SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,
2002 Commission File No. 0-9989
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
STAKE TECHNOLOGY LTD.
(Exact name of registrant as specified in its charter)
CANADA
(Jurisdiction of Incorporation)
Not Applicable
(I.R.S. Employer Identification No.)
2838 Highway 7
Norval, Ontario L0P 1K0, Canada
(Address of Principle Executive Offices)
(905) 455-1990
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to 12(g) of the Act:
Common Shares, no Par value
(Title of Class)
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 12 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 |_|
At July 29, 2002 registrant had 41,937,428 common shares outstanding, the only
class of registrant's common stock outstanding. There were no other classes of
stock outstanding and the aggregate market value of voting stock held by
non-affiliates at such date was $79,056,745. The Company's common shares are
traded on the Nasdaq Smallcap Market tier of the Nasdaq Stock Market under the
symbol STKL and The Toronto Stock Exchange under the symbol SOY.
There are 35 pages in the June 30, 2002 10-Q and the index follows the cover
page.
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STAKE TECHNOLOGY LTD. 1 June 30, 2002 10-Q
STAKE TECHNOLOGY LTD.
FORM 10-Q
June 30, 2002
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as at June 30, 2002 and December 31, 2001
Consolidated Statements of Retained Earnings for the six months ended June
30, 2002, June 30, 2001 and the year ended December 31, 2001
Consolidated Statements of Earnings for the three months ended June 30,
2002 and 2001
Consolidated Statements of Earnings for the six months ended June 30, 2002
and 2001.
Consolidated Statements of Cash Flow for the three months ended June 30,
2002 and 2001
Consolidated Statements of Cash Flow for the six months ended June 30,
2002 and 2001
Condensed Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II - OTHER INFORMATION
All financial information is expressed in Canadian Dollars
The closing rate of exchange on July 29, 2002 was CDN. $1 = US $0.6364
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 2 June 30, 2002 10-Q
PART I - FINANCIAL INFORMATION
Item 1 -
Consolidated Financial Statements
Stake Technology Ltd.
For the Six Months ended June 30, 2002
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 3 June 30, 2002 10-Q
Stake Technology Ltd.
Consolidated Balance Sheets
As at June 30, 2002 and December 31, 2001
Unaudited
(Expressed in thousands of U.S. dollars)
June 30, December 31,
2002 2001
------- -------
Assets (note 6)
Current assets
Cash and cash equivalents $ 7,647 $ 3,364
Restricted cash -- 1,147
Marketable securities -- 6,307
Accounts receivable - trade 12,749 8,377
Current portion of note receivable 1,330 1,256
Inventories (note 4) 13,593 13,821
Other receivables and prepaid expenses 1,351 1,258
Future income taxes 752 663
------- -------
37,422 36,193
Note receivable 363 1,047
ProPProperty, plant and equipment - at cost, less accumulated
amortization of $10,585 (December 31, 2001 - $8,785) 31,583 30,883
Investments 394 366
Goodwill - at cost, less accumulated amortization of
$985 (December 31, 2001 - $985) 9,120 8,540
Other assets (note 5) 3,745 3,032
------- -------
$82,627 $80,061
======= =======
Liabilities
Current liabilities
Bank indebtedness (note 6) $ 2,871 $ 1,206
Accounts payable and accrued liabilities 13,607 12,831
Customer deposits 299 1,389
Current portion of long-term debt (note 6) 2,154 2,634
Current portion of long term payables (note 7) 808 1,067
------- -------
19,739 19,127
Long-term debt (note 6) 13,600 14,014
Long-term payables (note 7) 1,386 1,598
Future income taxes 1,696 1,822
------- -------
36,421 36,561
------- -------
Shareholders' Equity
Capital stock (note 8) 36,236 35,875
Contributed surplus 2,937 2,910
Retained earnings 5,436 3,709
Currency translation adjustment 1,597 1,006
------- -------
46,206 43,500
------- -------
$82,627 $80,061
======= =======
Contingencies (note 10)
(See accompanying notes to consolidated financial statements)
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STAKE TECHNOLOGY LTD. 4 June 30, 2002 10-Q
Stake Technology Ltd.
Consolidated Statements of Retained Earnings
For the six months ended June 30, 2002 and 2001 and the year ended December 31,
2001
Unaudited
(Expressed in thousands of U.S. dollars)
Six months ended Year ended
------------------- ------------
June 30, June 30, December 31,
2002 2001 2001
-------- -------- ------------
Retained Earnings - Beginning of the Year $3,709 $3,690 $3,690
Net earnings for the period 1,727 547 19
------ ------ ------
Retained Earnings - End of Period $5,436 $4,237 $3,709
====== ====== ======
(See accompanying notes to consolidated financial statements)
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STAKE TECHNOLOGY LTD. 5 June 30, 2002 10-Q
Stake Technology Ltd.
Consolidated Statements of Earnings For the three months ended June 30, 2002 and
2001 Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
June 30, June 30,
2002 2001
-------- --------
Revenues $ 31,378 $ 23,988
Cost of goods sold 25,942 20,180
-------- --------
Gross profit 5,436 3,808
Selling, general and administrative expenses 3,223 2,494
-------- --------
Earnings before the following 2,213 1,314
Interest expense (306) (519)
Interest and other income 97 143
Foreign exchange gain (loss) 466 (41)
-------- --------
Earnings before income taxes 2,470 897
Provision for income taxes 766 372
-------- --------
Net earnings for the period $ 1,704 $ 525
======== ========
Net earnings per share for the period
- Basic $ 0.04 $ 0.02
======== ========
- Diluted $ 0.04 $ 0.02
======== ========
(See accompanying notes to consolidated financial statements)
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STAKE TECHNOLOGY LTD. 6 June 30, 2002 10-Q
Stake Technology Ltd.
Consolidated Statements of Earnings
For the six months ended June 30, 2002 and 2001
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
June 30, June 30,
2002 2001
-------- --------
Revenues $ 54,685 $ 43,107
Cost of goods sold 45,971 36,634
-------- --------
Gross profit 8,714 6,473
Selling, general and administrative expenses 6,174 4,874
-------- --------
Earnings before the following 2,540 1,599
Interest expense (726) (1,009)
Interest and other income 203 228
Foreign exchange gain (loss) 460 (11)
-------- --------
Earnings before income taxes 2,477 807
Provision for income taxes 750 260
-------- --------
Net earnings for the period $ 1,727 $ 547
======== ========
Net earnings per share for the period
- Basic $ 0.04 $ 0.02
======== ========
- Diluted $ 0.04 $ 0.02
======== ========
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 7 June 30, 2002 10-Q
Stake Technology Ltd.
