Alberta’s other natural resource
2008 Annual Report
Alberta’s other natural resource
Financial Highlights
Net Sales
Net Income
Earnings per unit/share
Unitholders’/
Shareholders’ Equity
2008
2007
2006
$37,633,464 $36,450,872
$38,700,675
4,955,419 5,468,026
8,380,065
0.82
0.91
1.39
27,147,713
30,367,284
24,996,400 Corporate Profile
Big Rock Brewery, headquartered in Calgary, Alberta, produces premium, all-natural craft
beers. As Canada’s leading craft brewer, Big Rock Brewery boasts a family of ten exceptional
ales and lagers, Rock Creek dry cider, as well as an ongoing selection of seasonal beers. Big
Rock beer is available in draught, bottles and cans.
As a company Big Rock remains committed to three business fundamentals:
• Consistently brew distinctive, all natural, craft beers;
• Constantly provide superior, personalized customer experience; and
• Always create and sustain strong community relationships.
Table of Contents
1
Financial Highlights
10 Message to Unitholders
14 Management’s Discussion and Analysis
25 Management Report
26 Auditors’ Report
27 Financial Statements and Notes
Annual Meeting of Unitholders
The annual meeting of the unitholders of
Big Rock Brewery Income Trust will be held at:
Big Rock Brewery
5555 - 76th Avenue S.E.,
Calgary, Alberta, Canada
Thursday, May 21, 2009 at 2:00 p.m.
local Mountain Standard Time (MST)
Calgary was
made for beer
The two main ingredients in beer are water and
barley. Calgary is blessed with the finest of both.
Our water is clear and clean, with a high mineral
content – perfect for making ales. To make lagers,
we filter the water to a silky softness. A few miles
from town we’ve found local farmers who grow
plump, sweet two-row barley. It’s the best barley
on the planet, and it’s a big part of every Big Rock
brew.
Paul Gautreau
Vice President, Operations & Brewmaster
Paul joined Big Rock in 1986 and has over 23 years experience in
the brewing business. With 16 years experience mentoring under
the original Big Rock Brewmaster Bernd Pieper, Paul has an intimate
knowledge of our brewery. His experience coupled with his passion
for brewing premium, craft beers continues to be an inspiration to
his team of brewers.
2008 Annual Report
4
Looking Back at 2008
Seasonal Offerings from Big Rock
Environment
We brew world-class beers and continue to showcase our
As a socially and environmentally conscious business it is Big Rock
talent by batch brewing unique seasonal offerings. Having
Brewery’s responsibility to reduce our impact on the environment. In
the opportunity to create seasonal beers allows our team of
2008 we commissioned Conscious Brands to do an environmental
brewers to create products that remind both the industry and our
assessment of the brewery; one of the many recommendations
consumers that we are a craft brewery.
from this assessment was that we implement a Sustainability
For Paul, Brewmaster at Big Rock, every Big Rock beer must be
Management Team. This team has been created and tasked
with reducing our environmental footprint through better energy
management, transportation and material consumption. Through
these efforts we have been able to reduce waste water by 35%.
a work of fine craftsmanship. Whether it’s a new interpretation
of a classic or an original creation, it must be perfectly balanced
and finished. He adjusts colour, flavour notes, texture and
strength to his own practiced eye and palate.
Industry Best Practices
In 2008 we offered two seasonal beers: a new winter warmer,
We developed and initiated a comprehensive Good Manufacturing
McNally Winter Spice Ale, and back by popular demand, our
Practice (GMP) and an enhanced Food Safety Program, which will
Espresso Stout. These limited time offerings were very well
be a systematic preventative approach to food safety. This is a
received, selling out almost a full month ahead of our sales
plant wide program to ensure all departments adhere to Good
projections, and positioning us well for next year when beer
Manufacturing Practice as well as 6 different Hazard Analysis and
lovers across the country will once again be looking forward to
Critical Control Point prerequisite programs. These practices ensure
what’s new from Big Rock.
that we remain ahead of the industry Quality Assurance standards.
Health and Safety
Big Rock takes a proactive leadership role in employee Health
and Safety. In 2008 we developed a detailed Employee Safety
Manual and launched a Corporate Safety Management Program.
The manual provides Big Rock Brewery workers with the company’s
health, safety and environment policies and guides them in
performing their assigned tasks in a safe and effective manner.
Big Rock teamed up
with Calgary-based
company Cookie
Occasion to create
the McNally Winter
Spice gift set: four
Winter Spice bottles,
two winter spice
glasses and some
delicious bite-sized
ginger cookies.
Back by popular demand:
Espresso Stout
2008 Annual Report
5
100% real beer made
by 100% real people
Fiscal 2008 was an important (and positive) year for
Big Rock. Our double-digit increase in sales over the
second half of the year demonstrates the strength
of our people, our brands and our close business
relationships across Canada.
We implemented a restructuring program during the
second half of 2008 designed to improve our routes to
market, and create efficiencies throughout sales and
marketing while strengthening our brand’s position and
visibility. Producing volume growth during this period
is a strong testament to the passion, dedication and
pride of our employees. Our employees embraced the
changes, welcomed new teammates and continued to
make Big Rock a fantastic place to work. Personally,
I am very proud to work at Big Rock with such a
passionate and professional team.
Bill McKenzie
Vice President, Sales & Marketing
When Bill joined Big Rock in July 2008 he brought with him over fifteen
years of progressive, cross-functional industry experience. Bill provides
the leadership skills required to ensure our sales and marketing teams
reach outstanding sales results, build strong customer relationships,
and take a balanced marketing approach as they continue to build the
Big Rock brand. Bill will be focused on synchronizing all sales and
marketing initiatives to create efficiencies across the country.
2008 Annual Report
6
Outstanding in Their Field
Alberta Retail Chains
Community based word-of-mouth programs will continue to build
Big Rock continues to develop strong partnerships with leading
the Big Rock brand across all of our markets. If you have driven
retailers in Alberta. Some of the results of these partnerships
through rural Alberta recently you may have seen our giant beer
are: increased visibility in published flyers and print ads, a better
cans on display in farmers’ fields across the province. To erect
distribution of our core brands and increased market share and
these larger-than-life beer cans we stack two round hay bales on
volume.
top of each other and then wrap the bales in a giant tarp printed
Trade Marketing
with our beer can artwork.
Continually educating consumers on our products to ensure
Building on this program we will now accept nominations for
farmers who are “outstanding in their field”. The winners will be
awarded hay bale beer cans as their trophy.
Big Rock is recognized as a local, premium craft brewery is
something we take pride in. Accomplishing this task requires
that we stay focused on our sales and marketing initiatives, that
To us each hay bale beer can celebrates the hard work of our
farmers and has presented an opportunity for us to meet them
and thank them personally. The program continues to tie us to
our farming roots: Alberta grows the best malting barley in the
world - and Big Rock uses it exclusively.
we synchronize all the moving parts and that we be consistent
and clear in all we do at our retail and on premise accounts.
Delivering the Big Rock message at the point-of-purchase will
continue to be a critical part of us reaching our objectives in
2009.
British Columbia: Business revitalization
Grasshopper Weiss Squad
Wheat beers are often considered the best summer beers
because they are light and refreshing. Grasshopper, one of
our core brands, is a wheat beer or Weissbier (“vice beer”).
During the busy summer beer season we
In a province that loves craft brews, Big Rock needs to grow
its market share. With an engaged BC sales team and strong
regional leadership we are poised to grow share, volume and
visibility in this emerging market.
educated consumers through our unique
Grasshopper sampling promotion: The
In Alberta we
drink the wheat.
Grasshopper Weiss Squad.
Some people call Grasshöpper a wheat
ale. Some call it a weissbier (pronounced
vice beer.) Same difference. Grasshöpper’s
brewed with Alberta wheat, so it tastes like
Alberta sunshine. It makes you glad you’re here.
This interactive sampling promotion
integrated traditional advertising (radio and
Ontario Sales Force
With double-digit growth in Canada’s largest
beer market (Ontario), Big Rock could afford
to invest and move away from the existing
agency representation and hire its own sales
outdoor) with product tastings and print
team. With a roster of beer industry veterans
collateral to ensure our consumers are
making up this team (collectively offering over
educated on our product’s unique attributes.
75 years of industry experience) Big Rock is
confident that our brands will continue to be
well received in the Ontario marketplace.
Grasshopper Weiss Squad
print collateral.
BGRK_2-sidedTentCard FA.indd 1
7/22/08 3:04:59 PM
2008 Annual Report
7
Contributing to the community
Over the past 23 years Big Rock has supported
hundreds of causes through sponsorships, special
events, donations and (when required) simply
lending a hand.
We pride ourselves on delivering homegrown,
premium beer, that’s why we foster relationships
that present Western Canada in a premium way
and why we continue to look for events that enrich
music, arts and culture, thereby, supporting the
communities where we live and work.
Jim Button
Vice President, Corporate and Community Affairs
Jim officially joined the Big Rock team in May 2007 although he has
worked closely with the brewery for more than 12 years. Over the course
of his 20+ year career in marketing and public relations he has been
recognized for his work in the community with a philanthropy award
from the Canadian Association of Fundraising Professionals, Calgary
Inc. Magazine twice listed him in its “Top 40 Under 40” list and Alberta
Venture Magazine recognized him with an e-Award for his community
service. Looking into 2009 Jim will leverage his years of experience to
ensure that Big Rock continues to be recognized for its ongoing investment
into arts and culture, education and agriculture and the environment.
2008 Annual Report
8
Shown above: Anslem and Brian, two of our Big Rockers, have
been an integral part of the Interpretive Brewery project.
Big Rock Untapped
Big Rock Interpretive Brewery
Support For Up-and-Coming
Heritage Park Historical Village is Canada’s
Canadian Musicians
largest living history museum, offering
guests a total immersion experience in
the history of Western Canada beginning
from the 1860s. We were fortunate to have
been given the responsibility of creating an Interpretive Brewery
for the new expansion. This functioning mini brewery showcases
the importance of brewing in Western Canada and provides an
We know that music and beer are a
natural pairing, which is why (on top of the
numerous music festivals we sponsor)
we are proud of our Untapped Volume 2
compilation CD.
Up-and-coming Canadian artists were given the chance to
engaging, hands on experience for those who visit the park.
upload their music onto bigrockuntapped.com with the hopes of
Visitors to the Big Rock Interpretive Brewery will also be given
were submitted for consideration and judged by a panel of music
the opportunity to brew their own fresh beer through brewing
courses offered at this facility. The grand opening is scheduled
for April 2009.
15th Annual Big Rock Eddies
making it onto this CD. Over 500 songs from over 170 artists
industry movers and shakers.
In all 40,000 CDs were distributed through specially marked
cases of beer, giving the artists significant exposure to a
broader audience while giving Big Rock a significant increase
in sales through these cases, and increasing our exposure to
Our annual Eddie Awards are a celebration of the ideas and
a new demographic, further connecting Big Rock to the Arts
creativity of the people who know our beers best – those who
community.
drink them. Every year for the last 15 years we have offered up
prizing and fame to those friends of Big Rock that have displayed
extraordinary talent when creating television and print ads on our
behalf. (Of course it helps that we have over $20,000 in prize
money up for grabs.)
