Notes to the Projected Financial Statements

REVENUE:
Based upon the foregoing, revenue in the initial year will be approximately $7,400. It will increase to $21,000 in two and then more than double in year three to about $43,000. It will double once again in year four to $86,000 and finally reach approximately $98,500 by year five. It will stabilize at that level provided we do not expand or change our sales mix.

OPERATING EXPENSES:

Advertising expense:
Our bulk sales will not require any direct marketing. We already have established good relationships with purchasers of bulk syrup and we will continue to seek additional buyers of bulk syrup in order to reduce the risk of having too much inventory on hand.

The advertising expense is directly attributable to our retail segment. We have allocated $4.00 for every gallon of syrup we intend to sell into the retail market. Based on an average selling price between Grade "A" ($60.00 per gallon) and Grade "B" ($45.00 per gallon) of $52.50, we have budgeted approximately 7.6% of our selling price to our advertising budget.

The advertising budget was arrived at as follows:

 
Containers and Labels:
The containers and labels is another cost directly associated with our retail market. Based upon a review of a number of supplier's catalogues, it is estimated that it will cost approximately $12.00 per gallon for small retail containers and labels. We have used this amount to arrive at the following expenses.

This appears to be quite high. We will evaluate whether or not similar containers can be obtained elsewhere. If we subsequently go an alternative route we will ensure the supplier complies will all required government regulations.

Clean-up & Supplies / Repairs & Maintenance:
During our discussions with Department of Agriculture personnel in Nova Scotia and Ottawa as well as maple producers, the one clear point that was stressed by all was the necessity for sanitation for all equipment. It is vitally important to clean the system at the end of the season and properly store same. We have also discussed the requirements for maintaining the system.

Industry experts suggested that we allocate $0.15 cents per tap annually for costs associated with clean up and supplies. They also recommended an additional $0.15 cents annually per tap for repairs to the system.

Based upon the above recommendations we have arrived at the following:

Fixed Assets & Depreciation Expense:

The woodlot represents approximately 150 acres of maple producing trees, owned by Mr. MacMillan. A $75,000 value has been placed on this woodlot ($500 per acre). This is a natural resource and is not subject to depreciation.

Depreciation expense for the building is based on an estimated useful life of 20 years. The building will be depreciated on a straight line basis. Depreciation expense for equipment and the pipeline system is also based upon a 20 year useful life. The majority of the equipment is stainless steel and does not rust. During our visit to other producers, one advised that their pipeline system was at least 20 years old. Provided the pipeline is properly maintained, it can be used for 20 years and beyond.

The following table demonstrates the years in which the capital assets are acquired and provides for the depreciation expense during the first five years.

For a detailed analysis of the specific equipment requirements please refer to "Capital Assets" within the Operating Plan section.

NOTE: The Maple Syrup Company will acquire assets that are eligible for investment tax credits (ITC). A partnership is not subject to income taxes but rather income (loss) earned by the partnership flows through to the partners in their respective agreed proportions. Each partner will have to include 50 % of the income or loss of this venture on their respective income tax returns.

The investment tax credits are also allocated to the respective partners in the same fashion. The investments tax credits will reduce the federal income tax otherwise payable for both Mr. MacLean and Mr. MacMillan. The capital cost of the asset must also be reduced by the amount of the investment tax credit. We have capitalized and depreciated The Maple Syrup Company's capital assets net of any applicable investment tax credits.

Based upon the partners income (loss), the allocation to the partners are as follows:

Fuel Expense:
The evaporator we intend to use is an oil fired unit. The oil fired unit provides a more constant heat. This we feel will result in an higher quality end product. It also requires less labour in the sugarhouse. The manufacturer's representative suggested that it will cost approximately $1.50 per finished gallon of syrup for the evaporator selected in our plan.

Land Rentals:
It is estimated that Mr. MacMillan's woodlot has at least 8,000 tapable trees. This woodlot will be adequate for the first two (2) years. During year three an additional 2,000 taps will be leased from an adjacent woodlot. The going rate for leasing the woodlot is based on tap usage. We anticipate we can secure this property for $0.50 (cents) per tap. This requires an outlay of $1,000 during year three (2,000 taps @ $.050 per tap). This expenditure will increase to $6,000 in year four and year five (12,000 taps @ $0.50 per tap).

Membership Fees:
We have budgeted $400 in membership fees for years two through five. We know it will be beneficial to become involved with an association as it will provide us an opportunity to meet with other maple producers and suppliers. This will assist us to keep up to date with new developments and trends in the maple industry.

Professional Fees:
We anticipate the cost to prepare the financial records for the partnership to be approximately $500 annually. During year one, we have provided for an additional $500 as there will be filing requirements for such things as GST registration, and the initial cost to have the records set up for us.

Property Taxes:
As previously stated, regardless of whether or not we embark on this project, the property taxes will be payable. Therefore, we feel this will not be an added cost to our maple syrup business.

