UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
February 28, 2005
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-19884
LEADING BRANDS, INC.
[Exact name of Registrant as specified in its charter]
Not Applicable
[Translation of Registrant's name into English]
British Columbia, Canada
[Jurisdiction of incorporation or organization]
Suite 1800 – 1500 West Georgia Street, Vancouver,
BC Canada V6G 2Z6
[Address of principal executive offices]
Securities registered or to be registered pursuant to Section
12(b) of the Act:
None
Securities registered or to be registered pursuant to Section
12(g) of the Act:
Common Shares Without Par Value
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act:
None
[Title of Class]
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period
covered by the annual report:
February 28, 2005 – 15,045,069 Common Shares without par value
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such shorter
period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes
x
No
¨
Indicate by check mark which financial statement item the Registrant
has elected to follow:
Item 17
x
Item 18
¨
1
Securities and Exchange Commission
Washington, D.C. 20549 U.S.A.
Form 20-F
For the fiscal year ended February 28, 2005
Commission File No. 0-19884
Leading Brands, Inc.
Index
2
P A R T I
Item 1. – Identity of Directors, Senior Management and Advisers
This item is not applicable for an Annual Report.
Item 2. – Offer Statistics and Expected Timetable
This item is not applicable for an Annual Report.
Item 3. – Key Information A. Selected Financial data.
1. and 2.
The following table sets forth certain selected consolidated financial information with respect to the Company for the periods indicated. It should be read in conjunction with this Annual Report and the Company's consolidated financial statements listed in Item 17 of this Annual Report. The following table is derived from, and is qualified by, the Company's financial statements and the notes thereto which have been prepared in accordance with generally accepted accounting principles in Canada.
Unless otherwise specified, all amounts set out in this Annual Report are expressed in United States dollars.
YEAR
ENDED Feb. 28, 2005 |
YEAR
ENDED Feb. 29, 2004 |
YEAR
ENDED Feb. 28, 2003 |
YEAR
ENDED Feb. 28, 2002 |
YEAR
ENDED Feb. 28, 2001 |
|
Net sales /
operating revenue |
$33,566,204 | $40,796,926 | $47,276,240 | $41,013,507 | $50,297,646 |
Net Income
(loss) |
$625,643 | ($1,847,490) | ($6,250,126) | $1,338,988 | $1,215,558 |
Net Income
(loss) per share |
$0.04 | ($0.12) | ($0.46) | $0.10 | $0.09 |
Total assets |
$20,609,242 | $22,320,335 | $20,948,792 | $22,426,084 | $30,373,140 |
|
$11,235,547 | $9,310,349 | $9,639,692 | $13,296,913 | $12,619,395 |
Capital stock |
$27,096,951 | $25,949,750 | $25,515,098 | $23,452,934 | $23,566,528 |
Long-term
Obligations |
$2,913,843 | $3,443,512 | $2,251,173 | $3,184,346 | $5,493,736 |
Cash dividends
declared per common share |
NIL | NIL | NIL | NIL | NIL |
3
YEAR
ENDED Feb. 28, 2005 |
YEAR
ENDED Feb. 29, 2004 |
YEAR
ENDED Feb. 28, 2003 |
YEAR
ENDED Feb. 28, 2002 |
YEAR
ENDED Feb. 28, 2001 |
|
Weighted
average number of common shares outstanding |
15,042,035 | 14,949,575 | 13,754,598 | 13,593,310 | 10,390,165 |
For all years presented, diluted earnings per share was the same as basic except for 2001 where diluted EPS was $0.08.
The following table sets forth the above financial information prepared in accordance with generally accepted United States accounting principles as disclosed in note 21 of the annual financial statements. The selected financial data should be read in conjunction with the Company’s financial statements and the notes thereto, included elsewhere in this Annual Report.
YEAR
ENDED Feb. 28, 2005 |
YEAR
ENDED Feb. 29, 2004 |
YEAR
ENDED Feb. 28, 2003 |
YEAR
ENDED Feb. 28, 2002 |
YEAR
ENDED Feb. 28, 2001 |
|
Net sales /
operating revenue |
$33,566,204 | $40,796,926 | $47,276,240 | $41,013,507 | $50,297,646 |
Net Income (loss) | $782,784 | ($238,539) | ($5,819,049) | $3,511,343 | ($3,219,782) |
Net Income (loss)
per share |
$0.05 | ($0.02) | ($0.43) | $0.26 | ($0.34) |
Total assets | $20,452,035 | $22,169,654 | $20,133,137 | $21,189,083 | $24,954,200 |
Net assets | $11,078,340 | $9,159,668 | $8,824,037 | $11,861,687 | $7,291,720 |
Capital Stock | $27,096,951 | $25,949,750 | $25,515,098 | $23,142,225 | $23,521,712 |
Long-term
Obligations |
$,913,843 | $3,443,512 | $2,251,173 | $3,382,571 | $5,800,031 |
Cash dividends
declared per common share |
NIL | NIL | NIL | NIL | NIL |
The primary difference between the income of $625,643 under Canadian GAAP versus the income of $782,784 under US GAAP for the year ended February 28, 2005 is the fair value based method to account for employee based options under Canadian GAAP not required under US GAAP.
For all years presented, the diluted earnings (loss) per share was the same as basic earnings per share.
4
3. Exchange Rates
The Company maintains its financial records in Canadian dollars and translates them into United States dollars for reporting purposes. In this Annual Report, unless otherwise specified, all dollar amounts are expressed in United States dollars. Assets and liabilities have been translated using the rate in effect at the fiscal year end (1.2335), while revenues and expenses have been translated at the average rate for the fiscal year (1.2888) .
Exchange Rate – May 2, 2005: 1.2555 |
April 1-30,
2005 |
March 1-31,
2005 |
Feb. 1-28,
2005 |
Jan. 1-31,
2005 |
Dec. 1-31,
2004 |
Nov. 1-30,
2004 |
|
High | 1.2569 | 1.2438 | 1.2559 | 1.2412 | 1.2414 | 1.2243 |
Low | 1.2147 | 1.2018 | 1.2249 | 1.2003 | 1.1837 | 1.1759 |
Average | 1.2369 | 1.2157 | 1.2383 | 1.2245 | 1.2176 | 1.1957 |
End of Period | 1.2585 | 1.2096 | 1.2335 | 1.2412 | 1.2020 | 1.1860 |
B. Capitalization and indebtedness.
This item is not applicable for an Annual Report.
C. Reasons for the offer and use of proceeds.
This item is not applicable for an Annual Report.
D. Risk factors.
5
Historically, the Company has had periods of unprofitable operations. The Company is engaged in a relatively capital intensive industry (bottling operations) that is subject to some seasonal fluctuations. In periods of low volumes, fixed costs can result in operating losses.
The Company derives a substantial portion of its revenue from several major customers with the largest customer contributing 18% of revenue and the ten largest comprising 75% of revenue. The loss of several major customers would have a negative impact on earnings.
The Company purchases from the United States certain raw materials and goods for resale in Canada and thus is vulnerable to exchange rate fluctuations. The Company sells certain products manufactured in Canada into the US. The Company does not presently use any financial instruments to hedge foreign currency fluctuations. The sale of Canadian-produced products into the US acts as a natural hedge against foreign currency fluctuations. A significant increase in the value of the US dollar in relation to the Canadian dollar would increase the Company’s cost of product and revenues from export sales. The amount of export revenue does not offset the amount of raw materials and goods for resale purchased in US dollars. Therefore, some vulnerability to exchange rate fluctuations exists.
The Company relies on a limited number of suppliers for certain raw materials. While other sources of supply do exist, an unexpected disruption in supply could create operational problems and increased costs in the short term.
The following are some of the other factors that could affect the Company’s financial performance:
- | Increased competitor consolidations, market place competition, and competitive product and pricing pressures could impact the Company’s earnings, market share and volume growth. |
- | Changes in laws and regulations, including changes in accounting standards, taxation requirements (including tax rate changes, new tax laws and revised tax law interpretations) and environmental laws in domestic or foreign jurisdictions. For example, the Company currently has significant tax losses available, and a change in legislation affecting these would negatively impact future results. Environmental laws affecting beverage containers could add costs to the Company and/or decrease consumer demand for the Company’s products. |
- | Interest rate fluctuations and other capital market conditions, including foreign currency rate fluctuations, which are subject to various factors, including the impact of changes in worldwide and national economies, foreign currency movements, pricing fluctuations for the Company’s products and changes in interest rates (see Item 11). |
- | The uncertainties of litigation, as the Company is party to certain lawsuits as detailed in Item 8. |
- | Changes in general economic and business conditions. |
6
- | The effectiveness and success of the Company’s marketing programs, especially for newer brands such as True Blue , Infinity , BrandX Originals , TREK ® and Soy 2 O . |
- | Changes in consumer tastes and preference and market demand for new and existing products. |
- | Adverse weather conditions, which could reduce demand for the Company’s beverage products, sales of which are negatively affected by cooler temperatures. |
Item 4. – Information on the Company
A. | History and development of the Company. |
1. | The legal name of the Company is “Leading Brands, Inc.”. |
2. | The Company was incorporated on February 4, 1986 under the name "2060 Investments Ltd.". On May 21, 1986 the Company changed its name to "Camfrey Resources Ltd." On March 16, 1993, the Company changed its name to "Brio Industries Inc.", and on October 25, 1999, the Company changed its name from Brio Industries Inc. to Leading Brands, Inc. |
3. | The Company is incorporated under the laws of the province of British Columbia, Canada. The address and telephone number of its principal place of business is: |
Suite 1800 – 1500 West Georgia Street | |
Vancouver BC | |
Canada V6G 2Z6 | |
Tel: 604-685-5200 | |
4. | During the last half of 2003 and first quarter of 2004, the Company changed the method of going to market in the United States from focusing principally on third party beverage distributors in specific geographic areas, to a hybrid system that incorporates direct-to- store sales by the Company and a variety of alternative wholesalers. |
5. | Principal capital expenditures and divestitures |
Sale of Quick.com (“Quick”) assets and business | |
Effective January 1, 2001, the Company sold the business and certain intellectual property and capital assets of its online home delivery business to Northland Technologies Inc. (“NTI”), a Company related by way of a common director, in exchange for 12,000,000 redeemable preferred shares in NTI with a stated value of $7.8 million. Prior to January 1, 2001, this business was in the development stage and had not commenced commercial operations. |
7
The preferred shares include voting rights granting the Company a 12% share in net assets of NTI and are redeemable by NTI on or after March 23, 2001 for either the transfer of all of NTI’s right, title and interest in the Quick assets and business, or cash of $7.8 million. The shares are retractable at the option of the Company on or after January 1, 2004 for the redemption amount plus any unpaid dividends. In the event of retraction, NTI retains its right to pay the redemption amount in either of the manners described above. | |
At the end of fiscal year 2003, the Company decided to discontinue its support of the Quick Home Delivery Operations and, accordingly, recorded a $6,523,880 write-down on its investment. | |
6. | There are no significant capital expenditures or divestitures currently in progress. |
7. | There have been no public takeover offers by third parties in respect of the Company’s shares or by the Company in respect of other companies’ shares during the last and current financial year. |
B. | Business overview. |
1. | The Company and its subsidiaries are engaged in beverage bottling, distribution, sales, merchandising, brand development, brand licensing and brand management of beverage and food products, throughout most of North America. Originally a "direct to store" distributor of soft drinks in western Canada, the Company evolved into a fully integrated bottling and distribution operation. |
In the fiscal year ended February 28, 2005, Leading Brands of Canada, Inc. was the principal operating subsidiary engaged in the Company’s food and beverage business, and Leading Brands USA, Inc. was the principal sales subsidiary in the United States. | |
2. | Beverage Bottling |
The beverage bottling operations of the Company comprise the largest juice and new age beverage packaging entity in Western Canada. The Company operates two plants: a 50,000 square foot plant in Edmonton, Alberta and a 100,000 square foot plant in Richmond, British Columbia. The Company bottles juices and new age beverages for co- pack customers, private label customers, and the Company’s licensed and branded products. The Company’s plants are primarily “hot fill” plants designed to allow for extended shelf life of products without the use of preservatives. In a “hot fill” process, the liquid is heated to a high temperature prior to filling. The bottle is filled and capped while the liquid remains at the high temperature and then the filled bottle is sent through a cooling tunnel. The cooling causes a pressure seal which preserves the product without the need to add any artificial preservatives. In 2003 the Company added a carbonated beverage line to its Richmond, British Columbia plant. That line was installed at the principal cost of the major customer utilizing that line. |
8