Grasshoppin’ Contest
The Grasshoppin’: Be Our Festival Field
As the event continues to gain popularity and recognition, we
Reporter Contest was created to help
expanded and hosted regional events in both Edmonton and
integrate our community investment
Toronto; each regional event sent one winner to the awards show
initiatives (primarily our support of
in Calgary where top prizes were awarded.
nine folk music festivals across the
country) with our marketing programs
and help us develop a more
substantial online presence.
Our 2008 Festival Field Reporter
winner will attend five festivals
(that have Big Rock beer gardens)
in five different cities and report
on the 2009 Canadian music
festival scene.
2008 1st place print ad: “Don’t Bother Knockin’”
Credit: Luke Devlin & Sebastian Abboud, Calgary
Watch for more through our blog at bigrockbeer.com.
2008 Annual Report
9
Message to unitholders
2008 Business Results
In 2007 Big Rock began refocusing both our marketing and sales
programs. In our effort to be recognized as a craft brewery known for
brewing premium products - and for having strong ties to both the land
and our community - we renewed our commitment to return to our roots.
In 2008 we continued on this path with a focus on rebuilding our
sales and marketing teams and growing our distribution networks.
Midway through the year Bill McKenzie joined the brewery as Vice
President of Sales and Marketing. With the momentum built from
our renewed focus, alongside Bill’s re-energized sales team, we
recognized hectolitre sales increases in quarter three (9.8%) and
quarter four (19.5%). Total hectoliter sales for 2008 were up 6.5%.
This translated into increased revenues of $1,182,592 (3%) to
$37,633,464 from $36,450,872 in 2007.
In 2008, our operations group was faced with increasing input costs
and challenges in the Calgary labour market. Despite these issues
they were able to achieve a 1.4% decrease in cost-of-sales per
hectolitre through a comprehensive budgeting program and continual
monitoring of costs and efficiencies. This, along with increased
sales, helped contribute to an overall increase in gross profits of 2%
over 2007.
Delivery and distribution was another area of increased cost (5% per
hectolitre), which is primarily attributed to higher fuel surcharges.
Sales and marketing activities in 2008 concentrated on brand
development and educating consumers on the concept of better beer.
Costs around these programs totaled $8,924,508 ($7,589,901) in
2007), an increase of 18%.
Overall 2008 profit margins were 13% ($4,955,419), which was a slight
decline from 15% in 2007 ($5,486,026). Big Rock’s distributions were
decreased from $1.50 per unit in 2007 to $1.20 per unit in 2008.
2008 Annual Report
10
Industry Trends
a true craft beer. The second trend worth noting, therefore, is
There is no doubt that these are tough economic times,
that, notwithstanding the decline in megabrewery sales, their
but the high-end beer category continues to do well despite
craft divisions have been doing very well indeed. The average
significant increases in commodity and hop prices. Sales for
increase over 2007 in the craft brew category is a healthy 12%
craft beers have continued to increase and continue to gain
while the North American beer growth was only .5%.
market share. Consumers continue to be intrigued by fullflavoured beers brewed locally. Just as significant is the idea
There is a third trend, somewhat larger than the entire beer
that the industry has awoken to the fact that craft beers are
industry, that also needs to be considered when contemplating
not only the fastest growing segment in the beer industry but
the future growth of Big Rock. In 2007, the New Oxford
also the fastest growing segment in all of beverage alcohol.
American Dictionary named “locavore” as the word of the
year. Previous words of the year include “podcast” (2005) and
Three significant trends are taking place today:
“carbon neutral” (2006). Locavore was coined in 2005 by four
•
Worldwide consolidation
women at the San Francisco farmers’ market and is associated
•
Decline in megabrewery sales while craft sales increase
with the “hundred-mile diet.” Both locavores and hundred-
•
Shift towards local
milers encourage the already existing trend to use locally
grown, seasonally available foods.
In 2007 the international beer industry was marked by
consolidation. That trend continued in 2008, but the global
Big Rock was part of the locavore (or, for dictionary purists, the
financial crisis in the second half of the year has had a much
locopotable) trend before it started.
greater (and generally negative) impact on the large, giant and
megabreweries as compared to the craft sector of the business.
Ben Zimmer, the editor for American dictionaries at Oxford
University Press, commented that locavore “shows how food-
Typically the North American beer market grows about 1% a
lovers can enjoy what they eat while still appreciating the
year. But in 2008 the rate was only half that. The first trend to
impact they have on the environment.” Just think how much
be noted therefore is that giant and megabrewers are scaling
diesel it took to put bananas or an imported Belgian Pilsner on
back their investments in response to slowing sales. As a
your table. In contrast locavores consume
result of the current economic uncertainty many brewers have
products with a much lighter carbon footprint.
gone through the process of laying off employees, closing
facilities and implementing serious head office restructuring.
This trend in food is paralleled by a similar trend in beer. For one
The interesting trend is not one of simple retrenchment, but of
part of the market, the trend towards “trading up” towards local,
a complex change involving international consolidation along
fresh, tasty, and often organic food remains strong. “Trading up”
with lower profits and sales. This trend marks a significant
in the beer market means moving from the high volume industrial
change from previous beliefs. Traditionally, as the editor of
beer to hand-crafted beers - including Big Rock.
Beer Marketer’s Insights observed, beer holds up well during
tough economic times. Nothing is recession-proof but beer, he
Maureen Ogle, author of Ambitious
said, is now considered “recession-resistant.”
Brew: the Story of American Beer has
noted the growing fragmentation of
Imported beers, largely from Europe, have also been losing
the consumer market with a significant
a large share of the American market to the growing and
increase in the number of beer brands
improved craft brewers. Globally mass market beers are
being made available. Also noted was that
seeing flat and/or sales decreases. A strategy developing in
megabreweries, like all large organizations,
the overall American market is the ‘shadow crafts’: beer made
are not known for being nimble and
by the big brewers disguised to look like craft beers. The big
responsive to changes in consumer tastes -
brewers do not actively advertise their involvement with these
such as “trading up.”
brews as it affects the ability of these products to be seen as
2008 Annual Report
11
This presents a great opportunity for Big Rock and other
business. As a leader within the Canadian craft brewing
surging craft brewers that are focused on brewing a better
industry we will continue to leverage the quality aspects of
beer. People are paying more attention to what and how they
our family of beers and our cider with every customer and
consume. One of our greatest strengths is our long history of
consumer. We will deliver this quality message through a
using only the purest ingredients with no adjuncts or additives.
focused
and
engaged
and customer
promotions
To create a masterpiece, no compromise may be tolerated. To create a masterpiece, no compromise
may
be tolerated.
To sales
create ateam
masterpiece,
no compromise
may be tolerated.
We proudly rely on natural carbonation and were one of the
that highlight our unique brand attributes.
first North American breweries to utilize cold micro-filtration to
retain a natural full flavour that is not altered by heat used in
We will be entering the third year of our long-term commitment
pasteurization.
to return to our roots. This continuity will ensure that we are
recognized as a quality Alberta company with strong ties to the
Beer in this respect is like liquid bread: local ingredients,
land and our community. Big Rock is taking a more proactive
handcrafted with skill and passion, and served fresh makes
position in the brewing industry and has proudly rejoined the
all the difference. Alberta has two large malting plants and
Brewers Association of Canada. As part of this ongoing strategy
Alberta farmers plant vast acreages of what is arguably the
we are looking forward to many exciting activities in 2009.
highest quality malting barley in the world. Big Rock maintains
close contact with the producers represented by the Western
2009 Sales Conference
Barley Growers’ Association in order to maintain the highest
If you ever want to experience the passion at Big Rock you
order of quality control.
should attend a sales conference for a few days. In January
the sales and marketing team traveled to Banff for an event-
In 2007 we recognized these trends and made a commitment
filled conference that began with a team dinner at the Banff
to return to our roots with a desire to be recognized as a
Centre, followed by a fun and interactive tradeshow and ending
premium craft brewer with strong ties to the land and our
with a market tour. It was a chance for our team to engage in
community. We realized this was a process that was going
the business and the tasks ahead. Everyone left Banff with
to take some time and we are proud to say that we are now
full clarity around their goals and objectives for 2009 and with
beginning to see the results. This helps explain why, despite
many more Big Rock memories.
flat sales for the first two quarters of 2008, Big Rock’s sales
increased substantially for the last half of the year.
Looking Forward to 2009
Despite the economic environment we remain excited that
in 2009 we will build our brands while managing our costs
on both the production and the commercial side of the
2009 Big Rock National Sales conference in Banff, AB
Thirty-five years ago E.F. Schumacher published a book, Small is Beautiful. It was
considered economic heresy in its day for insisting that the “single-minded concentration
on output and technology has been dehumanizing.” Today, the great variety of excellent
beer produced by the craft brewery sector has proven Schumacher right. Floods of
standardized beer, the result of single-minded concentration, have created niches
in a fragmented market that Big Rock will strive to fill.
2008 Annual Report
12
Online Strategy
We have partnered with Comrade Agency to re-build our website,
expand into online communities and refine our online strategy. The
new website is scheduled to launch in April 2009. This site will
support our sales and marketing initiatives while communicating
the story of Big Rock alongside each of our core, niche and
seasonal beers.
The website will promote a two-way conversation with our
consumers and will play a key role in building our database so
we can develop a solid Customer Relationship Management
(CRM) strategy. Regular monthly email correspondence with
our database will include but not be limited to: newsletters,
invitations, contests and promotions. A brewer’s blog will give
www.bigrockbeer.com scheduled launch April, 2009
consumers a consistent voice discussing relevant topics and,
more importantly, give them a reason to engage with Big Rock.
Pilot Brewery
With our return to our roots strategy as a craft brewer we have
plans to be more innovative and experimental with our brews. To
this point Big Rock is in the process of installing a smaller scale
brewing system (commonly referred to as a “pilot brewery”).
The pilot brewery gives our brewers the chance to work with new
recipes on a smaller, more economical scale. When one of the
recipes meets our brewers’ high standards we will gladly share
and bring it to market. This brewery will be operational in the
fall of 2009 and you can expect to see the results soon after
implementation.
As we move forward into this new economic community we will
Traditional ingredients
hold true to our roots and continue to advance in ways that appeal
to our consumer.
All of us at Big Rock thank you for your continued support as
unitholders. Through our dedication to being Canada’s leading
craft brewer, we strive to maximize the value of Big Rock and
provide stable cash distributions to our unitholders.
Ed E. McNally
President &
Chief Executive Officer
2008 Annual Report
13
Management’s Discussion and Analysis for the year ended December 31, 2008
March 23, 2009
This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the Big Rock Brewery
Income Trust (“Big Rock” or the “Trust”) consolidated financial statements and accompanying notes for the year
ended December 31, 2008. The consolidated financial statements of the Trust have been prepared in accordance
with Canadian Generally Accepted Accounting Principles (“GAAP”) and are denominated in Canadian dollars.
