Date: Thu, 18 Dec 1997 06:31:52 GMT Server: Stronghold/2.0.1 Apache/1.2.0 Connection: close Content-Type: text/html BIG ROCK BREWERY: NOTES TO FINANCIAL STATEMENTS

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NOTES TO FINANCIAL STATEMENTS

Big Rock Brewery Ltd.
March 31, 1997

1. DESCRIPTION OF BUSINESS

Big Rock Brewery Ltd. (the "Company") produces and markets primarily its own brands of specialty draught and bottled beer for sale across Canada and the United States. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Big Rock Brewery (Sask.) Ltd.

2. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") which, except as described in note 13, are in accordance with United States ("U.S.") GAAP. The consolidated financial statements, in management's opinion, have been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized below.

All figures are reported in Canadian dollars. Exchange rates between the U.S. and Canadian dollars for each of the years reported in these consolidated financial statements were as follows:

Canadian Equivalent of $1 U.S.

End of Year

Average For Year

March 31, 1997

1.3843

1.3608

March 31, 1996

1.3652

1.3726

Inventories
Inventories of raw materials, supplies, promotional goods and dispensing units are valued at the lower of cost (first-in first-out method) and replacement cost.
Inventories of brews in process and finished product are valued at the lower of cost (including direct materials, labour and overhead costs) and net realizable value.

Returnable glass containers are initially recorded at cost. In order to charge operations for wear and disappearance, the costs of bottles are charged to operations over their estimated useful life.

Capital assets
Capital assets are stated at cost less accumulated amortization. Amortization is recorded on the straight-line basis over the estimated useful lives of the assets.
Amortization rates are as follows:

Buildings

2.5%

Production equipment

3.3% to 15%

Vehicles

25%

Furniture and fixtures

15%

Revenue recognition
Revenue is recognized at the time of shipment at the gross sales price charged to the purchaser. Invoices for sales to Canadian customers other than those in British Columbia are submitted to the respective provincial Liquor Control Boards who pay the Company after deducting Liquor Control Board commissions. For sales inBritish Columbia and the United States, the Company invoices are paid directly by the distributors. Excise taxes which are assessed on production and Liquor ControlBoard Commissions are recorded as reductions to gross sales prices.

Deferred income taxes
The Company follows the tax allocation method of accounting for the tax effect of the timing differences between taxable income and accounting income. Timing differences result principally from claiming capital cost allowance for income tax purposes in excess of amortization on capital assets.

Foreign exchange
Transactions in foreign currencies are recorded in Canadian dollars at the exchange rates in effect at the date of the transaction. Monetary assets and liabilities in foreign currencies have been converted to Canadian dollars at exchange rates in effect at the balance sheet date. Foreign exchange gains and losses included in earnings are not material for the years presented.

Earnings per share
Earnings per share are calculated using the weighted average number of shares outstanding during each year which was 4,476,200 for the year ended March 31, 1997 (1996 - 4,419,104). Fully diluted earnings per share is calculated on the assumption that outstanding common share options which are dilutive were exercised at the beginning of the period and the funds derived therefrom were invested at the Company's annual after tax cost of financing.

The fully diluted weighted average number of common shares was 4,976,200 for the year ended March 31, 1997 (1996 - 4,820,608).

3. INVENTORIES

1997

1996

$

$

Raw materials and returnable glass

1,154,227

1,078,180

Brews in progress

229,639

188,592

Finished product

372,098

336,833

 

Promotional goods and dispensing units

144,251

112,975



1,900,215

1,716,580

4. CAPITAL ASSETS

1997

1997

1997

1996

1996

1996

Cost

Accumulated Amortization

Net Book Value

Cost

Accumulated Amortization

 

Net Book Value

 

$

$

$

$

$

$

Land

2,171,665

--

2,171,665

2,033,508

--

2,033,508

Buildings

9,601,791

881,591

8,720,200

2,342,140

362,804

1,979,336

Production Equipment

19,506,342

2,224,119

17,282.223

9,600,728

1,492,408

8,108,320

Vehicles

75.203

49,377

25,826

108,401

73,968

34,433

Furniture and fixtures

385,035

139,040

245,995

301,613

99,794

201,819

Assets under construction

8,864,197

--

8,864,197







31,740,036

3,294,127

28,445,909

23,250,587

2,028,974

21,221,613

During the year ended March 31, 1997, the Company capitalized interest of $504,904 (1996 - $179,593) and labour of $422,726 (1996 - $462,933) relating to the construction of its new brewing facilities.