The Company provides beverage packaging (“co-pack”) services to major branded beverage companies such as Coca Cola Enterprises Ltd., Quaker Tropicana Gatorade Canada and the Mark Anthony Group. These “co-pack” customers own their brands, and handle the distribution of the product to market. The Company simply “co-packs” or makes the product at the customers’ request. The Company charges a “co-pack fee” that equates to the cost of the packaging service provided and also bills for any materials not supplied by the customer. Certain co-pack customers are charged the “co-pack fee” only because they supply all raw materials to make the product. Other co-pack customers want the Company to provide some or all of the raw materials. The selling price to these customers is the cost of the raw materials supplied by the Company plus the “co-pack fee”. As a result, when a “co-pack” customer requests a change from a billing method in which the customer supplies the raw materials to a billing method where they request the Company to supply the raw materials, it can cause a significant change in revenue, with little or no change in gross profit, since the cost of sales changes by approximately the same dollar amount. In the 2002 fiscal year, the Company became involved in purchasing more materials and ingredients for two of its co-pack customers, thereby increasing the Company’s revenues and cost of sales. The Company’s private label juice program serves many of the primary major grocery chain stores in Canada. This business involves designing, developing and formulating juices and new age beverages, principally for chain stores, to be sold under their private or controlled label programs. Packaging materials and ingredients are purchased and the finished products are sold to customers. The Company’s plants are designed and equipped to handle various types of containers. The Edmonton plant has three lines: a glass line, a polyethylene teraphalate (“PET”) line and a foil pouch line. The Richmond plant has two lines: a line that produces a combination of glass and PET, and a line to run carbonated beverages with a post-fill tunnel pasteurization capability. The Company’s goal for beverage operations during the coming year is to expand the volume of cases packaged through co-pack operations, to expand the distribution of the Company’s own branded product lines, supplement those lines with products licensed from third parties and to expand sales of its own branded product lines into the United States. Sales and Distribution The Company’s sales and distribution system comprise the largest independent, fully integrated beverage distributor in Canada. The sales and distribution system has two regional warehouse distribution centers located in Richmond, British Columbia and Edmonton, Alberta. In addition, there are third party distribution centers in Montreal, Toronto and Calgary. The sales and distribution system distributes a variety of juices, new age beverages, waters, food and confectionary items to retail, wholesale and distribution outlets. |
9
The Company also owns and operates a spring water site at Mt. Woodside, Agassiz, British Columbia, approximately 50 miles east of Vancouver. The Company sells bulk tankered water to bottlers in the greater Vancouver area. The bulk tanker loading facility has tank storage capacity of 10,000 gallons. The Company also provides water for a public spring site free of charge at the base of the property. The Company differentiates itself in the marketplace with its customer service. By selecting the right mix of products and flavours and determining the merchandising strategy for those items, the Company has been successful in increasing the turns of its customers’ beverage inventory. The Company also distributes a wide variety of snack food, grocery and confectionary products The Company has a sales and marketing team that covers most of Canada. As a market of approximately 30,000,000 people, covering more than 2,000,000 square miles, it is not always cost effective for the Company's delivery system to carry its products to its customers on its own trucks. At the same time, it is imperative that the Company maintains contact with those customers and provides sales and merchandising services necessary to ensure proper presentation of the Company's brands on store shelves and to assure appropriate ordering and pull-through of the Company's products. The sales professionals in Canada cover all aspects of the retail trade including chain grocery and drug stores, mass merchandise centers, food service outlets and convenience stores. The salespeople and merchandisers are linked by computer to the Company's central databases, allowing for complete automation of the ordering functions. The Company also employs sales professionals in the United States. These salespeople are primarily focused on servicing third party regional distributors, major wholesale customers and retail chains contracted to the Company. The Company’s marketing department is constantly developing and implementing innovative marketing programs for all the brands represented. From sales booklets and point of sale materials to contests, sampling events, interactive websites and in-store demonstrations, the Company is always working to bring its brands to the top of its consumer's mind. The Company’s goal is to promote and market all the brands it represents in a fun, positive and informed environment. Brand Licensing and Brand Development The Company has increased its focus to licensed brands and the development of its own brands. Several of the Company's branded products, True Blue , Infinity , BrandX Originals , TREK , Soy 2 O , Pez® 100% Juice TM , Caesar’s Bloody Caesar ® , and Caesar’s Caesar Cocktail ® , are packaged and managed by the Company. The Company’s licensed brands include Fiji Natural Artesian Water ® , Hansen’s ® Beverages, and Stewart’s ® Fountain Classics . |
10
Other Business Overview Information | ||
Substantially all of the Company’s operations, assets and employees are located in Canada. In 2005 export sales were less than 10% of the Company’s revenues. | ||
3. | Demand for the Company’s beverage products is seasonal, with the warmer months having more demand than the cooler months. | |
4. | Sourcing and pricing of raw materials used in co-packing are generally the responsibility of the Company’s co-pack customers. For the Company’s branded and private label products, this risk remains with the Company. | |
Raw materials used in the beverage packaging business consist primarily of sugar, bottles, closures, flavoring and cardboard. The Company generally uses filtered municipal water but also has its own spring site in British Columbia as a source of spring water. | ||
- | Sugar is commodity priced and is generally purchased under a one year contract and there are several suppliers in both Canada and the United States. | |
- | Bottles are generally purchased in the US, but there is a PET bottle supplier in Canada. PET pricing is affected by changing oil prices. Clear glass supply can be limited due to market demand for this item. Pricing tends to remain stable during the year. | |
- | Closures and flavorings are generally purchased in the US, but Canadian suppliers are becoming available. | |
- | Cardboard is widely available and while pricing fluctuates from year to year, it is generally stable in the short term. | |
5. | The majority of the Company’s sales are handled directly by the Company’s own sales force. The Company uses a few brokers to assist with sales to retailers in some markets. | |
And in other markets, principally in the United States, goes to market with some products through third party distributors. | ||
6. | No material portion of the Company’s business is dependent on a single or connected group of patents, licenses, industrial, commercial or financial contracts or new manufacturing processes. | |
7. | The Company makes no statements concerning its competitive position. | |
8. | The Company is subject to regulations of the Canadian Food Inspection Agency, Health Canada and Natural Health Product Directorate, as well as the U.S. Food and Drug Administration with regards to ingredients and labeling of the Company’s products. | |
The Company is also subject to compliance with the Canada Customs and Revenue Agency and the United States Department of Homeland Security, Customs and Border |
11
Protection, for border security and customs functions related to the cross-border movement of raw materials and finished goods. |
C. Organizational structure.
Following is a list of the Company’s main subsidiaries as at February 28, 2005:
| Leading Brands of Canada, Inc. (LBCI) | |
- | incorporated provincially in Alberta, Canada; | |
- | 100% owned by Leading Brands, Inc.; | |
- | LBCI is the Company’s principal operating subsidiary in Canada. | |
| Leading Brands USA, Inc. (LBUI) | |
- | incorporated in Washington; | |
- | 100% owned by Leading Brands, Inc.; | |
- | LBUI is the Company’s principal operating subsidiary in the United States. | |
| Kert Technologies, Inc. (formerly The TREK Company, Inc.) | |
- | incorporated federally in Canada; | |
- | 90.5% owned by Leading Brands, Inc.; | |
- | licenses and owns the Company’s TREK ® trademarks and other intellectual property. | |
| LBI Brands, Inc. | |
- | incorporated provincially in British Columbia, Canada; | |
- | 100% owned by Leading Brands, Inc.; | |
- | owns certain of the Company’s proprietary brands, trademarks and other intellectual | |
property. | ||
| Quick, Inc. | |
- | incorporated in Florida, USA; | |
- | 97% owned by Leading Brands, Inc.; | |
- | owns certain trademarks and rights. | |
| Brio Snack Distributors Inc. | |
- | incorporated provincially in British Columbia, Canada; | |
- | 100% owned by Leading Brands of Canada, Inc.; | |
- | owns certain trademarks and rights. | |
| Leading Brands of America, Inc. (LBAI) | |
- | incorporated in Delaware; | |
- | 100% owned by Leading Brands, Inc. and Leading Brands of Canada, Inc.; | |
- | LBAI is presently inactive |
12
D. Property, plants and equipment.
Beverage Operations
Leading Brands operates two beverage plants: one in Edmonton, Alberta and one in Richmond, British Columbia. The two plants have a total 144 oz. equivalent case capacity of approximately 25,000,000 cases per annum.
Leading Brands owns a 50,000 square foot plant in Edmonton, Alberta, located at 4104 -99 Street. The plant contains three lines: glass, P.E.T. and pouch line for a combined 144 oz. equivalent case capacity of 10,000,000 cases per annum.
The Richmond, B.C. plant, is a 100,000 square foot leased facility, with a high speed combination hot fill glass and PET plastic line, and a carbonated line. This plant has an annual case volume capacity of approximately 15,000,000 144 oz. equivalent cases.
Leading Brands also owns and operates a spring site at Mt. Woodside, Agassiz, British Columbia, approximately 50 miles east of Vancouver. The Company sells bulk tankered water to bottlers in the greater Vancouver area.
Sales and Distribution
The Company has a sales office in the following location:
#250 – 1050 Seminaire nord, Saint-Jean-sur-Richelieu, Quebec. The space occupies 1,469 square feet and is leased month-to-month for $1,289 US per month.
The following location serves the role of regional warehouse or distribution centre.
3870 – 98 Street, Edmonton, Alberta. The space occupies 61,872 square feet and is leased for $16,720 US per month until August 31, 2007.
The Company also utilizes the following third party distribution centres:
(1) | 104 Walker Drive, Brampton Ontario | |
(2) | 2300 Chemin Monterey, Chomedey, Laval Quebec | |
(3) | 7151 44 Street SE, Calgary Alberta |
The Company’s head office is located at Suite 1800 – 1500 West Georgia Street, Vancouver BC. The space occupies 6,036 square feet and is being leased for $7,748 to $8,563 US per month until January 2008.
13
Item 5. – Operating and Financial Review
A. Operating results
Introduction
The Company is involved in two main business functions, the operation of two bottling plants and the distribution of the Company’s brands and other licensed brands. The plants provide bottling services to large co-pack customers and national grocery chains for their products and also produce the Company’s branded products. The Company’s distribution division markets and sells the Company’s branded beverage products and other food and beverage products licensed to the Company, through the Integrated Distribution System (IDS) of distributors, wholesalers, grocery chains and direct delivery to retail stores.
The Company’s goal is to increase production volume and sales by securing additional volume from its existing co-pack customers, securing new production contracts from customers requiring bottling services, and increasing distribution of the Company’s branded beverage products and other food and beverage products licensed to the Company through distribution contracts. The Company’s major focus is to accomplish this while incurring minimal increases in selling, general and administrative costs to create increased profit for the Company.
Financial Year Ended February 28, 2005
Sales
Year ended | Year ended | ||
Revenue | February 28, 2005 | February 29, 2004 | Change |
Bottling Plant | $17,294,507 | $18,221,670 | ($927,163) |
Distribution and | |||
Other | $17,121,342 | $23,551,905 | ($6,430,563) |
Total Gross Revenue | $34,415,849 | $41,773,575 | ($7,357,726) |
Discounts, | |||
allowances and | |||
Rebates | ($849,645) | ($976,649) | $127,004 |
Net Revenue | $33,566,204 | $40,796,926 | ($7,230,722) |
Gross sales for the year ended February 28, 2005 were $34,415,849 compared to $41,773,575 for the previous year, representing a decrease of 17.6 %. The decrease in plant revenue is a result of a decrease in revenue from sales to customers where the Company supplies the raw materials of $4,442,360 offset by an increase in revenue from sales to customers where the customer supplies the raw materials of $3,515,197, which includes a reduction in Ocean Spray production. The decrease in distribution and other revenue consists of a decrease in revenue from food products of $1,677,750, mainly due to the discontinuation of the Little Debbie’s snack food line, a decrease in revenue of the Company’s own brands of $3,017,051 mainly due to the refocus of the sales force in the US, and a net decrease in sales of licensed brands and other revenue of $1,735,762, representing a decrease in revenue from the loss of the Mad Croc distribution
14
contract in the amount of $3,147,008 offset by an increase in sales of other licensed brands and other revenue of $1,411,246. Sales discounts, allowances and rebates for the year ended February 28, 2005 were $849,645 compared to $976,649 for the previous year, representing a decrease of 13%. The decrease of $127,004 represents a decrease in sales discounts, allowances and rebates related to the sales of branded products in the amount of $300,856 offset by an increase in volume rebates related to the bottling plant in the amount of $173,852.
Cost of Sales and Margin
Year ended | Year ended | ||
Cost of Sales | February 28, 2005 | February 29, 2004 | Change |
Bottling Plant | $10,910,199 | $14,031,244 | ($3,121,045) |
Distribution and | |||
Other | $12,633,149 | $17,372,145 | ($4,738,996) |
Total | $23,543,348 | $31,403,389 | ($7,860,041) |
Cost of sales for the year ended February 28, 2005 were $23,543,348 compared to $31,403,389 for the previous year, representing a decrease of 25%. The decrease in plant cost of sales of $3,121,045 is a result of a decrease in cost of sales for customers where the Company supplies the raw materials of $4,321,060 offset by an increase in cost of sales for customers where the customer supplies the raw materials of $1,200,015. The decrease in distribution and other cost of sales of $4,738,996 consists of a decrease from foods products of $1,731,211, mainly due to the discontinuation of the Little Debbie’s snack food line, a decrease from the Company’s own brands of $1,736,227 mainly due to the refocus of the sales force in the US, and a net decrease in licensed brands and other products of $1,271,558, representing a decrease in Mad Croc distribution in the amount of $1,816,692 offset by an increase from other licensed brands and other products of $545,134.