Business Overview
In an environment where three of the country’s largest breweries are foreign owned, Big Rock stands
out as a Canadian producer, marketer, and distributor of premium quality specialty beers, also known
as craft beers (available in bottles, cans and kegs). The brewery is located in Calgary, Alberta with sales
and distribution facilities in Calgary and Edmonton, and sales representatives resident in Alberta, British
Columbia, Saskatchewan, Manitoba and Ontario. Big Rock products are available in Newfoundland, New
Brunswick, and Nova Scotia through third party agents. Big Rock also exports its products to Korea and to
Canadian Embassies throughout the world.
Additional information regarding Big Rock Brewery Income Trust, including the Trust’s Annual Information
Form is available on SEDAR at www.sedar.com
Selected Financial Information
Net Sales Revenue Net Income Earning per unit - basic Cash provided by operating activities Weighted average # of units outstanding Distributable cash per unit Distributions per unit Total Assets Future Income tax liability 2008 2007 2006
$ 37,633,464 $ 4,955,419 $ 0.82 $ 2,635,182 6,012,711 $ 0.26 $ 1.20 $ 35,899,733 $ 2,671,007 $ 36,450,872 $ 5,468,026 $ 0.91 $ 7,193,110 6,000,237 $ 1.04 $ 1.50 $ 35,861,144 $ 3,201,820 $ 38,700,675
$ 8,380,065
$ 1.39
$ 10,285,824
6,020,891
$ 1.54
$ 1.32
$ 42,170,729
$ 7,426,762
As at March 23, 2009 there were 6,016,570 trust units and 498,500 options to purchase trust units outstanding.
2008 Annual Report
14
Significant Events
Leadership Changes
In March 2008 Mr. Edward McNally, founder of Big Rock, was appointed President and Chief Executive
Officer after the resignation of Mr. Ken Barbet. At the end of the second quarter, Big Rock welcomed a new
Vice President of Sales and Marketing, Mr. Bill McKenzie. Mr. McKenzie has brought a significant amount of
leadership and experience from his years with Diageo and Molson to the Big Rock team, resulting in increased
sales dollars and volumes for quarters three and four.
Operations
Big Rock commissioned an environmental study to review the entire operation and, as part of the
recommendations received, the Trust has assembled a Sustainability Management Team. The team consists of
seven employees covering all departments and their mandate will be to ensure environmental sustainability and
to reduce resource use and utility costs wherever possible.
Sales and Marketing Initiatives
The first quarter of 2008 was busy with ‘Beer and Music’ initiatives. Big Rock Untapped was launched with
Untapped Volume 1, a compact disc of “untapped” artists, which was distributed in 25,000 specially marked
cases of Grasshopper, Traditional Ale and XO Lager. February and March were filled with music-related activities in
preparation for the JUNO Awards that took place on April 6, 2008. (Big Rock is the official beer of the JUNO Awards.)
The Grasshoppin’ music festival program was created to align our festival sponsorships across Canada with our
marketing initiatives. It was launched in the second quarter of 2008 and went into full swing in the third quarter
of 2008. At music festivals across the country people were invited to enter the Grasshoppin’: Be our Festival
Field Reporter contest for a chance to be selected and travel to five festivals, in five cities in 2009. Additionally,
as a part of our festival activity, and in support of our environmental initiatives, music lovers enjoyed Big Rock
beer using 100% compostable cups.
Summer was busy with significant on-premise and retail activity that included patio and golf promotions as
well as our Grasshopper Weiss Squad sampling program, which educated consumers on the unique product
attributes of our wheat beer. Other marketing activities included an on-premise promotion to support Traditional
Ale, another one of our core brands.
Our newest seasonal offering, McNally Winter Spice Ale, was developed and released in October 2008. It is
a full-bodied amber ale, spiced with cinnamon, nutmeg, cloves and ginger. Presented in a gift pack with four
bottles, two glasses and ginger cookies, Winter Spice was a huge success this Christmas season.
Results of Operations
For the year ended December 31, 2008, sales revenue increased $1,182,592 (3%) to $37,633,464 from
$36,450,872 for the year ended December 31, 2007. Hectolitre (hl) sales were down in the first two quarters
(1.9% and 0.5% respectively) but trended up in quarter three (9.8%) and quarter four (19.5%). Total hectoliter
sales for 2008 were up 6.5% to 178,056 hl for the year ended December 31, 2008 compared to 167,251 hl for
the year ended December 31, 2007.
Cost of sales increased $713,790 (5%) to $14,905,369 this year from $14,191,579 last year. Continued
increases in the cost of raw materials (aluminum, bottles, malt), as well as significantly higher utility costs were
the major contributors.
Gross profit for the year was up $468,802 (2%) to $22,728,095 from $22,259,293 last year, due to increased
sales volumes.
2008 Annual Report
15
Overall selling expenses increased by $1,704,991 (16%) to $12,337,372 compared to $10,632,381 last year.
Selling expenses include delivery costs of $3,412,865 (2007 - $3,042,480). This is an increase of 12% from
last year, which is attributed to higher fuel surcharges relating to freight costs during 2008. Sales and marketing
activities in 2008 concentrated on brand development and the focus on educating consumers around the
concept of better beer. Costs around these programs totaled $8,924,507 ($7,589,901 in 2007), an increase of
18%. Increases included higher spending on visibility items used for sponsorships (such as the Junos, Eddies
and music festivals) and aggressive on-premise retail campaigns for Grasshopper and Traditional Ale. Other
areas of increased spending were for consumer tastings and the development of an additional website (www.
bigrockuntapped.com).
General and administration expenses were $554,114 lower ($4,120,769) than 2007 levels ($4,674,883).
Differences include a reduction of $248,391 in professional and consulting fees relating to the internal reorganization compared to those incurred in 2007. Interest expenses of $177,956 were recorded (nil in 2007)
related to the use of the operating line of credit and interest paid on long term debt. Amortization expense for
the year was $1,887,275, down $227,593 from the same period in 2007 ($2,114,868) due to several older
assets being fully amortized and the disposal of non-utilized assets.
Other income for year ended 2008 was $219,883 ($461,883 in 2007). Other income includes interest income,
restaurant royalties, miscellaneous income (primarily from the sale of spent grains and rental of yard space),
gain or loss on asset disposals and net revenues from tours, hospitality, and the dry goods store. Primary
variances for 2008 include a reduction in interest income of $118,903 which was recorded in 2007 from
interest earned on short term investments. Other variances include a loss on disposal of assets in 2008 of
$50,497 which is an increase of $43,485 over those recorded in 2007.
Historical numbers for selling and general and administrative expenses have been reclassified for comparison
purposes only.
Review of the fourth quarter
Net income for the fourth quarter in 2008 was $1,532,875, up $92,794 from the same quarter in 2007
($1,440,081). Net revenues were up by $854,999 to $9,149,789 (2007 - $8,294,790) for the three month
period ended December 31, 2008. This is linked to increased Q4 sales which were up (on a hectoliter basis) by
19.5%. Cost of goods sold were $3,689,963 (2007 - $3,294,695) for the three month period ended December
31, 2008. The increase in cost of goods sold is due primarily to continued cost increases on raw materials
and overhead. Selling expenses were $3,295,780 ($2,651,689 in 2007) for the three month period ended
December 31, 2008 and included increased promotional materials, sponsorships and retail spending, and
delivery & distribution costs were up $180,191 over quarter four 2007. Provisions for current and future income
taxes were booked resulting in a net recovery of $790,515 for the quarter.
Summary of Quarterly Results
Quarter Ended
Net Sales
Net Income
31-Dec-08 $9,149,789 $1,532,875 30-Sep-08 $10,331,114 $1,417,385 30-Jun-08 $10,436,468 $1,537,122 31-Mar-08 $7,716,093 $468,037 31-Dec-07 $8,294,790 $1,440,081 30-Sep-07 $9,774,612 $1,374,104 30-Jun-07 $10,601,808 $1,807,632 31-Mar-07 $8,072,300 $834,972 31-Dec-06 $8,603,228 $1,883,998 Earnings per unit Basic
Diluted
$0.24 $0.24 $0.26 $0.08 $0.13 $0.23 $0.30 $0.14 $0.30 $0.24 $0.24 $0.26 $0.08 $0.13 $0.23 $0.30 $0.14 $0.29 Weighted Average
Units Outstanding
6,012,711
6,012,711
6,011,570
6,007,382
6,000,237
6,001,870
5,999,703
5,996,506
6,020,891
2008 Annual Report
16
Financial Condition
Big Rock’s cash and cash equivalents totaled nil at December 31, 2008 (December 31, 2007 - $798,382).
At December 31, 2008, accounts receivable increased by $954,200 to $2,595,977 from $1,641,777 as at
December 31, 2007, due in part to higher December 2008 sales. Substantially all of Big Rock’s accounts
receivable are from provincial government liquor authorities and the timing of receipts of large balances often
causes significant swings in accounts receivable over period ends.
Inventories as at December 31, 2008 increased to $3,694,083 from $2,910,027 as at December 31, 2007
primarily as a result of increased production and finished goods inventories based on higher sales levels.
The net book value of property, plant and equipment decreased by $1,096,362 during 2008 to $28,940,186
(December 31, 2007 - $30,036,548) as a result of several older assets being fully amortized and the disposal of
non-utilized assets.
Big Rock has a $5,000,000 demand operating facility provided by ATB Financial (ATB) which bears interest at ATB
prime rate. The balance of this facility was $1,246,194 at December 31, 2008 and will fluctuate as working capital
requirements dictate. The ATB facility imposes a number of positive and negative covenants on Big Rock including
the maintenance of certain financial ratios. At December 31, 2008 Big Rock was in compliance with all of its debt
covenants. At December 31, 2007 Big Rock was not in compliance with all of its debt covenants and a waiver was
received from ATB. Collateral for these borrowings is a general assignment of Big Rock’s assets.
At December 31, 2008, accounts payable increased by $1,411,530 to $2,887,571 from $1,476,041 as at
December 31, 2007. These payables are all in the normal course of business and fluctuate based upon timing of
receipt and payment of vendor invoices and are also affected by production levels. The significance of the increase
in 2008 relates to an additional vendor payment run in December of 2007 in preparation for an accounting system
change occurring as a part of the internal reorganization.
At December 31, 2008, 634,250 Unit Appreciation Rights (UAR’s) were outstanding (634,250 December 2007).
There was no liability for UAR’s at year end.
The provision for future income taxes payable decreased by $530,813 to $2,671,007 as at December 31,
2008 (from $3,201,820 as at December 31, 2007). Future income taxes payable reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, and the deferral of taxes payable as a result of the Trust’s new “flow
through” structure.
Contributed surplus of $740,754 represents primarily unit based compensation expense calculated using the
Black-Scholes option pricing model for unit option grants.
