Leading Brands, Inc.
Consolidated Financial Statements
February 28, 2005 and February 29, 2004
(Expressed in US Dollars)
 | BDO Dunwoody LLP | 600 Cathedral Place |
| Chartered Accountants | 925 West Georgia Street | |
| Vancouver, BC, Canada V6C 3L2 | ||
| Telephone: (604) 688-5421 | ||
| Telefax: (604) 688-5132 | ||
| E-mail: vancouver@bdo.ca | ||
| www.bdo.ca |
| Independent Auditors’ Report |
To the Shareholders of
Leading Brands, Inc.
We have audited the Consolidated Balance Sheets of Leading Brands, Inc. as at February 28, 2005 and February 29, 2004 and the Consolidated Statements of Income (Loss) and Deficit and Cash Flows for each of the years in the three-year period ended February 28, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated 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, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as at February 28, 2005 and February 29, 2004 and the results of its operations and its cash flows for each of the years in the three-year period ended February 28, 2005 in accordance with Canadian generally accepted accounting principles.
/s/ BDO Dunwoody LLP
Chartered Accountants
Vancouver, Canada
May 6, 2005
| BDO Dunwoody LLP | 600 Cathedral Place |
| Chartered Accountants | 925 West Georgia Street | |
| Vancouver, BC, Canada V6C 3L2 | ||
| Telephone: (604) 688-5421 | ||
| Telefax: (604) 688-5132 | ||
| E-mail: vancouver@bdo.ca | ||
| www.bdo.ca |
| Comments by Auditors for US Readers on Canada – United States Reporting Differences |
The reporting standards of the Public Company Accounting Oversight Board (United States) for auditors require the addition of an explanatory paragraph when the financial statements reflect a change in accounting policy, such as described in Note 1 for stock-based compensation. Although we conducted our audits in accordance with both Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), our report dated May 6, 2005 is expressed in accordance with Canadian reporting standards which do not permit reference to such an event in the auditors’ report when it is adequately disclosed in the financial statements.
/s/ BDO Dunwoody LLP
Chartered Accountants
Vancouver, Canada
May 6, 2005
| Leading Brands, Inc. Consolidated Balance Sheets (Expressed in US Dollars) |
| Feb. 28, 2005 | Feb. 29, 2004 | |||||
| Assets | ||||||
| Current | ||||||
| Accounts receivable (Note 19 (b)) | $ | 2,247,896 | $ | 3,622,420 | ||
| Inventory (Note 2) | 2,823,307 | 3,495,331 | ||||
| Prepaid expenses and deposits | 213,635 | 206,719 | ||||
| Future income taxes – current (Note 16) | 275,639 | 568,990 | ||||
| 5,560,477 | 7,893,460 | |||||
| Property, plant and equipment(Note 3) | 9,866,592 | 9,796,583 | ||||
| Trademarks and rights(Note 4) | 88,334 | 81,575 | ||||
| Goodwill(Note 5) | 2,718,721 | 2,510,701 | ||||
| Deferred costs(Note 6) | 157,207 | 150,681 | ||||
| Other | 125,783 | 74,868 | ||||
| Future income taxes – long term(Note 16) | 2,092,128 | 1,812,467 | ||||
| Total Assets | $ | 20,609,242 | $ | 22,320,335 | ||
| Liabilities and Shareholders’ Equity | ||||||
| Liabilities | ||||||
| Current | ||||||
| Bank indebtedness (Note 8) | $ | 2,512,897 | $ | 3,179,800 | ||
| Accounts payable and accrued liabilities | 2,999,526 | 5,526,816 | ||||
| Current portion of long-term debt (Note 9) | 947,429 | 859,858 | ||||
| 6,459,852 | 9,566,474 | |||||
| Long-term debt(Note 9) | 2,913,843 | 3,443,512 | ||||
| 9,373,695 | 13,009,986 | |||||
| Shareholders’ Equity | ||||||
| Share Capital | ||||||
| Authorized (Note 11(a)) | ||||||
| 500,000,000 common shares without par value | ||||||
| 20,000,000 preferred shares without par value | ||||||
| Issued | ||||||
| 15,045,069 common shares (2004 – 15,040,169) | ||||||
| (Note 11(b)) | 25,799,818 | 25,795,379 | ||||
| Contributed surplus (Note 12) | 1,297,133 | 154,371 | ||||
| Currency translation adjustment | 1,873,354 | 884,650 | ||||
| Deficit | (17,734,758 | ) | (17,524,051 | ) | ||
| 11,235,547 | 9,310,349 | |||||
| Total Liabilities and Shareholders’ Equity | $ | 20,609,242 | $ | 22,320,335 |
| Approved on behalf of the Board: | |
| /s/ Peter Buckley | Director |
| /s/ Ralph McRae | Director |
The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.
| Leading Brands, Inc. Consolidated Statements of Income (Loss) and Deficit (Expressed in US Dollars) |
| For the year ended | Feb. 28, 2005 | Feb. 29, 2004 | Feb. 28, 2003 | ||||||
| Gross Sales | $ | 34,415,849 | $ | 41,773,575 | $ | 48,193,393 | |||
| Less: Discounts, allowances and rebates | (849,645 | ) | (976,649 | ) | (917,153 | ) | |||
| Net Sales | 33,566,204 | 40,796,926 | 47,276,240 | ||||||
| Expenses (income) | |||||||||
| Cost of sales | 23,543,348 | 31,403,389 | 37,924,637 | ||||||
| Selling, general and administrative | 8,576,241 | 9,867,894 | 8,977,802 | ||||||
| Amortization of property, plant and equipment | 878,770 | 896,406 | 755,469 | ||||||
| Amortization of deferred costs and other | 80,768 | 296,875 | 271,823 | ||||||
| Interest on long-term debt | 202,687 | 161,843 | 110,705 | ||||||
| Interest on current debt | 112,483 | 177,787 | 155,676 | ||||||
| Interest accretion on redeemable preferred shares | |||||||||
| (Note 10) | - | - | 147,615 | ||||||
| Write down of investment in Quick Home | |||||||||
| Delivery Operations (Note 7) | - | - | 6,523,880 | ||||||
| Write down of deferred costs | - | 632,579 | - | ||||||
| Gain on contract settlements (Note 15) | (695,585 | ) | - | - | |||||
| (Gain) loss on sale of assets | 43,590 | 9,083 | (5,897 | ) | |||||
| 32,742,302 | 43,445,856 | 54,861,710 | |||||||
| Income (loss) before income taxes | 823,902 | (2,648,930 | ) | (7,585,470 | ) | ||||
| Income taxes recovery (expense)(Note 16) | (198,259 | ) | 801,440 | 1,335,344 | |||||
| Net income (loss) for the year | 625,643 | (1,847,490 | ) | (6,250,126 | ) | ||||
| Dividends | - | - | (22,138 | ) | |||||
| Deficit,beginning of year, as previously reported | (17,524,051 | ) | (15,676,561 | ) | (9,404,297 | ) | |||
| Adjustment for change in accounting policy | |||||||||
| (Note 1) | (836,350 | ) | - | - | |||||
| Deficit,beginning of year, as restated | (18,360,401 | ) | (15,676,561 | ) | (9,404,297 | ) | |||
| Deficit, end of year | $ | (17,734,758 | ) | $ | (17,524,051 | ) | $ | (15,676,561 | ) |
| Earnings (loss) per share(Note 11(j)) | |||||||||
| Basic and diluted | $ | 0.04 | $ | (0.12 | ) | $ | (0.46 | ) |
The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.