At March 31, 1997 capital assets include surplus land, buildings and production equipment which are held for resale with an aggregate net book value (being the estimated net realizable value) of $1,967,106 (1996 - $114,388). A writedown of $500,000 was recorded in 1997 to reduce the carrying value of these assets to their estimated net realizable values. The actual proceeds to be realized on the sale of the surplus assets could vary from the March 31, 1997 carrying value. This writedown has been reflected in accumulated amortization.

5. BANK INDEBTEDNESS

The Company has a demand revolving credit facility with a maximum limit at March 31, 1997 of $2,500,000 (1996 - $2,500,000). Advances under the line bear interest at the Royal Bank prime rate (effective rate at March 31, 1997 - 4.75%; March 31, 1996 - 6.75%). The limit on the facility was increased in May, 1997 to $5,000,000 (see note 6). Collateral provided for this loan is the same as described in note 6.

6. LONG-TERM DEBT

1997

1996

$

$

Term loan

--

951,967

Construction loan

11,682,692

8,751,246



11,682,692

9,703,213

Less current portion

(252,000)

(260,402)



11,430,692

9,442,811





The Company's long term credit facilities at March 31, 1997 and 1996 consisted of a term loan, provided by the Royal Bank, which was due on demand and carried an interest rate of prime plus 1/2% per annum and a $16,000,000 floating rate facility arranged with Royal Bank for the construction of the new brewery.

In May, 1997, the Company agreed with its lender to restructure its credit facilities as follows:

  1. A cash payment of $5,000,000 was made to settle the term loan and to reduce the construction loan balance. This payment has been reflected in the net loan balances set out above.
  2. The remaining long term debt was split into two segments with maximum amounts of $7,000,000 and $5,000,000 respectively.

    The first segment was used to refinance the equipment previously financed under the construction loan. This facility requires principal payments of $437,500 per quarter commencing July 31, 1998.

    The second segment was used to refinance the land and buildings previously financed under the construction loan. This facility requires principal payments of $28,000 per month commencing July 31, 1997.

  3. The amount available to the Company under its demand revolving credit facility was increased to $5,000,000 (see note 5).

A fixed and floating charge debenture and supplemental debenture for $20,000,000 covering all assets, a general security agreement and an assignment of fire insurance has been provided as collateral for credit facilities.

The facilities impose a number of positive and negative covenants on the Company including certain financial ratios.

The interest rates payable on these facilities vary from Royal Bank prime to prime plus 1/4% depending on the Company's average quarterly interest coverage ratios.

At March 31, 1997 the Company has a number of swap agreements to exchange floating interest rates for fixed interest on $15,500,000 (March 31, 1996 - $5,500,000) of the loan at rates varying from 6.31% to 7.49% (1996 - 6.81% to 7.91%) with maturity ranging from April 1997 to April 2000.

The average interest rate on the facilities (in aggregate) for the year ended March 31, 1997 was 7.20% (March 31, 1996 - 7.31%).

Cash interest payments made during 1997 amounted to $981,468 (1996 - $349,935).

Estimated principal payments required for subsequent fiscal years are as follows:

Total $

March 31, 1998

252,000

March 31, 1999

1,648,500

March 31, 2000

2,086,000

March 31, 2001

2,086,000

March 31, 2002

2,086,000

Thereafter

3,524,192


11,682,692


7. SHARE CAPITAL

Authorized
Unlimited number of voting common shares.

Unlimited number of preferred shares which may be issued in one or more series with rights, privileges, restrictions and conditions as fixed by the directors prior tothe issue of each series.

Issued and outstanding

Shares

Amount

#

$



Balance as at March 31, 1995

4,416,200

5,402,784

Stock options exercised in the year

10,000

41,502



Balance as at March 31, 1996 5,444,286

4,426,200

4,426,200

Shares issued for cash

600,000

850,000

Share issue costs, net of tax benefit

--

(466,374)



Balance as at March 31, 1997

5,026,200

10,827,912

On February 28, 1997, the Company issued, pursuant to a prospectus, 600,000 common shares at a price of $9.75 per share for total gross proceeds of $5,850,000.