Cash Flows
Cash provided by operating activities in the year ended December 31, 2008, decreased by $4,557,928 to
$2,635,182 from $7,193,110 for the year ended December 31, 2007, due primarily to the net change in non-cash
working capital as well as slighter lower net incomes for the year.
Cash used in financing activities throughout the year included cash distributions of $7,453,604 (2007 $8,881,374) paid to Unitholders. Unit options exercised during the year contributed $107,990 of cash compared to
$70,904 for the year ended December 31, 2007. Long term debt of $3,557,090 was acquired during 2008.
Cash used in investing activities during the year included the purchase of property, plant, and equipment assets
of $863,877 (2007 - $1,979,477). Additions during the year included new brewery flooring, a new keg washer,
2008 Annual Report
17
IT hardware and software and additional vehicles. Significant disposals included bottling line components and
vessels which were no longer being utilized.
Liquidity and Capital Resources
The Trust’s objective for managing capital is to maximize the profitability of its existing assets and to create longterm value and enhance returns for its Unitholders. The Trust considers Unitholders’ Equity, short-term and longterm debt less cash and cash equivalents to be part of its capital structure. Management may make adjustments
to the capital structure for changes in economic conditions. All of the borrowing facilities have financial tests
and other covenants customary for the types of facilities which must be met at each reporting date. Each
month the Board of Directors sets the cash distribution per unit, considering the Trust’s requirements for capital
expenditures, debt servicing requirements, and current operating results compared to budget as well as projected
net incomes.
Working capital (current assets less current liabilities) increased by $1,921,502 to $2,008,180 primarily as a
result of the payment of the current tax provision recorded at December 31, 2007.
The Trust generally relies on committed credit facilities and cash flow from operations to fund capital
requirements. The Trust’s revolving bank operating line of $5,000,000 is deemed to be sufficient to fund operating
fluctuations in cash requirements throughout the year.
Cash Distributions
Cash Distributions are not guaranteed and will fluctuate with performance of the business.
Over the long term it is management’s intention that Big Rock’s distributions to its Unitholders are funded by cash
flow from operating activities with the remaining cash directed towards capital spending and debt repayments.
The Trust intends to provide distributions to Unitholders that are sustainable to the Trust considering its liquidity
and long-term operational strategies. Since the level of distributions is highly dependent upon cash flow generated
from operations, which fluctuates significantly in relation to changes in financial and operational performance,
commodity prices, interest and exchange rates and many other factors, future distributions cannot be assured.
Distributions declared to Unitholders may exceed net earnings generated during the period. Net earnings may not
be an accurate indicator of the Trust’s liquidity, as it may be comprised of significant charges not involving cash
including future income tax, changes to non-cash working capital and amortization related expenses.
The following table provides a breakdown of the distributable cash per unit for the year:
Operating Activities
Net income for the year Items not affecting cash
Amortization Loss on sale of assets Unit based compensation Future income tax recovery Net change in non-cash working capital related to operations Cash provided by operating activities Allowance for productive capacity maintenance Distributable Cash per Unit * 2008
Per Unit $
2007
Per Unit $
0.82 0.91
0.31 0.01 -
(0.09) 1.05 (0.62) 0.43 (0.17) 0.26
0.35
0.07
(0.70)
0.63
0.57
1.20
(0.16)
1.04
* Distributable cash per unit is a non-GAAP measure. Readers should be cautioned that non-GAAP measures do not have a
standardized meaning prescribed by Canadian generally accepted accounting principles (“GAAP”) and, therefore are unlikely to
be comparable to similar measures presented by other issuers.
2008 Annual Report
18
Issued and Outstanding Trust Units
Units
#
Amount
$
6,006,474
7,800 (11,404) -
6,002,870
13,700
-
6,016,570
Balance as at December 31, 2006
Units issued on exercise of options Units repurchased and cancelled Transfer from contributed surplus related to options exercised
Balance as at December 31, 2007
Units issued on exercise of options
Transfer from contributed surplus related to options exercised Balance as at December 31, 2008
18,282,507
70,904
(37,968)
2,040
18,317,483
107,990
5,754
18,431,227
Trust Unit Options
As at December 31, 2008 there were 498,500 trust unit options outstanding and exercisable at a weighted average
price of $16.88. During the year, 13,700 options were exercised and 26,300 options were cancelled and 600 options
expired.
Issued and
Outstanding
Trust Unit
Units Options
#
Balance, beginning of year Cancelled Expired Granted Exercised Balance, end of year 539,100 (26,300) (600) -
(13,700) 498,500 2008
2007
Weighted
Average
Exercise
Price Units $
#
16.57 15.31 6.70 -
7.88 16.88 308,100 (26,200) (40,000) 305,000 (7,800) 539,100 Weighted
Average
Exercise
Price
$
17.85
18.68
19.07
15.58
9.09
16.57
Critical Accounting Estimates
Returnable glass containers
Returnable glass containers are initially recorded at cost. In order to charge operations for wear and shrinkage, the cost
of bottles is charged to operations over the estimated useful life of five years. The Trust has purchased $2,037,518 of
returnable glass containers since converting to the Industry Standard Bottle in early 2002. Net book value of returnable
glass containers as at December 31, 2008 is $759,223.
Stock-based compensation
The Trust recognizes compensation expense when options with no cash settlement feature are granted to employees
and directors under the option plan. Stock based compensation expenses recognized during the year ended December
31, 2008 was nil (2007 - $402,600).
Plant, Property and Equipment (PP&E)
Accounting for PP&E involves making estimates of the life of the assets, the selection of an appropriate method of
depreciation and determining whether an impairment of Big Rock’s assets exists. These assessments are critical due
to their potential impact on earnings. Big Rock completes an assessment of the carrying value of its property, plant
and equipment for indicators of impairment. If there are indicators of impairment, a recoverability test is undertaken by
performing a comparison of carrying value to the estimated undiscounted future net cash flows from the assets. If it
2008 Annual Report
19
is determined that an asset’s undiscounted future net cash flows are less than it’s carrying value, the asset is
written down to its net realizable value.
Keg Deposits
The Trust requires that customers pay deposits for each keg purchased which are subsequently refunded to
customers via invoice credits or cash payments when kegs are returned and these deposits are reflected as
a liability on the Trust’s balance sheet. In the normal course of business there is a percentage of kegs which
are never returned for refund. As a result the Trust performs an analysis based on factors such as total kegs
produced, current inventory rates and average keg turnover. In addition, return percentages are calculated and
tracked to estimate an average keg turnover rate. Together, this information is used to estimate a reasonable
keg deposit liability at each reporting date. Any adjustments required to the keg liability account are applied to
revenues.
Risks Related to the Business and the Industry
Big Rock operates in an environment that is both highly competitive and highly government regulated. Due to
the ongoing shifting effects of competition, the ability to predict future sales and profitability with any degree of
certainty is limited. There is a continuing entry of premium and super premium beers from other craft breweries
and the larger national and multi-national brewers with products that compete directly with craft beers. A large
number of imports are also being sold in the same markets where Big Rock competes for business. With the
large choice of brands now available, and the advertising initiatives of the major breweries, it is likely that price
promotions due to competitive pressures will continue.
Big Rock requires various permits, licenses, and approvals from several government agencies in order to
operate in its market areas. In Alberta, Big Rock’s largest market, the Alberta Gaming and Liquor Commission
provides the necessary licensing approvals. Other licenses have been obtained from the British Columbia Liquor
Distribution Board, the Saskatchewan Liquor and Gaming Authority, the Manitoba Liquor Control Commission,
the Liquor Control Board of Ontario, Nova Scotia Liquor Commission, Newfoundland and Labrador Liquor
Corporation and the Canada Revenue Agency – Excise. Management believes that Big Rock is in compliance with
all licenses, permits, and approvals.
In 2007, the Government of Canada enacted legislation imposing trust-level income taxes on publicly traded
income trusts at a rate comparable to the combined federal and provincial corporate tax rate for the taxation
years commencing January 1, 2011. Under this tax legislation, distributions from publicly traded income trusts
would be treated effectively as dividends to the trust unitholders and the distribution tax would apply in respect
of distributions of income as opposed to returns of capital. As such, the Trust has recognized future income tax
expenses (recoveries) on their consolidated statements of net income, comprehensive income and undistributed
income based on the temporary differences that exist at the balance sheet date and that are expected to
reverse after the date that the taxation changes take effect. The asset or liability is measured using income tax
rates that, at the balance sheet date, are expected to apply.
The Trust’s principal financial instruments are its outstanding amounts drawn from its credit facilities, which,
after cash flow from operations, are its main source of financing. Other financial assets and liabilities arising
directly from its operations and Trust activities include cash and cash equivalents, accounts receivable, bank
indebtedness, accounts payable and accrued liabilities, long term debt, unit based compensation liability and
distributions payable. The primary risks arising from the Trust’s financial instruments are credit risk, liquidity risk,
commodity price risk, interest rate risk and foreign exchange risk.
2008 Annual Report
20
Credit Risk and Management
Credit risk is the risk that the counterparty to a financial asset will default, resulting in the Trust incurring a financial
loss. The Trust has a concentration of credit risk because substantially all of its accounts receivable are from
provincial liquor boards, under provincially regulated industry sale and payment terms. The Trust is not exposed
to significant credit risk as payment in full is typically collected by provincial liquor boards at the time of sale and
receivables are with government agencies. Product sold outside of Canada is done so on a ‘Cash on Delivery’ basis
with no credit risk.
Credit risks associated with the potential non-performance by financial instrument counterparties has been
minimized through the careful selection of vendors, the development of long term vendor relationships and the
selective use of written arrangements to guarantee supply and payment terms.
Liquidity Risk and Management
The Trust’s principal sources of liquidity are its cash flow from operations and existing or new credit facilities.
Liquidity risk is mitigated by maintaining banking facilities, continuously monitoring forecast and actual cash flows
and, if necessary, adjusting levels of distribution to Unitholders and capital spending to maintain liquidity.
Commodity Price Risk and Management
The Trust is exposed to commodity price risk in the areas of utilities (natural gas), malted barley and aluminum,
where fluctuations in the market price or availability of these items could impact the Trust`s cash flow and
production. To minimize the impact of this risk the Trust enters into contracts which secure both supply and set
pricing to manage the exposure to pricing and availability.
Interest Rate Risk and Management
The Trust is exposed to interest rate cash flow risk on its operating and credit facilities which bear interest at variable
rates. The cash flow required to service the interest on these facilities will fluctuate as a result of changes to market
rates. The Trust evaluates the policies surrounding interest rates on an as needed basis and is confident that this
policy is sufficient based on current economic conditions, combined with the minimal amount of debt required by the
Trust.
Foreign Exchange Risk and Management
The Trust currently relies on a small number of foreign suppliers and thus has limited exposure to risk due to
variations in foreign exchange rates.
For a more detailed discussion of risk factors that could materially affect Big Rock’s results of operations and
financial condition, please refer to the Risk Factors section of the Trust’s Annual Information Form dated March 23,
2009 that is available on www.sedar.com.