Year ended | Year ended | ||
Margin | February 28, 2005 | February 29, 2004 | Change |
Bottling Plant | $6,175,626 | $4,155,596 | $2,020,030 |
Distribution and | |||
Other | $3,847,230 | $5,237,941 | ($1,390,711 |
Total | $10,022,856 | $9,393,537 | $629,319 |
Margin percentage | 29.9% | %23.0 | 6.9% |
Margin for the year ended February 28, 2005 was $10,022,856 compared to $9,393,537 for the previous year, representing a increase of 6.7% . The increase in plant margin of $2,020,030 is a result of a decrease in margin from customers where the Company supplies the raw materials of $121,300 offset by an increase in margin from customers where the customer supplies the raw materials of $2,141,330. The decrease in distribution and other margin of $1,390,711 consists of an increase from foods products of $137,035 mainly due to increased profitability from remaining food products, a decrease from the Company’s own brands of $1,154,083 mainly due to the refocus of the sales force in the US, and a net decrease in licensed brands and other products of $373,663, representing a decrease in Mad Croc distribution in the amount of $1,204,470 offset by an increase from other licensed brands and other products of $830,807.
15
Selling, General and Administration Expenses
These expenses decreased $1,291,653 from $9,867,894 to $8,576,241, or 13.1% . Selling, general and administrative expenses related to the US decreased $1,583,453 due to the refocus of the US sales division, marketing expenses decreased $409,418 due to lower sales of the Company’s own brands, offset by an increase in general and administrative expenses of $701,218 due to increased bottling plant volume.
Other Expenses and Recovery
Depreciation remained consistent with the prior year at $878,770 compared to $896,406 in the 2004 fiscal year. Amortization of deferred costs decreased by $216,107 from $296,875 to $80,768. Amortization decreased by $258,573 relating to the impairment write down at the end of the 2004 fiscal year of certain deferred costs for start up and product development in the US market that was partially offset by an increase in amortization of $42,466 for product development costs related to the Company’s new brands. Interest decreased by $24,460 from $339,630 to $315,170 due lower average borrowing levels. In the current year, the Company recorded income from the cancellation of certain distribution and bottling contracts in the amount of $695,585. In the current fiscal year, the Company recorded a loss on sale of assets in the amount of $43,590 due to the sale of retired production equipment, compared to a $9,083 loss on sale of assets in the prior year. In the year ended February 28, 2005, the Company reduced the valuation allowance against future income tax assets in the amount of $543,141 due to an increased certainty that the Company would be able to realize on the asset compared with $805,383 in the prior year. In the fiscal year ended February 28, 2005, the Company recorded a reduction in the future income tax asset in the amount of $745,090 corresponding to the operating profits in the Canadian operating entity. The Company paid cash income taxes in the fiscal year ended February 29, 2004 in the amount of $3,943 and recovered income tax of $3,690 in the year ended February 28, 2005.
Financial Year Ended February 29, 2004
Sales
Net sales for the year ended February 29, 2004 were $40,796,926, compared to $47,276,240 for the previous year, representing a decrease of 13.7 % or $6.48 million. The decrease is attributed to the following:
- | Decrease in sales due to the change in billing method for co-pack products, 32.5% ($15.36 million) | |
- | Increase in sales due to currency conversion, 10.9% (5.14 million) | |
- | Increase in sales for branded products and other non co-pack revenue, 1.6% (0.75 million) | |
- | Increase in sales for co-pack products, net of currency and billing method change, 6.3% ($2.99 million) |
Cost of Sales and Margin
Cost of sales decreased from $37,924,637 to $31,403,389 as a result of the net difference between the increase in cost of sales for branded products and the decrease in cost of sales due to
16
the change in billing method for a large co-pack customer. Gross margin was $9,393,537 in the current year compared to $9,351,603 in the prior year.
Selling, General and Administration Expenses
These expenses increased $890,092 from $8,977,802 to $9,867,894, or 9.9% . The additional costs are for wage and benefit costs, marketing expenses and other administrative costs incurred as a result of expanding the market for certain proprietary products into the US.
Other Expenses
Depreciation increased by $140,937 from $755,469 in the prior year to $896,406. The increase was due to the effect of foreign currency translations of $106,597 and increased depreciation due to the addition of capital assets in the production facilities of $34,340. Amortization of deferred costs increased by $25,052 from $271,823 to $296,875. The increase was due to the effect of foreign currency translation of $38,354 net of a decrease in amortization of $13,302 due to trademarks and other deferred costs reaching the end of their amortization periods in the fiscal year ended February 29, 2004. Interest decreased by $74,366 from $413,996 to $339,630 due the reduction of interest accretion on convertible preferred shares in the amount of $147,615, converted in the December 2002, net of the increase in interest due to the effect of foreign currency translation in the amount of $37,586 and interest on higher average borrowing levels in the amount of $35,663. For US GAAP, interest accretion of $147,615 on convertible preferred shares in 2003 would not be recorded as explained in note 21 of the financial statements. In the year ended February 28, 2003, the Company decided to discontinue support of the Quick Home Operations delivery service and, accordingly, recorded a $6,523,880 impairment write down on its investment.
B. Liquidity and Capital Resources
Financial Year Ended February 28, 2005
As at February 28, 2005 the company had negative working capital of $899,375 compared to negative working capital of $1,673,014 at the prior year end. This improvement in working capital resulted from cash generated through operating income. Bank indebtedness was $2,512,897 compared to $3,179,800 for the prior year which was reduced for the reasons mentioned above. There were no cash or cash equivalents as at February 28, 2005 or the previous year.
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. The Company does not expect any additional covenant violations in the foreseeable future.
Notwithstanding the negative working capital as at February 28, 2005, the Company believes it will have sufficient working capital for the next 12 months since the Company has generated cash flow from operations at the beginning of the fiscal year ending February 28, 2006, significantly reducing the working capital deficit. The Company has no significant planned capital projects and believes that it currently has sufficient working capital to continue
17
operations for the next twelve months and thereafter. Should any significant capital projects be planned, they will likely require further financing.
Net cash generated in operating activities for the 12 months ended February 28, 2005 was $1,770,156 compared to $853,640 utilized in the prior fiscal year. Cash in-flow from operations generated $2,137,132 of cash compared to $712,314 utilized in the prior year. In fiscal 2005 normal operating activities in the Canadian operations generated $2,140,790, settlement from cancellation of distribution and bottling contracts generated $695,585, normal operating activities in the US operations utilized $639,482 and other marketing and holding entities utilized $59,761. Working capital changes utilized $366,976 due mainly to a decrease in trade accounts payable of $2,857,118, mostly due to a $2,370,237 decrease in Canadian operations due to cash generated from operations, the change in product mix in the co-pack products mentioned in the sales section, discontinuation of the Little Debbie’s snack food line and reduced sales in the Company’s own brands and a $484,068 decrease in US operations due to the discontinuation of the Mad Croc product line and payment of legal fees relating to the contract settlement. The utilization from the reduction of accounts payable was offset by working capital generated by a decrease in prepaid expenses of $9,773, a decrease in inventory of $920,364; a $914,222 decrease in the Canadian operating entities due to the same reasons mentioned above for the reduction of accounts payable and a $6,142 decrease in the US operating entities and a decrease in accounts receivable of $1,560,005; a $1,527,480 decrease in the Canadian operating entity for the reasons mentioned above for accounts payable and inventory, a $33,881 decrease in the US operating entities and a $1,356 increase in the marketing and holding entities.
Net cash utilized in investing activities was $290,679 compared to $687,916 in the prior year. $256,329 was expended on the purchase of capital assets compared to $541,776 in the prior year. During fiscal year 2005, $178,690 was expended on equipment for the bottling operations, $29,908 was expended on vehicles and $47,731 was expended on office equipment, software, and leasehold improvements. The sale of assets generated $40,715 compared to $63,730 in the prior year. Cash was utilized for expenditures on deferred costs in the amount of $75,065 for new product development costs compared to $209,870 in the prior year, of which $77,699 for new product development costs and $132,171 for start up costs related to the alcohol bottling contract.
Financing activities utilized $1,650,381 compared to $1,257,966 generated in the prior year. In the current year, the Company repaid long-term debt of $1,128,209 compared to $724,006 in the prior year, decreased bank indebtedness in the amount of $890,440 compared to $57,057 in the prior year as a result of increased cash flow from operations in the fiscal year ended February 28, 2005. This was offset by proceeds from additional long term debt of $363,829 in the current year, which is consisted of a $232,775 increase in the Company’s term loan to fund capital equipment purchases and a $131,054 increase in the mortgage on the Edmonton bottling facility. In the prior year, long term debt increased $1,728,180 mostly due to an increase in the Company’s term loan. In the current year, the issuance of common shares relating to the exercising of options and warrants generated $4,439 compared to $310,849 in the prior year.
The company has a demand revolving operating bank loan with a credit limit of $3,648,156 with an interest rate of the Canadian prime rate of its lender plus 0.75 – 1.25% per annum. The
18
Company also has a term loan from the bank in the amount of $3,186,508 with an interest rate of the Canadian prime rate of its lender plus 1.0% per annum.
Other sources of financing include a mortgage, a promissory note payable and leases more fully described in note 9 of the financial statements.
The Company generally maintains bank indebtedness in Canadian funds and does not use financial instruments for hedging purposes. The Company does not have any material capital expenditure commitments.
Financial Year Ended February 29, 2004
As at February 29, 2004 the company had negative working capital of $1,673,014. Bank indebtedness was $3,179,800. There were no cash or cash equivalents as at February 29, 2004..
Net cash utilized in operating activities for the 12 months ended February 29, 2004 was $853,640. Operating activities utilized $712,314 of cash compared to $196,774 generated in the prior year. Working capital changes utilized $141,326 due to an increase in trade accounts receivable of $1,063,691, which was partially offset by a decrease in prepaid expenses relating to the refund of deposits on production line equipment of $547,131, a decrease in inventory of $293,777 and an increase in accounts payable of $81,457.
Net cash utilized in investing activities was $687,916 compared to $2,394,301 in the prior year. $541,776 was expended on the purchase of capital assets for production line modification and expansion compared to $944,931 in the prior year. During the fiscal year ended February 28, 2003, $693,953 was advanced to support Quick Home Delivery operations that were discontinued at the end of that fiscal year. $209,870 was expended on deferred costs compared to $781,094 in the prior year. Expenditures were higher in 2003 due to new product development costs for TREK ®, and Pez® 100% Juice TM and start up costs in the US.
Financing activities generated $1,257,966 from an increase term loan of $1,497,342, other long term debt of $230,838 net of repayment of long term debt in the amount of $724,006, proceeds from the issuance of common shares relating to the exercising of options and warrants for $310,849 and a decrease in bank indebtedness of $57,057.
Other sources of financing include a mortgage, a note payable and leases more fully described in note 9 of the financial statements.
C. Research and development, patents and licenses, etc.
The Company defers certain new product promotion, launch and development costs and amortizes them over 36 months commencing with the date of the launch of the related product. See note 6 of the financial statements. In the fiscal year ended February 29, 2004, the Company has taken a non-cash write down in the amount of $632,579 due to impairment of deferred costs from previous periods, related to the refocus of the US market. Under US GAAP, SOP 98-5,
19
Reporting on the Costs of Start-Up Activities, costs are expensed as incurred as explained in note 21 to the financial statements.
The Company does not have a formal research and development program. It develops products as and when it sees fit by working with existing staff and outside consultants, where appropriate.
Following are current and pending patents and intellectual property owned by the Company:
- | patents for Quick website design and graphics |
- | patent on the TREK ® bottle |
- | proprietary TREK ® bottle and cap |
- | TREK ® formulations for Fuel, Burn and Recover |
- | Pez® 100% Juice TM packaging |
- | a large inventory of formulations for a wide variety of juices and new age beverages. |
D. Trend Information.
Sales to date for the first quarter of fiscal 2006 are trending about 13% lower than the comparable period in the prior year. Concurrently, cost of sales are trending lower causing gross margin to remain consistent with the same period in the prior year. This is primarily due to the reduced sales in co-pack products due to a reduction in sales of co-pack products in which the Company supplies the raw materials and an increase in sales of co-pack products in which the customer supplies the raw materials. The strength of the Canadian dollar compared to the US dollar over the prior year, has a positive effect on the Company’s cost of goods sold in the Canadian market. This is partially offset by the increased costs of goods sold into the US market.
E. Off-balance sheet arrangements.
1. | The Company is committed to operating leases for premises and equipment as disclosed in Note 13 of the financial statements. The payment obligations are as outlined in the note, and the amounts are expensed as operating expenses in the period the lease payments are made. |
2. | The Company has no off-balance sheet arrangements of this nature. |
F. Tabular disclosure of contractual obligations.
Payments due by period | |||||
Contractual Obligations | Total |
less than 1
year |
1-3
years |
3-5
years |
more than
5 years |
Long-term Debt Obligations | 3,861,272 | 947,429 | 1,722,415 | 769,411 | 422,017 |
Capital (Finance) Lease
Obligations |
- | - | - | - | - |
Operating Lease
Obligations |
2,798,531 | 1,287,461 | 1,448,067 | 63,003 | - |
20
Purchase Obligations | 705,000 | 705,000 | - | - | - |
Other Long-term Liabilities Reflected on the Company’s Balance Sheet under the GAAP of the primary financial statements | - | - | - | - | - |
Interest – estimated (1) | 1,395,000 | 303,000 | 472,000 | 320,000 | 300,000 |
Total | 8,759,803 | 3,242,890 | 3,642,482 | 1,152,414 | 722,017 |
1) Since the interest rates on the majority of the Company’s debt is at floating interest rates based on prime, the interest amount above is estimated.