| Leading Brands, Inc. Consolidated Statements of Cash Flows (Expressed in US Dollars) |
| For the year ended | Feb. 28, 2005 | Feb. 29, 2004 | Feb. 28, 2003 | ||||||
| Cash provided by (used in) | |||||||||
| Operating activities | |||||||||
| Net income (loss) for the year | $ | 625,643 | $ | (1,847,490 | ) | $ | (6,250,126 | ) | |
| Items not involving cash | |||||||||
| Amortization of property, plant and equipment | 878,770 | 896,406 | 755,469 | ||||||
| Amortization of deferred costs and other | 80,768 | 296,875 | 271,823 | ||||||
| Loss (gain) on sale of assets | 43,590 | 9,083 | (5,897 | ) | |||||
| Write-down of deferred costs | - | 632,579 | - | ||||||
| Write-down of investment in Quick Home | |||||||||
| Delivery Operations | - | - | 6,523,880 | ||||||
| Interest accretion on redeemable preferred shares | - | - | 147,615 | ||||||
| Write-down and return of property, plant and | - | - | 17,697 | ||||||
| equipment | |||||||||
| Stock based compensation expense | 306,412 | 105,616 | - | ||||||
| Issue of shares for employee compensation | |||||||||
| (Note 11) | - | - | 71,657 | ||||||
| Changes in non-cash operating working capital | |||||||||
| items (Note 17) | (366,976 | ) | (141,326 | ) | 400,196 | ||||
| Future income taxes | 201,949 | (805,383 | ) | (1,335,344 | ) | ||||
| 1,770,156 | (853,640 | ) | 596,970 | ||||||
| Investing activities | |||||||||
| Purchase of property, plant and equipment | (256,329 | ) | (541,776 | ) | (944,931 | ) | |||
| Advances for Quick Home Delivery Operations | - | - | (693,953 | ) | |||||
| Proceeds on sale of property, plant and equipment | 40,715 | 63,730 | 25,677 | ||||||
| Expenditures on deferred costs | (75,065 | ) | (209,870 | ) | (781,094 | ) | |||
| (290,679 | ) | (687,916 | ) | (2,394,301 | ) | ||||
| Financing activities | |||||||||
| Increase (decrease) in bank indebtedness | (890,440 | ) | (57,057 | ) | 1,638,349 | ||||
| Issuance of common shares (Notes A and 11) | 4,439 | 310,849 | 406,884 | ||||||
| Proceeds from issuance of long-term debt | 363,829 | 1,728,180 | 638,814 | ||||||
| Repayment of long-term debt | (1,128,209 | ) | (724,006 | ) | (649,156 | ) | |||
| (1,650,381 | ) | 1,257,966 | 2,034,891 | ||||||
| Increase (decrease) in cash | (170,904 | ) | (283,590 | ) | 237,560 | ||||
| Effect of exchange rate changes on cash | 170,904 | 283,590 | (237,560 | ) | |||||
| Cash,beginning and end of year | $ | - | $ | - | $ | - | |||
| Supplementary disclosure of cash flow | |||||||||
| Information | |||||||||
| Cash paid during the year | |||||||||
| Income tax payments (recovery), net | $ | (3,690 | ) | $ | 3,943 | $ | - | ||
| Interest paid | $ | 315,476 | $ | 334,842 | $ | 266,380 |
Notes:
A. During the year ended February 28, 2003, the Company issued common shares with a value of $1,918,002 of which $406,884 were issued for cash, $1,553,055 were issued for conversion of preferred shares, $71,657 were issued for employee compensation and $113,594 were cancelled shares from treasury stock.
The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.
| Leading Brands, Inc. Summary of Significant Accounting Policies (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) which, in the case of the Company, differ in certain respects from generally accepted accounting principles in the United States (“US GAAP”) as explained in Note 21. Details of significant accounting policies are as follows:
| Nature of Business | Leading Brands, Inc. and its subsidiaries are engaged in the bottling, distribution, sales, merchandising and brand management of beverages and food products across North America. The Company primarily operates in the following integrated activities: beverage packaging, food and beverage sales and distribution, as well as brand licensing and development. |
| Basis of Presentation | These consolidated financial statements include the accounts of the Company and its wholly owned Canadian and United States subsidiaries, together with a 90.5% interest (2004 – 91%) in KERT Technologies, Inc. (Note 13(c)) and a 97% (2004 – 97%) interest in Quick, Inc. All intercompany transactions and balances have been eliminated. The Company fully consolidated Kert Technologies, Inc, and Quick, Inc. and recorded its minority interest, however since the minority interest’s proportionate loss is in excess of the minority interest’s contribution, the loss has been absorbed by the Company. Accordingly, no minority interests appear on the Company’s consolidated balance sheets and statements of income (loss) and deficit. |
| Inventory | Raw materials and finished goods purchased for resale are valued at the lower of cost determined on a first-in, first-out basis and net realizable value. Finished goods, produced from manufacturing operations, are valued at the lower of standard cost which approximates average cost and net realizable value. |
| Property, plant and equipment | Property, plant and equipment are recorded at cost and are amortized using the declining-balance method at annual rates as follows: | |
| Plant and equipment | - 7% to 20% | |
| Buildings | - 5% | |
| Automotive equipment | - 20% | |
| Land improvements | - 8% | |
| Furniture and fixtures and computer | ||
| hardware and software | - 20% | |
| Leasehold improvements are amortized over the lesser of their expected life or the lease term. | ||
| Management periodically performs a review of undiscounted future operating cash flows to assess the valuation of the property, plant and equipment. Property, plant and equipment are written down when a permanent and significant impairment in their value has occurred. | ||
| Leading Brands, Inc. Summary of Significant Accounting Policies (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| Software Development for Internal Use | Software development costs including costs related to acquired software which are expected to provide future benefits with reasonable certainty are deferred and amortized as described above. |
| Deferred Charges | Start-up costs are amortized over a five year period, from the time when commercial operations of the applicable business units commence. Certain new product promotion and launch costs are deferred and amortized over 36 months commencing with the date of launch of the related product. |
| Management periodically performs a review of the related undiscounted future operating cash flows to assess the valuation of deferred costs. Deferred costs are written down when a permanent and significant impairment in their value has occurred. In fiscal 2004, a write down of $632,579 was taken on deferred costs. | |
| Revenue Recognition | Revenue on sales of products is recognized when the products are delivered and title transfers to customers. Revenues from the provision of manufacturing, packaging or other services are recognized when the services are performed and collection of related receivables is reasonably assured. |
| Shipping and Handling Fees and Costs | The Company records shipping and handling revenue as a component of sales revenue and shipping and handling costs as a component of cost of sales. |