Related Party Transactions
Related party transactions for the year include the engagement of a consultant, related to Mr. McNally, to coordinate
work on special projects undertaken by the Trust in the normal course of business. The value of 2008 transactions
totals $108,399, which has been recorded at the exchange amount.
2008 Annual Report
21
Commitments
As at December 31, 2008 the Trust is a party to the following contracts:
A contract with Rahr Malting Canada Ltd. to supply malt barley for the period January 1, 2008 to December 31,
2008 at a fixed price of $525 per metric tonne. The contract is for the purchase of raw materials which will be
delivered in quantities to be used over a reasonable period during the normal course of business as needed to
ensure meeting production targets. For 2009 supply is guaranteed at a price of $684 per metric tonne.
A three year contract to purchase approximately 136,000 gigajoule (GJ) of natural gas at a fixed price of
$9.58 per GJ for Big Rock’s own use during the period March 1, 2006 to February 28, 2009.
On February 26, 2009 the Trust entered into a one year agreement with Direct Energy to provide natural gas
at a floating rate for a one year term (March 1, 2009 – February 28, 2010). The rate at the time of signing
was $5 per GJ.
Disclosure Controls and Procedures and Internal Controls over Financial Reporting
The Trust’s management under the supervision of, and with the participation of the Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”) of Big Rock Brewery Operations Corp. (the administrator of the Trust),
have designed and evaluated the effectiveness and operation of its disclosure controls and procedures, as
defined under National Instrument 52 – 109 Certification of Disclosure in Issuers’ Annual and Interim Filings
(“NI 52-109”). Disclosure controls and procedures are designed to provide reasonable assurance that
information required to be disclosed in reports filed with Canadian securities regulatory authorities is recorded,
processed, summarized and reported in a timely fashion. The disclosure controls and procedures are designed
to ensure that information required to be disclosed by the Trust in such reports is then accumulated and
communicated to management, including the CEO and the CFO, as appropriate, to allow timely decisions
regarding required disclosure. Due to the inherent limitations in all control systems, an evaluation of the
disclosure controls can only provide reasonable assurance over the effectiveness of the controls. The disclosure
controls are not expected to prevent and detect all misstatements due to error or fraud. Based on the evaluation
of disclosure controls and procedures, the CEO and CFO have concluded that, subject to the inherent limitations
noted above, the Trust’s disclosure controls and procedures are effective as of December 31, 2008.
The Trust’s management under the supervision of, and with the participation of the CEO and CFO, have designed
and implemented internal controls over financial reporting (“ICFR”), as defined under NI 52-109. The Trust’s
management used the COSO Internal Control over Financial Reporting-Guidelines for Smaller Public Companies
(2006) as its framework. The process used involved four steps as follows: establishment of a foundation-which
involved assessing the tone at the top, the organization structure and baseline of current internal controls;
design and execution-which involved prioritizing risk, identifying controls and evaluation of control effectiveness;
access and report-which involved summarizing and reporting on the finding; and conclusion on controls
supported by documented evidence. The purpose of internal controls over financial reporting is to provide
reasonable assurance regarding the reliability of financial reporting and preparation of financial statements in
accordance with GAAP, focusing in particular on controls over information contained in the annual and interim
financial statements. The internal controls are not expected to prevent and detect all misstatements due to error
or fraud. The CEO and CFO acknowledge responsibility for the design of ICFR and confirm that there were no
changes in the Trust’s controls over financial reporting during the fourth quarter and year ended December 31,
2008, that have materially affected or are reasonably likely to materially affect the Trust’s internal control over
financial reporting. Based upon their evaluation of these controls as of December 31, 2008, the CEO and CFO
have concluded that the Trust’s ICFR have the following potential weaknesses:
2008 Annual Report
22
•
Due to the limited number of staff at the Trust it is not feasible to achieve complete segregation of incompatible duties. The Trust has mitigated this weakness in controls by adding management review procedures over the areas where segregation is an issue.
• The Trust does not retain staff with specialized and current income tax, financial reporting and complex accounting expertise. The Trust reports current and future income tax expenses and liabilities and other complex accounting calculations based on management’s estimates and relies on reviews by management, external consultants and on the Audit Committee for quality assurance.
As a result of our assessment of the design of our ICFR, we conclude that there is only a remote likelihood that a material
misstatement would not be prevented or detected. Management and the board of directors work to mitigate the risk of a material
misstatement in financial reporting; however there can be no assurance that this risk can be reduced to less than a remote
likelihood of a material misstatement.
Accounting Standards Adoption
Effective January 1, 2008 the Trust adopted the new CICA Handbook accounting requirements for Section 1535 “Capital
Disclosures”, Section 3031 “Inventories”, Section 3862 “Financial Instruments – Disclosures” and Section 3863 “Financial
Instruments – Presentation”. In accordance with the transitional provisions for these new standards, these policies were adopted
prospectively without restatement of prior periods. Refer to Note 2 of the interim financials for additional disclosure.
Future Accounting Pronouncements
Section 3064 “Goodwill and Intangible Assets”
Effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008, the new CICA Handbook
Section 3064 will replace Section 3062 “Goodwill and Other Intangible Assets” and Section 3450 “Research and Development
Costs”. These sections establish standards for the recognition, measurement, presentation and disclosure of goodwill and
intangible assets including internally generated intangible assets. These new sections are effective for the Trust beginning
January 1, 2009.
International Financial Reporting Standards
On March 11, 2008, the Accounting Standards Board of Canada confirmed that effective January 1, 2011, International Financial
Reporting Standards (“IFRS”) will replace Canadian GAAP for publicly accountable enterprises. A diagnostic analysis has been
completed to determine which of the differences between IFRS and Canadian GAAP that may significantly impact the Trust. A
changeover plan with a target date of January 1, 2011 will be developed and will include members of financial management as
well as key operations staff to focus on specific potential issues. Staff will be participating in IFRS training sessions to develop the
appropriate knowledge base and qualified, experienced external consultants will be retained to assist in the transition.
It is not possible at this time to quantify the financial impact of the transition to IFRS on the Trusts financial statements or to
determine the impact of the changeover on accounting system, disclosure controls and procedures and internal controls over
financial reporting.
Income Taxes
In 2007, legislation was substantively enacted that effectively imposes an income tax for income trusts for taxation years beginning
in 2011. As such, the Trust has recognized future income tax expenses (recoveries) on its consolidated statement of net income,
comprehensive income and undistributed income based on the temporary differences that exist at the balance sheet date and that
are expected to reverse after the date that the taxation changes take effect. The asset or liability is measured using income tax
rates that, at the balance sheet date, are expected to apply.
2008 Annual Report
23
Forward-looking Statements
Certain statements contained in this MD&A may constitute forward-looking statements. These statements
relate to future events or the Trust’s future performance. All statements, other than statements of historical fact,
may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use
of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”,
“propose”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe” and similar expressions. These
statements involve known and unknown risks, uncertainties and other factors that may cause actual results or
events to differ materially from those anticipated in such forward-looking statements. Big Rock believes that the
expectations reflected in those forward-looking statements are reasonable but no assurance can be given that
these expectations will prove to be correct and such forward-looking statements included in this MD&A should
not be unduly relied upon by investors as actual results may vary. These statements speak only as of the date of
this MD&A and are expressly qualified, in their entirety, by this cautionary statement.
In particular, this MD&A contains forward-looking statements, pertaining to the following:
• expected volumes;
• projections of market prices and costs;
• treatment under governmental regulatory and taxation regimes; and
• supply and demand of Big Rock’s products.
With respect to forward-looking statements listed above and contained in this MD&A, Big Rock has made
assumptions regarding, among other things:
• volumes in the current fiscal year will remain constant or will increase;
• input costs for brewing and packaging materials will remain constant or will not significantly increase or decrease;
• there will be no material change to the regulatory environment in which Big Rock operates; and
• there will be no supply issues with Big Rock’s vendors.
Big Rock’s actual results could differ materially from those anticipated in these forward-looking statements as
a result of the risk factors set forth above and as set out under the heading “Risk Factors” in the Trust’s annual
information form for the financial year ended December 31, 2008 and filed on SEDAR on March 23, 2009.
Big Rock’s actual results could differ materially from those anticipated in these forward-looking statements as a
result of these risk factors set forth above.
Investors should not place undue reliance on forward-looking statements as the plans, intentions or expectations upon which
they are based might not occur. Readers are cautioned that the foregoing lists of factors are not exhaustive. The forwardlooking statements contained in this MD&A are expressly qualified by this cautionary statement. Big Rock does not undertake
any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or
otherwise, unless required by law.
2008 Annual Report
24
Management Report
March 23, 2009
The accompanying consolidated financial statements in the annual report are the responsibility of management. The consolidated
financial statements of the Trust have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). In
the opinion of management, the financial statements have been prepared within acceptable limits of materiality and, when necessary,
management has made informed judgments and estimates in accounting for transactions which were not complete at the balance sheet
date. Where alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances as
indicated in the notes to the consolidated financial statements.
Management maintains appropriate systems of internal control. Policies and procedures are designed to give reasonable assurance
that transactions are appropriately authorized, assets are protected and financial records are properly maintained to provide reasonable
assurance that financial information is relevant and reliable.
The Audit Committee is appointed by the Board of Directors, and is comprised of directors, all of which are not officers or employees of
the Company. The Committee meets regularly with management to discuss internal controls over the financial reporting process, auditing
matters and financial reporting issues, to satisfy itself that each party is discharging its responsibilities and to review the financial
statements and the external auditors’ report. The Audit Committee has approved the financial statements.
Edward E. McNally
Colleen McLeod
President and
Chief Financial Officer
Chief Executive Officer
2008 Annual Report
25
Auditors’ Report
To the Unitholders of
Big Rock Brewery Income Trust
We have audited the consolidated balance sheets of Big Rock Brewery Income Trust as at December 31, 2008 and 2007 and the
consolidated statements of net income, comprehensive income and undistributed income and cash flows for the years then ended. These
financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Trust as at
December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian
generally accepted accounting principles.
