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MANAGEMENT DISCUSSION & ANALYSIS
The following discussion and analysis should be read in
conjunction with the Company's Consolidated Financial
Statements and Notes included therein.
OVERVIEW
The Company commenced operations in 1985 with a brewing
capacity of 10,000 hl. To meet increasing demand for its
products, Big Rock has continually increased its brewing
capacity and expanded from its original 10,000 hl annual
capacity to 150,000 hl of annual capacity in the fall of
1992. Significant increases in sales followed each
expansion. From 1993 to 1995, the Company realized an 87.6%
increase in hectolitres shipped and a 95.0% increase in net
sales. To sustain future growth, the Company entered another
expansion phase. In fiscal 1997, Big Rock completed its new
brewing facility which will have an annual brewing and
packaging capacity of 450,000 hl and an annual fermentation
capacity of 250,000 hl.
The new facility is equipped with a state-of-the-art
canning line. Five of the Company's products are packaged in
aluminum cans which have a food grade liner in each can. The
aluminum cans allow the Company to reach more distant as
well as seasonal markets and capture a segment of the market
that has grown rapidly in Western Canada.
With the new brewery, the Company's capacity utilization
will have an effect on gross profits. As the Company
increases production levels, it will experience efficiencies
and increased gross margins because fixed and semi-variable
costs will be distributed over a larger sales base. Big Rock
has introduced new state-of-the-art packaging equipment
which allows for greater labour efficiencies. The Company
experienced pressure on its gross margins during the
start-up phase at the new brewery while production levels
were below the facility's designed production capacity. In
February of 1997, the Company completed a public offering
that netted approximately $5,200,000. The proceeds from the
sale of common shares were applied to reduce the
indebtedness that resulted from construction of the new
brewery. The Company will further reduce debt with the
proceeds from the sale of surplus land and buildings
retained at the Company's previous location. By reducing its
indebtedness, the Company will strengthen its balance sheet,
reduce interest charges and concentrate available funds to
expand its marketing efforts in new and existing markets. On
February 27, 1997 the Company's common shares were listed on
the Toronto Stock Exchange (Big Rock Brewery Ltd. - BR). The
listing will create greater liquidity for shareholders.
YEAR ENDED MARCH 31 , 1997 COMPARED TO YEAR ENDED
MARCH 31,1996
Net sales increased by 10.6% to $15,124,650 in 1997 from
$13,675,212 in 1996.
The Company had increased sales in Canadian markets
(19.5%) while the U.S., which accounted for 15.4% of sales
in 1996, decreased to 7.5% in 1997. The Company's
distributors in the U.S. have been concentrating their
efforts on entry into large chain accounts but it is too
early to determine the level of growth.
The Ontario market, which accounts for 36.0% of all
Canadian beer sales, has shown positive results during the
Company's introduction period. Cost of sales as a percentage
of net sales decreased to 48.7% in fiscal 1997 from 49.8% as
reported in 1996. The decrease related to certain costs
being spread over a larger sales base. The decrease in cost
of sales translates to an increase in gross profit to 51.3%
of net sales as compared to 50.2% for 1996. Selling, general
and administrative expenses increased to $4,699,788 for
fiscal 1997 from $3,684,851 as reported in 1996. The
increase relates to new sales staff in Ontario, promotional
and marketing support for existing and new markets and
additional administrative staff to support future growth.
Amortization expense of $823,200 for the year ending March
31, 1997 increased by $142,175 or 20.9% from the reported
$681,025 in 1996. The increase is due to the new brewing
facility and production equipment purchased in fiscal 1997.
Amortization expense will increase in fiscal 1998 as the
current period only reflected amortization on the new
facility for half the year.
Interest expense increased to $545,093 in 1997 as
compared to $108,737 in 1996. This relates to the increased
bank financing arranged for the new brewery. The interest
for the first half of fiscal 1997 was capitalized as the new
facility was under construction (See Note 4 - Capital
Assets).
Bad debt expense of $348,412, compared to $244,414 in
1996, is a result of a U.S. distributor filing for
bankruptcy.
On March 31, 1997 the Company wrote down capital assets
by $500,000, reducing the carrying value of surplus land,
buildings and production equipment (which are held for
resale) to their estimated net realizable value. Net income
of $515,149 for the fiscal year ended March 31, 1997
decreased from $1,303,923 in 1996. Earnings per share has
decreased to $0.12 for fiscal 1997 as compared to $0.30 for
1996. The decrease relates to the one time write down of
surplus capital assets, bad debt expense and increased
interest charges and depreciation.
LIQUIDITY AND CAPITAL RESOURCES
As at March 31, 1997, the Company had a working capital
of $2,526,592 as compared to $2,919,087 (net of construction
costs payable). The cash provided from operating activities
increased to $2,435,140 in 1997 from $2,051,983 reported in
1996. During fiscal 1997, the Company completed the
construction of the new brewery. The new brewery was
financed with a $16,000,000 term loan. The Company applied
proceeds from the public offering to the long term debt
thereby reducing the debt to $11,682,692. In May of 1997,
the Company restructured its credit facilities by increasing
its revolving credit line to $5,000,000 (1996 - $2,500,000),
and splitting the long-term debt into two segments. The
first segment has a maximum of $7,000,000 and requires
principal payments of $437,500 per quarter commencing July
31, 1998. The second segment is a $5,000,000, 15 year
amortization facility which requires principal payments of
$28,800 per month commencing July 31, 1997. Collateral for
the credit facility consists of a fixed and floating charge
debenture on the lands, buildings and equipment of the
Company and a fixed mortgage and charge against the new
brewery (See Note 6 - Long Term Debt). In the fiscal year
ending March 31, 1997, the Company made capital expenditures
of $8,599,290 (March 31, 1996 - $11,323,613) which relate to
the new brewery and other production equipment. The Company
does not anticipate any substantial capital expenditures in
the next few years. As the Company achieves expected levels
of sales growth, fermenting tanks will be purchased at an
estimated cost of $1,600,000.
The increase in share capital relates to the sale of
common shares. The public offering of the Company's shares
was completed in February, 1997 and raised net proceeds of
approximately $5,200,000.
The company expects to meet its future financing needs
from a number of sources. These include; working capital
through operating cash flow, cash on hand, proceeds from the
sale of surplus capital assets retained at the Company's
previous location and to the extent required, a revolving
line of credit.
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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