Date: Thu, 18 Dec 1997 06:29:50 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, 1996

 

BASIS OF PRESENTATION SIGNIFICANT ACCOUNTING POLICIES INVENTORIES CAPITAL ASSETS DEMAND OPERATING LOAN CONSTRUCTION COSTS PAYABLE LONG-TERM DEBT SHARE CAPITAL INCOME TAXES EARNINGS PER SHARE COMMITMENTS EXPORT SALES FINANCIAL INSTRUMENTS NET CHANGE IN NON-CASH WORKING CAPITAL DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES COMPARATIVE FIGURES

1. BASIS OF PRESENTATION


The Company produces and markets its own brands of specialty draught and bottled beer for sale across Canada and the United States.

2. SIGNIFICANT ACCOUNTING POLICIES



The financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") which, except as described in note 15, are in accordance with U.S. GAAP. The 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 financial statements, with bracketed figures reflecting the average exchange rate for the year are:

 

                                   Canadian Equivalent of $1 U.S.

March 31, 1996 1.3652 (1.3726) March 31, 1995 1.3837 (1.3125)

 

Inventories

Inventories of raw materials and supplies 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 cost of bottles is 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 to their estimated salvage or residual values. 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 in British Columbia and the United States, the Company invoices are paid directly by the distributors. Excise taxes are assessed on production.

 

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 for the year are not material.

 

Earnings per share

Earnings per share are calculated using the weighted average number of shares outstanding during the period. Fully diluted earnings per share are calculated on the assumption that outstanding common share options which were dilutive were exercised at the beginning of the year and the funds derived therefrom were invested at 5.0% representing the Company's annual after tax cost of financing.

3. INVENTORIES


						  1996		  1995	
						   $		   $	
						_________	_________
Raw materials and returnable glass		1,078,180	1,027,743
Brews in progress				  188,592	  196,737
Finished product				  336,833	  333,509
Promotional goods and dispensing units		  112,975	   95,053
						_________	_________
						1,716,580	1,653,042
                                                =========       =========

4. CAPITAL ASSETS


						  1996			
				__________________________________________
						 Accumulated	   Net	
				   Cost		Amortization	Book Value
				    $		     $		    $	
				_________	___________	__________
Land				2,033,508	        --	 2,033,508
Buildings			2,342,140	    362,804	 1,979,336
Production equipment		9,600,728	  1,492,408	 8,108,320
Vehicles			  108,401	     73,968	    34,433
Furniture and fixtures		  301,613	     99,794 	   201,819
Assets under construction	8,864,197	        --	 8,864,197
				__________	___________	__________
				23,250,587	  2,028,974	21,221,613
                                ==========	===========     ==========
						
						  1995			
				__________________________________________
					      Accumulated	   Net	
				  Cost	      Amortization	Book Value
				   $		    $		    $	
			       __________	_________	__________
Land				  328,200	       --	   328,200
Buildings			2,340,840	  298,185	 2,042,655
Production equipment		8,594,421	  925,797	 7,668,624
Vehicles			  130,451	   90,622	    39,829
Furniture and fixtures		  199,974	   69,030	   130,944
Equipment deposits		  386,216	       --	   386,216
			       __________	_________	__________
			       11,980,102	1,383,634	10,596,468
                               ==========       =========       ==========

At March 31, 1996 the cost of building and equipment includes capitalized interest and labour totalling $702,438 (1995 - $702,438). Assets under construction includes capitalized interest of $179,593 and labour of $462,933 for the year ended March 31,1996.

At March 31, 1996 and 1995 production equipment includes $114,388 of surplus equipment held for sale which is not being amortized.

5. DEMAND OPERATING LOAN


The Company has a revolving line of credit to a maximum limit of $2,500,000 (1995 - $750,000) which bears interest at Royal Bank prime rate (1995 - prime + 1/8%) (effective rate at March 31, 1996 - 6.75%; March 31, 1995 - 9.875%). A general security agreement and a general assignment of book debts has been provided as collateral.

6. CONSTRUCTION COSTS PAYABLE


Construction costs payable represent amounts payable relating to the construction of the Company's new brewery. These amounts were paid subsequent to the year end with proceeds received under the terms of the Company's long-term construction loan agreement (see note 7).

7. LONG-TERM DEBT


						   1996		   1995	
						    $		    $	
						___________	__________
Term loan					    951,967	 1,176,974
Construction loan 				  8,751,246	        --
						___________	__________
						  9,703,213	 1,176,974
Less current portion				  (260,402)	 (220,476)
						___________	__________
						  9,442,811	   956,498
						===========	==========

The term loan, provided by the Royal Bank, is due on demand and bears interest at prime plus 1/2% per annum. Scheduled blended interest and principal payments of $26,700 per month are required.

The construction loan represents borrowing made by the Company under a $15,000,000 revolving term credit, floating rate facility arranged with Royal Bank for the construction of a new brewery. The credit facility will be reduced over five years, by $235,600 monthly, beginning April 30, 1997 and by $2,500,000 on the earlier to occur of June 30, 1997 and the date of the sale of the existing brewery. Should the new brewery not be completed and demonstrate production capability of 50% on or before October 31, 1996, the loan becomes due and payable at that date.

A fixed and floating charge debenture on the lands, building and equipment, a fixed mortgage and charge against the new brewery, and an assignment of fire insurance has been provided as collateral for both loans.

The Company has a number of swap agreements to exchange floating interest rate for fixed interest on $5,500,000 of the construction loan at rates varying from 6.81% to 7.19% until April 1997.

The average interest rate on the facility for the period ended March 31, 1996 was 7.31%.