Calgary, Canada March 12, 2009
Chartered Accountants
2008 Annual Report
26
Consolidated Balance Sheets
Big Rock Brewery Income Trust
As at December 31
2008
$
ASSETS [note 5]
Current
Cash and cash equivalents
-
Accounts receivable 2,595,977 Inventories (note 3) 3,694,083 Income taxes receivable 38,577
Prepaid expenses and other
354,779 6,683,416 Property, plant and equipment (note 4)
Deferred charges and other assets
Total assets
2007
$
798,382
1,641,777
2,910,027
248,103
5,598,289
28,940,186
276,131
30,036,548
226,307
$35,899,733
$35,861,144
LIABILITIES AND UNITHOLDERS’ EQUITY
Current
Bank indebtedness (note 5) 1,246,194
Accounts payable and accrued liabilities
2,887,571 Income taxes payable (note 7) -
Distributions payable (note 11) 541,471 4,675,236 Long term debt (note 5) 3,557,090
Future income taxes (note 7)
2,671,007 10,903,333 Unitholders’ equity
Trust unitholders’ capital (note 6)
18,431,227 Contributed surplus (note 6) 740,754 Undistributed income 5,824,419 24,996,400 35,899,733 1,476,041
3,255,217
780,353
5,511,611
3,201,820
8,713,431
18,317,483
746,508
8,083,722
27,147,713
35,861,144
See accompanying notes
On behalf of the Board:
E.E. McNally
Director
Gordon Tallman
Director
2008 Annual Report
27
Consolidated Statements of Net Income,
Comprehensive Income & Undistributed Income
Big Rock Brewery Income Trust
Year ended December 31
2008
$
Revenue
Net Revenue (note 2)
37,633,464 Cost of Goods Sold
14,905,369 Gross profit
22,728,095 Expenses
Selling Expenses 12,337,372 General and Administrative 4,120,769 Interest on Long Term Debt (note 5) 103,112
Interest on Bank Indebtedness (note 5) 74,844
Amortization 1,887,275 18,523,372 2007
$
36,450,872
14,191,579
22,259,293
10,632,381
4,674,883
2,114,868
17,422,132
Other Income Income before income taxes
Current income tax expense Future income tax recovery (note 7) 219,883 461,883
4,424,606 -
(530,813) (530,813) 5,299,044
4,055,960
(4,224,942)
(168,982)
Net income and comprehensive income for the year
4,955,419
5,468,026
Undistributed income, beginning of year 8,083,722 Cash distributions declared (note 11) (7,214,722) Excess of consideration paid over the carrying value of Trust Units repurchased -
Undistributed income, end of year
5,824,419
Net income per unit (note 2)
Basic 0.82
Diluted
0.82
11,738,829
(9,001,035)
(122,098)
8,083,722
0.91
0.87
See accompanying notes
2008 Annual Report
28
Consolidated Statements of Cash Flows
Big Rock Brewery Income Trust
Year ended December 31
2008
$
2007
$
OPERATING ACTIVITIES
Net income for the period 4,955,419 Items not affecting cash
Amortization 1,887,275 Loss on sale of assets 50,497 Unit based compensation (note 6) -
Future income tax recovery (530,813) 6,362,378 Net change in non-cash working capital related to operations (note 12) (3,727,196) Cash provided by operating activities 2,635,182 2,114,868
402,600
(4,224,942)
3,760,552
3,432,558
7,193,110
FINANCING ACTIVITIES
Distribution payments (note 11) (7,453,604) Trust Unit repurchased (note 6)
-
Bank indebtness 1,246,194
Cash received on exercise of options (note 6) 107,990 Long term debt 3,557,090 Cash used in financing activities
(2,542,330) (8,881,374)
(160,066)
70,904
(8,970,536)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (863,877) Proceeds from sale of equipment 22,467
Deferred charges and other assets (49,824) Cash used in investing activities
(891,234) Net decrease in cash
(798,382) Cash and cash equivalents, beginning of year
798,382 Cash and cash equivalents, end of year
-
Supplemental disclosure of cash flow information
Income taxes paid Interest paid 3,236,693 177,956 5,468,026
(1,979,477)
218,455
(1,761,022)
(3,538,448)
4,336,830
798,382
1,525,354
4,623
See accompanying notes
2008 Annual Report
29
Notes to Consolidated Financial Statements
Big Rock Brewery Income Trust
December 31, 2008 and 2007
1. DESCRIPTION of BUSINESS
Big Rock Brewery Income Trust (“Big Rock” or the “Trust”) is a regional producer of premium, all-natural craft beers sold in eight
provinces and three territories in Canada, as well as exported to Korea and to Canadian Embassies around the world. Big Rock trust
units are listed on The Toronto Stock Exchange (the “TSX”). The consolidated financial statements include the accounts of the Trust,
Big Rock Brewery Limited Partnership (formerly Big Rock Brewery Partnership) (“the Partnership”) and Big Rock Brewery Operations
Corporation. This structure reflects an internal reorganization (the “Reorganization”) completed on December 21, 2007.
The Reorganization
Prior to the Reorganization, the Trust owned the Big Rock Business (the business of producing and marketing of draught and packaged
beer, coolers and ciders and the business of producing similar products on a contract basis for third parties) indirectly through the
Partnership which was wholly-owned by the Trust’s two corporate subsidiaries, Big Rock Brewery Ltd. and Pine Creek Brewing Company
Ltd. These entities were subject to income taxes which, in turn, reduced the cash that would otherwise be available for distribution to
the Unitholders.
The Reorganization modified the structure of the Trust to provide the Trust with a “flow-through” structure that eliminates the majority
of income tax expense currently being incurred until December 31, 2010. The Reorganization did not result in a change to the number,
type or percentage ownership of outstanding trust units of the Trust.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Trust have been prepared in accordance with Canadian generally accepted accounting
principles (“GAAP”).
The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the dates of the
consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results
could differ materially from those estimates and assumptions. The consolidated financial statements, in management’s opinion,
have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies
summarized below.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated amortization. Amortization is recorded on a straight line basis over
the estimated useful lives of the assets as follows:
Buildings Production equipment Vehicles Furniture and fixtures 40 years
10 – 40 years
4 years
7 – 25 years
Big Rock completes an assessment of its property, plant and equipment for indicators of impairment. If there are indicators of
impairment, a recoverability test is undertaken by performing a comparison of carrying value to the estimated undiscounted future net
cash flows from the assets. If it is determined that an asset’s undiscounted future net cash flows are less than its carrying value, the
asset is written down to its net realizable value.
Industry standard returnable glass containers purchased are initially recorded at cost. In order to charge operations for wear and disappearance,
the cost of new bottles is charged to operations over the estimated useful life of five years. Other containers are recorded as inventory.
2008 Annual Report
30
Cash and Cash Equivalents
Short term investments with initial maturity of not more than 90 days are considered to be cash equivalents, and are recorded at cost,
which approximates current market value. At December 31, 2008, cash and cash equivalents were nil. At December 31, 2007, cash and
cash equivalents included a $1,000,000 term deposit with an interest rate of 3.75% and a net bank overdraft of $201,618.
Prepaid Expenses
Prepaid expenses include expenses for items such as insurance, municipal taxes, licensing, sales and marketing campaigns
and term sponsorships which are recorded at cost and amortized on a straight line basis over the life of the item, generally
three months to one year.
Deferred Charges
Deferred charges include new product artwork, website development, trademark and special project costs and are stated at cost
less accumulated amortization. Amortization commences when product enters the market or upon project completion. Amortization
is recorded on a straight line basis generally over periods of five to ten years, although specific deferrals may warrant a longer period
based on the life of the project. The deferral of these costs is reviewed periodically for possible revisions to the amortization period
or write-down to net realizable value.
Revenue Recognition and Presentation
The Trust recognizes revenue on product sales at the time the product is shipped and the following conditions exist: title has passed
to the purchaser according to shipping terms, the price is fixed and determinable and collection of the sales proceeds is reasonably
assured. Revenue for Alberta represents gross sales to the provincial liquor control board less excise taxes and commissions
arriving at the net proceeds to Big Rock. Revenue for other provincial jurisdictions represents net sales to the liquor control boards,
after excise taxes and commissions. Excise taxes are assessed on beer production at tiered rates up to $31.22 per hectoliter, and
provincial liquor control board commissions cover distributions and other service charges.
Gross Product Revenues Co-Packing Revenue Excise Taxes AGLC Commissions B.C. Cost of Service Recovery Net Revenue 2008
$ 47,397,996 575,625 (4,725,132) (5,684,409) 69,384 37,633,464 2007
$
44,936,154
954,040
(4,287,124)
(5,163,581)
11,383
36,450,872
Product which has passed its expiration date for freshness, or has been damaged, and is returned by distributors is accepted and
destroyed. As these costs have historically represented less than 1% of net revenue, management does not record an allowance for
estimated returns.
Cost of Goods Sold
The following expenses are included in cost of goods sold: raw material costs, packaging costs, logistics costs, manufacturing
labour and overhead, brewing and processing costs, and quality control costs.
Receivables
Substantially all of Big Rock’s accounts receivable are from provincial government liquor authorities which issue weekly or monthly
remittances on account. Given that terms are set and receivables over 60 days average only three to five percent of total owing, the
Trust has a policy of reviewing, reconciling and if necessary, writing off balances older than one year.
Inventories
The Trust categorizes inventories as raw materials (materials and supplies to be consumed in the production process), brews in
progress (in the process of production for sale), finished product (held for sale in the ordinary course of business), consignment
product (consigned to provincial warehouses for sale) and promotional and resale goods (to be used in the ordinary course of
business. Inventories are valued at the lower of cost (weighted average) and net realizable value. Inventories of brews in progress
and finished product are valued at the lower of cost (including direct materials, labour and overhead costs) and net realizable value.
2008 Annual Report
31
Keg Deposits
The Trust requires that customers pay deposits for kegs purchased which are subsequently refunded to customers via invoice credits
or cash payments when kegs are returned and these deposits are reflected as a liability on the Trust’s consolidated balance sheet. In the
normal course of business there is a percentage of kegs which are never returned for refund. As a result the Trust performs an analysis
based on factors such as total kegs produced, current inventory rates and average keg turnover. In addition, return percentages are
calculated and tracked to estimate an average keg turnover rate. Together, this information is used to estimate a reasonable keg deposit
liability at each reporting date. Any adjustments required to the keg liability account are applied to revenues.
Income Taxes
Under the Income Tax Act (Canada), the Trust qualifies as a mutual fund trust. As a result, the Trust is not subject to income taxes
to the extent that its taxable income in a year is paid or payable to its Unitholders until December 31, 2010. As such, no current
income tax provisions have been made for the current year.
Future income taxes represent management’s estimate of the differences between the book and tax basis of the Trust’s assets and
liabilities existing at the balance sheet date, expected to reverse after January 1, 2011 at the rate that is currently anticipated to be
applicable beginning in 2011 and thereafter.
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 income are not material for the periods presented.
Net Income per Unit
The Trust follows the treasury stock method for determining per unit amounts. Under this method, proceeds that would arise from
the exercise of options would be used to purchase trust units at the weighted average market price in the determination of diluted
per unit amounts. Net income per unit is calculated using the weighted average number of trust units outstanding during each year
which was: basic – 6,012,049 (2007 – 6,000,237); diluted – 6,013,004 (2007 – 6,294,928).
Unit-based Compensation Plan
The Trust has established a unit option plan whereby options for a maximum of 10% of outstanding trust units may be granted to
key management, directors and consultants of the Trust. Options granted under the plan are generally exercisable immediately and
expire five years after the grant date. All options are granted at or above the market price of the trust units on the date of the grant.
The fair value of options granted is charged to income with a corresponding credit to contributed surplus in the year of grant as
they all vest immediately. The fair value of the unit options is determined using the Black-Scholes option pricing model. When direct
awards of trust units are granted they are also accounted for using the fair value method based on the quoted price of the Trust’s
units. Participants in the plan, upon exercising their options, may request to receive either a cash payment equal to the difference
between the exercise price and the market price of the Trust’s units or units issued from Treasury. Irrespective of the participant’s
request, the Trust may choose to only issue trust units.
