section 6, and shall set forth in reasonable detail the method of calculation of each with a brief statement of the facts requiring such adjustment. Where appropriate, such notice to holders of the Second Preferred Shares Series 1 may be given in advance and included as part of the notice required under the provisions of section 6.3.
6.9 ENTITLEMENT TO DIVIDENDS
A holder of Second Preferred Shares Series 1 on the record date for any dividend declared payable on such share will be entitled to such dividend notwithstanding that such share is converted after such record date and before the payment date of such dividend, and the registered holder of any common share resulting from any conversion shall be entitled to rank equally with the registered holders of all other common shares in respect of all dividends declared payable to holders of common shares of record on any date after the date of conversion. Subject as aforesaid, no payment or adjustment will be made on account of any dividend, accrued or otherwise, on the Second Preferred Shares Series 1 converted or the common shares resulting from any conversion.
6.10 AVOIDANCE OF FRACTIONAL SHARES
In any case where a fraction of a common share or Convertible Preferred Share Series 1 would otherwise be issuable hereunder, whether on conversion of one or more Second Preferred Shares Series 1, as a payment of a dividend or otherwise, the Corporation shall adjust such fractional interest by rounding up or down to the nearest whole share.
6.11 POSTPONEMENT OF ISSUANCE OF SHARES UPON CONVERSION
In any case where the application of the foregoing provisions results in an increase in the Conversion Factor taking effect immediately after the record date for a specific event, if any Second Preferred Shares Series 1 are converted after that record date and prior to completion of the event, the Corporation may postpone the issuance to the holder of the additional common shares to which he is entitled by reason of the increase in the Conversion Factor but such additional common shares shall be so issued and delivered to that holder upon completion of the event and the Corporation shall, in the interim, deliver to the holder an appropriate instrument evidencing his right to receive such additional common shares.
6.12 CERTAIN COVENANTS
Any registered holder of Second Preferred Shares Series 1 may proceed to protect and enforce its rights and the rights of such holders by any available remedy by proceeding at law or in equity to protect and enforce any such rights, whether for the specific enforcement of any provision herein or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.
7. GENERAL
7.1 CONFLICT
In the event of any conflict or inconsistency between any of the Second Preferred Shares Series 1 Provisions and the Second Preferred Shares Class Provisions, such conflict or inconsistency shall be resolved in favour of the Second Preferred Shares Class Provisions.
7.2 RESTRICTIONS
Notwithstanding anything contained in these Second Preferred Shares Series 1 Provisions:
(a) the Corporation shall not, without the consent of the holders of the Second Preferred Shares Series 1, issue any equity security, or any security which may be converted into or exchanged for an equity security of the Corporation, in either case where such equity security has liquidation, voting, dividend or redemption rights, terms or privileges which are in priority to those attaching to the Second Preferred Shares Series 1;
(b) the Corporation shall not pay any non-cash paid-in-kind dividends to the holders of the Second Preferred Shares Series 1 to the extent that the maximum aggregate number of common shares into which all of the holders' Second Preferred Shares Series 1 from time to time outstanding are convertible (assuming the maximum conversion rate), including the Second Preferred Shares Series 1 issuable on the payment of such dividend, would exceed the Maximum Common Share Number;
(c) the outstanding Second Preferred Shares Series 1 shall not, at any time, be converted into a number of common shares which exceeds the Maximum
Common Share Number, and any adjustment resulting from such prohibition shall be satisfied by the Corporation declaring and paying, immediately prior to conversion, a dividend in cash, out of which adjustment applicable withholding taxes shall be withheld; and
(d) the Corporation shall not issue common shares in a transaction requiring adjustment of the Conversion Factor as contemplated by section 6.4(b)(iv) to the extent that as a result of such adjustment the common shares into which the outstanding Second Preferred Shares Series 1 would be convertible (assuming the maximum conversion rate) would exceed the Maximum Common Share Number.