Critical Accounting Policies
The Company’s annual financial statements have been prepared in accordance with accounting principles generally accepted in Canada. Differences from United States accounting principles are disclosed in note 21 in the notes to the annual financial statements in Item 17 of this Annual Report on Form 20-F. Some accounting policies have a significant impact on the amount reported in these financial statements. A summary of those significant accounting policies can be found in the Summary of Significant Accounting Policies in the annual financial statements. Note that the preparation of this Annual Report on Form 20-F requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company believes, as explained below, that the most critical accounting policies cover the following areas: goodwill, revenue recognition and stock based compensation.
Goodwill
Goodwill is recorded at cost and, effective January 1, 2002, it is no longer amortized. 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. An impairment loss will only be recognized if the carrying amount is not recoverable when compared to the undiscounted future cash flow. As the Company has reported net income for fiscal 2005 and expects its operations to continue to be profitable in the future, no impairment loss has been recognized. 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. |
21
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, bottling or other services are recognized when the services are performed and collection of related receivables is reasonably assured. Certain figures are reclassified in prior periods relating to sales discounts, allowances and rebates to conform with Canadian GAAP changes on revenue recognition.
Stock-based Compensation
Effective January 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 issued to employees and directors in the notes to the financial statements. The effect of this change in accounting policy was to increase the accumulated deficit and contributed surplus as of March 1, 2004 by $836,350.
Under US GAAP, the Company continues to apply 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 remeasured as if the awards were newly granted.
Compensation costs are charged to the Consolidated Statements of Income and Deficit or capitalized to deferred costs, depending on the nature of the award.
As a result of the change in accounting policy under Canadian GAAP, there is a Canadian – US GAAP difference as described in more detail in Note 21 of the consolidated financial statements.
New 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.
22
The Company is assessing the effect on the consolidated financial statements as a result of the implementation of these new standards.
G. Forward Looking Statements.
This report includes “forward-looking information” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements which are not historical facts, are forward-looking statements. The Company, through its management, makes forward-looking public statements concerning its expected future operations, performance and other developments. The words “believe”, “intend”, “expect”, “anticipate”, “project”, “estimate”, “predict” and similar expressions are also intended to identify forward-looking statements.
Such forward-looking statements are necessarily estimates reflecting the Company's best judgment based upon current information and involve a number of risks and uncertainties, and there can be no assurance that other factors will not affect the accuracy of such forward-looking statements. It is impossible to identify all such factors. Factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, general economic conditions, weather conditions, changing beverage consumption trends, pricing, availability of raw materials, economic uncertainties (including currency exchange rates), government regulation, managing and maintaining growth, the effect of adverse publicity, litigation, competition and other factors which may be identified from time to time in the Company's public announcements.
Reliance should not be placed on these forward-looking statements, which reflect the views of our directors and management as at the date of this Annual Report only. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after publication.
Item 6. – Directors, Senior Management and Employees
A. Directors and senior management.
The following is a list of the current directors and senior officers of the Company, their municipalities of residence, their current positions with the Company, areas of experience, and principal business activities performed outside the Company:
Name and Municipality
of Residence |
Principal Occupation and Areas of Experience |
Ralph D. McRae
West Vancouver, BC |
Mr. McRae is a director and the Chairman, President and Chief Executive Officer of the Company and has been with Leading Brands, Inc. since March 1996. He is also a director and the |
23
Name and Municipality
of Residence |
Principal Occupation and Areas of Experience |
Chairman, CEO and Secretary/Treasurer of Leading Brands of Canada, Inc., and Kert Technologies, Inc. | |
Mr. McRae is a director and the Chairman and CEO of McRae Management Ltd., a waste management and water company based in Coquitlam, BC. | |
He is a member of the Bar of both British Columbia and Alberta, and holds a Bachelor of Commerce (1980) and LLB (1981) from the University of British Columbia | |
R. Thomas Gaglardi
Vancouver, BC |
Mr. Gaglardi has been a director of Leading Brands, Inc. since October 1998 and Secretary of the Company since June 1999. He is also the President of Northland Properties Corporation, a hotel, real estate and restaurant company, and Chairman and CEO of Sandman Hotels, Inns & Suites and Moxie’s Restaurants, LP. |
Peter Buckley
West Vancouver, BC |
Mr. Buckley has been a director of Leading Brands, Inc. since August 1997. He is also the President of Old Spaghetti Factory Canada Ltd. |
Iain J. Harris
Vancouver, BC |
Mr. Harris was a director of Leading Brands, Inc. from May 1996 to December 2003, and from June 2004 until the present time. He is also the Chairman and Chief Executive Officer of Summit Holdings Ltd. |
Jonathan Merriman
San Francisco, CA |
Mr. Merriman has been a director of Leading Brands, Inc. since January 1999. He is also the Chairman and CEO of Merriman Curhan Ford & Co |
Douglas Carlson
Aspen, CO |
Mr. Carlson has been a director of Leading Brands, Inc. since June 1999. He is also the Chief Executive Officer of FIJI Water Holdings, LLC. Mr. Carlson is a Certified Public Accountant. |
Donna Higgins, CGA
Port Coquitlam, BC |
Ms. Higgins is the Chief Financial Officer of Leading Brands, Inc., Leading Brands of Canada, Inc., and Leading Brands USA, Inc. Prior to joining Leading Brands in 1999, Ms. Higgins held accounting and finance positions with both a large Pepsi bottler and regional beverage distributor. |
There are no arrangements or understandings pursuant to which any of the above was selected as a director or executive officer. There are no family relationships between any of the persons named above.
B. Compensation.
24
In fiscal 1996, the Company implemented a management incentive compensation system. Under that system, the executive and divisional management of the Company exchanged part of their salary for stock options and a bonus program, payable in a combination of cash and the Company shares. Entitlement to the bonus is tied directly to the Company’s profitability in relation to budget. The Company’s sales and delivery personnel are paid in part by commission. The Company’s plant workers are also paid in part by an incentive tied to their productivity. The Company has no other bonus or profit sharing plans.
Compensation of Directors
Directors receive $1,500 CDN per quarter (pro rated for those serving less than a full quarter) and $500 CDN for each directors’ meeting and committee meeting attended.
Directors are also compensated for their services in their capacity as directors by the granting from time to time of incentive stock options. During the most recently completed financial year, there were 225,000 stock options expired and new options were granted to these Directors.
BBI Holdings Inc. (“BBI”), which is controlled by Ralph McRae, receives $5,431 USD per month for consulting services provided by Mr. McRae and another director of BBI.
Compensation of Executive Officers
The following table is a summary of compensation paid to the CEO, the CFO, and the 2 most highly compensated Executive Officers of the Company and its subsidiaries.
Annual Compensation | Stock Options | ||||
Name and
Position |
Fiscal
Year Ending |
Salary
(US$) |
Bonus
(US$) |
Other Annual
Compensation (US$) |
Securities Under Options
Granted during the fiscal year (#) |
Ralph McRae,
Chairman, President and CEO |
2005 | nil | nil |
372,439
(1)
65,172 |
nil |
Donna
Higgins, CFO |
2005 | 106,688 | nil | nil | 30,000 (2) |
Dave Read,
President of LBI Brands, Inc. |
2005 | nil | nil | 238,071 (3) | nil |
Patrick Wilson,
VP of Sales and President of Leading Brands USA, Inc. |
2005 | 146,195 | nil | nil | 112,500 (4) |
25
(1) | McRae Ventures, Inc., a company with a director in common with the Company, receives $372,439 for consulting services provided by Mr. McRae. BBI Holdings Inc., a company with a director in common with the Company, receives $5,431 per month for consulting services provided by Mr. McRae and another director of BBI Holdings Inc. |
(2) | 30,000 previously granted options @ US$1.00 expired Jan.25, 2005 and 30,000 options @ US$1.04 were granted July 15, 2004 |
(3) | VE Services, a company owned by Mr. Read, received $238,071 for consulting services provided by Mr. Read. |
(4) | 92,500 previously granted options @ US$1.00 expired Nov. 3, 2004 and 92,500 options @ $US1.04 were granted July 15, 2004, expiring July 15, 2014 and 20,000 options @ US$1.10 were granted Mar. 1, 2004, expiring March 1, 2009. |
No amounts have been set aside or accrued by the Company during its last fiscal year to provide pension, retirement or similar benefits for directors or officers of the Company.
C. Board practices.
1. | The Company’s board of directors is currently comprised of six directors. These are divided into three classes designated as Class I, Class II and Class III, to provide for a rotation of three year terms of office. Any director whose term has expired is eligible for re-election. |
The terms of office of Douglas Carlson and Iain Harris, the directors in Class II, will expire at the conclusion of the 2005 annual general meeting to be held on June 28, 2005, while the terms of office of the directors in Classes III and I expire at the 2006 and 2007 annual general meetings, respectively. | |
The following table lists the current terms of office for the directors and the period during which the directors have served: |
Name | Class | Term of Office | Served Since | |
Douglas Carlson | II | Aug/02 to Aug/05 | June 1999 | |
Iain J. Harris | II | Aug/02 to Aug/05 | May 1996 | |
Peter Buckley | III | Aug/03 to Aug/06 | August 1997 | |
R. Thomas Gaglardi | III | Aug/03 to Aug/06 | October 1998 | |
Ralph D. McRae | I | July/04 to July/07 | March 1996 | |
Jonathan Merriman | I | July/04 to July/07 | January 1999 |
26
2. | There are no directors’ service contracts with the Company or any of its subsidiaries providing for benefits upon termination of employment. | |
3. | The members of the Company’s audit committee are: | |
- | Peter Buckley | |
- | Douglas Carlson | |
- | Iain Harris | |
The function of the audit committee is one of review and oversight. The committee reports to the Board from time to time with respect to its activities and its recommendations and provides background and supporting information as may be necessary for the Board to make an informed decision. | ||
The members of the Company’s compensation committee are: | ||
- | Douglas Carlson | |
- | Jonathan Merriman | |
The Committee is responsible for, among other things, reviewing and determining the annual salary, bonus/profit sharing and other compensation levels of the executive officers of the Company. Compensation matters may also be reviewed and approved by the entire board of directors. | ||
As of April 1, 2005 the executive officers of Leading Brands, Inc. are: |
Ralph D. McRae | Chairman, President and Chief Executive Officer | |
Donna Higgins | Chief Financial Officer | |
R. Thomas Gaglardi | Secretary |
D. Employees.
Following are the number of employees of the Company for the past 3 financial years:
February 28, 2005 | February 29, 2004 | February 28, 2003 | |
Canada | 186 | 180 | 181 |
United States | 2 | 2 | 13 |
E. Share ownership.
1. | Options to purchase common shares from the Company or subsidiaries of the Company are granted from time to time to directors, officers and employees of the Company on terms and conditions acceptable to the board of directors, and subject to shareholder approval. |
27
As of February 28, 2005, there were 2,975,519 issued and outstanding options, with a weighted average exercise price of $1.07. As of May 2, 2005 there were 2,855,519 issued and outstanding options, with a weighted average exercise price of $1.07. Of the total stock options granted, 2,019,143 have vested and are available for exercise as at May 2, 2005. The following table provides share ownership information with respect to the directors and officers listed in subsection 6.B above. |
Name |
Common
Shares Held (1) (#) |
# of
Common Shares under Options Granted |
Date of Grant |
Exercise
Price |
Expiration Date |
Ralph McRae |
449,160
(2.99%) |
500,000
300,000 200,000 |
Mar.1, 2000
Aug.29,2000 Aug.29,2000 |
1.00
1.00 1.00 |
Mar.1, 2010
Sept.1,2005 Sept.1,2005 |
Donna Higgins
Dave Read Patrick Wilson |
nil
1,000 11,658 |
20,000
30,000 50,000 50,000 50,000 50,000 100,000 50,000 20,000 92,500 |
Jun.8, 1999
July 15, 2004 Aug.14, 2000 Aug.26, 2003 July 2, 1999 Aug.27, 1999 Jan.22, 2001 Aug.26, 2003 Mar. 1, 2004 July 15, 2004 |
1.00
1.04 1.00 1.29 1.00 1.00 1.00 1.29 1.10 1.04 |
Apr.30, 2009
July 15, 2014 Aug.14, 2005 Aug.26, 2008 July 2, 2009 Aug 27,2009 Jan.22, 2006 Aug.26, 2008 Mar.1, 2009 July 15, 2014 |
(1) | The information as to number of shares beneficially owned (directly or indirectly or over which control or direction is exercised) is not within the knowledge of the management of the Company and has been furnished by the respective director or officer. |
2. | There are no other arrangements for involving the employees in the capital of the Company. |
Item 7. – Major Shareholders and Related Party Transactions
A. Major shareholders.
28
As at May 2, 2005, the Company had 15,045,069 common shares without par value issued and outstanding.