Options

At March 31, 1997, 500,000 common shares were reserved for the exercise of stock options by staff, directors and a consultant to the Company. These options are exercisable as follows:

Issued and outstanding

# of Shares

Exercise Value



October 31, 1997

100,000

$ 4.00

December 15, 1999

170,500

$14.65

October 16, 2000

165,550

$13.88

April 30, 2000

40,000

$13.50

March 20, 2001

23,950

$12.63

8. INCOME TAXES

The Company is classified as a public company engaged in manufacturing and processing activities for Canadian income tax purposes. The Company's effective tax expense is summarized as follows:

 

1997

1996

$

$

Income before income tax expense

840,149

2,139,923

Income tax expense at statutory rate of 44.6%

375,000

955,000

Effect on taxes of:

Manufacturing and processing profits deduction

(72,000)

(151,000)

Non-deductible expenses

27,000

22,000

Large Corporations tax

61,000

20,000

Other

(66,000)

(10,000)



325,000

836,000

Current income tax (recovery) expense

(253,000)

303,600

Deferred income tax expense

578,000

532,400



325,000

836,000



9. COMMITMENTS

The Company leases warehouse premises in Edmonton and Calgary on which the lease expires in October 2000 and August 1997, respectively. The Company also leases office equipment and vehicles. Annual lease payments including estimated utilities and property taxes are as follows:

$


1998

147,356

1999

114,267

2000

77,245

2001

66,754

2002

35,982


441,604

 

10. EXPORT SALES

Net sales in 1997 in the United States, on a percentage basis, were 7.5% (1996 - 15.4%).

11. FINANCIAL INSTRUMENTS

Financial instruments of the Company consist mainly of cash, accounts receivable, accounts payable and accrued liabilities, bank indebtedness, long term debt and interest rate swaps. As at March 31, 1997 and 1996, there are no significant differences between the carrying amounts reported on the balance sheet (excluding the interest rate swaps), and their estimated market values. At March 31, 1997, a cash payment of approximately $500,000 (1996 - Nil) would be required to settle the swap agreements.

The Company is exposed to currency risk on cash and trade receivables denominated in U.S. dollar, totaling U.S. $230,495 at March 31, 1997 (March 31, 1996 -U.S. $690,901).

The Company has a concentration of credit risk, with respect to trade receivables due to the receivables from Provincial Liquor Boards and business with exclusive distributors for most of its sales in the U.S. and British Columbia.

12. NET CHANGE IN NON-CASH WORKING CAPITAL

The net change in non-cash working capital relating to operating activities consist of:

1997

1996

$

$

Accounts receivable

216,445

(13,573)

Income taxes receivable

(508,354)

(331,406)

Inventories

(183,635)

(63,538)

Prepaid expenses and other

(34,374)

(150,469)

Accounts payable and accrued liabilities

543,103

116,175



(66,000)

(10,000)

33,185

(442,811)

13. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

U.S. GAAP differs in certain respects from Canadian GAAP. Differences which materially affect these consolidated financial statements are:

Demand loans
In accordance with Canadian banking practices a portion of the Company's bank loans are payable on demand but provide for monthly repayment installments over an assumed term and accordingly are classified as long-term debt for amounts due in the following fiscal period. U.S. GAAP classifies all demand loans as current liabilities and not as long-term debt. There are no differences in classification at March 31, 1997. At March 31, 1996 under U.S. GAAP current liabilities would increase by $691,565 to $2,812,068 and long-term debt would decrease to $8,751,246.

Earnings per share
Earnings per share under U.S. GAAP is based upon the weighted average numbers of shares outstanding during each year plus dilutive common stock equivalents such as common share purchase options. Primary earnings per share is calculated as if common share purchase options were exercised at the beginning of the year and as if funds obtained thereby were used to purchase common shares of the Company for cancellation at the average market price during the year. Fully diluted earnings per share is calculated as if the proceeds from the exercise of common share purchase options were used to purchase the Company's common shares at the higher of the average market price during the year or the market price at the end of the year.

Earnings per share in accordance with U.S. GAAP is as follows:

1997

1996



Primary earnings per share

$0.12

$0.29

Weighted average number of common shares

4,527,832

4,490,118



Fully diluted earnings per share

$0.12

$0.29

Weighted average number of common shares

4,527,832

4,490,118



14. COMPARATIVE FIGURES

Certain of the comparative figures have been reclassified to conform with the current year's presentation.


 

 

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Management Discussion and Analysis | Auditors' Report
Financial Statements and Notes | Corporate Information

 


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5555 76th Ave S.E., Calgary, Alberta, Canada, Phone: 403-720-3239, Fax: 403-236-7523
ale@bigrockbeer.com

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