7.3 AMENDMENTS
Sections 1 to 7, inclusive, of the Second Preferred Shares Series 1 Provisions may be repealed, altered, modified, amended or amplified only with the sanction of the holders of the Second Preferred Shares Series 1 given as hereinafter specified, in addition to any other approval required by the Canada Business Corporations Act.
7.4 SANCTION BY HOLDERS OF SECOND PREFERRED SHARES SERIES 1
The sanction of holders of the Second Preferred Shares Series 1 as to any and all matters referred to herein or as to any change adversely affecting the rights or privileges of the Second Preferred Shares Series 1 may be given and shall be deemed to have been sufficiently given if given by the holders of the Second Preferred Shares Series 1 in the manner provided in the Second Preferred Shares Series 1 Provisions with respect to the sanction of the holders of any series of the Second Preferred Shares and the said provisions shall apply mutatis mutandis.
SCHEDULE "B" TO THE ARTICLES OF AMALGAMATION
OF
COTT CORPORATION
CORPORATION COTT
7. Other provisions, if any
Without in any way limiting the powers conferred upon the Corporation and its directors by the Canada Business Corporations Act, the Board of Directors of the Corporation may from time to time on behalf of the Corporation:
(a) borrow money upon the credit of the Corporation and limit or increase the amount to be borrowed;
(b) issue, reissue, sell or pledge bonds, debentures, notes or other evidences of indebtedness, guarantees or securities of the Corporation, whether secured or unsecured;
(c) to the extent permitted by the Canada Business Corporations Act, give guarantees on behalf of the Corporation to secure performance of any obligation of any person or give, directly or indirectly, financial assistance to any person on behalf of the Corporation by means of a loan, guarantee or otherwise;
(d) mortgage, hypothecate, pledge or otherwise, the real or personal, movable or immovable property of the Corporation, currently owned or subsequently acquired, including book debts, rights, powers, franchises and undertakings, to secure any present or future debt obligations or any money borrowed or other debt, liability or obligation of the Corporation, including any bonds, debentures, notes, create a security interest in all or any of debenture stock, other evidences of indebtedness, guarantees or securities of the Corporation which it is by law entitled to issue; and
(e) delegate to one or more of the directors or officers of the Corporation all or any of the powers conferred by the foregoing provisions to such extent and in such manner as the Board of Directors shall determine at the time of each such delegation.
For the purposes of the Special Corporate Powers Act of the Province of Quebec and without in any way limiting the powers conferred upon the Corporation and its directors by Section 189 of the Canada Business Corporations Act, the Corporation, may for the purpose of securing any bonds, debentures or debenture stock which it is by law entitled to issue, hypothecate, mortgage or pledge, and cede and transfer, any property, movable or immovable, present or future, which it may own.
The directors may appoint one or more additional directors, who shall hold office for a term expiring not later than the close of the next annual meeting of shareholders, but the total number of directors so appointed may not exceed one-third of the number of directors elected at the previous annual meeting of shareholders.
EXHIBIT 10.29
(COTT LOGO)
December 13, 2006
WITHOUT PREJUDICE
DELIVERED VIA EMAIL TO: hycoray@aol.com
B. Clyde Preslar
Dear Mr. Preslar:
Re: Cott Corporation ("Cott") - Termination of Employment Services
We are writing to notify you that your employment services with Cott are hereby terminated without cause, effective December 1, 2006.
Cott appreciates your contribution to the corporation and with a view to resolving all matters on an amicable basis, has prepared the following severance arrangements, which are in accordance with your July 22, 2005 Employment Agreement in the event of a without-cause termination.
The severance arrangements are as follows:
1. DATE OF TERMINATION
The effective date of termination of services was December 1, 2006 (the "Termination Date").
2. ACCRUED SALARY AND VACATION PAY
You will be paid your salary and accrued vacation pay to the Termination Date. These payments will be less applicable statutory deductions and withholdings and paid in a lump-sum payment during the next pay period immediately following the Termination Date.