1. | Following are the shareholders that are the beneficial owners of 5% or more of the Company’s voting securities, as of May 2, 2005: |
(a) |
Number of shares | Percentage of outstanding shares | |
Cede & Co. (1) | 8,939,135 | 59.42% |
CDS & Co. (2) | 4,301,014 | 28.59% |
Northland Properties (3) | 2,020,626 | 13.43% |
Gilvest LP (4) | 864,000 | 5.74% |
(1) | Cede & Co. is an American depository, holding shares on behalf of beneficial owners. | |
(2) | CDS & Co. is a Canadian depository, holding shares on behalf of beneficial owners. | |
(3) | Northland Properties is related to R. Thomas Gaglardi, a director of Leading Brands, Inc. | |
(4) | Gilvest LP is related to Douglas Carlson, a director of Leading Brands, Inc. |
(b) | In December 2002, Northland Properties Corporation (“NPC”) converted 2,000,000 Class E preferred shares to 788,626 common shares at the rate of $1.75 USD per share. This transaction increased NPC’s percentage ownership of the Company’s outstanding shares from 8.66% as at February 28, 2002 to 13.52% at February 28, 2003. |
There has been no other significant change in the percentage ownership held by any major shareholders during the past three years. | |
(c) | The Company’s major shareholders do not have different voting rights than other shareholders. |
2. | The Company’s register of 225 members showed that 10,157,400 of the Company’s common shares or 67.5% were held by 183 registered shareholders residing in the United States. |
3. | To the best of the Company's knowledge, the Company is not owned or controlled, directly or indirectly, by another corporation or by any foreign government. |
4. | To the best of the Company's knowledge, there are no arrangements the operation of which at a subsequent date may result in a change in control of the Company. A substantial number of common shares of the Company are held by depositories, brokerage firms and financial institutions in "street form". |
B. Related party transactions.
29
1. | The Company has not at any time during the period since the beginning of the last fiscal year to May 6, 2005 been a party to any material transactions in which any director or officer of the Company, or any relative or spouse, or any relative of any such spouse, has any direct or indirect material interest except as follows: | |
a) | BBI Holdings Inc., a Company with a director in common with the Company, receives $5,431 per month for consulting services provided by Mr. McRae and another director of BBI Holdings Inc.; | |
b) | Effective January 1, 2001, the Company sold the business and certain intellectual property and capital assets of its online home shopping business to Northland Technologies Inc. (“NTI”), a company related by way of a common director, in exchange for 12,000,000 redeemable preferred shares in NTI with a stated value of $7.8 million. Prior to January 1, 2001, this business was in the development stage and had not commenced commercial operations. | |
The Company also entered into an agreement to provide certain management and administrative services to NTI until February 28, 2003 in exchange for a management fee calculated as costs incurred plus a 10% share of specified net profit. | ||
During the fiscal year 2003, the Company advanced $693,953 to support its investment in NTI related to the Quick Home Operations delivery service. | ||
At the end of the fiscal year 2003, the Company decided to discontinue its support of the Quick Home Operations delivery service and, accordingly, recorded a write down of $6,523,880 on this investment. See note 1(a) of the annual financial statements for further details. | ||
c) | Fiji Water, a company with a director in common with the Company, supplied products for resale in the amount of $250,126 during the year ended February 28, 2005. | |
2. | There are no outstanding loans or guarantees made by the Company or any of its subsidiaries to or for the benefit of any of the persons listed above. |
Item 8. – Financial Information
A. | Consolidated Statements and Other Financial Information. | |
The following financial statements for the year ended February 28, 2005 are included in this report.: | ||
(a) | Balance sheets | |
(b) | Statement of Income and Deficit | |
(c) | Statements of Cash Flows |
(d) | Summary of Significant Accounting Policies | |
(e) | Notes to the Financial Statements |
30
A-7.
Legal Proceedings
In January 2000, a former supplier of the Company commenced a lawsuit against the Company for unpaid amounts totaling approximately Cdn$991,000 in respect of beverage product allegedly purchased by the Company. The Company commenced a counter claim against the former supplier totaling approximately Cdn$7,478,000 for losses incurred as a result of the former supplier’s alleged breach of contract. This matter has been settled at no cost to the Company, pending final exchange of settlement documents.
An action from 2003 involving the former President of LBAI, a supplier, 3 licensors and their principal was settled in July 2004. A payment was made to the Company by the former President of LBAI, and no payment was made by the Company. The 3 license agreements were terminated, and certain suppliers of those products forgave substantial amounts.
The Company is subject to other legal proceedings and claims that arise in the ordinary course of its business, none of which are expected to have significant effects on the Company’s financial position or profitability.
A-8.
Dividend Distributions
The Company will consider dividend distributions when it determines that it cannot realize better returns to investors by investing internally.
B. Significant Changes since the date of the annual financial statements.
None
Item 9. – The Offer and Listing.
Note: For an Annual Report, only the information called for by Items 9.A.4 and 9.C is required
A. Offer and listing details.
31
4. | Following is information regarding the price history of the stock on the Nasdaq SmallCap Market, in United States dollars: | |
(a) | for the five most recent full financial years: |
Period
|
High $ | Low $ |
March 1, 2004 to Feb. 28, 2005 | 1.75 | 0.78 |
March 1, 2003 to Feb. 28, 2004 | 2.49 | 0.91 |
March 1, 2002 to Feb. 28, 2003 | 4.14 | 1.52 |
March 1, 2001 to Feb. 28, 2002 | 1.99 | 0.43 |
March 1, 2000 to Feb. 28, 2001 | 4.68 | 0.75 |
(b) | for each full financial quarter of the two most recent full financial years: |
Period | High $ | Low $ |
4
th
Quarter of Fiscal 2004
Dec. 1, 2004 – Feb. 28, 2005 |
1.06 | 0.80 |
3
rd
Quarter of Fiscal 2004
Sept. 1, 2004 – Nov.30, 2004 |
1.25 | 0.78 |
2
nd
Quarter of Fiscal 2004
June 1, 2004 – Aug. 31, 2004 |
1.50 | 0.90 |
1
st
Quarter of Fiscal 2004
Mar. 1, 2004 – May 31, 2004 |
1.75 | 0.95 |
4
th
Quarter of Fiscal 2003
Dec. 1, 2003 – Feb. 29, 2004 |
1.39 | 0.91 |
3
rd
Quarter of Fiscal 2003
Sept. 1, 2003 – Nov.30, 2003 |
1.57 | 1.03 |
2
nd
Quarter of Fiscal 2003
June 1, 2003 – Aug. 31, 2003 |
1.86 | 1.16 |
1
st
Quarter of Fiscal 2003
Mar. 1, 2003 – May 31, 2003 |
2.49 | 1.50 |
(c) | for the most recent six months: |
Period
|
High $ | Low $ |
April 1 - 30, 2005 | 0.91 | 0.71 |
March 1 – 31, 2005 | 0.87 | 0.81 |
February 1 – 28, 2005 | 0.89 | 0.80 |
January 1 – 31, 2005 | 0.96 | 0.80 |
December 1 – 31, 2004 | 1.06 | 0.83 |
November 1 – 30, 2004 | 0.99 | 0.78 |
32
C. | Markets. |
The Company's common shares have been quoted on the NASDAQ Small-cap Market since August 3, 1993. The ticker symbol is LBIX. | |
On May 8, 2002 the Company’s common shares were listed on the Toronto Stock Exchange (“TSX”) under the ticker symbol LBI. On April 8, 2003 the Company voluntarily delisted its shares from the TSX. |
Item 10. – Additional Information.
A. | Share capital |
This item is not applicable for an Annual Report. | |
B. | Memorandum and articles of association. |
This information has been previously reported and is incorporated by reference. | |
C. | Material contracts. |
There are no additional material contracts, other than those discussed elsewhere in this report. | |
D. | Exchange controls. Canada has no system of exchange controls. There are no exchange restrictions on borrowing from foreign countries or on the remittance of dividends, interest, royalties and similar payments, management fees, loan repayments, settlement of trade debts, or the repatriation of capital. Any such remittances to United States residents, however, may be subject to withholding tax. |
E. | Taxation. A brief and general description is included below of certain taxes, including withholding taxes, to which United States security holders may be subject under the existing tax laws and regulations of Canada. The consequences, if any, of provincial taxes are not considered. |
Please note that the following information is a brief summary only and security holders should seek the advice of their own tax advisors with respect to the applicability or effect on their own individual circumstances of the matters referred to herein and of any United States federal, state or local taxes. | |
Taxation on Dividends | |
Generally, cash dividends paid or deemed to be paid by a Canadian-corporation to non- resident shareholders are subject to a withholding tax of 25%. Dividends paid to US residents are subject to a withholding tax of 15%, and dividends paid to a US resident company which owns 10% or more of the voting shares of the Canadian corporation are subject to a withholding tax of 5%. Dividends paid by a Canadian corporation to shareholders resident in Canada are not subject to withholding tax. |
33
Taxation on Capital Gains Generally the disposition by a non-resident of shares of a Canadian public corporation is not subject to Canadian income tax, unless such shares are “taxable Canadian property” within the meaning of the Income Tax Act (Canada) and no relief is afforded under any applicable tax treaty. The shares of the Company would be taxable Canadian property of a non-resident purchaser if the non-resident purchaser used the shares in carrying on a business in Canada, or if the non-resident, together with persons with whom he does not deal at arm's length, owned 25% or more of the issued shares of any class of the capital stock of the Canadian corporation at any time during the five-year period immediately preceding the disposition. In addition, Canada may tax capital gains realized by an individual resident in the United States on the disposition of shares of a Canadian corporation if the following conditions are met: |
- | the individual was resident in Canada for 120 months during any period of 20 consecutive years preceding, and at any time during the 10 years immediately preceding, the disposition of shares, and | |
- | the individual owned the shares when he ceased to be resident in Canada. |
Holders of common shares of the Company should seek independent advice from their own professional tax advisers with respect to the income tax consequences arising from the holding of common shares of the Company. | |
F. | Dividends and paying agents. |
This item is not applicable. | |
G. | Statement by experts. |
This item is not applicable. | |
H. | Documents on display. |
Copies of documents concerning the Company, which are referred to in this Report, are available for inspection at the head office of the Company located at Suite 1800 – 1500 W. Georgia Street, Vancouver BC Canada V6G 2Z6. | |
I. | Subsidiary Information. |
This item is not applicable. |
Item 11. – Quantitative and Qualitative Disclosures About Market Risk.
The table below shows the long term debt whose fair value is subject to market risk as interest rates change.
34
FIXED INTEREST RATE | |||
LONG TERM DEBT | Mortgage | Note Payable | |
Interest Rate | 4.53% | 8.0% | |
Principal at February 28, 2005 | 586,430 | 88,334 | |
Principal payments by year: | |||
2006 | 29,991 | 88,334 | |
2007 | 31,378 | ||
2008 | 32,829 | ||
2009 | 34,283 | ||
2010 and thereafter | 457,949 | ||
TOTAL | 586,430 | 88,334 |
The fair value of this debt decreases as market interest rates increase. The fair value of this debt is estimated at $ 679,000 as at February 28, 2005 as disclosed in note 19 (a) of the financial statements.
VARIABLE INTEREST RATE | |||
DEBT | Operating Loan | Term Loan | |
Interest Rate | prime + 0.75% to 1.25% | prime + 1.0% | |
Principal at February 28, 2005 | 2,512,897 | 3,186,508 |
Principal payments by year: | |||
2006 | 829,104 | ||
2007 | 829,104 | ||
2008 | 829,104 | ||
2009 | 699,196 | ||
TOTAL | - | 3,186,508 |
The fair value of this debt is equal to the book amount. Future cash flows will be adversely impacted by interest rate increases.
Item 12. – Description of Securities Other than Equity Securities.
This item is not applicable.
35
P A R T II
Item 13. – Defaults, Dividend Arrearages and Delinquencies.
This item is not applicable.
Item 14. – Material Modifications to the Rights of Security Holders and Use of Proceeds.
A. | There were no material modifications to the rights of the Company’s shareholders during the fiscal year ended February 28, 2005. |
B. | There were no material modifications to any class of securities during the fiscal year ended February 28, 2005. |
C. | There has been no material withdrawal or substitution of assets securing any class of registered securities of the Company. |
D. | There has been no change of trustee or paying agent for any registered securities. |
E. | This item is not applicable. |
Item 15. - Controls and Procedures.
Based on their evaluation as of February 28, 2005, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Act”) are effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Act is recorded, processed, summarized and communicated to them as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company’s internal controls during the period covered by this annual report that could significantly affect the Company’s internal controls over financial reporting.
Item 16A. – Audit Committee Financial Expert.
The Company’s Board of Directors has determined that the Company has at least one audit committee financial expert, Mr. Douglas Carlson, serving on its audit committee. For details on his professional career, see “Item 6. Directors, Senior Management and Employees”.