Consolidated Statements of Cash Flow
For the three months ended June 30, 2002 and 2001
Unaudited
(Expressed in thousands of U.S. dollars)
June 30, June 30,
2002 2001
-------- --------
Cash provided by (used in)
Operating activities
Net earnings for the period $ 1,704 $ 525
Items not affecting cash
Amortization 929 824
Provision for future income tax (196) 85
Other (24) (68)
-------- --------
2,413 1,366
Change in non-cash working capital balances related to operations
(note 9) (1,492) (195)
-------- --------
921 1,171
-------- --------
Investing activities
Acquisition of companies, net of cash acquired (note 3) (293) --
Acquisition of property, plant and equipment (985) (1,140)
Proceeds from note receivable 356 347
Other (161) (15)
-------- --------
(1,083) (808)
-------- --------
Financing activities
Repayments of revolving credit facilities, net (1,030) (1,175)
Repayment of long-term debt facilities (442) (2,093)
Borrowings under long-term debt facilities -- 61
Payment of deferred purchase consideration (285) --
Proceeds from the issuance of common shares, net of issuance costs 290 5,978
Increase in deferred financing costs (23) --
Decrease (increase) in restricted cash 880 (1,391)
Purchase and redemption of preference shares of subsidiary
companies (12) (19)
-------- --------
(622) 1,360
-------- --------
Foreign exchange gain on cash held in a foreign currency 77 19
-------- --------
(Decrease) increase in cash during the period (707) 1,742
Cash and cash equivalents - Beginning of period 8,354 --
--------
Cash and cash equivalents - End of period $ 7,647 $ 1,742
======== ========
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 8 June 30, 2002 10-Q
Stake Technology Ltd.
Consolidated Statements of Cash Flow
For the six months ended June 30, 2002 and 2001
Unaudited
(Expressed in thousands of U.S. dollars)
June 30, June 30,
2002 2001
-------- --------
Cash provided by (used in)
Operating activities
Net earnings for the period $ 1,727 $ 547
Items not affecting cash
Amortization 1,863 1,678
Provision for future income tax (217) 58
Other (49) (76)
-------- --------
3,324 2,207
Change in non-cash working capital balances related to operations
(note 9) (4,382) (3,394)
-------- --------
(1,058) (1,187)
-------- --------
Investing activities
Proceeds from disposition of marketable securities 6,307 --
Acquisition of companies, net of cash acquired (note 3) (507) (322)
Acquisition of property, plant and equipment (2,152) (1,534)
Proceeds from note receivable 714 691
Other (264) 3
-------- --------
4,098 (1,162)
-------- --------
Financing activities
Borrowings under revolving credit facilities, net 1,665 1,771
Repayment of long-term debt facilities (15,912) (2,880)
Borrowings under long-term debt facilities 15,000 61
Payment of deferred purchase consideration (432) --
Proceeds from the issuance of common shares, net of issuance costs 388 5,981
Increase in deferred financing costs (509) --
Decrease (increase) in restricted cash 1,147 (1,391)
Purchase and redemption of preference shares of subsidiary
companies (117) (94)
-------- --------
1,230 3,448
-------- --------
Foreign exchange gain on cash held in a foreign currency 13 7
-------- --------
Increase in cash during the period 4,283 1,106
Cash and cash equivalents - Beginning of period 3,364 636
-------- --------
Cash and cash equivalents - End of period $ 7,647 $ 1,742
======== ========
(See accompanying notes to consolidated financial statements)
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STAKE TECHNOLOGY LTD. 9 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
1. Interim financial statements
The interim consolidated financial statements of Stake Technology Ltd.
(the Company) have been prepared in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X and in accordance with
accounting principles generally accepted in Canada which conform, in all
material respects (except as indicated in Note 12, with accounting
principles generally accepted in the U.S.) Accordingly, these financial
statements do not include all of the disclosures required by generally
accepted accounting principles for annual financial statements. In the
opinion of management, all adjustments considered necessary for fair
presentation have been included; all such adjustments are of a normal,
recurring nature. Operating results for the six months ended June 30, 2002
are not necessarily indicative of the results that may be expected for the
full year ending December 31, 2002. For further information, see the
Company's consolidated financial statements, including the accounting
policies and notes thereto, included in the Annual Report on Form 10K for
the year ended December 31, 2001.
2. Description of business and significant accounting policies
The Company was incorporated under the laws of Canada on November 13, 1973
and operates in three principal businesses. The Food Group manufactures
and sells agricultural products with a focus on soy, soymilk and other
natural and organic food products. The Environmental Industrial Group
processes and sells abrasives and industrial minerals and recycles
inorganic materials. The Company also operates a division developing and
commercializing a proprietary steam explosion technology for processing of
biomass into higher value products. The Company's assets, operations and
employees at June 30, 2002 are located in the United States and Canada.
The Company's significant accounting policies are outlined below:
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned, with the exception of
International Materials and Supplies, Inc., which the Company owns 51% of
the outstanding common shares. All significant intercompany accounts and
transactions have been eliminated on consolidation.
Cash and cash equivalents
Cash and cash equivalents consist of unrestricted cash and short-term
deposits with a maturity at acquisition of less than 90 days.
Marketable securities
Marketable securities consist of portfolio investments in other companies
and are valued at market.
Inventories
Raw materials, finished goods and merchandise inventory are valued at the
lower of cost and estimated net realizable value. Cost is determined on a
first-in, first-out basis.
Inventories of grain are valued at market. Changes in market value are
included in cost of sales. The Food Group generally follows a policy of
hedging its grain transactions to protect gains and minimize losses due to
market fluctuations. Sale, purchase and futures contracts are adjusted to
market price and gains and losses from such contracts are included in cost
of sales. The Company has a risk of loss from hedge activity if the grower
does not deliver the grain as scheduled.
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STAKE TECHNOLOGY LTD. 10 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Investments
Investments in companies over which the Company exercises significant
influence are accounted for by the equity method whereby the Company
includes its proportionate share of earnings and losses of such companies
in earnings.
Property, plant and equipment
Property, plant and equipment is stated at cost, less accumulated
amortization.
Amortization is provided on property, plant and equipment on the
diminishing balance basis or, in the case of certain U.S.-based
subsidiaries, straight-line basis at rates based on the estimated useful
lives of the assets as follows: 10% to 33% for office furniture and
equipment, machinery and equipment and vehicles and 4-8% for buildings.
Amortization is calculated from the time the asset is put into use.
Goodwill and intangible assets
The Company adopted the new CICA Handbook Section 3062 "Goodwill and
Intangible Assets" on January 1, 2002. This new standard eliminates the
amortization of goodwill and indefinite life intangible assets. Goodwill
represents the excess of cost of subsidiaries and businesses over the
assigned value of net assets acquired.
In accordance with the new standard, the Company has assessed the carrying
value of goodwill for possible impairment, and has determined that no such
impairment exists as at January 1, 2002. The Company's trademarks are
intangible assets with an indefinite life. The Company has further
determined that there is no impairment in the value of trademarks. As
required by the standard, the new rules related to goodwill and other
intangible assets has been applied prospectively. On a pro-forma basis,
the impact of adopting the new standard on prior period earnings is:
Three months ended
-------------------
June 30, June 30,
2002 2001
$ $
-------- --------
Net earnings for the quarter 1,704 525
Add back: goodwill and trademark amortization, net of tax -- 85
-------- --------
Adjusted net earnings for the quarter 1,704 610
======== ========
Adjusted net earnings per common share 0.04 0.02
======== ========
Six months ended
-------------------
June 30, June 30,
2002 2001
$ $
-------- --------
Net earnings for the period 1,727 547
Add back: goodwill and trademark amortization, net of tax -- 153
-------- --------
Adjusted net earnings for the period 1,727 700
======== ========
Adjusted net earnings per common share 0.04 0.02
======== ========
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STAKE TECHNOLOGY LTD. 11 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Other assets
Pre-operating costs
Net costs incurred in the pre-operating stage of start-up businesses are
deferred until the business reaches commercial operation or the passage of
a certain period of time as predetermined by management.