Cash interest payments made during 1996 amounted to $349,935 (1995 - $83,249).

Estimated principal repayments required for subsequent years are as follows:

 

			   Term		Construction		
			   loan		   loan		  Total
			    $	    	    $		    $	
			_________	_________	_________
1997			  260,402	       --	  260,402
1998			  279,922	5,362,000	5,641,922
1999			  300,904	2,862,000	3,162,904
2000			  110,739	  527,246	  637,985
			_________	_________	_________
			  951,967	8,751,246	9,703,213
                        =========       =========       =========

8. SHARE CAPITAL


Authorized 20,000,000 common shares.

1,000,000 preferred shares which may be issued in one or more series with rights, privileges, restrictions and conditions as fixed by the directors prior to the issue of each series.

 

Issued and outstanding		  1996				  1995		
			_________________________	__________________________
			 Shares		 Amount		 Shares		 Amount	
			   #  		   $		   #  		   $
			_________	_________	_________	_________
Beginning of year	4,416,200	5,402,784	4,406,200	5,362,784
Stock options exercised	   10,000	   41,502	   10,000	   40,000
in the year		_________	_________	_________	_________
End of year		4,426,200	5,444,286	4,416,200	5,402,784
			=========	=========	=========	=========

As of March 31, 1996, 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:

 

	Expiry Date			# 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

9. INCOME TAXES


The Company is classified as a public company engaged in manufacturing and processing activities for Canadian income tax purposes. Statutory tax rates in effect on March 31 1996 were 38.1% (1995 - 37.4%) on taxable income. The Company's effective tax expense is summarized as follows:

 

						   1996		   1995	
						    $		    $	
						___________	__________
Income before income tax expense		  2,139,923	 2,802,332
						___________	__________
 
Income tax expense at statutory    
rate of 44.6% (1995 - 44.3%)			    955,000	 1,242,000
Effect on taxes of				
Manufacturing and processing profits deduction	   (151,000)	  (197,000)
Non-deductible expenses				     22,000	    20,000
Large Corporations tax				     20,000	        --
Other						    (10,000)	    (5,000)
						___________	__________
						    836,000	 1,060,000
                                                ===========	==========
 
Current income tax expense			    303,600	   538,000
Deferred income tax expense			    532,400	   522,000
						___________	__________
						    836,000	 1,060,000
                                                ===========	==========
 
Income taxes paid in 1996 were $303,600 (1995 - $535,500).
 

10. EARNINGS PER SHARE


 
						   1996		  1995	
						___________	__________
Basic						      $0.30	     $0.40
Weighted average number of common shares	  4,419,104	 4,408,700
                                                ===========	==========
 
Fully diluted					      $0.30	     $0.39
Weighted average number of common shares	  4,820,608	 4,584,533
                                                ===========     ==========

11. COMMITMENTS


The Company leases warehouse premises in Edmonton and Calgary on which the leases expire in August 1996 and 1997 respectively. The Company also leases office equipment and vehicles. Annual lease payments including estimated utilities and property taxes are as follows:

 

				     $	
				___________
1997				    152,000
1998				     72,000
1999				     24,000
				___________
				    248,000
                                ===========

12. EXPORT SALES


Sales in the United States, made through independent distributors, comprise approximately 15.4% of net sales for the year ended March 31, 1996 and 23.5% for the year ended March 31, 1995.

13. FINANCIAL INSTRUMENTS


Financial instruments of the Company consist mainly of cash, accounts receivable, accounts payable and accrued liabilities, long term debt and interest rate swaps. As at March 31, 1996, there are no significant differences between the carrying amounts reported on the balance sheet, including the interest rate swaps, and their estimated market values.

The Company is exposed to currency risk on cash and trade receivables denominated in U.S. dollar, totalling US$690,901 at March 31, 1996.

The Company is also exposed to interest rate variance on the portion of long term debt not covered by the swap agreements described in note 7.

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.

14. NET CHANGE IN NON-CASH WORKING CAPITAL


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

 

						   1996		   1995	
						    $		    $	
						___________	__________
Accounts receivable				   (13,573)	  (303,979)
Inventories					   (63,538)	  (710,009)
Prepaid expenses and other			  (150,469)	   (18,727)
Accounts payable and accrued liabilities	   116,175 	  (146,618)
Income taxes payable/receivable			  (331,406)	  (153,854)
						___________	__________
						  (442,811)	(1,333,187)
                                                ===========     ==========

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


Generally accepted accounting principles used in the United States of America ("U.S.") differ in certain respects from GAAP used in Canada. Differences which materially affect these 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 classified all demand loans as current liabilities and not as long-term debt.

As a result, under U.S. GAAP, current liabilities would increase at March 31, 1996 by $691,565 (1995 - $956,498) to $2,812,068 and long-term debt would decrease to $8,751,246 (1995 - nil).

 

Earnings per share


Net income per share under U.S. GAAP is based upon the weighted average numbers of shares outstanding during each year plus common stock equivalents such as common share purchase options unless they are antidilutive. Primary income 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 net income 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 value at the end of the year.
Earnings per share in accordance with U.S. GAAP is as follows:

 

						   1996		  1995	
						___________	__________
Primary earnings per share			      $0.29	     $0.38
Weighted average number of common shares	  4,490,118	 4,626,700
                                                ===========     ==========
 
Fully diluted earnings per share		      $0.29	     $0.38
Weighted average number of  common shares	  4,490,118	 4,626,700
                                                ===========	==========

16. COMPARATIVE FIGURES


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

This Annual Report
Financial Highlights | Report to Shareholders
Management Discussion and Analysis | Auditors' Report
Financial Statements and Notes | Corporate Information

 


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

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