Item 16B. – Code of Ethics.
The Company has adopted a code of business conduct and ethics, which is attached as an exhibit to this report.
Item 16C. – Principal Accountant Fees and Services.
a) | Audit Fees – Audit fees billed for the fiscal years ended February 28, 2005 and February 29, 2004 totaled $55,919 and $85,259 respectively. |
36
b) | Tax Fees - Tax fees billed for the fiscal years ended February 28, 2005 and February 29, 2004 totaled $Nil and $12,821 respectively. |
c) | All Other Fees – Other fees billed for the fiscal year ended February 28, 2004 totaled $1,218 and to date, there were no other fees billed for the fiscal year ended February 29, 2005. |
The audit committee approves all audit, audit-related services, tax services and other services provided by BDO Dunwoody LLP. Any services provided by BDO Dunwoody LLP that are not specifically included within the scope of the audit must be pre-approved by the audit committee in advance of any engagement. Under the Sarbanes-Oxley Act of 2002, audit committees are permitted to approve certain fees for audit-related services, tax services and other services pursuant to a de minimus exception prior to the completion of an audit engagement. In 2004, none of the fees paid to BDO Dunwoody LLP were approved pursuant to the de minimus.
Item 16D. – Exemptions from the Listing Standards for Audit Committees.
None
Item 16E. – Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
During 2002, the Company repurchased 108,400 of its issued and outstanding shares. These shares were cancelled during 2003, and no further shares have been repurchased.
P A R T III
Item 17. – Financial Statements.
The Consolidated Financial Statements of Leading Brands, Inc. for the year ended February 28, 2005, February 29, 2004 and February 28, 2003 are attached to this report.
Item 18. – Not applicable.
Item 19. – Exhibits.
Exhibit No. | Description |
1.1 | Certificate of Incorporation and Articles and amendments to the Articles and Memorandum of the Company, incorporated by reference from prior filings. |
2.1 | Information Circular dated May 25, 2005. |
11.1 | Code of Business Conduct and Ethics |
37
38
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
LEADING BRANDS, INC.
/s/ Ralph McRae
Ralph D. McRae
Chairman and Chief Executive Officer
Dated: May 25, 2005
39
INFORMATION CIRCULAR
LEADING BRANDS, INC.
Suite 1800 – 1500 West Georgia Street
Vancouver, British Columbia
Canada V6G 2Z6
www.LBIX.com
(all information as at May 2, 2005 unless otherwise noted)
In this Information Circular, unless otherwise specified,
all dollar amounts are expressed in United States dollars.
Persons Making The Solicitation
This Information Circular is furnished in connection with the solicitation of proxies by the management of Leading Brands, Inc. (the “Company”) for use at the annual general meeting (the “Meeting”) of the Company’s shareholders (the “Shareholders”) to be held at the time and place and for the purposes set forth in the accompanying Notice of Meeting. The Company will conduct its solicitation by mail and officers and employees of the Company may, without receiving special compensation, also telephone or make other personal contact. The Company will pay the cost of solicitation.
Appointment Of Proxies
The individuals named in the accompanying proxy form are directors or officers of the Company. A registered Shareholder wishing to appoint some other person (who need not be a Shareholder) to represent the Shareholder at the Meeting has the right to do so, by striking out the two printed names and inserting the appointed person’s name in the blank space on the proxy form.
Voting By Proxy
Common shares of the Company (the “Shares”) represented by properly executed proxies in the accompanying form will be voted or withheld from voting on each respective matter in accordance with the instructions of the Shareholder on any ballot that may be called for. Where no choice has been specified by the Shareholder, such Shares will, on a poll, be voted in accordance with the notes to the form of proxy.
When so authorized by the Shareholder, the enclosed proxy form confers discretionary authority upon the person named therein as proxyholder with respect to amendments or variations to matters identified in the Notice of the Meeting and with respect to other matters which may properly come before the Meeting. At the date of this Information Circular, management of the Company knows of no such amendments, variations or other matters to come before the Meeting.
Completion And Return Of Proxy
Completed and signed proxy forms must be deposited at the office of the Company’s registrar and transfer agent, Pacific Corporate Trust Company, 10 th Floor - 625 Howe Street, Vancouver, British Columbia, Canada V6C 3B8, not later than forty-eight (48) hours, excluding Saturdays, Sundays and
- 1 -
holidays, prior to the time of the Meeting, or shall be deposited with the Chairman of the Meeting prior to commencement of the Meeting.
Non-Registered Holders
Only registered Shareholders or duly appointed proxyholders are permitted to vote at the Meeting. Most Shareholders of the Company are “Non-Registered” Shareholders because the Shares they own are not registered in their names but are instead registered in the name of a Nominee or Intermediary such as a brokerage firm through which they purchased the Shares. Such Intermediaries include banks, trust companies, securities dealers or brokers and trustees or administrators of self-administered RRSP's, RRIFs, RESPs and similar plans, or clearing agencies such as The Canadian Depository for Securities Limited ("CDS"). If you purchased your Shares through a broker, you are likely a Non-Registered Holder.
The Notice of Meeting, Information Circular and form of proxy (collectively, the "Meeting Materials") are being sent to both registered and Non-Registered Shareholders of the Company by either the Company (through its agent) or the Intermediaries (through their service providers).
If you are a Non-Registered Holder, and the Company or its agent has sent these materials directly to you, your name and address and information about your holdings of securities, have been obtained in accordance with applicable securities regulatory requirements from the Intermediary holding on your behalf. By choosing to send these materials to you directly, the Company (and not the Intermediary holding on your behalf) has assumed responsibility for (i) delivering these materials to you, and (ii) executing your proposed voting instructions. Please return your voting instructions as specified in the request for voting instructions.
The Meeting Materials will include either a form of proxy or a voting instruction form. Please follow the instructions on the form you received and return your completed and signed voting instructions as specified on the form.
If you are a Non-Registered Holder who wishes to vote at the Meeting in person, you should appoint yourself as proxyholder by writing your name in the space provided on the proxy or voting instruction form, and return the form in the envelope provided. Do not complete the voting section of the form as your vote will be taken at the meeting.
Revocability of Proxy
A registered Shareholder who has given a form of proxy may revoke it at any time before it has been exercised. The revocation must be in writing and executed by the registered Shareholder or by the registered Shareholder’s attorney authorized in writing or, if the registered Shareholder is a corporation, by a duly authorized officer or attorney of the corporation, and delivered either to the registered office of the Company, at 1100 – 888 Dunsmuir Street, Vancouver, British Columbia, Canada, V6C 3K4, at any time up to and including the last business day preceding the day of the Meeting or any adjournment of it, or to the Chair of the Meeting on the day of the Meeting, or any adjournment of it.
Only registered Shareholders have the right to revoke a proxy. Non-Registered Holders who wish to change their vote must, at least 7 days before the Meeting, arrange for their respective Nominees to revoke the proxy on their behalf.
A revocation of a proxy does not affect any matter on which a vote has been taken prior to the revocation.
- 2 -
Interest of Certain Persons in Matters to be Acted Upon
Except as disclosed herein, no Person has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in matters to be acted upon at the Meeting. For the purpose of this paragraph, "Person" shall include each person: (a) who has been a director or executive officer of the Company at any time since the commencement of the Company’s last fiscal year; (b) who is a proposed nominee for election as a director of the Company; or (c) who is an associate or affiliate of a person included in (a) or (b).
Voting Securities And Principal Holders Of Voting Securities
The Company is authorized to issue 500,000,000 common shares without par value, of which 15,045,069 Shares are issued and outstanding as of May 2, 2005. Any Shareholder of record at the close of business on May 18, 2005 is entitled to receive notice of and vote at the Meeting and is entitled to one vote for each Share held. The Company has no other classes of voting securities.
To the best of the knowledge and belief of the directors and senior officers of the Company, as of May 2, 2005, the following persons beneficially own, directly or indirectly, or exercise control or direction over, Shares carrying 10% or more of the voting rights attached to all outstanding Shares of the Company:
Shareholder | Number of Shares | Percentage of Issued Capital |
Cede & Co. (1) | 8,939,135 | 59.42% |
CDS & Co. (2) | 4,301,014 | 28.59% |
Northland Properties Corporation (3) | 2,020,626 | 13.43% |
(1) |
Cede & Co. is an American depository, holding
shares on behalf of beneficial owners.
|
(2) |
CDS & Co. is a Canadian depository, holding
shares on behalf of beneficial owners.
|
(3) |
Northland Properties Corporation (“NPC”)
is the beneficial owner of these Shares. NPC is related to R. Thomas Gaglardi,
a director of the Company.
|
Election Of Directors
The Company’s board of directors is currently comprised of six directors. These are divided into three classes designated as Class I, Class II and Class III, to provide for a rotation of three year terms of office. Any director whose term has expired is eligible for re-election.
The terms of office of Douglas Carlson and Iain Harris, the directors in Class II, will expire at the conclusion of the Meeting, to be held on June 28, 2005, while the terms of office of the directors in Classes III and I expire at the 2006 and 2007 annual general meetings, respectively. Accordingly, the number of directors to be elected at the Meeting is now two.
The persons named below will be presented for election at the Meeting as management’s nominees.
- 3 -
The following table provides information respecting the individuals proposed to be nominated by management for election as directors at the Meeting, including the approximate number of voting shares of the Company beneficially owned, directly or indirectly, by each of them:
Name, Present Position(s) with the
Company (2) , Province/State and Country of Residence |
Principal Occupation (1) | Director Since | Common Shares Held (3) |
Douglas Carlson
(4)
(6)
Director Colorado, USA |
Chief Executive Officer of FIJI Water Holdings, LLC (7) since July 1996. | June 1999 | 864,000 |
Iain J. Harris
(4)
Director British Columbia, Canada |
Chairman and Chief Executive Officer of Summit Holdings Ltd. |
May 1996-Dec. 2003
and June 2004 et seq. |
151,000 |
The persons named below are current directors whose term of office will continue after the Meeting.
Name, Present Position(s) with
the Company (2) , Province/State and Country of Residence |
Principal Occupation (1) |
Director
Since |
Term
Expires |
Common Shares Held (3) |
Peter Buckley
(4)
Director British Columbia, Canada |
President, Old Spaghetti Factory Canada Ltd. |
August
1997 |
August
2006 |
51,000 |
Thomas Gaglardi
Secretary and Director British Columbia, Canada |
President, Northland Properties Corporation and Chairman & CEO of Sandman Hotels, Inns & Suites and Moxie’s Restaurants, LP. |
October
1998 |
August
2006 |
2,020,626 (5) |
Ralph D. McRae
Chairman, President, CEO and Director British Columbia, Canada |
Chairman of the Company since March 1996. President and CEO of the Company since November 1996 |
March
1996 |
June 2007 | 449,160 |
Jonathan Merriman
(6)
Director California, USA |
Chairman and CEO of Merriman Curhan Ford & Co. |
January
1999 |
June 2007 | 362,192 |
(1) |
Each of the nominees named above has held the principal
occupation or employment indicated for at least five years.
|
(2) |
For the purposes of disclosing positions held in
the Company, "Company" includes the Company and any parent or subsidiary
thereof.
|
(3) |
The information as to country of residence, principal
occupation and number of shares beneficially owned by the nominees (directly
or indirectly or over which control or direction is exercised) is not
within the knowledge of the management of the Company and has been furnished
by the individuals listed.
|
(4) |
Member of the Company’s Audit Committee.
|
(5) |
All of these Shares are held by Northland Properties
Corporation, a company related to Mr. Gaglardi.
|
(6) |
Member of the Company’s Compensation Committee.
|
(7) |
Fiji Water Holdings, LLC, a company with a director
in common with the Company, supplied products for resale in the amount
of $250,126 during the year ended February 28, 2005.
|
If Messrs. Carlson and Harris are elected, they will each hold office as a director until the conclusion of the 2008 annual general meeting of the Company, unless the director’s office is earlier vacated in accordance with the Articles of the Company or the provisions of the Business Corporations Act of British Columbia.
- 4 -
Executive Compensation
Form 51-102F6 under the Securities Act (British Columbia) requires the disclosure of compensation received by each “Named Executive Officer” of the Company or its subsidiaries. Set out below are particulars of compensation paid to the following persons (the "Named Executive Officers"):
(a) |
the Company’s chief executive officer;
|
(b) |
the Company’s chief financial officer;
|
(c) |
each of the Company’s three most highly compensated
executive officers other than the chief executive officer and the chief
financial officer, who were serving as executive officers at the end of
the most recently completed financial year and whose total salary and
bonus exceeds Cdn$150,000 (US$116,387) per year; and
|
(d) |
any additional individuals for whom disclosure would
have been provided under (c) but for the fact that the individual was
not serving as an executive officer of the Company at the end of the most
recently completed financial year.
|
During the most recently completed fiscal year of the Company, namely the year ended February 28, 2005, the Company and its subsidiaries had four Named Executive Officers, whose names and positions held within the Company are set out in the summary of compensation table below.