| Foreign Currency Translation and Transactions | The functional currency of the Company is the Canadian dollar. These financial statements are reported in US dollars for the convenience of US readers. Transactions denominated in US dollars have been translated into Canadian dollars at the approximate rate of exchange prevailing at the time of the transaction. Monetary assets and liabilities, including intercompany balances, have been translated into Canadian dollars at the year end exchange rate. All exchange gains and losses are included directly in earnings. Exchange gains and losses included in earnings that related to long-term debt are considered to be an integral part of financing costs and accordingly, are included in interest expense. |
| Assets and liabilities of the Company’s operations having a functional currency other than the US dollar are translated into US dollars using the exchange rate in effect at the year- end date and revenues and expenses are translated at the average rate during the year. Exchange gains or losses on translation of the Company’s net equity investment in these operations are deferred as a separate component of shareholders’ equity. |
| Leading Brands, Inc. Summary of Significant Accounting Policies (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| Use of Estimates | The preparation of financial statements in conformity 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may materially differ from those estimates. The financial statement accounts which required management to make significant estimates and assumptions in determining carrying value included property, plant and equipment, goodwill and future income taxes. |
| Stock-Based Compensation | The Company has adopted the recommendations of CICA Handbook Section 3870, “Stock-Based Compensation and Other-Stock-Based Payments”. Section 3870 establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. See Note 1 for details on the change in Accounting Policy regarding stock-based compensation in fiscal 2005. |
| Compensation costs are charged to the Consolidated Statements of Income (Loss) and Deficit or capitalized to deferred costs, depending on the nature of the award. | |
| Goodwill and Other Intangible Assets | Goodwill is tested for impairment annually or if an event occurs that will more likely than not reduce the fair value of the reporting unit below its carrying value. The significant assumptions are as follows: |
| a. | Expected cash flows from operations of the related entity, over the next five fiscal years. | |
| b. | Forecasted operating results based on current economic conditions and expected future events. | |
| c. | Seasonality of the business is built into the discounted cash flow model, therefore normal fluctuation in sales will not significantly affect the analysis. | |
| Trademarks and rights including the acquisition of domain names which are expected to provide future benefits are recorded at cost and amortized over their expected useful life. | ||
| Leading Brands, Inc. Summary of Significant Accounting Policies (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| Income Taxes | Future income tax assets and liabilities are computed based on differences between the carrying amount of assets and liabilities on the balance sheet and their corresponding tax values using the enacted income tax rates by tax jurisdiction at each balance sheet date. Future income tax assets also result from unused loss carry-forwards and other deductions. The valuation of future income tax assets is reviewed annually and adjusted, if necessary, by use of a valuation allowance to reflect the estimated realizable amount. Significant management judgement is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We evaluate all available evidence, such as recent and expected future operating results by tax jurisdiction, and current and enacted tax legislation and other temporary differences between book and tax accounting to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Although the Company has tax loss carry-forwards and other future income tax assets (Note 16), there is uncertainty as to utilization of the full amount of these future income tax assets. Accordingly, the future income tax asset amounts have been partially offset by an uncertainty provision. |
| Comparative Figures | Certain of the comparative figures have been reclassified to conform with the current year’s presentation. |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 1. | Change in Accounting Policy |
Stock Based Compensation | |
| Effective March 1, 2004, the Company has retroactively adopted, without restatement, the new recommendations of CICA Handbook Section 3870, “Stock-based compensation and other stock- based payments”, which now requires companies to adopt the fair value based method for all stock-based awards granted on or after March 1, 2002. Previously the Company was only required to disclose the pro forma effect of stock options granted to employees and directors in the notes to the financial statements. The effect of this change in accounting policy was to increase the deficit and contributed surplus as of March 1, 2004 by $836,350. | |
| 2. | Inventory |
| 2005 | 2004 | |||||
| Finished goods | $ | 1,402,645 | $ | 1,308,375 | ||
| Raw materials | 1,420,662 | 2,186,956 | ||||
| $ | 2,823,307 | $ | 3,495,331 |
| 3. | Property, plant and equipment |
| 2005 | 2004 | |||||||||||
| Accumulated | Net Book | Net Book | ||||||||||
| Cost | Amortization | Value | Value | |||||||||
| Plant and equipment | $ | 13,255,258 | $ | 5,931,761 | $ | 7,323,497 | $ | 7,191,475 | ||||
| Buildings | 1,561,366 | 674,798 | 886,568 | 859,706 | ||||||||
| Automotive equipment | 701,548 | 521,614 | 179,934 | 186,442 | ||||||||
| Land | 351,530 | - | 351,530 | 324,633 | ||||||||
| Land improvements | 360,043 | 208,646 | 151,397 | 151,971 | ||||||||
| Leasehold improvements | 123,050 | 81,586 | 41,464 | 39,977 | ||||||||
| Furniture and fixtures | 548,108 | 407,625 | 140,483 | 158,880 | ||||||||
| Computer hardware and | ||||||||||||
| software | 2,049,129 | 1,257,410 | 791,719 | 883,499 | ||||||||
| $ | 18,950,032 | $ | 9,083,440 | $ | 9,866,592 | $ | 9,796,583 |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 4. | Trademarks and Rights |
| 2005 | 2004 | ||||||
| Trademarks and rights | $ | 258,229 | $ | 238,471 | |||
| Less accumulated amortization | (169,895 | ) | (156,896 | ) | |||
| $ | 88,334 | $ | 81,575 |
| In connection with the decision to discontinue its support of the NTI investment, as part of the write-down in investment, the Company wrote down $233,713 in trademarks and rights during 2003 (Note 7). There were no additions to trademarks and rights during the year ended February 28, 2005. The change in the trademarks and rights amount from the prior year was due to translation adjustments. | |
| 5. | Goodwill |
| 2005 | 2004 | ||||||
| Goodwill | $ | 3,563,842 | $ | 3,291,158 | |||
| Less accumulated amortization | (845,121 | ) | (780,457 | ) | |||
| $ | 2,718,721 | $ | 2,510,701 |
| The change in the goodwill balance from the prior year was due to translation adjustments. | |
| 6. | Deferred Costs |
| 2005 | 2004 | ||||||
| Product development costs | $ | 127,581 | $ | 665,013 | |||
| Start up costs | 146,336 | 421,291 | |||||
| 273,917 | 1,086,304 | ||||||
| Less: accumulated amortization | (116,710 | ) | (300,066 | ) | |||