3. TERMINATION OF SERVICES PAYMENT AND OUT-PLACEMENT
We have agreed to pay you a lump-sum payment in connection with salary and bonus entitlements equal to $1,485,000.00, less applicable statutory withholdings and deductions, to be paid on the later of (a) a date that falls between January 1, 2007 and January 5, 2007 and (b) within five (5) business days following the expiry of the revocation period as set out in section 11 (d) herein.
In addition, we will pay for the out of pocket cost of the following outplacement services for a maximum of six (6) months with Right Management Consultants: EXECUTIVE SERVICE
4. BENEFITS
We confirm that all benefits entitlement ceases as of the Termination Date and that you have no further entitlement to any benefits beyond the Termination Date other than any rights under applicable law to purchase continuation coverage under Cott's group health plan.
5. EXPENSES
To the extent that you have incurred any proper travel, entertainment or other business expenses, you will be reimbursed in accordance with Cott's policy. All expense reports must be submitted within 30 days of your Termination Date.
6. STOCK OPTIONS/SHARE PURCHASE PLAN/401K PLAN
All of your rights with respect to vested stock options and vested performance share units that you hold personally will continue after the termination of your employment, subject of course to the provisions of the Cott's Restated 1986 Common Share Option Plan as amended (the "Option Plan"), for 60 days following the Termination Date, and thereafter such options and share units shall be null and void.
All other rights under Cott's share purchase plans and other long-term incentive plans, including, without limitation, all rights to unvested shares under the Cott Corporation Executive Incentive Share Purchase Plan, 401k Plan, and all rights under Cott's Performance Share Unit Plan, shall terminate on the Termination Date in accordance with those plans.
7. NO OTHER PAYMENTS
The payments and other entitlements set out in this letter constitute your complete entitlement and Cott's complete obligations whatsoever, including with respect to the cessation of your employment, whether at common law, statute or contract. For greater certainty, we confirm that you are not entitled to any further payment (including any bonus payments), benefits, perquisites, allowances or entitlements earned or owing to you from Cott pursuant to any employment or any other agreement, whether written or oral, whatsoever, all having ceased on the Termination Date without further obligation from Cott. All amounts paid to you pursuant to this letter shall be deemed to include all amounts owing pursuant to the Employment Standards Act, 2000, and such payments represent a greater right or benefit than that required under the Employment Standards Act, 2000.
8. RESIGNATION & RELEASE
You will resign as an officer and director of Cott (and any direct and indirect affiliates, subsidiaries and associated companies) with effect as of the Termination Date. In this respect, you agree to execute and deliver the Resignation Notice attached hereto as Schedule "1" and such further documentation as may be required by Cott, in its sole discretion, in order to effect this resignation. You agree to sign the Release in the form attached as Schedule "2" to this letter, which as set forth in your Employment Agreement is a condition precedent to any severance payments.
9. YOUR CONTINUING OBLIGATIONS
(a) You will continue to abide by all of the applicable provisions of your Employment Agreement, and the "Confidentiality Undertaking and Restrictive Covenant" dated July 22, 2005 ("the Confidentiality Agreement"), which are intended to continue following the cessation of your employment, including but not limited to the Confidentiality, Non-Solicitation, and Non- Competition covenants provided in Articles 1 and 5 of the Confidentiality Agreement, which in the case of the confidentiality covenant continues forever, and in the case of the Non-Solicitation and Non-Competition covenants, will apply for a period of twenty-four (24) months from the Termination Date.