Summary of Compensation
The following table is a summary of compensation paid to the Named Executive Officers for each of the Company’s three most recently completed fiscal years, converted to US dollars . Compensation for each Named Executive Officer is paid by the Company in Canadian dollars. As the Canadian:US dollar exchange rate has increased by 6% during the fiscal year ended February 28, 2005, that may imply an increase in compensation when none has occurred in Canadian dollars, or otherwise exaggerate any actual Canadian dollar increase.
Annual Compensation | Long Term Compensation |
All
Other Compensation |
||||
Name and
Principal Position |
Fiscal
Year Ending |
Salary
(US$) |
Bonus
(US$) |
Other Annual
Compensation (US$) |
Securities Under Options
Granted during the year (#) |
Life insurance
premiums (US$) |
Ralph McRae,
Chairman, President and CEO |
2005
2004 2003 |
nil
nil nil |
nil
nil 125,000 |
372,439
65,172 (1) 351,468 61,512 (1) 282,340 53,904 (1) |
nil
nil nil |
965
1,210 808 |
- 5 -
Annual Compensation | Long Term Compensation |
All
Other Compensation |
||||
Name and
Principal Position |
Fiscal
Year Ending |
Salary
(US$) |
Bonus
(US$) |
Other Annual
Compensation (US$) |
Securities Under Options
Granted during the year (#) |
Life insurance
premiums (US$) |
Donna
Higgins, CFO |
2005
2004 |
106,688
80,263 (4) |
nil
nil |
nil
nil |
20,000
(2)
30,000 (3) 50,000 |
807
584 |
Dave Read,
President of LBI Brands, Inc. |
2005
2004 2003 |
nil
nil nil |
nil
nil 21,519 |
238,071
(5)
154,300 138,193 |
100,000
(6)
50,000 nil |
nil
nil nil |
Patrick Wilson,
VP of Sales |
2005
2004 2003 |
146,195
n/a n/a |
nil | nil | 112,500 (7) | 978 |
(1) |
BBI Holdings Inc., a company with a director in
common with the Company, receives US$5,431 per month for consulting
services provided by Mr. McRae and another director of BBI Holdings Inc.
|
(2) |
20,000 previously granted options @US$1.00 were
extended for a further 5-year period, expiring April 5, 2009.
|
(3) |
30,000 previously granted options @ US$1.00
expired Jan.25, 2005 and 30,000 options @ US$1.04 were granted July
15, 2004.
|
(4) |
Ms. Higgins was appointed CFO of the Company in
April 2003. This figure represents 12 complete months during the fiscal
year ended February 29, 2004.
|
(5) |
VE Services a company owned by Mr. Read, received
$238,071 for consulting services provided by Mr. Read.
|
(6) |
50,000 previously granted options @ US$1.00
were extended for a further 5-year period, expiring July 2, 2009 and 50,000
previously granted options @ US$1.00 were extended for a further 5-year
period, expiring August 27, 2009.
|
(7) |
92,500 previously granted options @ US$1.00
expired Nov. 3, 2004 and 92,500 options @ $US1.04 were granted July
15, 2004 and 20,000 options @ US$1.10 were granted Mar. 1, 2004.
|
Long-Term Incentive Plans - Awards in Most Recently Completed Fiscal Year
The Company has no long-term incentive plans in place and therefore there were no awards made under any long-term incentive plan to the Named Executive Officers during the Company’s most recently completed fiscal year. A "long-term incentive plan" is a plan under which awards are made based on performance over a period longer than one fiscal year, other than a plan for options, SARs (stock appreciation rights) or restricted share compensation.
Options/SARs Granted During the Most Recently Completed Fiscal Year
The Company does not have a formal stock option plan. Options for the purchase of common shares of the Company are granted from time to time to directors, officers and employees as an incentive. During the most recently completed fiscal year, the following incentive stock options were granted by the Company to the Named Executive Officers. No SARs (stock appreciation rights) were granted during this period.
- 6 -
Name |
Securities
Under Options Granted (#) |
% of Total
Options Granted to Employees in Fiscal year (1) |
Exercise
or Base Price (US$/ Security) |
Market Value of
Securities Underlying Options on the Date of Grant or Extension of Grant (US$/Security) (2) |
Expiration Date |
Donna Higgins |
20,000
30,000 |
5.76 |
1.00
1.04 |
1.10
1.04 |
April 5, 2009
July 15, 2014 |
Dave Read |
50,000
50,000 |
11.53 |
1.00
1.00 |
1.10
1.10 |
July 2, 2009
August 27, 2009 |
Patrick Wilson |
92,500
20,000 |
12.97 |
1.04
1.10 |
1.04
1.10 |
July 15, 2014
March 1, 2009 |
(1) |
During the last fiscal year, 867,500 new options
were granted. Total options expired or forfeited during the last fiscal
year were 889,267.
|
(2) |
Calculated as the closing price of the Company’s
shares on the Nasdaq SmallCap Market on the date of grant.
|
Aggregated Option Exercises During the Most Recently Completed Fiscal Year and Fiscal Year End Option Values
The following table sets out the number of options that were exercised by the Named Executive Officers during the most recently completed fiscal year, as well as the fiscal year end value of stock options held by the Named Executive Officers. During this period, no outstanding SARs were held by the Named Executive Officers.
Name
|
Securities
Acquired on Exercise (#) |
Aggregate
Value Realized (1) (US$) |
Unexercised Options at
Fiscal Year-End Exercisable/Unexercisable (#) |
Value of Unexercised
In-the-Money Options at Fiscal Year-End (US$) Exercisable / Unexercisable (US$) (2) |
Ralph McRae | nil | nil | 1,000,000 / nil | Nil |
Donna Higgins | nil | nil | 83,500 / 66,500 | Nil |
Dave Read | nil | nil | 215,000 / 35,000 | Nil |
Patrick Wilson | 4,900 | 167 | 14,459 / 98,041 | Nil |
(1) |
Based on the difference between the option exercise
price and the closing market price of the Company’s shares on the
date of exercise.
|
(2) |
In-the-Money Options are those where the market
value of the underlying securities as at the most recent fiscal year end
exceeds the option exercise price. The closing market price of the Company’s
shares as at February 28, 2005 was US$0.840
|
Option Repricing
The Company did not reprice any stock options during the most recently completed financial year.
- 7 -
Defined Benefit or Actuarial Plan Disclosure
The Company does not have a defined benefit or actuarial plan for its officers and key employees, under which benefits are determined by final compensation and years of service.
Termination of Employment, Change in Responsibilities and Employment Contracts
The Company has no specific compensatory plans or arrangements that would entitle a Named Executive Officer to receive more than Cdn$100,000 as compensation in the event of resignation, retirement or other termination of employment or from a change of control of the Company or its subsidiaries, or a change of responsibilities following a change of control. The local laws regarding termination and severance are assumed to apply.
Compensation Committee
The Company’s Compensation Committee (the “Committee”) is comprised of two directors: Jonathan Merriman and Douglas Carlson.
Report on Executive Compensation
The Committee is responsible for, among other things, reviewing and determining the annual salary, bonus/profit sharing and other compensation levels of the executive officers of the Company. Compensation matters may also be reviewed and approved by the entire board of directors.
Compensation Principles
The Company is committed to the philosophy of sharing the benefits of success with those who help the Company grow and prosper. The Company’s strength and ability to sustain growth is based on an organization which perceives people as its single most important asset. The Committee’s philosophy is to provide sufficient compensation opportunities for executives of the Company in order to attract, retain and motivate the best possible management team to lead the Company in the achievement of its performance goals. The Committee believes that compensation significantly based on performance is more likely to enhance the continuing financial success of the Company and the improvement of shareholder value. In furtherance of these goals, the Company has developed a profit participation plan for senior management and an employee share option plan to increase the risk/reward ratio of its executive compensation program, to focus management on long term strategic issues, and to align management’s interests with those of the Shareholders of the Company in the sustained growth of shareholder value.
Compensation Elements and Determination Process
The Company’s executive compensation program includes base salary, annual cash or short-term incentives (bonuses). Bonuses for senior management are, with limited exceptions, discretionary and are intended to reward senior managers for exceptional performance that positively impacts the profitability and growth of the Company. Long term incentives are granted in the form of stock options which generally vest over several years of service with the Company. The level of the option grant is related to the ability of that employee to affect the overall performance of the Company. For the financial year ended February 28, 2005, compensation for executive officers of the Company consisted of a fixed base salary and long term compensation in the form of stock options.
- 8 -
Salary levels are reviewed periodically and adjustments may be made, if warranted, after an evaluation of executive and company performance, salary trends in the Company’s business sector, and any increase in responsibilities assumed by the executive. To aid in its assessments and with its ongoing responsibilities, the Committee will, from time to time, retain independent consultants to advise on compensation matters.
Compensation of Chief Executive Officer
The compensation of the chief executive officer is determined in accordance with the considerations described above.
Summary
In summary, the Committee is ultimately responsible for determining, affirming or amending the level and nature of executive compensation of the Company. The Committee will have access, at the expense of the Company, to independent, outside compensation consultants for both advice and competitive data for the purpose of making such determinations. The Committee believes that the compensation policies and programs outlined above will ensure that levels of executive compensation truly reflect the performance of the Company, thereby serving the best interests of the Shareholders.
Respectfully submitted by the Compensation Committee:
Douglas Carlson
Jonathan Merriman
- 9 -
Performance Graph
The following chart compares the total cumulative shareholder return for $100 invested in common shares of the Company beginning on February 28, 2000 with the cumulative total return of the NASDAQ Composite Index (“NASDAQ Index”) for the five most recently completed fiscal years of the Company.
LEADING BRANDS, INC. (“LBIX”)
Comparison of Five Year Total Common Shareholders’ Return
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |
LBIX PRICE
(US$) |
$2.406 | $0.781 | $1.85 | $1.96 | $1.05 | $0.840 |
NASDAQ
INDEX |
4696.69 | 2151.83 | 1731.49 | 1337.52 | 2029.82 | 2051.72 |
Compensation of Directors
Directors receive Cdn$1,500 per quarter (pro rated for those serving less than a full quarter) and Cdn$500 for each directors’ meeting and committee meeting attended. Directors are also compensated for their services in their capacity as directors by the granting from time to time of incentive stock options. During the last completed fiscal year, 225,000 stock options that were previously granted to directors expired. Also during the year, 225,000 stock options were granted to directors.
BBI Holdings Inc. (“BBI”), which is controlled by Ralph McRae, receives US$5,431 per month for consulting services provided by Mr. McRae and another director of BBI. Reference is made to the Summary Compensation Table above for details of compensation paid to directors who are also Named Executive Officers, in their capacity as executive officers.
- 10 -
Indebtedness Of Directors and Executive Officers
During the last completed fiscal year, no director, executive officer or nominee for director of the Company or any of their associates has been indebted to the Company or any of its subsidiaries, nor has any of these individuals been indebted to another entity which indebtedness is the subject of a guarantee, support in agreement, letter of credit or other similar arrangement or understanding provided by the Company or any of its subsidiaries.
Interest Of Informed Persons In Material Transactions
To the knowledge of management of the Company, except as disclosed herein, since the commencement of the last completed fiscal year, no informed person of the Company, nominee for director, or any associate or affiliate of any informed person or nominee, had any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any transaction or any proposed transaction which has materially affected or would materially affect the Company.
In December 2002, Northland Properties Corporation (“NPC”), a company related to a director of Leading Brands, Inc., converted 2,000,000 Class E preferred shares to 788,626 common shares at the rate of US$1.75 per share. This transaction increased NPC’s percentage ownership of the Company’s outstanding shares from 8.66% as at February 28, 2002 to 13.52% at February 28, 2003.
Appointment Of Auditor
The management of the Company intends to nominate BDO Dunwoody LLP, Chartered Accountants, for appointment as auditor of the Company to hold office until the close of the next annual general meeting of the Company, at a remuneration to be fixed by the directors. BDO Dunwoody LLP was first appointed as auditor on December 13, 2001.
Management Contracts
Management functions of the Company are performed by the directors or executive officers, certain of whom perform these services as contractors to the Company, as disclosed in the Executive Compensation section.
Particulars of Matters to be Acted Upon
Incentive Stock Options
Director, officer, consultant and employee stock options (commonly referred to as incentive stock options) are a means of rewarding future services provided to the Company and are not intended as a substitute for salaries or wages, or as a means of compensation for past services rendered.
The Company is requesting shareholder approval to grant authority to the directors to replace expiring stock options with the same quantity of options at current market prices, in accordance with the policies of all regulatory bodies and stock exchanges having jurisdiction over the Company.
The full text of the ordinary resolution relating to the approval of replacement stock options is attached hereto as Schedule “A”.
- 11 -
Other Matters
Management is not aware of any matters to come before the Meeting other than those set forth in the Notice of Meeting. If any other matter properly comes before the Meeting, it is the intention of the persons named in the Proxy to vote the shares represented thereby in accordance with their best judgment.
Additional Information
Additional information relating to the Company is available on SEDAR at www.sedar.com.
The Company will provide to any Shareholder, upon request to the Director of Corporate Affairs at Suite 1800 - 1500 West Georgia Street, Vancouver BC, Canada V6G 2Z6, copies of this Information Circular and the Annual Report, including the most recent audited financial statements and MD&A, and interim financial statements.