| Less: write-down | - | (635,557 | )* | ||||
| $ | 157,207 | $ | 150,681 |
| * | Amount translated at the exchange rate in effect at the year-end date. |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 7. | Write Down of Investment |
| At the end of fiscal year 2003, the Company decided to discontinue its support of its investment in Quick Home Delivery Operations and recorded a $6,523,880 write-down of this investment. | |
| 8. | Bank Indebtedness |
| 2005 | 2004 | |||||
| Bank indebtedness | $ | 2,512,897 | $ | 3,179,800 |
The Company has a demand revolving operating bank loan with a credit limit of $3,648,156 (2004 - $3,369,020). Interest is charged on the drawn-down amounts at the bank prime rate plus 0.75% - 1.25% (2004 - 0.75 -1.25%) . The bank prime rate at February 28, 2005 was 4.25% (2004 – 4.25%) . The operating loan is collateralized by a charge on all assets of the Company and an assignment of all risk insurance on land, buildings, equipment and inventory owned by the Company. Bank indebtedness includes a demand revolving operating loan of $2,255,806 (2004 - $2,598,042) and un-presented cheques of $272,407 (2004 - $588,863) and is net of cash of $15,316 (2004 - $7,105). The agreement with respect to the bank indebtedness contains three restrictive covenants. They are a tangible net worth covenant, a current ratio covenant and a capital acquisition covenant. The Company was in compliance with all but the current ratio covenant at February 28, 2005. Subsequent to the year end, the lender renewed the Company’s loans. |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 9. | Long-term Debt |
| 2005 | 2004 | ||||||
| a) | Bank loan, principal of $69,092 plus interest repayable | $ | 3,186,508 | $ | 3,483,759 | ||
| per month, collateralized as described in Note 8, with | |||||||
| interest at a rate of bank prime plus 1%, due on demand. | |||||||
| b) | Mortgage, principal and interest repayable at $4,661 | 586,430 | 443,788 | ||||
| per month including interest at a one-year fixed rate of 4.53% | |||||||
| per annum, collateralized by a first mortgage on certain land | |||||||
| and buildings and due May 1, 2009. Replaced with | |||||||
| principal and interest repayable at $4,983 per month including | |||||||
| interest at a one year fixed rate of 5.61% per annum until May | |||||||
| 1, 2006, thereafter floating interest rate at prime plus 1%. | |||||||
| c) | Promissory note of $200,000, repayable in | 88,334 | 81,575 | ||||
| semi-annual instalments of $20,000 plus interest at 8% per | |||||||
| annum, on May 31 and November 30, commencing May 31, | |||||||
| 2000, due November 29, 2004. Instalments paid until | |||||||
| November 30, 2002. This note is unsecured. | |||||||
| d) | Other | - | 294,248 | ||||
| 3,861,272 | 4,303,370 | ||||||
| Less current portion | 947,429 | 859,858 | |||||
| $ | 2,913,843 | $ | 3,443,512 |
| Principal due over the remaining terms of the long-term debt is as follows: |
| 2006 | $ | 947,429 |
| 2007 | 860,482 | |
| 2008 | 861,933 | |
| 2009 | 733,479 | |
| 2010 | 35,932 | |
| 2011 and thereafter | 422,017 | |
| $ | 3,861,272 |
| The agreement with respect to the bank loan (Note (a)) contains a demand feature whereby the bank can demand repayment at any time. The bank has indicated that it does not expect repayment of the loan other than as scheduled, accordingly, the principal payments are classified in accordance with the bank loan repayment schedule. |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 10. | Redeemable Preferred Shares |
| During 2001, the Company entered into an obligation to issue 2,000,000 Class E redeemable, convertible preferred shares (“Class E shares”) at CDN$1.00 per share to a company with a director in common with the Company. The Class E shares could have been redeemed at the shareholder’s option for cash at any time after January 1, 2004. Accordingly, under Canadian GAAP, the obligation to redeem the Class E shares for cash was recorded as a liability, with the remaining amount reflected as equity. The liability portion of the Class E shares was initially recorded at its fair value of $1,003,739, calculated as the present value at January 1, 2001 of the redemption value of the outstanding Class E shares of $1,310,034, plus the present value of the annual dividends for the period of entitlement from January 1, 2002 to December 31, 2003 using a discount rate of 9%. The equity component was determined using an option pricing model and calculated as $306,295 at February 28, 2001. The shares were issued on March 6, 2001. Interest expense on the liability portion was to be recognized over the three-year period from the date the Company entered into an obligation to issue the shares to the first redemption date of December 31, 2003 at a rate of 9% per annum. The preferred shares were converted to 788,626 common shares on December 31, 2002 at the rate of $1.75 per share (see Notes 11(a)(iv) and (b)). For the year ended February 28, 2005, the Company recorded interest expense of $Nil (2004 - $Nil; 2003 - $147,615). | |
| 11. | Share Capital |
| a) | Authorized share capital |
| Number of Shares | ||||
| 2005 | 2004 | |||
| Common shares without par value | 500,000,000 | 500,000,000 | ||
| Preferred shares without par value | 9,999,900 | 9,999,900 | ||
| Series “A” preferred shares | 1,000,000 | 1,000,000 | ||
| Series “B” preferred shares | 100 | 100 | ||
| Series “C” preferred shares | 1,000,000 | 1,000,000 | ||
| Series “D” preferred shares | 4,000,000 | 4,000,000 | ||
| Series “E” preferred shares | 4,000,000 | 4,000,000 | ||
| 20,000,000 | 20,000,000 | |||
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 11. | Share Capital – Continued | ||
| The rights and restrictions attached to the shares are as follows: | |||
| i) | The Series A and B preferred shares bear annual preferential non-cumulative dividends at a rate of 5% per annum and are redeemable at the Company’s option or retractable at the holder’s option with 21 days notice. | ||
| ii) | The Series C preferred shares bear annual preferential dividends at a rate of 8% per annum, calculated monthly. The shares are convertible to common shares based upon the conversion value of the amount paid for the shares, together with any unaccrued unpaid dividends, for a period of five years, at the following conversion prices per common share: $1.25 for the first year from the date of issue, $1.45 for the second year from the date of issue, $1.70 for the third year from the date of issue, $2.00 for the fourth year from the date of issue and $2.35 for the fifth year following the date of issue. | ||
| iii) | The Series D preferred shares bear annual preferential cumulative dividends at a rate of 8% per annum calculated monthly. The shares are convertible to common shares based upon the conversion value of the amount paid for the shares, together with any accrued unpaid dividends, for a period of five years, at the following conversion prices per common share: $1.25 for the first year from the date of issue, $1.45 for the second year from the date of issue, $1.70 for the third year from the date of issue, $2.00 for the fourth year from the date of issue and $2.35 for the fifth year following the date of issue. | ||
