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:
- 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.
- 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.
- 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.

|