Date: Thu, 18 Dec 1997 06:32:58 GMT Server: Stronghold/2.0.1 Apache/1.2.0 Connection: close Content-Type: text/html BIG ROCK BREWERY:MANAGEMENT DISCUSSION & ANALYSIS

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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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