(b) You are required to return forthwith to Cott all of the property of Cott in your possession or in the possession of your family or agents including, without limitation, other wireless devices and accessories, computer and office equipment, keys, passes, credit cards, customer lists, sales materials, manuals, computer information, software and codes, files and all documentation (and all copies thereof) dealing with the finances, operations and activities of Cott, its clients, employees or suppliers. You shall be entitled to retain your cell phone provided all ongoing usage charges and invoices relating thereto from the date hereof shall be from your own account. It is your responsibility to make all of the necessary arrangements to effect the transfer of the usage charges to your own personal account as soon as possible, and in any event, within 10 days from the Termination Date. Cott acknowledges that you have returned your blackberry and computer.
(c) You will maintain the severance arrangements as set out in this letter in the strictest confidence and will not disclose them except to your immediate family, or to the extent that such disclosure may be required by law, or to permit you to obtain tax planning, legal or similar advice. Cott will also keep the terms of the settlement confidential, except to Cott's professional advisors, or to the extent that such disclosure may be required by law.
(d) You will agree to cooperate reasonably with Cott, and its legal advisors, at Cott's request, direction and reasonable cost, in connection with: (i) any Cott business matters in which you were involved during your employment with Cott; or (ii) any existing or potential claims, investigations, administrative proceedings, lawsuits and other legal and business matters which arose during your employment involving Cott; (iii) effecting routine administrative compliance with respect to any regulatory requirements that were applicable to Cott during the period of your employment; and (iv) completing any further documents required to give effect to the terms set out in this letter with respect to which you have knowledge of the underlying facts.
10. TAXES
All payments referred to in this letter will be less applicable withholdings and deductions, and you shall be responsible for all tax liability resulting from your receipt of the payment and benefits referred to in this letter, except to the extent that Cott has withheld funds for remittance to statutory authorities.
11. GENERAL
(a) Entire Agreement: The agreement confirmed by this letter and the attached schedules constitutes the entire agreement between you and Cott with reference to any of the matters herein provided or with reference to your employment or office with Cott, or the cessation thereof. All promises, representations, collateral agreements, offers and understandings not expressly incorporated in this letter agreement are hereby superseded and have no further effect.
(b) Severability: The provisions of this letter agreement shall be deemed severable, and the invalidity or unenforceability of any provision set out herein shall not affect the validity or enforceability of the other provisions hereof, all of which shall continue in accordance with their terms.
(c) Period of Review: You have twenty-one (21) days from the date set forth above to consider this letter agreement, including attachments. No change to this letter agreement, whether material or immaterial, will initiate a new twenty-one (21) day period. If you so desire, you may voluntarily and knowingly sign, but are not required to sign, this letter agreement before the end of the twenty-one (21) day period.
(d) Right to Revoke: You may revoke your acceptance of this letter agreement at any time before the end of the seventh day after your execution of the letter. In order for your revocation to be effective, you must provide written notice of your intent to revoke to Sher Zaman at the following address prior to the end of the seventh day after execution:
Cott Corporation 207 Queen's Quay West, Suite 340 Toronto, ON M5J 1A7
You understand that, in the event you revoke this letter agreement, it shall be of no effect, and you shall forfeit all of the consideration which is being provided to you in exchange for their entering into this letter agreement, including but not limited to Cott's promise to make the payments described herein.
(e) Full Understanding: By signing this letter, you confirm that: (i) you have had an adequate opportunity to read and consider the terms set out herein, including the Release attached, and that you fully understand them and their consequences; (ii) you have been advised, through this paragraph, to consult with legal counsel and have obtained such legal or other advice as you consider advisable with respect to this letter agreement, inducting attachments; and (iii) you are signing this letter voluntarily, without coercion, and without reliance on any representation, express or implied, by Cott, or by any director, trustee, officer, shareholder, employee or other representative of Cott.
(f) Arbitration: In the event any dispute arises between you and Cott with respect to the interpretation, effect or construction of any provisions of this Agreement, either Cott or you may refer the matter to final and binding arbitration without right of
appeal, pursuant to the Arbitration Act, Ontario, for the disputed matters to be determined by an arbitrator that is to be mutually agreed upon, upon written notice to the other, whereupon, subject to the availability of such an arbitrator, the arbitration hearing will commence within 30 days of the said notice, without formality, with the costs of the arbitration to be shared equally between the parties, subject to such order for costs as the arbitrator may determine in his or her sole discretion.