| There are no Series A, B, C or D preferred shares outstanding as at February 28, 2005 and February 29, 2004. | |||
| iv) | The Series E preferred shares bear annual preferential cumulative dividends at a rate of 9% per annum commencing on the first anniversary from the date of issue. The shares are convertible to common shares based upon the conversion value of the amount paid for the shares, together with any accrued unpaid dividends, for a period of three years, at the following conversion prices per common share: $1.50 for the first year from the date of issue, $1.75 for the second year from the date of issue and $2.00 for the third year following the date of issue. The Series E preferred shares were converted to 788,626 common shares on December 31, 2002 (Note 10) and none were outstanding as at February 28, 2005 and February 29, 2004. | ||
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 11. | Share Capital – Continued |
| b) | Changes in Issued Common Share Capital | ||||||
| Number of | |||||||
| Common | |||||||
| Shares | Amount | ||||||
| Issued as at March 1, 2002 | 13,661,786 | $ | 23,566,528 | ||||
| Issued for cash in connection with the exercise | |||||||
| of stock options | 344,506 | 406,884 | |||||
| Issued in connection with the payment of | |||||||
| compensation to employees | 42,151 | 71,657 | |||||
| Issued in connection with the conversion of | |||||||
| Series E preferred shares and accrued | |||||||
| Dividends (Note 10) | 788,626 | 1,553,055 | |||||
| Cancelled in connection with the share | |||||||
| repurchase program | (108,400 | ) | (113,594 | ) | |||
| Issued as at February 28, 2003 | 14,728,669 | 25,484,530 | |||||
| Issued for cash in connection with the exercise | |||||||
| of stock options | 261,500 | 260,849 | |||||
| Issued for cash in connection with the exercise | |||||||
| of warrants | 50,000 | 50,000 | |||||
| Issued as at February 29, 2004 | 15,040,169 | 25,795,379 | |||||
| Issued for cash in connection with the exercise | |||||||
| of stock options | 4,900 | 4,439 | |||||
| Issued as at February 28, 2005 | 15,045,069 | $ | 25,799,818 | ||||
| c) | Changes in Issued Preferred Share Capital | ||||||
| Series E | |||||||
| Number of | |||||||
| Shares | Amount | ||||||
| Issued as at March 1, 2002 | 2,000,000 | $ | 310,709 | ||||
| Dividends | - | 22,138 | |||||
| Converted to common shares (Note 10) | (2,000,000 | ) | (332,847 | ) | |||
| February 28, 2003, February 29, 2004 and | |||||||
| February 28, 2005 | - | $ | - | ||||
| d) | Stock Options | |
| The Company occasionally grants stock options to its employees, officers, directors and consultants to purchase common shares of the Company. The options granted are generally exercisable at a price which is equal to or greater than the fair market value of the common shares at the date the options are granted. | ||
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 11. | Share Capital – Continued | |
| e) | Stock Option Information | |
| Weighted | ||||||
| Issued and | Average | |||||
| Outstanding | Exercise | |||||
| Options | Price | |||||
| Outstanding at March 1, 2002 | 3,000,000 | 1.03 | ||||
| Granted | 1,066,000 | 1.75 | ||||
| Exercised | (344,506 | ) | 1.18 | |||
| Cancelled | (237,500 | ) | 1.71 | |||
| Outstanding at February 28, 2003 | 3,483,994 | 1.19 | ||||
| Granted | 539,859 | 1.41 | ||||
| Exercised | (261,500 | ) | 1.00 | |||
| Cancelled | (760,167 | ) | 1.46 | |||
| Outstanding at February 29, 2004 | 3,002,186 | 1.15 | ||||
| Granted | 867,500 | 1.04 | * | |||
| Exercised | (4,900 | ) | 0.91 | |||
| Forfeited | (150,000 | ) | 1.30 | |||
| Expired | (739,267 | ) | 1.30 | |||
| Outstanding at February 28, 2005 | 2,975,519 | $1.07 |
| * | The weighted average date-of-grant fair value of the options granted during 2005 was $1.34 (2004 - $1.33; 2003 - $1.56 per share) based on the Black-Scholes option pricing model using weighted average assumptions as described in Note 12. |
| During the year ended February 29, 2005, the Company extended the term of 128,750 (2004 - 100,000) options for a period of five years. | ||
| f) | Options Outstanding and Exercisable | |
| The following table summarizes the options outstanding and exercisable at February 28, 2005. | ||
| Weighted Average | |||||
| Number of | Remaining | Number of | |||
| Options | Contractual | Exercise | Shares | Exercise | |
| Outstanding | Life (Years) | Price | Exercisable | Price | |
| 1,838,019 | 2.25 | $1.00 | 1,814,018 | $1.00 | |
| 532,500 | 9.42 | $1.04 | 62,127 | $1.04 | |
| 125,000 | 3.08 | $1.70 | 70,835 | $1.70 | |
| 105,000 | 2.27 | $1.47 | 84,000 | $1.47 | |
| 100,000 | 3.50 | $1.29 | 30,000 | $1.29 | |
| 65,000 | 9.92 | $0.81 | - | $0.81 | |
| 60,000 | 4.00 | $1.10 | 11,000 | $1.10 | |
| 50,000 | 4.00 | $1.02 | 9,167 | $1.02 | |
| 50,000 | 4.00 | $1.09 | 9,167 | $1.09 | |
| 20,000 | 2.25 | $0.83 | 15,333 | $0.83 | |
| 10,000 | 4.00 | $2.20 | 4,000 | $2.20 | |
| 10,000 | 4.33 | $1.49 | 1,333 | $1.49 | |
| 10,000 | 3.42 | $2.38 | 5,000 | $2.38 | |
| 2,975,519 | 2,115,980 |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 11. | Share Capital – Continued | |
| g) | Share Purchase Warrants Information | |
| Weighted | ||||||
| Average | ||||||
| Number of | Exercise | |||||
| Warrants | Price | |||||
| Outstanding at March 1, 2002 and February 28, 2003 | 875,000 | $ | 1.21 | |||
| Exercised | (50,000 | ) | 1.00 | |||
| Outstanding at February 29, 2004 | 825,000 | 1.23 | ||||
| Expired | (475,000 | ) | 1.29 | |||
| Outstanding at February 28, 2005 | 350,000 | $ | 1.14 |
| As at February 28, 2005, all of the outstanding warrants were exercisable and will expire on August 21, 2006. | ||
| h) | Shareholder Protection Rights Plan | |
| On August 26, 2003, a Shareholder Protection Rights Plan was adopted whereby one share purchase right is attached to each outstanding common share, exercisable only in the case of a specific event, such as the acquisition by an acquirer of 20% or more of the issued common shares of the Company, and at a predetermined calculated price. | ||
| i) | Share Buyback | |
| During 2001, the Company decided to repurchase up to 10% of its issued and outstanding shares at prices from time to time determined to be appropriate by management. | ||
| During 2002, the Company repurchased 108,400 of its issued and outstanding shares. These shares were cancelled during 2003. | ||
| j) | Earnings (Loss) Per Common Share | |
| The Company uses the “Treasury Stock Method” to calculate earnings per common share. Under this method basic earnings per share is based on the weighted average aggregate number of common and non-voting shares outstanding during each period. The diluted earnings per share assumes that the redeemable preferred shares had been converted and the outstanding stock options and share purchase warrants had been exercised at the beginning of the period. | ||
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 11. | Share Capital – Continued | |
Details of the numerator and denominator used in the calculation of earnings (loss) per share are as follows: | ||
| 2005 | 2004 | 2003 | |||||||||
| Numerator | |||||||||||
| Net income (loss) for the year | $ | 625,643 | $ | (1,847,490 | ) | $ | (6,250,126 | ) | |||