During 2001, the Company initiated the start-up of an organic dairy
business based in Canada. Certain pre-operating costs of $308 (December
31, 2001 - $32) have been deferred. Amortization of these costs on a
straight-line basis will commence in July 2002 and will be fully amortized
by December 31, 2003.
During 2000, the Company acquired Nordic Aseptic, Inc., which was
considered a start-up business from the date of acquisition to December
31, 2000. Certain operating costs, net of income earned during the
pre-operating period totaling $482 were deferred. Amortization of these
costs commenced January 1, 2001 and are being amortized on a straight-line
basis over three years.
Patents, trademarks and licences
Costs of acquiring or registering patents, and licences are capitalized
and amortized on a straight-line basis over their expected lives of 10 to
20 years. As described above, the Company's trademarks have been deemed to
be indefinite life intangible assets, and therefore are not amortized.
Costs of renewing patents and trademarks are expensed as incurred.
Deferred financing costs Costs incurred in connection with obtaining
long-term financing are deferred and amortized over the term of the
related financing agreement.
Revenue recognition
i) Food Group
Grain sales are recorded at the time of shipment. Revenues from
custom drying services are recorded upon provision of services and
on completion of quality testing. All other Food Group revenue is
recognized upon the sale and shipment of a product or the providing
of a service to a customer.
ii) Environmental Industrial Group
Revenue from the sale of industrial minerals is recognized upon the
sale and shipment of the related minerals. Revenue from recycling
activities is recognized upon the sale and shipment or the disposal
of non-hazardous material received.
iii) Steam Explosion Technology
The percentage of completion method is used to account for
significant contracts in progress when related costs can be
reasonably estimated. The Company uses costs incurred to date as a
percentage of total expected costs to measure the extent of progress
towards completion.
Revenue from consulting and contract research is recognized when the
service is completed.
License fees related to sales of the Company's technologies are
recorded as revenue over the term of the license.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 12 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Change in reporting currency
The Company has historically prepared and filed its consolidated financial
statements in Canadian dollars. On January 1, 2002, the Company adopted
the United States (U.S.) dollar as its reporting currency for presentation
of its consolidated financial statements. With the recent acquisitions of
a number of Food Group companies and Virginia Materials in the United
States, a significant portion of the Company's net earnings will be earned
by its U.S. operations. Historical consolidated results have been restated
using a translation of convenience, whereby all historical results have
been reflected using the exchange rate in effect on December 31, 2001 of
$1 U.S. to $1.5928 CDN.
Foreign currency translation
The Company's Canadian operations are self-sustaining operations, with the
exception of the Corporate office, which is considered to be an integrated
operation. The assets and liabilities of the self-sustaining operations
are translated at exchange rates in effect at the balance sheet date.
Monetary assets and liabilities of the Corporate office are translated at
exchange rates in effect at the balance sheet date. All other assets and
liabilities of the integrated operations are translated at historical
exchange rates. Revenues and expenses are translated at average exchange
rates prevailing during the period. Unrealized gains or losses resulting
from self-sustaining operations are accumulated and reported as currency
translation adjustment in shareholders' equity. Unrealized gains or losses
resulting from integrated operations are included in the determination of
earnings.
Other revenues and expenses arising from foreign currency transactions are
translated into U.S. dollars using the exchange rate in effect at the
transaction date. Monetary assets and liabilities are translated using the
rate in effect at the balance sheet date. Related exchange gains and
losses are included in the determination of earnings.
Customer deposits
Customer deposits principally include prepayments by the Food Group's
customers for merchandise inventory to be purchased during the spring
planting season.
Income taxes
The Company follows the asset and liability method of accounting for
income taxes whereby future income tax assets are recognized for
deductible temporary differences and operating loss carry-forwards, and
future income tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the amounts
of assets and liabilities recorded for income tax and financial reporting
purposes. Future income tax assets are recognized only to the extent that
management determines that it is more likely than not that the future
income tax assets will be realized. Future income tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment or substantive enactment. The income tax expense
or benefit is the income tax payable or refundable for the period plus or
minus the change in future income tax assets and liabilities during the
period.
Employee stock compensation
Employee/director stock options granted by the Company contain exercise
prices, which are equivalent to the share price on the grant date. Any
consideration paid by employees on exercise of stock options or purchase
of stock is credited to share capital. No compensation expense is recorded
upon issuance of stock options to employees.
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STAKE TECHNOLOGY LTD. 13 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Derivative instruments
The Food Group enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on grain
transactions to the extent considered practicable for minimizing risk from
market price fluctuations. Futures contracts used for hedging purposes are
purchased and sold through regulated commodity exchanges. Inventories,
however, may not be completely hedged, due in part to the Company's
assessment of its exposure from expected price fluctuations. Exchange
purchase and sales contracts may expose the Company to risk in the event
that a counterparty to a transaction is unable to fulfill its contractual
obligation. The Company manages its risk by entering into purchase
contracts with pre-approved producers. The Company has a risk of loss from
hedge activity if a grower does not deliver the grain as scheduled. Sales
contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated. All futures transactions are
marked to market. Gains and losses on futures transactions related to
grain inventories are included in cost of goods sold.
Earnings per share
Basic earnings per share are computed by dividing the income available for
common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed
using the treasury stock method whereby the weighted average number of
common shares used in the basic earnings per share calculation is
increased to include the number of additional common shares that would
have been outstanding if the dilutive potential common shares had been
issued.
Use of estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
3. Business acquisitions
(a) As part of the October 31, 2001 acquisition of certain assets of
Virginia Materials and Supplies, Inc. and 51% of the outstanding
common shares of International Materials & Supplies, Inc., the
Company agreed to pay the vendors contingent consideration
equivalent to 50% of the pre-tax profit generated by these
businesses for a two year period from the date of acquisition. This
contingent consideration will be recorded as an increase to goodwill
when the amount of the contingency is determinable. During the
period, the Company paid $507 (December 31, 2001 - $89) in respect
of the contingent consideration.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 14 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
3. Business acquisitions, continued
(b) On July 2, 2002, the Company acquired certain assets and the
businesses of Organic Kitchen Inc. and Cloud Mountain Inc.
Consideration consisted of $297 ($450 CDN) paid in cash on closing.
In addition, the Company will pay 10% of the pre-tax profits earned
to December 31, 2005, up to a maximum of $1,319 ($2,000 CDN). This
contingent consideration will be recorded as an increase to the
trademark and producer contracts when the amount of the contingency
is determinable.