(g) Currency: All dollar amounts set forth or referred to in this letter refer to U.S. currency.
(h) Governing Law: The agreement confirmed by this letter shall be governed by the laws of the Province of Ontario, Canada.
* * *
If this offer is acceptable to you once you have had an opportunity to review it, please sign the acknowledgement below to confirm your acceptance of same and return to Abilio Gonzalez.
If you have any questions regarding the terms set out in this letter, please feel free to contact Abilio Gonzalez.
Yours very truly,
COTT CORPORATION
PER:
/s/ Abilio Gonzalez ------------------------------------- Enclosures: |
1. Schedule "1" - Resignation Notice
2. Schedule "2" - Release
Acknowledgement and Acceptance
I acknowledge having been provided at least twenty-one (21) days to review this letter and the attached Release and Resignation Notice. I also acknowledge that I have been advised, by this paragraph, and have had the opportunity to obtain independent legal advice and that the only consideration for the Release is as referred to in this letter. I confirm that no other promises or representations of any kind have been made to me to cause me to sign this acknowledgement and acceptance.
/s/ B. Clyde Preslar 12/14/06 ------------------------------------- --------------- B. Clyde Preslar Date |
SCHEDULE "1"
RESIGNATION NOTICE
TO: COTT CORPORATION
AND TO: ALL DIRECT AND INDIRECT AFFILIATES, SUBSIDIARIES AND ASSOCIATED
COMPANIES THEREOF
AND TO: ALL DIRECTORS THEREOF
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I, B. CLYDE PRESLAR confirm my resignation as a director and from all offices held by me of COTT CORPORATION, including all direct and indirect affiliates, subsidiaries, and associated companies, with effect as of December 1, 2006.
/s/ B. Clyde Preslar ---------------------------------------- B. CLYDE PRESLAR |
SCHEDULE "2"
RELEASE
FROM: B. CLYDE PRESLAR ("PRESLAR")
TO: COTT CORPORATION ("COTT"), ITS RESPECTIVE DIRECT AND INDIRECT
AFFILIATES, ASSOCIATES, SUBSIDIARIES, PARENTS AND RELATED ORGANIZATIONS
AND ALL OF THEIR RESPECTIVE PAST AND PRESENT SHAREHOLDERS, PARTNERS,
DIRECTORS, OFFICERS, EMPLOYEES, CONTRACTORS, CONSULTANTS, AGENTS,
REPRESENTATIVES, TRUSTEES, ADMINISTRATORS, ATTORNEYS AND INSURERS (ALL
COLLECTIVELY REFERRED TO AS "RELEASEES")
1. In consideration of the terms as set out in the letter from Cott to Preslar
dated December 13, 2006 (the "Agreement"), the receipt and sufficiency of
which consideration are hereby acknowledged, and except for the obligations
owed to Preslar and referred to in the Agreement, Preslar hereby remises,
releases and forever discharges Cott and the other Releasees of and from
all manner of actions, causes of action, suits, debts, dues, accounts,
bonds, contracts, liens, claims and demands whatsoever which against the
Releasees he now has, ever had or hereafter can, shall or may have for or
by reason of any cause, matter or thing whatsoever existing to the present
time, and particularly and without limiting the generality of the
foregoing, of and from all claims and demands of every nature and kind in
any way related to or arising from Preslar's employment or other engagement
with Cott or the termination of such employment, engagement or other
agreements, including all damages, salary, remuneration, commission,
vacation pay, overtime pay, termination pay, severance pay, notice of
termination, profit-sharing, stock options or other equity, bonuses,
proceeds of any insurance or disability plans, pension or retirement
benefits, or any other fringe benefit or perquisite of any kind whatsoever
and including any claims Preslar may have under any United States, Canada,
state, province, or local statute or ordinance, including without
limitation the U.S. Age Discrimination In Employment Act, the U.S. Civil
Rights Acts of 1964 and 1991, the U.S. Family and Medical Leave Act ,the
U.S. Employment Retirement Income Security Act ("ERISA "); the Florida
Civil Rights Act of 1992; any contract or agreement (except the Agreement);
and any common law principle. The payments, benefits, and other
entitlements referred to in the Agreement arc deemed to satisfy all
requirements or money owing under all applicable laws including without
limitation, any and all wages, vacation pay, termination and severance pay
under the Employment Standards Act, 2000.