| Provision for dividends on preferred shares | - | - | (22,138 | ) | |||||||
| Net income (loss) available to common shareholders | $ | 625,643 | $ | (1,847,490 | ) | $ | (6,272,264 | ) | |||
| Denominator | |||||||||||
| Weighted average shares outstanding | 15,042,035 | 14,949,575 | 13,754,598 | ||||||||
| Effect of dilutive securities – stock options | 90,645 | - | - | ||||||||
| Denominator for diluted EPS | 15,132,680 | 14,949,575 | 13,754,598 |
| For the year ended February 29, 2004 and February 28, 2003, common equivalent shares (consisting of mostly shares issuable on exercise of stock options and warrants) totaling 3,827,186 and 4,358,994, respectively, were not included in the computation of diluted earnings per share because the effect was anti-dilutive. | ||
| 12. | Stock-Based Compensation | |
| a) | Prior to the accounting change in 2004, Canadian generally accepted accounting principles only required disclosure of compensation expense for employee grants under the stock option plan as if the value of all options granted had been determined based on the fair market value based method. The Company’s net loss for the prior period presented and net loss per common share would have been increased to the pro-forma amounts below had the fair value based method, adopted as at March 2004, been followed: | |
| Year Ended | Year Ended | |||||||
| February 29 | February 28 | |||||||
| 2004 | 2003 | |||||||
| Net loss – as reported | $ | (1,847,490 | ) | $ | (6,250,126 | ) | ||
| Total employees stock-based compensation expense | ||||||||
| determined using the fair value based method for all | ||||||||
| awards net of related tax effects | (592,622 | ) | (243,728 | ) | ||||
| Net loss – pro-forma | (2,440,112 | ) | (6,493,854 | ) | ||||
| Dividends | - | (22,138 | ) | |||||
| Net loss available to common shareholders | $ | (2,440,112 | ) | $ | (6,515,992 | ) | ||
| Basic and diluted income (loss) per share – as reported | $ | (0.12 | ) | $ | (0.46 | ) | ||
| Basic and diluted income (loss) loss per share – | ||||||||
| pro-forma | $ | (0.16 | ) | $ | (0.47 | ) |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 12. | Stock-Based Compensation – Continued | |
| b) | The fair value of each option granted was estimated on the date of grant using the Black- Scholes option-pricing model with the following weighted average assumptions used for grants: | |
| 2005 | 2004 | 2003 | |||
| 2.98% to | 2.46% to | 3.00% to | |||
| Risk-free rate | 4.47% | 3.27% | 4.38% | ||
| Dividend yield | Nil% | Nil% | Nil% | ||
| Volatility factor of the expected market price of | |||||
| the Company’s common shares | 115% | 138% | 138% | ||
| Weighted average expected life of the options | |||||
| (months) | 60 | 60 | 60 |
| c) | In connection with the vesting of certain non-employees, employees and directors stock options, the Company has recorded stock option compensation of $306,412 (February 29, 2004 - $123,803; February 28, 2003 - $30,568) which was credited to contributed surplus, of which, $Nil (February 29, 2004 - $18,187; February 28, 2003 - $30,568) was included in deferred costs for product development and $306,412 (February 29, 2004 - $105,616; February 28, 2003 - $Nil) was expensed in the year. |
| 13. | Commitments | |
| a) | The Company is committed to annual operating leases for premises and equipment. The minimum annual lease payments for the next five years and thereafter are as follows: | |
| 2006 | $ | 1,287,461 |
| 2007 | 888,029 | |
| 2008 | 560,038 | |
| 2009 | 63,003 | |
| 2010 | - | |
| Total future minimum lease payments | $ | 2,798,531 |
| b) | The Company has commitments with various suppliers to purchase certain volumes of materials. It is not anticipated that losses will be incurred on these contracts. | |
| c) | During the year ended February 28, 2005, the Company transferred 0.5% of its interest in KERT Technologies, Inc. (“KERT”) to an independent party. The Company has no further commitments to transfer shares of KERT. |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 14. | Contingencies | |
| a) | Certain former employees of the Company have commenced actions against the Company seeking damages for wrongful dismissal, breach of contract, negligent misrepresentations and other claims. The Company believes it has substantial defences to the claims, has initiated counter claims and is vigorously defending the actions. The amount and likelihood of loss, if any, is not presently determinable. | |
| b) | The Company is also a party to various other legal claims which have arisen in the normal course of business, none of which are expected to have a material adverse effect on the financial position or results of operations of the Company. | |
| 15. | Gain on Contract Settlement | |
| The Company recorded other income in the fiscal year 2005 of $695,585 from the settlement of certain disputes and resultant contract cancellations. Due to the nature of payment, they are non- recurring. | ||
| 16. | Income Taxes | |
| 2005 | 2004 | 2003 | ||||||||
| Current | $ | (3,690 | ) | $ | 3,943 | $ | - | |||
| Future | 201,949 | (805,383 | ) | (1,335,344 | ) | |||||
| $ | 198,259 | $ | (801,440 | ) | $ | (1,335,344 | ) |
| The difference in income tax expense (recovery) due to differences between the Canadian statutory federal income tax rate and the Company’s effective income tax rate applied to income (loss) before income taxes was as follows for each of the years in the three year period ended February 28, 2005: |
| 2005 | 2004 | 2003 | ||
| Income tax expense (recovery) computed | ||||
| at basic Canadian statutory rates | 35.6% | (35.6)% | (37.6)% | |
| Effect of non-deductible amounts | 50.3% | 31.4% | 23.4% | |
| Effect of changes in foreign exchange rates | 45.2% | -% | -% | |
| Recognition of future income tax expenses | 86.9% | -% | -% | |
| Recognized tax benefits | (62.4)% | (5.1)% | (0.1)% | |
| Changes in valuation allowance | (131.5)% | (20.9)% | (3.3)% | |
| 24.1% | (30.2)% | (17.6)% |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 16. | Income Taxes - continued The effects of each type of temporary difference that gives rise to the future income tax assets and liabilities are as follows: |
| 2005 | 2004 | ||||||
| Operating and other losses carried forward | $ | 2,449,041 | $ | 3,405,383 | |||
| Property, plant and equipment | 139,098 | 331,900 | |||||
| Trademark and deferred costs | 52,574 | - | |||||
| Total future income tax assets | 2,640,713 | 3,737,283 | |||||
| Valuation allowance | (272,946 | ) | (1,355,826 | ) | |||
| Net future income tax assets | 2,367,767 | 2,381,457 | |||||
| Less: current portion | 275,639 | 568,990 | |||||
| $ | 2,092,128 | $ | 1,812,467 |
| The Company has provided a valuation allowance against a portion of the future income tax assets. As at February 28, 2005, the Company and its subsidiaries have accumulated net operating losses in the amount of approximately $2.01 million which can be applied against future earnings. The net operating loss carryforward amounts commence to expire in 2006. | |
| 17. | Changes in Non-Cash Operating Working Capital Items |
| 2005 | 2004 | 2003 | ||||||||
| Non cash working capital related to | ||||||||||
| operations: | ||||||||||
| Accounts receivable | $ | 1,560,005 | $ | (1,063,691 | ) | $ | 999,079 | |||