Organic Kitchen Inc. owns the trademark "Organic Kitchen" which is
utilized in the sale of various organic products in Canada. Cloud
Mountain Inc. sources organic animal feed for the production of
organic animals. The acquisition of these businesses is in line with
the Company's strategy to expand its organic food business in
Canada.
The net assets acquired are summarized below:
$
Net assets acquired
Inventory 132
Trademark and producer contracts 165
---
297
===
4. Inventories
June 30, December 31,
2002 2001
$ $
Raw materials 5,973 6,026
Finished goods and merchandise 6,276 6,323
Grain 1,344 1,472
-------- ------------
13,593 13,821
======== ============
Grain inventories consist of the following:
June 30, December 31,
2002 2001
$ $
Company owned grain 1,342 1,338
Unrealized gain (loss) on
Sales and purchase contracts (15) 100
Futures contracts 17 34
-------- ------------
1,344 1,472
======== ============
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 15 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
5. Other assets
June 30, December 31,
2002 2001
$ $
Trademarks 2,498 2,498
Pre-operating costs, net of accumulated amortization of $243
(December 31, 2001 - $161) 549 366
Deferred financing costs, net of accumulated amortization of $21
(December 31, 2001 - $nil) 512 24
Other 186 144
-------- ------------
3,745 3,032
======== ============
6. Long-term debt and banking facilities
On March 15, 2002, the Company entered into a new financing arrangement
with a major Canadian bank and its U.S. subsidiary. This financing
arrangement includes the following components:
i) $15,000 term loan with scheduled quarterly payments to
amortize the debt over seven years.
Interest on the term loan is payable at the borrower's option
at U.S. dollar base rate or U.S. LIBOR plus a premium based on
certain financial ratios of the Company.
On June 28, 2002, the Company made its first scheduled
quarterly payment of the term loan, reducing the total amount
outstanding at June 30, 2002 to $14,650.
ii) CDN $4,000 demand line of credit facility
Interest on borrowings under this facility is payable monthly
and accrues at the borrower's option based on various
reference rates including Canadian or U.S. bank prime, or
Canadian bankers' acceptances, plus a margin based on certain
financial ratios of the Company. As at June 30, 2002 $540
(December 31, 2001 - $nil) of this facility has been utilized.
Subsequent to June 30, 2002, the Company completed an
amendment to this credit agreement, whereby the CDN $4,000
demand line of credit facility has been increased to CDN
$5,000.
iii) $5,000 demand line of credit facility
Interest on borrowings under this facility is payable monthly
and accrues at the borrower's option based on various
reference rates including U.S. bank prime, or LIBOR, plus a
margin based on certain financial ratios of the Company. As at
June 30, 2002 $3,650 (December 31, 2002 - $nil) of this
facility has been utilized.
Total debt of $15,447 outstanding at December 31, 2001 was repaid on March
15, 2002 with the proceeds of the new financing arrangement. Financing
charges (loan breakage fees and deferred financing costs) of $185 related
to the debt outstanding at December 31, 2001, which was extinguished on
March 15, 2002, were expensed in the fourth quarter of 2001.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 16 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
6. Long-term debt and banking facilities, continued
The term loan and the Canadian and U.S. line of credit facilities
described above are collateralized by a first priority security against
all of the Company's assets in both Canada and the United States.
In addition to the $14,650 term loan described above, the Company also has
$1,104 of other debt outstanding at June 30, 2002 (December 31, 2001 -
$16,648).
As at June 30, 2002, the Company does not have any line of credit
facilities other than those described above and a $200 margin financing
facility, of which $111was utilized at June 30, 2002 (December 31, 2001 -
$200).
7. Long-term payables
June 30, December 31,
2002 2001
$ $
Product rebate payable 1,266 1,209
Deferred purchase consideration 608 1,040
Preference shares of subsidiary companies 320 416
-------- ------------
2,194 2,665
Less: current portion 808 1,067
-------- ------------
1,386 1,598
======== ============
8. Capital stock
June 30, December 31,
2002 2001
$ $
(a) Issued and fully paid -
41,321,528 common shares (December 31, 2001 -
41,081,228) 33,387 32,929
4,555,750 warrants (December 31, 2001 - 4,690,750) 2,849 2,946
-------- ------------
36,236 35,875
======== ============
(b) In the first six months of 2002, employees and directors exercised
165,300 options and 165,300 common shares were issued for net cash
proceeds of $296.
(c) In the second quarter of 2002, 75,000 warrants were exercised and
75,000 common shares were issued for net cash proceeds of $131.
(d) On April 2, 2002, 60,000 warrants with an exercise price of $1.75
per unit, were repurchased by the Company for a net cash cost of
$39.
(e) Subsequent to June 30, 2002, 500,000 warrants and 113,500 options
have been exercised and 613,500 common shares have been issued for
net cash proceeds of $1,396.
(f) As at June 30, and July 26, 2002, there were options vested to
employees and directors to acquire 1,444,125 common shares at
exercise prices of $1.06 to $2.10. In addition, at June 30 and July
26, 2002 options to acquire an additional 440,900 common shares at
$1.06 to $2.10 have been granted to employees and directors but have
not yet vested.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 17 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
8. Capital stock, continued
(g) During 1997, the shareholders of the Company agreed to reduce the
capital account of the Company's common shares by $15,712 through a
reduction of the deficit.
(h) Employee stock options granted by the Company in 2002 and 2001 were
granted at prices, which approximated the value of stock on the
grant date. These options vest at various dates ranging from the
date of the grants to June 17, 2006 and expire two to six years
subsequent to the grant date.
The fair value of the options granted during 2002 and 2001 was
estimated using the Black-Scholes option-pricing model with the
assumptions of a dividend yield of 0% (2001 - 0%), an expected
volatility of 30% (2001 - 30%), a risk-free interest rate of 3%
(2001 - 3%), and an expected life of one to six years.
The total value of 110,000 (2001 - 1,238,125) stock options that
were granted by the Company to employees and directors during 2002
was $118 (2001 - $508). Of this total amount, the cost of stock
compensation expense for the period ended June 30, 2002 would be $24
(December 31, 2001 - $410). The unrecognised value of $94 (December
31, 2001 - $98) will be charged to pro forma net earnings in future
years according to the vesting terms of the options. Compensation
expense of options granted in prior years and vesting in 2002 is $44
(December 31, 2001 - $65). The resulting pro forma net earnings
(loss) and basic earnings (loss) per share for the six month period
ended June 30, 2002 are $1,659 (December 31, 2001 - $(456)) and
$0.04 (December 31, 2001 - $(0.01)) respectively.