2. Preslar confirms that the Agreement has been entered into by the parties
for the purposes of fully and finally settling and compromising all
possible claims that Preslar might have against the Releasees and,
therefore, in this respect, Preslar covenants and agrees not to file any
complaint or initiate any proceeding under the Employment Standards Act,
2000, under the Ontario Human Rights Code, under the Workplace Safety and
Insurance Act, under the Occupational Health & Safety Act, under the Labour
Relations Act, under the Pay EquiAct, or pursuant to any other applicable
law or legislation, including the statutes and laws set forth and/or
referenced in the preceding paragraph, in any jurisdiction governing or
related to Preslar's employment or other engagement with Cott.
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In the event that Preslar hereafter makes any claim or demand or commences
or threatens to commence any action, claim or proceeding or to make any
complaint against Cott in this respect, this Release may be raised as an
estoppel and complete bar to any such action, claim or proceeding. Preslar
confirms that he has no right to re-instatement, re-call or re-employment
with any of the Releasees, and Preslar waives and releases all rights he
had or may have had in this regard. This paragraph shall not release any
rights that may not legally be waived.
3. Preslar further agrees not to make or assist in the commencement of any
claims (expressly including any cross-claim, counterclaim, third party
action or application) against any other person or corporation who might
claim contribution or indemnity against the persons or corporations
discharged by this Release, including under the provisions of the
Negligence Act or any other statute.
4. With the exception of disclosure to Preslar's immediate family or to his
legal or professional advisors (but provided any such person agrees not to
disclose such information to any other person), Preslar agrees that the
terms and contents of this Release, the consideration included in the
Agreement, the contents of the negotiations and discussions resulting in
this Release, and any dispute resolved by this Release, shall all remain
privileged and confidential and shall not be disclosed except to the extent
required by law or as otherwise agreed to in writing by Cott.
5. This Release shall be binding upon Preslar and his heirs, executors,
administrators, successors and assigns and shall ensure to the benefit of
Cott and to the benefit of all of the Cott's heirs, executors,
administrators, successors and assigns.
6. Preslar acknowledges that he has had an opportunity to review this Release
for no less than twenty-one (21) days and the right to revoke his
acceptance of the Release for a period of seven (7) days after his
execution of the Release. Preslar also acknowledges that he has been
advised to and has in fact obtained independent legal advice and that the
only consideration for this Release is as referred to above. Preslar
further confirms that no other promises or representations of any kind have
been made to Preslar to cause him to sign this Release.
7. Preslar acknowledges that this Release, the settlement of any dispute
between Preslar and Cott, or the payment of any monies to Preslar, shall
not constitute an admission of liability on the part of Cott, which
liability is denied.
8. Preslar agrees that he alone shall be responsible for all tax liability
resulting from his receipt of the payments referred to in the Agreement,
except to the extent that Cott has withheld funds for remittance to
statutory authorities. Preslar agree to indemnify and save Cott harmless
from any and all amounts payable or incurred by Cott (save and except any
penalties and interest that are attributable to Cott's not having deducted
sufficient funds by its own direction) if it is subsequently determined
that any greater amount should have been withheld in respect of income tax
or any other statutory withholding.