On April 1, 2006 the Trust introduced a unit appreciation rights plan (“UAR”) to be used as a basis for incentive compensation to
employees. Under the plan, employees who held incentive unit options previously issued in June 2005 with an exercise price of
$19.07 (the “old” options) could exchange each old option for a new UAR. The UARs vest after a three year period beginning April
1, 2006 and are exercisable for two years thereafter at a price of $17.00 per trust unit (to be settled in cash). At the end of each
reporting period, the intrinsic value of the UARs, as determined by the difference between the trading price of the Trust units at that
date and the exercise price, is recorded as a liability on the balance sheet, on a pro rata basis, over the vesting period. For UAR’s
issued in exchange for old options, to the extent this amount is less than the compensation expense originally recorded in 2005 for
the old options, an offsetting amount is charged to contributed surplus. Any liability in excess of the amount previously recorded as
compensation expense will be recorded as additional compensation expense in the current period.
Changes in Accounting Policies
Effective January 1, 2008 the Trust adopted the new Canadian Institute of Chartered Accountants (“CICA”) Handbook accounting
requirements for Section 1535 “Capital Disclosures”, Section 3031 “Inventories”, Section 3862 “Financial Instruments –
Disclosures” and Section 3863 “Financial Instruments – Presentation”. In accordance with the transitional provisions for these new
standards, these policies were adopted prospectively without restatement of prior periods.
2008 Annual Report
32
Capital Disclosures
CICA Handbook Section 1535 “Capital Disclosures” requires the disclosure of qualitative and quantitative information about the
Trust’s objectives, policies and processes for managing capital, which have been provided in Note 10.
Inventory
Inventory consists of materials, supplies, brews in progress and finished goods for resale. CICA Handbook Section 3031 requires
inventories to be measured at the lower of cost or market and net realizable value, which is consistent with the Trust’s current policy
for measuring inventories. The other requirements in this section had no material effect on the Trust’s financial statements.
Financial Instruments
CICA Handbook Section 3862 “Financial Instruments – Disclosures” and Section 3863 “Financial Instruments – Presentation”
replace Section 3861 “Financial Instruments – Disclosure and Presentation” effective January 1, 2008 for the Trust. Section 3862
requires the disclosure of information to allow users to evaluate the significance of the financial instruments on the Trust’s financial
position and performance and the nature and extent of risks arising from financial instruments and how the Trust manages those
risks. Section 3863 deals with the classification of financial instruments, related interest, dividends, losses and gains, and how the
entity manages those risks. The additional information to comply with these standards is disclosed in Note 9.
Future Accounting Pronouncements
Section 3064 “Goodwill and Intangible Assets”
Effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008, the new CICA Handbook
Section 3064 will replace Section 3062 “Goodwill and Other Intangible Assets” and Section 3450 “Research and Development Costs”.
These sections establish standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets
including internally generated intangible assets. These new sections are effective for the Trust beginning January 1, 2009. The Trust does
not anticipate that these changes will have a material effect on the financial statements.
International Financial Reporting Standards
On March 11, 2008, the Accounting Standards Board of Canada confirmed that effective January 1, 2011, International Financial
Reporting Standards (“IFRS”) will replace Canadian GAAP for publicly accountable enterprises. A diagnostic analysis has been
completed to determine which of the differences between IFRS and Canadian GAAP that may significantly impact the Trust. A
changeover plan with a target date of January 1, 2011 will be developed and will include members of financial management as
well as key operations staff to focus on specific potential issues. Staff will be participating in IFRS training sessions to develop the
appropriate knowledge base and qualified, experienced external consultants will be retained to assist in the transition.
It is not possible at this time to quantify the financial impact of the transition to IFRS on the Trust’s consolidated financial
statements or to determine the impact of the changeover on accounting system, disclosure controls and procedures and internal
controls over financial reporting.
Income Taxes
In 2007, legislation was substantively enacted that effectively imposes an income tax for income trusts for taxation years beginning
in 2011. As such, the Trust has recognized future income tax expenses (recoveries) on its consolidated statement of net income,
comprehensive income and undistributed income based on the temporary differences that exist at the balance sheet date and that
are expected to reverse after the date that the taxation changes take effect. The asset or liability is measured using income tax
rates that, at the balance sheet date, are expected to apply.
3. INVENTORIES
Raw materials and returnable glass containers Brews in progress Finished product Consignment product Promotional and resale goods 2008
$
914,560 536,939 1,588,786 96,208 557,590 $3,694,083 2007
$
719,433
492,026
1,034,713
102,937
560,918
$2,910,027
2008 Annual Report
33
4. PROPERTY, PLANT and EQUIPMENT
2008
Cost $
Accumulated
Amortization
$ Net Book
Value
$
Land Buildings Production Equipment Vehicles Furniture and fixtures 2,516,234
11,432,602 32,748,898 975,869 2,260,115 49,933,718 -
2,677,618 16,002,173 795,735 1,518,006 20,993,532 2,516,234
8,754,984
16,746,725
180,134
742,109
28,940,186
2007
Cost $
Land Buildings Production Equipment Vehicles Furniture and fixtures 2,516,234 11,289,633 32,423,888 914,303 2,127,877 49,271,935 Accumulated
Amortization
$ -
2,397,008 14,743,389 699,316 1,395,674 19,235,387 Net Book
Value
$
2,516,234
8,892,625
17,680,499
214,987
732,203
30,036,548
5. Available Credit Facility
Big Rock has a $5,000,000 demand operating facility provided by ATB Financial (ATB) which bears interest at ATB prime rate. It is a
revolving facility which is used to fund working capital requirements and allows for borrowing, repayment, and additional borrowing
up to the amount specified as necessary. The balance outstanding on this facility as at December 31, 2008 was $1,246,194
(2007 - nil). Collateral for these borrowings is a general assignment of Big Rock’s assets. The facility imposes a number of positive
and negative covenants on Big Rock including the maintenance of certain financial ratios. At December 31, 2008, Big Rock was in
compliance with all of its debt covenants. At December 31, 2007, Big Rock was not in compliance with all of its debt covenants and
a waiver was received from ATB. Effective interest rate for the year was 3.5%
On April 21, 2008, the Trust obtained term financing provided by ATB, for a period of three years at prime plus one quarter, payable
in full on April 30, 2011. Funds totaling $3,557,090 were advanced to the Trust under this term facility. Interest is payable monthly
and collateral for this borrowing is a general assignment of Big Rock’s assets. Effective interest rate for the year was 3.75%.
The aggregate maturities of obligations are summarized as follows:
2009
2010
2011 2012
2013
$3,557,090
-
2008 Annual Report
34
6. TRUST UNITHOLDERS’ CAPITAL
Authorized
Unlimited number of Trust Units.
Issued and outstanding Trust Units
Units
#
Balance as at December 31, 2006 Units issued on exercise of options Units repurchased and cancelled Transfer from contributed surplus related to options exercised Balance as at December 31, 2007 Units issued on exercise of options Transfer from contributed surplus related to options exercised Balance as at December 31, 2008 Amount
$
6,006,474 7,800 (11,404) -
6,002,870 13,700 -
6,016,570 18,282,507
70,904
(37,968)
2,040
18,317,483
107,990
5,754
18,431,227
Unit-based Compensation Plan
During 2008, no UARs were issued or cancelled and 634,250 are outstanding (2007 – 421,250 issued, 116,500 cancelled, and
634,250 outstanding at December 31, 2007). As at December 31, 2008 and 2007, the trading price of the Trust units was less
than the exercise price of the UARs, thus no liability was recorded.
Trust Unit Options
No stock based compensation has been recorded in the year in respect of previously issued options (nil granted, 13,700 exercised,
26,900 cancelled and nil compensation expense for the year ended December 31, 2008). For the year ended December 31, 2007,
$402,600 in stock based compensation was recorded (305,000 granted, 7,800 exercised, 66,200 cancelled). As at December 31,
2008, there were 498,500 unit options outstanding and exercisable at a weighted average price of $16.88.
Issued and
Outstanding
Trust Unit
Units Options
#
Balance, beginning of year Cancelled Expired Granted Exercised Balance, end of year 539,100 (26,300) (600) -
(13,700) 498,500 2008
2007
Weighted
Average
Exercise
Price Units $
#
16.57 15.31 6.70 -
7.88 16.88 Weighted
Average
Exercise
Price
$
308,100 (26,200) (40,000) 305,000 (7,800) 539,100 17.85
18.68
19.07
15.58
9.09
16.57
The following table summarizes information about incentive unit options outstanding at December 31, 2008:
Number
Outstanding
at December
Exercise
Price
31, 2008
$12.65
$15.26
$17.00
$17.72
to
to
to
to
$15.25
$16.99
$17.71
$19.07
2,900 240,000 50,000 205,600 498,500 Weighted
Average
Weighted
Remaining
Average
Contractual Life
Exercise
(years)
Price
0.493 3.085 2.352 1.898 2.507 $12.65 $15.26 $17.00 $18.81 $16.57 Number
Exercisable at
December 31,
2008
2,900
240,000
50,000
205,600
498,500
2008 Annual Report
35
During 2008, no stock option grants were made. In February 2007, 265,000 options were granted at an exercise price of $15.26
and stock based compensation of $328,600 was charged to salary expense. In October 2007, 40,000 options were granted at an
exercise price of $17.72 and stock based compensation of $74,000 was charged to salary expense. The fair value of the options
granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate Dividend yield Expected volatility Expected hold period Estimated value of option granted Feb-07
Oct-07
3.97% 10.22% 25.6% 2 years $1.24 5.00%
8.00%
27.0%
2 years
$1.85
The following table summarizes contributed surplus activity:
Contributed Surplus
Balance, beginning of year
Stock option benefit
Transfer to capital related to options exercised
Balance, end of year
2008
$
2007
$
345,948
402,600
(2,040)
746,508
746,508
-
(5,754)
740,754
7. INCOME TAXES
Income tax expense varies from the amounts that would be computed by applying the Canadian Federal and Provincial income tax
rates to earnings before provision for income taxes as shown in the following table:
Income before income taxes Income tax expense at statutory rate of 29.86% (32.65% for 2007) Effect on taxes of
Trust distributions Non-deductible expenses Large Corporation tax Future income tax recovery on temporary differences Other Income tax recovery Current income tax Future income tax recovery 2008
$
2007
$
4,424,606 1,321,187 5,299,044
1,730,138
(1,398,382) 77,195 -
(530,813) -
(530,813) -
(530,813) (1,897,313)
(40,177)
10,000
28,370
(168,982)
4,055,960
(4,224,942)
No current income tax provision was booked for the year ended December 31, 2008 (2007 - $4,055,960).
Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. The components of the Trust’s future income tax
liability are as follows:
Future tax assets (Iiabilities)
Property, Plant and Equipment Deferred Charges and other assets Net future tax liability 2008
$
2007
$
(2,621,361) (49,646) (2,671,007) (3,152,174)
(49,646)
(3,201,820)
2008 Annual Report
36
8. COMMITMENTS
As at December 31, 2008 the Trust is a party to the following contracts:
A contract with Rahr Malting Canada Ltd. to supply malt barley for the period January 1, 2008 to December 31, 2008 at a fixed price of
$525 per metric tonne. The contract is for the purchase of raw materials which will be delivered in quantities to be used over a reasonable
period during the normal course of business as needed to ensure production targets are met. For 2009, supply is guaranteed at a price of
$684 per metric tonne.
A three year contract to purchase approximately 136,000 gigajoule (GJ) of natural gas at a fixed price of $9.58 per GJ for Big Rock’s own
use during the period March 1, 2006 to February 28, 2009.
On February 26, 2009, the Trust entered into a one year agreement with Direct Energy to provide natural gas at a floating rate for a one
year term (March 1, 2009 – February 28, 2010). The rate at the time of signing was $5 per GJ.
9. FINANCIAL INSTRUMENTS and FINANCIAL RISK MANAGEMENT
The Trust’s principal financial instruments are its outstanding amounts drawn from its credit facilities, which, after cash flow from
operations, are its main source of financing. Financial assets and liabilities arising directly from its operations and Trust activities include
cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, long term debt, unit based
compensation liability and distributions payable. The primary risks arising from the Trust’s financial instruments are credit risk, liquidity
risk, commodity price risk, interest rate risk and foreign exchange risk.
Classification of Financial Instruments Cash and cash equivalents Accounts receivable Bank indebtedness Accounts payable and accrued liabilities Long-term debt Unit-based compensation liability Distributions payable Designated as
Held for trading
Loans and receivables
Other financial liabilities
Other financial liabilities
Other financial liabilities
Other financial liabilities
Other financial liabilities
Fair Value of Financial Assets and Financial Liabilities
All financial instruments are required to be measured at fair value on initial recognition of the instrument, except for certain related party
transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as “held for trading”,
“available for sale”, “held to maturity”, “loans and receivables” or “other financial liabilities” as defined by CICA Section 3855.
Financial assets and liabilities classified as “held for trading” are measured at fair value with changes in fair value recognized in income.
Financial assets classified as “available for sale” are measured at fair value with changes in fair value recognized in other comprehensive
income until the asset is removed from the consolidated balance sheets. Financial assets classified as “held to maturity”, “loans and
receivables” and “other financial liabilities” are measured at amortized cost using the effective interest rate method of amortization. All
financial assets and financial liabilities are recorded at amounts which approximate their carrying amounts.
Credit Risk and Management
Credit risk is the risk that the counterparty to a financial asset will default, resulting in the Trust incurring a financial loss. The Trust has
a concentration of credit risk because substantially all of its accounts receivable are from provincial liquor boards, under provincially
regulated industry sale and payment terms. The Trust is not exposed to significant credit risk as payment in full is typically collected by
provincial liquor boards at the time of sale and receivables are with government agencies. Product sold outside of Canada is done so on a
‘Cash on Delivery’ basis with no credit risk.
Credit risks associated with the potential non-performance by financial instrument counterparties has been minimized through the careful
selection of vendors, the development of long term vendor relationships and the selective use of written arrangements to guarantee
supply and payment terms.
Liquidity Risk and Management
The Trust’s principal sources of liquidity are its cash flow from operations and existing or new credit facilities. Liquidity risk is mitigated by
maintaining banking facilities, continuously monitoring forecast and actual cash flows and, if necessary, adjusting levels of distribution to
Unitholders and capital spending to maintain liquidity.
2008 Annual Report
37
Commodity Price Risk and Management
The Trust is exposed to commodity price risk related to accounts payable and accrued liabilities, in the areas of utilities (natural gas),
malted barley and aluminum, where fluctuations in the market price or availability of these items could impact the Trust`s cash flow and
production. To minimize the impact of this risk the Trust enters into contracts which secure both supply and set pricing to manage the
exposure to pricing and availability.
Interest Rate Risk and Management
The Trust is exposed to interest rate cash flow risk on its operating and credit facilities which bear interest at variable rates. The cash flow
required to service the interest on these facilities will fluctuate as a result of changes to market rates. The Trust evaluates the policies
surrounding interest rates on an as needed basis and is confident that this policy is sufficient based on current economic conditions,
combined with the minimal amount of debt required by the Trust.
Foreign Exchange Risk and Management
The Trust currently relies on a small number of foreign suppliers and thus has limited exposure to risk due to variations in foreign
exchange rates.
Sensitivity Analysis
The following table illustrates potential effects of changes in relevant risk variables on the Trust’s net income for the year ended
December 31, 2008:
Impact on Net Income
Increase
or
Type
Decrease
Interest rate change Foreign exchange (USD) 75 bps $0.03 Year
ended
December 31,
2008
$1,335 $219 As at
Year
ended
December 31,
December 31, December 31,
2007
2008
2007
$-
$686 $36,025 $(1,029) $$881
10. CAPITAL DISCLOSURE
The Trust’s objective for managing capital is to maximize the profitability of its existing assets and to create long-term value and enhance
returns for its Unitholders. The Trust considers Unitholders’ equity, short-term and long-term debt less cash and cash equivalents to be
part of its capital structure. All of the borrowing facilities have financial tests and other covenants customary for the types of facilities
which must be met at each reporting date.
Over the long term it is management’s intention that Big Rock’s distributions to its Unitholders are funded by cash flow from operating
activities with the remaining cash directed towards capital spending and debt repayments. The Trust intends to provide distributions to
Unitholders that are sustainable to the Trust considering its liquidity and long-term operational strategies. Since the level of distributions
is highly dependent upon cash flow generated from operations, which fluctuates significantly in relation to changes in financial and
operational performance, commodity prices, interest and exchange rates and many other factors, future distributions cannot be assured.
Distributions declared to Unitholders may exceed net income generated during the period. Net income may not be an accurate indicator of the
Trust’s liquidity, as it may be comprised of significant charges not involving cash including future income tax and amortization related expenses.
2008 Annual Report
38
11. CASH DISTRIBUTIONS
Distributions for the year ended December 31, 2008 total $7,214,722 ($9,001,035 for 2007). The amount of the distribution depends
upon numerous factors, including profitability, fluctuations in working capital, sustainability of margins during seasons when margins are
traditionally low and over longer periods, debt repayments capital expenditures and the actual cash amounts distributed by the Trust.
Period Covered 2008
Record
Date
Distribution
Date
January 31-Jan 15-Feb February 28-Feb 15-Mar March 31-Mar 15-Apr April
29-Apr 16-May May 31-May 15-Jun June 30-Jun 15-Jul July 29-Jul 15-Aug August 31-Aug 15-Sep September 30-Sep 14-Oct October 31-Oct 15-Nov November 30-Nov 15-Dec December
31-Dec 16-Jan Per
Unit
2007
Record
Date
Distribution
Date
Per
Unit
$0.13 31-Jan 15-Feb $0.13 28-Feb 15-Mar $0.13 31-Mar 16-Apr $0.09 30-Apr 15-May $0.09 31-May 15-Jun $0.09 30-Jun 13-Jul $0.09 31-Jul 15-Aug $0.09 31-Aug 14-Sep $0.09 30-Sep 15-Oct $0.09 31-Oct 15-Nov $0.09 30-Nov 14-Dec $0.09 31-Dec 15-Jan $1.20 $0.11
$0.11
$0.11
$0.13
$0.13
$0.13
$0.13
$0.13
$0.13
$0.13
$0.13
$0.13
$1.50
A total of $7,214,722 in distributions were declared for 2008 (2007 - $9,001,035), payments in 2008 totaled $7,453,604
(2007 - $8,881,374) with $541,471 payable at December 31, 2008 (2007 - $780,353).
The following cash distributions have been announced by the Trust to date in 2009:
Period Covered Record Date Distribution Date Per Unit
January 2009 February 2009 March 2009 30-Jan 27-Feb 31-Mar 13-Feb 13-Mar 15-Apr $0.09
$0.09
$0.09
12. NET CHANGE IN NON-CASH WORKING CAPITAL
Operating Activities
Accounts receivable Inventories Prepaid expenses and other Accounts payable and accrued liabilities Income taxes receivable/(payable)
Net change in non-cash working capital 2008
$ (954,200) (784,056) (106,676) 1,411,530 (3,293,794) (3,727,196) 2007
$
1,591,894
800,400
24,997
(1,343,946)
2,359,213
3,432,558
13. RELATED PARTY TRANSACTIONS
Related party transactions for the year include the engagement of a consultant, related to Mr. McNally, to coordinate work on special
projects undertaken by the Trust in the normal course of business. The value of 2008 transactions totals $108,399, which has been
recorded at the exchange amount.
14. SUBSEQUENT EVENTS
The Trust has noted no significant subsequent events after December 31, 2008.
15. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the current year financial statement presentation.
2008 Annual Report
39
Corporate Information
Directors
Edward E. McNally
Chairman
Big Rock Brewery Operations Corp.
Calgary, Alberta
Charles Wilson
Past President & Chief Executive Officer
Shell Canada Limited
Evergreen, Colorado
James M. Jackson
Officers and Senior Personnel
Edward E. McNally
Chairman
President & Chief Executive Officer
Colleen McLeod
Chief Financial Officer
Paul Gautreau
Vice President, Operations & Brewmaster
Bill McKenzie
Vice President, Sales & Marketing
Developer
Jackson & Jackson
Durango, Colorado
Jim Button
Kathleen McNally-Leitch
Christine Fowler
Administrator Big Rock Lecture Series
University of Calgary
Calgary, Alberta
Vice President, Corporate & Community Affairs
Vice President, Corporate Services
& Corporate Secretary
J. Cameron Millikin
Chairman
Baymont Capital Resources, Inc.
Calgary, Alberta
John Hartley
Rancher
Calgary, Alberta
Robert G. Peters
President
Black Diamond Land & Cattle Ltd.
Calgary, Alberta
Gordon G. Tallman
Corporate Director
Calgary, Alberta
Michael G. Kohut
Chief Financial Officer
Trilogy Energy Trust
Calgary, Alberta
Jim H.T. Riddell
Head Office
5555 – 76th Avenue SE
Calgary, Alberta T2C 4L8 Canada
Telephone: (403) 720 3239
Toll Free: 1 800 242 3107
Facsimile: (403) 236 7523
www.bigrockbeer.com
Auditors
Ernst & Young LLP
Chartered Accountants
1000, 440 – 2 Avenue SW
Calgary, Alberta T2P 5E9
Transfer Agents
Valiant Trust Company
310, 606 – 4 Street SW
Calgary, Alberta T2P 1T1
President & Chief Operating Officer
Paramount Resources Ltd.
Calgary, Alberta
2008 Annual Report
40
Big Rock Brewery Income Trust
5555 – 76th Avenue SE, Calgary, Alberta, Canada T2C 4L8
www.bigrockbeer.com