9. Supplemental cash flow information
Three months ended
---------------------
June 30, June 30,
2002 2001
$ $
Change in non-cash working capital balances related to operations:
Accounts receivable - trade (3,222) (2,682)
Inventories 2,432 657
Other receivables and prepaid expenses (541) (81)
Accounts payable and accrued liabilities 1,254 2,892
Customer deposits (1,415) (981)
-------- --------
(1,492) (195)
======== ========
Six months ended
---------------------
June 30, June 30,
2002 2001
$ $
Change in non-cash working capital balances related to operations:
Accounts receivable - trade (4,258) (3,032)
Inventories 391 884
Other receivables and prepaid expenses (80) (674)
Accounts payable and accrued liabilities 655 94
Customer deposits (1,090) (666)
-------- --------
(4,382) (3,394)
======== ========
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 18 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
10. Contingencies
a) The Company has filed a claim against a former director relating to
certain actions taken when he was the President of its operating
division, Barnes Environmental/Pecal. The former director has
counter-claimed against the Company and its subsidiaries, the
Chairman of the Company and Easton Minerals Limited, the Company's
32% equity investment. The Company and its legal counsel believe
that the counter-claim is without merit.
b) Various other claims or potential claims arising in the normal
course of business are pending against the Company. It is the
opinion of management that these claims or potential claims are
without merit and that the final determination of these claims or
potential claims will not materially affect the financial position
or results of the Company.
c) The Company believes, with respect to both its operations and real
property, that it is in material compliance with current
environmental laws. Based on known existing conditions and the
Company's experience in complying with emerging environmental
issues, the Company is of the view that future costs relating to
environmental compliance will not have a material adverse effect on
its financial position, but there can be no assurance that
unforeseen changes in the laws or enforcement policies of relevant
governmental bodies, the discovery of changed conditions on the
Company's real property or in its operations, or changes in use of
such properties and any related site restoration requirements, will
not result in the incurrence of significant costs. No provision has
been made in these financial statements for these future costs since
such costs, if any, are not determinable at this time.
d) In the normal course of business, the Food Group holds grain for the
benefit of others. The Company is liable for any deficiencies of
grade or shortage of quantity that may arise in connection with such
grain.
e) The Company has guaranteed loans of a third party to facilitate the
purchase of equipment used in the processing of certain of the
Company's inventory. As at June 30, 2002, the balance due on these
loans was $199.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 19 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
11. Segmented information
The Company operates in three industry segments: (a) the Food Group, which
manufactures, markets, distributes and packages grains and other food
products with a focus on soy, natural and organic food products; (b) the
Environmental Industrial Group, which recycles and sells or disposes of
certain non-hazardous and hazardous industrial waste and resale of
inorganic minerals; and (c) the Steam Explosion Technology Group: which is
responsible for the design, engineering, and sale of customized steam
explosion technology systems. The Company's assets, operations and
employees are located in Canada and the United States.
Industry segments
Three months ended
June 30, 2002
------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
Canada 191 3,529 -- 3,720
U.S 23,358 3,134 75 26,567
Other 1,036 54 -- 1,090
---------- ------------- ---------- ------------
Total revenues to external customers 24,585 6,718 75 31,378
---------- ------------- ---------- ------------
Interest expense 257 83 -- 306
---------- ------------- ---------- ------------
Segment net income 863 555 6 1,704
---------- ------------- ---------- ------------
Identifiable assets 51,493 20,124 11,010 82,627
---------- ------------- ---------- ------------
Expenditures on property, plant and equipment 747 234 4 985
---------- ------------- ---------- ------------
Three months ended
June 30, 2001
------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
Canada 13 3,887 -- 3,900
U.S 18,578 1,268 192 20,038
Other -- 50 -- 50
---------- ------------- ---------- ------------
Total revenues to external customers 18,591 5,205 192 23,988
---------- ------------- ---------- ------------
Interest expense 406 80 33 519
---------- ------------- ---------- ------------
Segment net income (loss) 498 136 (109) 525
---------- ------------- ---------- ------------
Expenditures on property, plant and equipment 929 203 8 1,140
---------- ------------- ---------- ------------
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 20 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
11. Segmented information, continued
Industry segments, continued
Six months ended
June 30, 2002
------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
Canada 266 6,351 -- 6,617
U.S 40,726 5,421 150 46,297
Other 1,684 88 -- 1,772
---------- ------------- ---------- ------------
Total revenues to external customers 42,676 11,859 150 54,685
---------- ------------- ---------- ------------
Interest expense 590 136 -- 726
---------- ------------- ---------- ------------
Segment net income 879 820 28 1,727
---------- ------------- ---------- ------------
Expenditures on property, plant and equipment 1,444 632 76 2,152
---------- ------------- ---------- ------------
Six months ended
June 30, 2001
------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
Canada 78 7,517 -- 7,595
U.S 32,342 2,197 282 34,821
Other 623 68 -- 691
---------- ------------- ---------- ------------
Total revenues to external customers 33,043 9,782 282 43,107
---------- ------------- ---------- ------------
Interest expense 812 164 33 1,009
---------- ------------- ---------- ------------
Segment net income (loss) 529 368 (350) 547
---------- ------------- ---------- ------------
Expenditures on property, plant and equipment 1,286 240 8 1,534
---------- ------------- ---------- ------------
Geographic segments
June 30, 2002 December 31, 2001
------------------------ ------------------------
U.S. Canada Total U.S. Canada Total
$ $ $ $ $ $
Goodwill and trademarks 9,928 1,690 11,618 9,429 1,609 11,038
====== ====== ====== ====== ====== ======
Property, plant and
equipment 24,124 7,459 31,583 24,009 6,874 30,883
====== ====== ====== ====== ====== ======
Total assets 56,591 26,036 82,627 55,299 24,762 80,061
====== ====== ====== ====== ====== ======
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 21 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. United States Accounting Principles differences
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada (Canadian GAAP)
which conform in all material respects applicable to the Company with
those in the United States (U.S. GAAP) during the periods presented except
with respect to the following:
Under U.S. GAAP, certain development and start-up costs of $189 and $276
incurred in the three months and six months ended June 30, 2002,
respectively (three months ended June 30, 2001 - $nil; six months ended
June 30, 2001 - $nil; December 31, 2001 - $32), deferred in these
financial statements would be expensed. Amortization of $40 and $80 in the
three months and six months ended June 30, 2002 (three months ended June
30, 2001 - $53; six months ended June 30, 2001 - $106; December 31, 2001 -
$212) capitalized in the current and prior periods, related to the
development and start-up costs would not have been expensed.
On March 8, 2002, the Company committed to grant certain employees 110,000
options to acquire 110,000 common shares at $2.15. These options were
provided to employees contingent upon approval by the shareholders of the
2002 stock option plan on June 18, 2002. Under U.S. GAAP, the difference
in stock price between the exercise price and the closing price the day
immediately preceding the day of shareholders' approval, is considered to
be compensation expense. Accordingly, $59 was recorded in the second
quarter of 2002 as stock option compensation expense.
During 2000, the Company repriced certain options. As a result $nil (six
months ended June 30, 2001 - $559; December 31, 2001 - $321) would be
recognized as an expense under U.S. GAAP.
Effective January 1, 2002, the Company adopted the U.S. dollar as its
reporting currency. Under Canadian GAAP historical results were restated
using a translation of convenience, whereas under U.S. GAAP, the
consolidated financial statements would be restated on a retroactive
basis.