| Inventory | 920,364 | 293,777 | (1,729,470 | ) | ||||||
| Prepaid expenses and deposits | 9,773 | 547,131 | (601,178 | ) | ||||||
| Accounts payable and accrued liabilities | (2,857,118 | ) | 81,457 | 1,731,765 | ||||||
| $ | (366,976 | ) | $ | (141,326 | ) | $ | 400,196 |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 18. | Related Party Transactions Related party transactions not disclosed elsewhere are as follows: |
| 2005 | 2004 | 2003 | ||||||||
| i) | Incurred consulting fees with a | |||||||||
| company related by a director in | ||||||||||
| common (the President) | $ | 65,177 | $ | 61,507 | $ | 53,901 | ||||
| ii) | Incurred professional service fees | |||||||||
| with a company related by a director | ||||||||||
| in common for the services of the President | $ | 372,439 | $ | 351,468 | $ | 287,564 | ||||
| iii) | Incurred services from a company | |||||||||
| related by a director in common | $ | 9,753 | $ | 11,237 | $ | 10,674 | ||||
| iv) | Sold water to a company with a | |||||||||
| director in common | $ | 11,685 | $ | 9,841 | $ | 8,085 | ||||
| v) | Purchased product from a company | |||||||||
| with a director in common | $ | 250,126 | $ | 184,743 | $ | 171,584 | ||||
| vi) | Incurred consulting fees with a | |||||||||
| company related by an officer in common | $ | 241,076 | $ | 154,300 | $ | 138,193 |
| The above-noted transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. | ||
| 19. | Fair Value of Financial Instruments, Credit Risk and Interest Rate Risk | |
| a) | Fair Value of Financial Instruments | |
| The carrying values of accounts receivable, bank indebtedness and accounts payable and accrued liabilities approximates their respective fair values due to the short-term or demand nature of the instruments. The fair value of long-term debt has been estimated at $3,866,000 (2004 - $4,305,000). | ||
| b) | Credit Risk | |
| The Company’s customers consist mainly of wholesale and retail grocery suppliers and food distributors principally located in North America. During the fiscal year ended February 28, 2005, the Company’s ten largest customers comprised approximately 75% (2004 - 65%; 2003 – 75%) of sales and no one customer comprised more than 18% (2004 - 17%; 2003 – 27%) of sales. In addition, to cover credit risk, the Company performs ongoing credit evaluations of its customers’ financial condition. | ||
| Accounts receivable are presented net of an allowance for doubtful accounts in the amount of $457,143 at February 28, 2005 and $426,139 at February 29, 2004. | ||
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 19. | Fair Value of Financial Instruments, Credit Risk and Interest Rate Risk - Continued | |
| c) | Interest Rate Risk | |
| The Company has bank indebtedness that is subject to floating rates of interest. Changes in the interest rate may cause fluctuations in the results of operations of the Company. | ||
| 20. | Segmented Information | |
| The Company operates in one industry segment being the production and distribution of beverages and food products. The Company’s principal operations are comprised of an integrated bottling and distribution system for beverages, water and snack foods. Substantially, all of the Company’s operations, assets and employees are located in Canada and export sales during all the years reported are less than 15%. | ||
| 21. | Differences Between Canadian and United States Generally Accepted Accounting Principles | |
| These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) which, in the case of the Company, differs in certain respects from US GAAP. | ||
| Material differences between Canadian and US GAAP are summarized below: | ||
| a) | Adjustments to Consolidated Financial Statements | |
| Adjustments to Consolidated Statements of Income (Loss) | ||
| 2005 | 2004 | 2003 | |||||||||
| Net income (loss) for the year, Canadian GAAP | $ | 625,643 | $ | (1,847,490 | ) | $ | (6,250,126 | ) | |||
| Write-off product launch costs and certain deferred | |||||||||||
| costs based on SOP 98-5(i) | (75,065 | ) | (228,647 | ) | (822,757 | ) | |||||
| Amortization of deferred costs (i) | 80,768 | 284,153 | 257,040 | ||||||||
| Write down of deferred costs (i) | - | 632,579 | - | ||||||||
| Fair value of options granted to employees (ii) | 186,981 | - | - | ||||||||
| Interest accretion on redeemable preferred shares (vi) | - | - | 147,615 | ||||||||
| Reduction of write down of investment of Quick | |||||||||||
| Home Delivery Operations (v) | - | - | 1,007,550 | ||||||||
| Compensation costs recorded on application of | |||||||||||
| FIN 44 (iii) | (35,543 | ) | 920,866 | (158,371 | ) | ||||||
| Net income (loss) for the year, US GAAP | 782,784 | (238,539 | ) | (5,819,049 | ) | ||||||
| Provision for dividends on preferred shares | - | - | (96,253 | ) | |||||||
| Net income (loss) available to common shareholders, | |||||||||||
| US GAAP | $ | 782,784 | $ | (238,539 | ) | $ | (5,915,302 | ) | |||
| Basic and diluted earnings (loss) per share, US GAAP | $ | 0.05 | $ | (0.02 | ) | $ | (0.43 | ) |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 21. | Differences Between Canadian and United States Generally Accepted Accounting Principles – Continued | |
| a) | Adjustments to Consolidated Financial Statements – Continued | |
| Adjustments to Assets, Liabilities and Shareholders’ Equity | ||
| 2005 | 2004 | |||||||
| Total assets, Canadian GAAP | $ | 20,609,242 | $ | 22,320,335 | ||||
| Write-off product launch costs and certain | ||||||||
| Deferred costs (i) | (157,207 | ) | (150,681 | ) | ||||
| Total assets, US GAAP | $ | 20,452,035 | $ | 22,169,654 | ||||
| Total liabilities, Canadian and US GAAP | $ | 9,373,695 | $ | 13,009,986 | ||||
| Total shareholders’ equity, Canadian GAAP | 11,235,547 | 9,310,349 | ||||||
| Change in deficit relating to: | ||||||||
| Application of SOP 98-5 (i) | 82,771 | 89,297 | ||||||
| Application of EITF 00-2 (iv) | (239,978 | ) | (239,978 | ) | ||||
| Total shareholders’ equity, US GAAP | 11,078,340 | 9,159,668 | ||||||
| Total liabilities and shareholders’equity, US GAAP | $ | 20,452,035 | $ | 22,169,654 |
| 2005 | 2004 | 2003 | |||||||||
| Cash flows from operating activities | |||||||||||
| under Canadian GAAP | $ | 1,770,156 | $ | (853,640 | ) | $ | 596,970 | ||||
| Application of SOP 98-5 and EITF | |||||||||||
| 00-2 (i), (iv) | (75,065 | ) | (209,870 | ) | (792,189 | ) | |||||
| Cash flows provided by (used in ) | |||||||||||
| operating activities under US | |||||||||||
| GAAP | $ | 1,695,091 | $ | (1,063,510 | ) | $ | (195,219 | ) | |||
| Cash flows used in investing | |||||||||||
| activities under Canadian GAAP | $ | (290,679 | ) | $ | (687,916 | ) | $ | (2,394,301 | ) | ||
| Application of SOP 98-5 and EITF | |||||||||||
| 00-2 (i), (iv) | 75,065 | 209,870 | 792,189 | ||||||||
| Cash flows used in investing | |||||||||||
| activities under US GAAP | $ | (215,614 | ) | $ | (478,046 | ) | $ | (1,602,112 | ) |
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 21. | Differences Between Canadian and United States Generally Accepted Accounting Principles - Continued | ||
| a) | Adjustments to Consolidated Financial Statements – Continued | ||
| i) | Product Launch and Deferred Costs | ||