9. Notwithstanding the foregoing or anything herein to the contrary, this
Release in no way releases Cott or any of the other Releasees from any
indemnification obligations such
2
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party or parties may hereafter have with respect to Preslar as provided for
in, and subject to all limitations of, the charter documents, by laws or
other agreements or documents of such parties, or by law, as the case may
be, as of the date hereof, all of which shall continue to at least the same
extent as currently exist with respect to Cott's directors and/or most
senior officers.
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SIGNED, SEALED AND DELIVERED THIS 14TH DAY OF DECEMBER, 2006
/s/ Beverly S. Weaver /s/ B. Clyde Preslar ------------------------------------- ---------------------------------------- Witness B. CLYDE PRESLAR |
EXHIBIT 10.30
TINA DELL'AQUILA
HAND DELIVERED
Wednesday, February 21, 2007
PRIVATE AND CONFIDENTIAL: TINA DELL'AQUILA
Dear Tina
Further to our recent discussions I am pleased to be able to confirm to you in writing the following changes to your compensation while you undertake the Chief Financial Officer position on an interim basis.
JOB TITLE: Interim Chief Financial Officer
EFFECTIVE DATE: December 1, 2006
PREMIUM: You will receive an additional premium payment of $6,250 per
month for 7 months after which time it will be reviewed.
Your salary will be adjusted in February as part of our annual
merit process.
CAR ALLOWANCE: Your car allowance will be changed from $13,500 to $16,000
per year.
BONUS: Your bonus percentage will be increased to 100% of your base
salary for 7 months after which time it will be reviewed.
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 24 months base salary (excluding
premium identified above), bonus guaranteed at 100% targeted
payout (for further clarification bonus target for termination
purposes is 65% of annual base salary), car allowance and
benefits (excluding long and short term disability coverage
and 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 events. In addition, the payment will be subject to you
signing a release in form and content satisfactory to Cott at
such time.
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All other existing terms and conditions remain the same.
Tina, thank you for all of your hard work and commitment to Cott and please contact me if you have any questions.
Yours sincerely
/s/ Abilio Gonzalez ------------------------------------- Abilio Gonzalez Chief People Officer |
I agree and accept the above amendments terms.
.
.
.
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF COTT CORPORATION
Jurisdiction of Direct or Indirect
Name of Subsidiary Incorporation or Organization Percentage 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%
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. Cott Nelson (Holdings) Limited United Kingdom 100%
(formerly Macaw (Holdings) Limited)
19. Cott (Nelson) Limited (formerly Macaw United Kingdom 100%
(Soft Drinks) Limited)
20. Cott Private Label Limited United Kingdom 100%
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Jurisdiction of Direct or Indirect
Name of Subsidiary Incorporation or Organization Percentage Ownership
-------------------------------------------- ----------------------------- --------------------
21. Cott Retail Brands Netherlands BV Netherlands 100%
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%
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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.
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 19, 2007 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 February 28, 2007 |
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brent D. Willis, 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/ Brent D. Willis ------------------------ Brent D. Willis Chief Executive Officer February 28, 2007 |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Tina Dell'Aquila, 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/ Tina Dell'Aquila -------------------------- Tina Dell'Aquila Chief Financial Officer, Vice President, Controller & Assistant Secretary February 28, 2007 |
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, Brent D. Willis, 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 30, 2006 (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 28th day of February, 2007.
/s/ Brent D. Willis ---------------------------------------- Brent D. Willis Chief Executive Officer February 28, 2007 |
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, Tina Dell'Aquila, Chief Financial Officer, Vice President, Controller & Assistant Secretary 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 30, 2006 (the "Report").
The undersigned hereby certifies that to the best of her 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 28th day of February, 2007.
/s/ Tina Dell'Aquila ---------------------------------------- Tina Dell'Aquila Chief Financial Officer, Vice President, Controller & Assistant Secretary February 28, 2007 |