Accordingly, the following would have been reported under U.S. GAAP:
Three months ended Six months ended Year ended
----------------------- ------------------------ ------------
June 30, June 30, June 30, June 30, December 31,
2002 2001 2002 2001 2001
$ $ $ $ $
---------- ---------- ---------- ---------- ------------
Net earnings for the period - as reported 1,704 525 1,727 547 19
Development, start-up and pre-operating costs expensed 40 53 80 106 212
Pre-operating costs capitalized (189) -- (276) -- (32)
Stock option compensation expense (59) (357) (59) (559) (321)
Tax effect of above items (16) -- (32) -- (85)
---------- ---------- ---------- ---------- ------------
Net earnings (loss) for the period - US. GAAP 1,480 221 1,440 94 (207)
========== ========== ========== ========== ============
Net earnings (loss) per share - U.S. GAAP 0.04 0.01 0.04 0.00 (0.01)
========== ========== ========== ========== ============
Weighted average number of common shares outstanding 41,198,000 30,159,000 41,156,000 29,322,000 32,456,000
========== ========== ========== ========== ============
Shareholders' equity - as reported 46,206 28,770 43,500
Cumulative development, start-up and pre-operating
costs expensed, net of related amortization and
taxes of $117 (June 30, 2001 - $nil; December 31,
2001 - $85) (666) (428) (438)
Cumulative stock compensation expense, net of taxes
of $nil (412) (592) (353)
---------- ---------- ------------
Shareholders' equity - U.S. GAAP 45,128 27,750 42,709
========== ========== ============
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 22 June 30, 2002 10-Q
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. United States Accounting Principles differences, continued
Comprehensive income
U.S. GAAP requires that a comprehensive income statement be prepared.
Comprehensive income is defined as "The change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner events". It includes all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. The comprehensive income statement reconciles the
reported net income to the comprehensive income.
The following is a comprehensive income statement (prepared in accordance
with U.S. GAAP), which, under U.S. GAAP, would have the same prominence as
other financial statements.
Three months ended Six months ended Year ended
------------------- ------------------- ------------
June 30, June 30, June 30, June 30, December 31,
2002 2001 2002 2001 2001
$ $ $ $ $
-------- -------- -------- -------- ------------
Net earnings (loss) for the period-U.S. GAAP 1,480 221 1,440 94 (207)
Currency translation adjustment 510 (311) 591 546 971
-------- -------- -------- -------- ------------
Comprehensive income (loss) 1,990 (90) 2,031 640 764
======== ======== ======== ======== ============
Other U.S. GAAP disclosures
June 30, December 31,
2002 2001
$ $
Allowance for doubtful accounts 1,262 1,117
======== ============
Accrued payroll 1,094 1,059
======== ============
13. Comparative balances
Certain comparative account balances have been reclassified to achieve
comparability to current period balances.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 23 June 30, 2002 10-Q
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Recent Corporate Developments
On July 2, 2002, the Company completed the acquisition of certain assets and the
businesses of Organic Kitchen Inc. and Cloud Mountain Inc. Organic Kitchen Inc.
owns the trademark "Organic Kitchen" which is utilized in the sale of various
organic products in Canada. Cloud Mountain Inc. sources organic animal feed for
the production of organic animals. The acquisition is intended to further
compliment the Company's strategy to build a Canadian niche business focused on
organic foods.
On March 25, 2002, the Company announced the launch of a new Division, Sunrich
Valley, which has entered the Canadian organic milk market with a full range of
organic milk products. These products will be marketed under the brand "MU". The
organic dairy market is one of the fastest growing segments of the natural and
organic foods business. The Company intends to complement its current product
offering with butter, cheese and cultured products over the next year.
On March 15, 2002, the Company entered into a new financing arrangement with a
major Canadian bank and its U.S. subsidiary, replacing existing lines of credit
and long-term debt facilities. The new facilities consist of the following
components; i) $15,000 term loan due May 2005, with scheduled quarterly
repayments to amortize over seven years; ii) CDN $4,000 demand line of credit
facility and, iii) $5,000 demand line of credit facility. The new facilities are
collateralized by a first priority security against all the Company's assets.
Interest is payable at the borrower's option depending on the facility (LIBOR,
U.S. dollar base rate, Canadian prime or Canadian bankers' acceptances) plus a
premium based on certain financial ratios of the Company.
New Directors/Management Changes
Mr. Tim Bergqvist and Mr. Michael Boyd retired from the Company's Board of
Directors at the Annual Shareholders meeting on June 18, 2002. Mr. Bergqvist has
been a Director since 1989 and Mr. Boyd since 1995. Mr. Boyd was also chairman
of the Audit Committee.
Ms. Leslie Markow who held the position of Vice President of Regulatory
Reporting/Corporate Compliance and Chief Administrative Officer left the Company
during the second quarter. Mr. John Dietrich has assumed most of Ms. Markow's
responsibilities and holds the position of Vice President, Treasurer, reporting
to the Chief Financial Officer.
Change in Reporting Currency
The Company has historically prepared and filed its consolidated financial
statements in Canadian dollars. On January 1, 2002, the Company adopted the
United States (U.S.) dollar as its reporting currency for presentation of its
consolidated financial statements. With the recent acquisitions of the Food
Group companies and Virginia Materials in the United States, a significant
portion of the Company's net earnings will be earned by its U.S. operations.
Historical consolidated results have been restated using a translation of
convenience, whereby all historical results have been reflected using the
exchange rate in effect on December 31, 2001 of $1 U.S. to $1.5928 CDN.
Developments at the Food Group
Sales and earnings have increased significantly in the Food Group versus the
same period in 2001. Key to this growth has been the turnaround at Nordic
Aseptic, the Company's aseptic packaging operation. In the second quarter of
2002, this facility achieved its first profitable month in history and was
profitable for two consecutive months in the quarter. This represents a major
milestone for the Food Group as cumulative losses at Nordic Aseptic for the 16
month period ending April 2002, were in excess of $2,800. Efforts remain focused
on increasing sales volumes over and above current levels while at the same time
continuing to achieve efficiency improvements through a combination of improved
processes and cost reduction initiatives.
The Group's Technical Processing function continues to drive improved results
due to the strong growth in the Group's dietary fibre product line and sales of
soy concentrate, further supplemented by the positive impact of cost reduction
programs implemented in the first quarter of 2002. These positive factors are
expected to continue in future months given the strong demand for key products.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 24 June 30, 2002 10-Q
Sales of specialty beans, organic feeds and bulk grains continue to show strong
volume and margin growth as a result of the continued growth in the natural and
organic food markets. The Company is currently pursuing a number of exciting
sales opportunities as mainstream marketers enter the natural and organic food
markets. These opportunities are expected to have a positive impact on the Group
in the latter part of the year.
Developments at the Environmental Industrial Group
Sales and earnings in the Environmental Industrial Group have increased
significantly versus the same period in 2001. The Group's U.S. based operations
continue to exceed expectations as a result of strong sales of silica-free
abrasives from Virginia Materials. The start-up of the Baltimore plant forecast
for the second quarter of 2002 has been delayed pending resolution of a number
of regulatory matters. In the meantime, this market is being serviced from
existing operations. It is expected that the issues related to the Baltimore
plant will be resolved during the third quarter and sales will remain strong
going forward.