Financial information is provided in the Company’s comparative financial statements and MD&A for its most recently completed financial year.
Directors’ Approval
This Information Circular contains information as at May 2, 2005, except where another date is specified. The contents of this Information Circular have been approved and its mailing authorized by the board of directors of the Company.
DATED at Vancouver, British Columbia, this 25 th day of May, 2005
ON BEHALF OF THE BOARD OF DIRECTORS
/s/ Ralph McRae
Ralph D. McRae, Chairman, President and
Chief Executive Officer
- 12 -
SCHEDULE “A”
APPROVAL OF GRANTING OF INCENTIVE STOCK OPTIONS
WHEREAS:
1. |
Director, officer, consultant and employee stock
options (commonly referred to as incentive stock options) are a means
of rewarding future services provided to the Company and are not intended
as a substitute for salaries or wages, or as a means of compensation for
past services rendered;
|
2. |
As previously-issued options expire, the Company
intends to re-issue the same quantity of options at current market prices.
|
IT IS RESOLVED THAT:
1. |
the directors are authorized in their absolute discretion
to replace expiring stock options with new options at the current market
price on the date of expiry, in accordance with the policies of all regulatory
bodies and stock exchanges having jurisdiction over the Company;
|
2. |
incentive stock options previously granted to insiders
of the Company during the prior year be ratified, approved and confirmed;
|
3. |
the directors be authorized to amend incentive stock
options held by insiders of the Company from time to time; and
|
4. |
no further shareholder approval will be required
prior to the exercising of these options or amended options.
|
- 13 -
CODE OF BUSINESS CONDUCT AND ETHICS
Purpose
Leading Brands, Inc. and its subsidiaries (collectively, “LBI” or the “Company”) are committed to conducting business in a manner that follows the highest ethical standards and complies with all applicable laws. This Code of Business Conduct and Ethics (the “Code”) has been adopted by the Company, in accordance with applicable legislation, to provide written standards and guidance to the Company’s directors, officers and employees (collectively, the “Covered Persons”) to promote:
| honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
| fair dealing with the Company’s shareholders, customers, suppliers, competitors and employees; |
| compliance with applicable governmental laws, rules and regulations; |
| full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, securities commissions, stock exchanges or regulatory authorities, and in other public communications made by the Company; |
| the prompt internal reporting of violations of the Code to the appropriate person or persons identified in this Code; and |
| accountability for adherence to the Code. |
This Code summarizes the principles and policies that we use to guide our conduct as representatives of the Company and provides that we will act ethically and in compliance with legal requirements in all jurisdictions where we operate.
This Code is general in nature and does not specifically address every potential form of unacceptable conduct. It is expected that Covered Persons will exercise good judgment and common sense in compliance with the principles set out in this Code. Each Covered Person has a duty to avoid any circumstance that would violate the letter or spirit of this Code.
1
Application
This Code applies to everyone in the Company, at all times and everywhere that we do business. It will be reviewed annually by the board of directors and supplemented as required from time to time.
Compliance with Laws, Rules and Regulations
LBI is committed to comply with the laws, rules and regulations that apply to its business activities. These laws are both numerous and complex.
All Covered Persons should understand those laws that apply to them in the performance of their jobs and take steps to ensure that the Company’s operations with which they are involved are conducted in conformity with those laws. Each Covered Person is personally responsible for complying with the law and is expected to ask for advice when there is uncertainty.
Senior management of the Company, or the Company’s Audit Committee, must be informed immediately of any matters coming to the attention of a Covered Person which could adversely affect the reputation of the Company, including inquiries and informal or formal investigations by governmental authorities. The Company requires that its Covered Persons be candid and cooperate fully with its external auditors and attorneys.
Following are some general examples of laws and policies that must be observed. This list is not all encompassing.
Confidential Information
Covered Persons will, during the course of their relationship with LBI, have access to confidential information relating to the Company and its business. Confidential information includes any information that has not been made available to the public that might be of use to competitors or harmful to the Company or its customers if disclosed. It also includes important non-public information about firms with which the Company has dealings, including customers and suppliers. Confidential information is a valuable asset, and protecting that information is an important obligation of all Covered Persons.
Confidential information must not be disclosed to anyone (including other LBI personnel) who is not authorized to receive it. Confidential information should never be discussed in public places such as elevators, public transportation or restaurants. In addition, documents, computers and work areas should be properly secured to prevent unauthorized access.
Discussing or exchanging information that is competitively sensitive is prohibited. Covered Persons who participate in trade associations, or who have routine contacts with competitors, must be especially careful not to divulge this type of information.
2
Conflicts of Interest
A conflict of interest exists when a Covered Person’s personal interests interfere with, or give the appearance of interfering with, the interests of the Company. Covered Persons are expected to use good judgment and common sense to avoid actual or apparent conflicts between private interests and those of the Company, including receiving improper personal benefits as a result of their position, regardless of whether such benefits are received from the Company or from a third party. In addition, Covered Persons may not use corporate assets, information, or their position for personal gain.
It is difficult to identify exclusively when a conflict of interest may arise. Conflicts of interest may manifest themselves in many ways and may reach farther than just the Covered Person. Many conflicts arise as a result of situations involving family members of Covered Persons. For this reason, Covered Persons must avoid any situation in which their independent business judgment might appear to be compromised.
Covered Persons are prohibited from:
| taking for themselves personally business opportunities that are discovered through the use of LBI property, information or position; |
| using LBI property, information or position for improper personal gain; and |
| competing with LBI. |
Each Covered Person is responsible for taking appropriate action to eliminate or prevent such conflict or appearance of a conflict. All questions or concerns about potential conflicts of interest, including reporting and disclosure of the situation, should be addressed to the appropriate level of management, or the Audit Committee.
Disclosure
As a publicly traded company, LBI has a duty to comply with all applicable laws and regulations with respect to accuracy in the information it reports to the securities commissions, stock exchanges, regulatory authorities, and the public.
The CEO, CFO, Corporate Controller, and Director of Corporate Affairs, among others, have a supervisory role with respect to the preparation of the Company’s public communications and reports, and are responsible for taking all steps reasonably necessary to cause the disclosure in these documents to be full, fair, accurate, timely and understandable. Any Covered Person who has a role in the Company’s financial or operating reporting and disclosure process has an obligation to discharge his or her responsibilities diligently pursuant to applicable law, regulations and listing requirements.
Covered Persons are prohibited from knowingly misrepresenting, omitting, or causing others to misrepresent or omit material facts about the Company to others, whether within or outside the Company.
Accuracy and candor is critical to the financial health of the Company. Any Covered Person who becomes aware of inaccuracies contained in the Company’s reports and public statements, shall promptly report such inconsistencies to the Company’s Audit Committee and general counsel.
3
Environment, Health and Safety
LBI is committed to managing and operating its assets in a manner that is protective of human health and safety and the environment. In conducting its operations, LBI will attempt to minimize environmental impact through sound environmental management practices that meet or exceed government standards.
Financial Controls and Records
The Company is required by laws, rules and regulations to maintain and retain certain records and to follow specific guidelines in managing its records. Accurate and reliable records are essential for LBI to meet its legal and financial obligations and to manage its business. LBI’s books and records must reflect all business transactions in a complete, accurate and timely manner, and must conform to applicable legal and accounting requirements and to the Company’s system of internal controls.
Covered Persons are responsible and accountable for the accurate reporting of all transactions in which they are directly involved. Falsification of the Company’s records in any form is a violation of this Code.
Gifts and Other Benefits
It is essential to efficient business practices that all those who do business with LBI have access to LBI on equal terms. Covered Persons may not solicit or accept entertainment, gifts or benefits that grant or appear to grant preferential treatment to an organizations or individual, including payments made by or to immediate family members.
Covered Persons are expected to make decisions about the use or purchase of materials, equipment, consultants, advice, property, and supplies with the intent of receiving the best value for the Company.
No Covered Person shall attempt to gain privileges or special benefits through payment of bribes, kickbacks, extraordinary commissions, payments or other consideration.
Information Systems
LBI’s computer and information systems are valuable assets of the Company.
Consequently, their use must be in accordance with Company policies designed to protect the integrity of those systems and associated data.
No Covered Person shall illegally reproduce software. Covered Persons of the Company who make, acquire or use unauthorized copies of computer software are subject to civil and criminal penalties and possible dismissal.
Insider Trading
Covered Persons may not engage in transactions in any securities, whether of the Company or of any other public companies with which LBI does business, while aware of material, non-public information (so called “insider trading”). In addition, Covered Persons shall not communicate such material, non-public information to any person who might use such information to purchase or sell securities (so called “tipping”).
4
Material inside information is considered to be any fact or information that has not been disclosed to the public and that would influence a reasonable investor’s decision to buy or sell a company’s stock or other securities, or would reasonably be expected to have significant effect on the market price or value of such securities.
A Covered Person who comes into possession of material non-public information may not execute any trade in the securities of the subject company without first consulting with the Company’s counsel. In addition, a Covered Person should wait a minimum of two full trading days after the release of such material information to the public before effecting a trade in such securities.
Privacy
Information relating to a Covered Person’s medical, financial, employment, legal or personal affairs is confidential and may not be disclosed to anyone, inside or outside of the Company, without the Covered Person’s consent or unless required by law or regulation. Personal information is protected under applicable provincial, state and federal legislation.
Proprietary Information
In the performance of assigned duties, Covered Persons may develop ideas, formulae, inventions, designs, processes, trademarks or trade names, or create original works of authorship relating to the business of the Company (“Intellectual Property”). Covered Persons must protect as valuable assets any confidential and proprietary information developed by or entrusted to them.
All Intellectual Property, including any patents, inventions, or rights or authorship resulting from the work of LBI Covered Persons is the exclusive property of LBI.
Use of Company Assets
Company assets should be used only for the legitimate business purposes of the Company. Such assets include the Company name, Intellectual Property, confidential information, ideas, plans and strategies. Each Covered Person must account for the use of assets and property belonging to the Company, and is prohibited from the personal use of such assets or property, as well as the questionable or unethical disposition of Company assets or property. All Covered Persons should protect the Company’s assets and ensure their efficient use.
Duty to report Violations
Each Covered Person has the right and the responsibility to question or challenge situations in which he or she suspects that something improper, unethical or illegal is occurring. Covered Persons are expected to promptly report what they believe in good faith to be a violation of law or Company policy, whether accidental or deliberate, to senior management, general counsel, or the Company’s Audit Committee.
5
Confidentiality regarding those who make compliance reports and those potentially involved is maintained to the extent possible during a compliance investigation. No Covered Person will be penalized for making a good-faith report of violators of this Code, nor will LBI tolerate retribution, retaliation or adverse personal action of any kind against anyone making a good faith report of a potential violation of this Code or other illegal or unethical conduct. However, any Covered Person knowingly or recklessly providing false information may be subject to disciplinary action, up to and including dismissal. If a Covered Person reports a violation, and is in some way involved in the violation, the fact that the Covered Person came forward will be considered if and when corrective actions are taken.
Violations of any of the Code, or other illegal or unethical conduct, may subject a Covered Person to disciplinary action and may be considered grounds for dismissal. Failure to comply with certain of these policies may violate applicable laws and subject the Covered Person to criminal or civil liability or both. Because individual violations may also subject the Company to civil or criminal liability or the loss of business, the Company takes compliance measures seriously and works diligently to enforce them.
Waiver
The Company reserves the right to amend, waive or alter the policies set forth in this Code at any time. All amendments or waivers of the Code require the approval of the board of directors of the Company. Any waiver of the Code for executive officers or directors must be promptly disclosed in accordance with applicable securities regulations, including an explanation for the waiver.
6
ACKNOWLEDGMENT
I hereby acknowledge that I have read, understand and agree to conduct myself in the scope of my employment in accordance with the Code of Business Conduct and Ethics of Leading Brands, Inc. and its subsidiaries.
Signature: | ||
Print Name: | ||
Date: |
7
EXHIBIT 12.1
CERTIFICATIONS
I, Ralph McRae, certify that:
1. | I have reviewed this annual report on Form 20-F of Leading Brands, Inc.; | |
2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: | |
a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b. | evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
c. | disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting. | |
5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors: | |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and | |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
Date: May 25, 2005
/s/ Ralph McRae
Ralph D. McRae
Chairman and Chief Executive Officer
EXHIBIT 12.2
CERTIFICATIONS
I, Donna Higgins, certify that:
1. | I have reviewed this annual report on Form 20-F of Leading Brands, Inc.; | |
2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: | |
a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b. | evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
c. | disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting. | |
5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors: | |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and | |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
Date: May 25, 2005
/s/ Donna Higgins
Donna Higgins
Chief Financial Officer
EXHIBIT 13.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Leading Brands, Inc. (the “Company”) on Form 20-F for the period ended February 28, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify that to the best of our knowledge:
1. | The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 25, 2005
/s/ Ralph McRae
Name: Ralph D. McRae
Title: Chief Executive Officer
Date: May 25, 2005
/s/ Donna Higgins
Name: Donna Higgins
Title: Chief Financial Officer
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 |
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 |
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 Cost
in 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 | ) |