Salaries, Wages & Benefits:
We have not recognized any salary for either partner in this plan. We have recognized and have capitalized the costs associated with the installation of pipelines (see balance sheet). The installation will be done by the two partners with the aid of a consultant. We have decided to present it in this way because if someone other than the partners was to put the pipeline in place it would be a real capital cost to the partnership.

Rather than a salary to the partners, we have decided to see how much income would be available for distribution. We felt by doing it this way it would be easier to evaluate the overall benefit this venture would provide to each of us.

During year one and two at the 2,000 and 5,000 tap level, we feel we can handle all the duties required in the tapping of trees and processing of raw sap. We want to keep all costs at a minimum in order to be in a position to reduce our debt load on a timely basis.

We anticipate we will hire one employee for a period of 10 weeks during year three. We intend to pay this employee $8.00 per hour for a 50 hour week. This would total $4,000. We have added an additional $1,000 for applicable employer contributions to CPP and UIC for a total of $5,000.

During year four and year five we will hire two (2) employees over the same time period. The costs will double to $10,000 for our employees.

The employees will be responsible for going to the woodlots to ensure all taps are in good working order, hauling sap from holding tanks to the sugarhouse. The employee(s) will also assist with duties within the sugarhouse.

Small Tools:
We have budgeted $400 annually for small tools such as drill bits, drills, wrenches, and so forth.

Telephone:
Telephone expense in this plan represents additional long distant charges directly associated with the maple syrup business.

Training & Trade Shows:
During our initial year we realize we could make costly mistakes particularly in the processing of sap. We also want to have a knowledgable, qualified person available to assist in the positioning of pipeline. The pipeline relies upon gravitational feed, thus a trained person who has worked within this industry is definitely more qualified then we are at present.

This consultant will provide us with the recommended positioning of the pipeline and assist in the placement of the initial 2,000 taps. We anticipate this will require 10 days @ $200 per day. We will have a second consultant during the processing period. We have been advised that we could hire an experienced person at a cost of $3,000. This we feel is money well spent as we will then be in the position to operate the equipment and process a fine quality end product.

We plan to attend at least one trade show annually. This will be beneficial as it will allow us the opportunity to learn about new equipment, processes and product available to the industry. It will also be a time to meet with fellow maple producers and establish new and/or stronger relationships. We have budgeted $500 annually to this account.

Utilities:
We anticipate very small amounts of added utilities costs associated with the processing of syrup during years one and two. Once the reverse osmosis equipment is acquired, utilities will increase. We have budgeted $500 in year 3 for this cost. We have doubled this expense to $1,000 in year 4 as the second reverse osmosis system was acquired during this time period.

Interest on Long Term Debt:
The interest on long term debt increased from $2,482 in year one to $12,160 in year five. It consistently increases as the company is going through growth periods during the entire 5 years.

Debt will be incurred in each of the first four years. The Maple Syrup Company used an interest rate of 8% and amortized the applicable debt over a ten (10) year period. The following table illustrates the applicable debt and interest expense for the entire 5 year period.

Overdraft Interest:
Overdraft interest arises as a result of cash deficiencies during the early months of the year and is then reduced as our products are sold. The entire details of how the overdraft interest arose is provided in the projected cashflow statements which accompany the projected financial statements.

Cash:
From a review of the cash balances at the end of each fiscal period, you will note that the Company was in a overdraft position in the initial two years. At the end of year three a small cash surplus will exist. Cash reserves at the end of year four is expected to be approximately $16,000 and is expected to increase to approximately $40,000 at the end of year 5.

Management decided not to take any drawings from the Company for the first five (5) years. This decision was arrived at due to the results outlined in the forecasted cashflow statements. Even during the initial months of year 5, The Maple Syrup Company plans to experience a cash overdraft. This of course is due to growth that the Company plans to achieve during its first four years. July of year 5 is the first time when positive cash flow exists and it should continue to be positive provided no further growth occurs.

In keeping with our conservative nature, please note that we have not reflected any interest income on any cash reserves that will be invested in short-term investments. When we find ourselves in this position, 30 to 90 day interest bearing certificates will be purchased. The partners intend to start taking reasonable draws commencing in Year 6. 

FINANCIAL PLAN OVERVIEW:

Based on the foregoing, we will recognize a loss of approximately $7,000 during year one. A small profit will be realized during year two and three whereby after year three the Company will have a retained earnings of approximately $1,000.

Year four will realize a profit of $15,000 and year 5 will have income of approximately $25,000.

From year 6 forward, net income will increase as the interest expense will decrease annually.

In summary, we conclude that our maple syrup operation can realize a profit, however, it is a long term project. We intend to work towards this end as the additional income will provide a good compliment to our present income base. We will take pride in knowing that we generated income from a resource that may otherwise disappear.