Sale of abrasives from Canadian operations to the bridge cleaning markets in the
Northeast U.S., subsequent to the September 11th tragic events have been slow,
but showed a significant lift late in the second quarter. This is expected to
continue through the summer and fall blasting seasons as the Group has secured
significant contracts in both New York State and Michigan. Environmental
recycling was also slow in the first half of the year due to a number of
economic factors, but showed improvement during the second quarter. This is
expected to continue as the year progresses and the Group aggressively pursues a
number of additional opportunities.
During 2002, BEI/PECAL management have signed new 3-year collective bargaining
agreements with the unions representing the unionized workforce of these
facilities.
Developments in the Steam Explosion Technology Group
In April 2002, the Company announced the signing of a contract for the first
sale of a StakeTech Steam Explosion Pulping System in China. The sale is valued
at $4,200. The system will be used to produce pulp for paper from straw. A major
advantage of the StakeTech System is that it uses high pressure steam with
minimal chemicals, and is therefore a far less polluting alternative. It is also
economic at a small scale, utilizing less energy as compared to traditional
pulping systems, all at a reduced upfront capital cost.
The contract will come into full force upon the client providing an initial 10%
down payment and provision of a letter of credit for 100% of the purchase price,
now expected by the middle of August, 2002. In turn, the Company will issue
various performance guarantees to support the manufacturing and quality
performance phases of the project. Manufacturing of the system will commence
upon receipt of the required down payment and letter of credit and will be ready
for shipment in approximately 14 months. Installation, commissioning and final
system acceptance will take an additional 16 months from the date of shipment.
The Group continues to focus on selling additional Steam Explosion Pulping
Systems in the China market through its license agreement with Pacitec Inc.
Operations For the Six Months ended June 30, 2002 Compared With the Six Months
Ended June 30, 2001
Consolidated
Revenues in the quarter ended June 30, 2002, increased by 30.8% to $31,378 from
$23,988 in 2001, and earnings for the second quarter of 2002 were $1,704 or
$0.04 per common share compared to $525 or $0.02 per common share in the second
quarter of 2001.
Revenues in the first six months of 2002 increased by 26.9% to $54,685 from
$43,107 in the first six months of 2001, and the Company's net earnings for the
first six months in 2002 were $1,727 or $0.04 per common share compared to $547
or $0.02 per common share for the first six months of 2001.
The increase in the Company's revenues of $11,578 is due to a number of factors
including increased sales of aseptic packaged soymilk products, increased sales
of bulk grains and specialty beans and the impact of the acquisitions of the
business and certain assets of Virginia Materials and Supplies, Inc. and 51% of
the outstanding common shares of International Materials and Supplies, Inc.
(Virginia Materials) in October, 2001.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 25 June 30, 2002 10-Q
Earnings for the six month period ended June 30, 2002 increased by $1,180 or
216% to $1,727, compared to the same period in 2001, due to improved financial
performance at Nordic Aseptic, the Company's aseptic packaging operations, the
October 2001 Virginia Materials acquisitions, improved volumes and margins in
dietary fiber and certain grain and agronomy products, cost reduction programs
implemented throughout the Company, reduced borrowing costs as a result of the
new banking arrangements implemented earlier this year and foreign exchange
gains as a result of the appreciation of the Canadian dollar.
EBITDA (earnings before interest, taxes, deprecation and amortization) for the
six months ended June 30, 2002 increased 49% to $4,863 versus $3,266 in the same
period in 2001.
U.S. readers should note that due to differences between Canadian and U.S. GAAP,
the earnings for the six months ended June 30, 2002 under U.S. GAAP is $1,472 or
$0.04 per common share versus earnings of $94 or $0.00 per common share in the
same period in 2001. Note 12 to the consolidated financial statements itemizes
these differences.
Cost of sales increased by 25.5% to $45,971 for the six months ended June 30,
2002 compared to $36,634 for the six months ended June 30, 2001. Consistent with
the revenue analysis above, the increase in cost of sales is related to the
revenue increase resulting from increased sales of certain food based products
and the acquisition of Virginia Materials.
The Company's consolidated gross margin improved to 15.9% for the six months
ended June 30, 2002 compared to 15.0% in the six months ended June 30, 2001.
Excluding the impact of the Nordic Aseptic operations, gross margin was 18.2%.
Selling, general and administrative expenditures increased 26.7% for the six
months ended June 30, 2002 to $6,176 compared to $4,874 for the six months ended
June 30, 2001. The increase in administrative costs is consistent with to the
Virginia Materials acquisition completed in October 2001 and increased Corporate
costs to support a larger public company. These increases were partially offset
by a reduction in amortization expense as a result of the Company adopting the
new CICA Handbook Section 3062 "Goodwill and Intangible Assets" on January 1,
2002, whereby goodwill and trademarks are not amortized. Amortization of
goodwill and trademarks in the six months ended June 30, 2001 was $180.
Interest expense decreased to $726 in the first six months of 2002 from $1,009
in the first six months of 2001. The decrease in borrowing costs relates mainly
to a decrease in the effective borrowing rate as a result of the new financing
arrangements, as announced by the Company in March 2002, in addition to a
decrease in floating interest rates on certain debt instruments versus 2001.
Interest and other income decreased to $203 in the six months ended June 30,
2002 from $228 in the six months ended June 30, 2001. This is due to higher
interest rates on cash and investment balances held throughout 2002 versus 2001.
Provision for income taxes increased to $750 for the six months ended June 30,
2002, compared to $260 in the same period in 2001 (2001 included a tax refund of
$85 related to the reassessment of an acquired Company's business). The
effective tax rate decreased from 42.7% in 2001, before the aforementioned
reassessment, to 30.2% in 2002 as a result of the realization of certain loss
carryforwards and tax planning strategies implemented by the Company.
Segmented Operations Information
Food Group
The Food Group contributed $42,676 or 78.0% of total Company consolidated
revenues in the first six months of 2002 versus $33,043 or 76.6% in the same
period in 2001. The increase of $9,633, or 29.2%, in Food Group sales was due
primarily to increased sales of aseptic packaged soymilk at Nordic Aseptic of
$6,154 and an increase in sales of bulk grains and specialty beans of $3,829.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 26 June 30, 2002 10-Q
Gross margin in the Food Group increased by $833 in the six months ended June
30, 2002 to $5,500 (12.9%) compared to $4,667 (14.1%) in the same period in
2001. Excluding the negative impact of Nordic Aseptic operations, adjusted gross
margin was 15.3% for the six months ended June 30, 2002. The increase in total
gross margin reflects the positive impact of improved product margins on organic
feed and specialty products and cost reduction initiatives undertaken throughout
the Group, offset by lower margins on bulk grains and a decline in margins in
certain retail consumer products.
Selling, general and administrative expenses increased to $3,687 in the six
months ended June 30, 2002 versus $3,298 in the six months ended June 30, 2001.
The increase is due primarily to increased payroll and related costs as the
organization continues to support the growth in operations and legal costs
associated with an action against a former supplier for failure to adhere to the
terms of a supply contact, as detailed in Part II - Other Information.