Under US GAAP, according to Statement of Position (“SOP”) 98-5,Reporting on the Costs of Start-Up Activities, costs incurred prior to commercial production of a product, costs incurred to establish business in a new territory and costs incurred to initiate a new process in an existing facility are to be expensed as incurred. Under Canadian GAAP, these costs may be capitalized to the extent that they meet specified criteria for recoverability. | |||
| During the year ended February 28, 2005, costs incurred in the development of a product and distribution network totaled $75,065 (2004 - $228,647; 2003 - $822,757) which were capitalized under Canadian GAAP. Stock option compensation costs of $Nil (2004 - $18,187; 2003 - $30,568) were included in the capitalized product development costs. The difference in cash flows was due to foreign currency translation. | |||
| ii) | Stock based compensation | ||
| Effective March 1, 2004, the Company adopted, on a retroactive basis without restatement, the Canadian GAAP fair-value-based method for all stock-based awards granted on or after January 1, 2002. U.S. GAAP does not require the fair-value-based method to account for employee based options as of January 1, 2002. Since the Company granted options to employees in the year ended February 29, 2005, the retroactive adoption without restatement of the new Canadian requirements has created differences between Canadian and U.S. GAAP with respect to the net loss for the year ended February 28, 2005. There would however be no adjustment to deficit as well as contributed surplus at March 1, 2004 under U.S. GAAP as was required under Canadian GAAP. | |||
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 21. | Differences Between Canadian and United States Generally Accepted Accounting Principles – Continued | ||
Under US GAAP, the Company applies Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related FASB Interpretation No. 44 (“FIN 44”) in accounting for all stock options granted to employees and directors. Under APB 25, compensation expense is generally recognized for stock options granted with exercise prices below the market price of the underlying common shares on the date of grant. Stock options that have been modified to reduce the exercise price are accounted for as variable. Stock options that have been modified to increase life are remesaured as if the awards were newly granted. As such, related pro-forma information as described in SFAS No. 123 has been disclosed as follows: | |||
| Year Ended | Year Ended | Year Ended | ||||||||||
| February 28 | February 29 | February 28 | ||||||||||
| 2005 | 2004 | 2003 | ||||||||||
| Net income (loss) for the year under | ||||||||||||
| U.S. GAAP – as reported | $ | 782,784 | $ | (238,539 | ) | $ | (5,819,049 | ) | ||||
| Deduct: Total stock-based employee | ||||||||||||
| compensation expense determined | ||||||||||||
| under fair-value-based methods for all | ||||||||||||
| awards | (154,313 | ) | (592,622 | ) | (243,728 | ) | ||||||
| Net loss for the year – pro-forma | $ | 628,471 | $ | (831,161 | ) | $ | (6,062,777 | ) | ||||
| Basic and diluted net loss per common | ||||||||||||
| share – pro-forma | $ | 0.04 | $ | (0.06 | ) | $ | (0.44 | ) |
| iii) | Compensation expense recorded on application of FIN 44 | ||
| During the year ended February 28, 2002, the Company repriced stock options previously granted to various employees and directors. Under FIN 44, the resulting intrinsic value of the stock options in the amount of $Nil (2004 - $920,866 recovery; 2003 - $158,371 expense) are recorded as compensation. As the options are subject to variable accounting (marked to market until exercised, expired, or forfeited), compensation expense (recovery) is recorded in subsequent periods based on the fluctuation in the share price. | |||
| During the year ended February 28, 2005, the Company extended the term of 128,570 options for a period of five years. Additional compensation resulted from the modification totaled $2,875 was recorded in accordance with FIN 44. | |||
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 21. | Differences Between Canadian and United States Generally Accepted Accounting Principles – Continued | ||
| a) | Adjustments to Consolidated Financial Statements – Continued | ||
| iv) | Under Emerging Issues Task Force Issue No. 00-2 (“EITF 00-2”),Accounting for Website Development Costin the U.S., certain general design and indirect costs related to website development are required to be expensed rather than capitalized. In Canada there is no similar restriction and certain of these costs were capitalized. | ||
| v) | Under US GAAP, applicable to non-monetary related party transactions, the consideration received in connection with the sale of the Quick.com assets and business (Note 7) would be recorded at the amount of the book value of the assets disposed. As a result of applying EITF 00-2 and SOP 98-5 to the operations of the Quick business, the book value of the Quick business on disposition for US GAAP purposes differed from the Canadian GAAP book value and, thus, the value attributed to the NTI preferred shares had been adjusted accordingly. | ||
| vi) | Per SEC Regulation S-X, Rule 5-02.28 (“Rule 5-02.28”), preferred shares which are redeemable at the option of the holder for cash are classified as mezzanine equity. | ||
| As there is no equity portion of the preferred shares under US GAAP, in 2003, the $147,615 interest accretion (Note 10) is eliminated and $96,253 of dividends on preferred shares have been reflected. | |||
| vii) | New Accounting Pronouncements | ||
| On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123(R) would require the Company to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In addition, SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. For public entities that file as a foreign private issuer, SFAS No. 123(R) is effective for the first fiscal year beginning after June 15, 2005. | |||
| In December 2004, FASB issued SFAS No. 153 to amend Opinion 29 by eliminating the exception for non-monetary exchanges of similar productive assets and replaces it with general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange is defined to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. | |||
| The Company is assessing the effect on the consolidated financial statements as a result of the implementation of these new standards. | |||
| Leading Brands, Inc. Notes to the Consolidated Financial Statements (Expressed in US Dollars) |
| February 28, 2005 and February 29, 2004 |
| 21. | Differences Between Canadian and United States Generally Accepted Accounting Principles – Continued | |
| b) | Comprehensive Income (Loss) | |
SFAS No. 130,Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general purpose financial statements. Details would be disclosed as follows: | ||
| 2005 | 2004 | 2003 | |||||||||
| Net income (loss) available to common | $ | 782,784 | $ | (238,539 | ) | $ | (5,915,302 | ) | |||
| shareholders, US GAAP | |||||||||||
| Other comprehensive income: | |||||||||||
| Foreign currency translation | |||||||||||
| adjustments | 988,704 | 1,083,495 | 863,588 | ||||||||
| Comprehensive income (loss), US GAAP | $ | 1,771,488 | $ | 844,596 | $ | (5,051,714 | ) |