Interest expense decreased to $590 in the six months ended June 30, 2002 versus
$812 in the six months ended June 30, 2001. The decrease was due to the
refinancing of the majority of the Group's debt in March 2002, in addition to
reductions in floating interest rates on certain debt instruments versus 2001,
as noted above.
Pre-tax earnings of the Food Group were $1,465 in the six months ended June 30,
2002 versus pre-tax earnings of $882 in the six months ended June 30, 2001.
Results were positively impacted by improved volume and margins on grain and
specialty beans and internal cost control programs, but negatively impacted by
the approximate $400 pre-tax loss at Nordic Aseptic. During the second quarter
of 2002 Nordic Aseptic had two consecutive profitable months, and the Company
expects that this trend will continue for the balance of the year.
The Food Group net earnings increased to $879 in the first six months of 2002
from $529 in the first six months of 2001 as a result of the key issues noted
above.
Environmental Industrial Group
The Environmental Industrial Group contributed $11,859 or 21.7% of the total
Company consolidated revenues in the first six months of 2002, versus $9,782 or
22.7% in 2001, an increase of $2,077 or 21.2%. Revenues were favourably impacted
by the acquisition of Virginia Materials ($2,862) in October 2001, partially
offset by weak market and economic conditions in the steel and foundry
businesses, the termination of a key distribution agreement, the economic impact
of the September 11th tragedy on the demand for abrasives and continued
competition in the silica sands market.
Gross margin in the Environmental Industrial Group increased to $3,064 in the
six months ended June 30, 2002 versus $1,602 in the six months ended June 30,
2001, an increase of 91.2%. The increase in margin resulted primarily from the
acquisition noted above and improvements in price and sales mix margins, offset
by a decrease in volume as a result of the economic conditions noted above. As a
percentage of revenues, gross margin improved to 25.8% in the first six months
of 2002 from 16.4% in the first six months of 2001.
Selling, general and administrative expenses increased to $1,582 in the six
months ended June 30, 2002 versus $960 in the six months ended June 30, 2001.
The increase is due in most part to the acquisition of Virginia Materials in
2001.
Interest expense decreased to $136 in the first six months of 2002 versus $164
in the first six months of 2001. The decrease was due to a combination of
reduced operating line utilization and the refinancing of the majority of the
Group's debt in March 2002, as noted above.
Pre-tax earnings of the Environmental Industrial Group were $1,364 in the six
months ended June 30, 2002 versus $498 in the six months ended June 30, 2001.
Results were positively affected by the addition of Virginia Materials, and
improved price and sales mix margins, but negatively impacted by unfavourable
economic and market conditions and increased competitive pressures in key
product groups.
Net earnings were $820 in the six months ended June 30, 2002 versus $368 in the
six months ended June 30, 2001.
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STAKE TECHNOLOGY LTD. 27 June 30, 2002 10-Q
Steam Explosion Technology Group
Revenues of $150 for the six months ended June 30, 2002 and $251 for the same
period in 2001 were derived from licence fees. The decrease in revenues over the
previous year is due to a change in the revenue recognition policy related to
the license fee. In 2001, the full annual license fee from the Company's agent
in China was recorded in the first half of the year. Commencing in 2002, the
Company is recording this revenue equally over the year.
Cost of sales for the six months ended June 30, 2001 consisted of amortization
charges. The asset was fully amortized in 2001, and therefore there were no
amortization charges in the first six months ended June 30, 2002.
Selling general and administrative expenses were $171 for the first six months
of 2002 compared to $150 for the same period in 2001. These costs reflect
payroll and related expenses required to manage and maintain the business and
prepare for implementation of the first sale of a StakeTech Steam Explosion
Pulping System in China.
Corporate Activities
Selling, general and administration expenses were $734 in the six months ended
June 30, 2002 versus $460 in the six months ended June 30, 2001. The increase
was due to an increase in the costs of administering a growing public company
including incremental payroll and related costs, public relations and
professional fees. The results for the quarter ended June 30, 2002 include a
provision for severance costs of $75.
Liquidity and Capital Resources at June 30, 2002
Current assets
Cash and cash equivalents increased to $7,647 at June 30, 2002 (December 31,
2001 - $3,364), primarily due to the conversion of $6,307 of marketable
securities held at year end to cash equivalents, offset by funding of certain
working capital and capital projects.
As of June 30, 2002 the Company had restricted cash of $nil (December 31, 2001 -
$1,147) and marketable securities of $nil (December 31, 2001 - $6,307). The
restricted cash at December 31, 2001 related primarily to funds restricted from
the December 2001 private placement. These funds were subsequently received by
the Company in April 2002 based on final approval of S-3 filing and clearance of
the Ontario Securities Commission hold period. The marketable securities were
funds held at year end in a mutual fund corporation which held cash equivalents.
These securities were disposed in the quarter ended March 31, 2002 and the
proceeds invested in cash equivalents, as noted above.
Trade accounts receivable increased to $12,749 at June 30, 2002 from $8,377 at
December 31, 2001. Trade receivables at June 30, 2002 attributable to the Food
Group were $8,705 (December 31, 2001 - $5,088). The increase was primarily
related to the seasonality of grain sales, in addition to improved sales in the
aseptic and soy concentrate operations. Trade receivables in the Environmental
Industrial Group were $3,885 (December 31, 2001 - $3,289), due in most part to
the seasonal upswing in this business. The Steam Explosion Technology Group has
a receivable of $150 as the Company recorded 50% of its annual $300 license fee
due in July 2002.
The note receivable of $1,693 (December 31, 2001- $2,303) including the
long-term portion, and the product rebate payable in long-term payables of
$1,266 (December 31, 2001 - $1,209) are related to an agreement with a major
European based company to supply product. This agreement required the Food Group
to expand a food processing plant to the customer's specifications, which was
completed in 2000. In accordance with the terms of the agreement the customer
pays 36 monthly instalments of $119. The agreement also requires the Company to
provide the customer with a product rebate beginning October 2003 until $1,720
is repaid. Upon the application of purchase accounting in 2000, both the
receivable and payable were fair valued using a discount rate of 9.5 %.
Inventories decreased $228 to $13,593 at June 30, 2002. The Food Group accounts
for $9,786 of the total balance (December 31, 2001 - $10,325) and the
Environmental Industrial Group $3,775 (December 31, 2001 - $3,496). The Steam
Explosion Technology Group is not required to carry significant inventories. The
lower balances in the Food Group are primarily due to decreased inventory of
aseptic packaging goods and seasonal grain inventories. The increase in the
Environmental Industrial Group is due in most part to seasonal inventory levels.
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STAKE TECHNOLOGY LTD. 28 June 30, 2002 10-Q
Future income tax assets of $752 at June 30, 2002 (December 31 2001 - $663)
consist primarily of Canadian tax losses and scientific research expenditures
recorded by the Canadian entity from 2000 through to June 30, 2002 with the
remaining balance of $215 (December 31, 2001 - $215) relating to the Food
Group's accounting reserves not deductible for tax until realized. The Company
believes that it is more likely than not that the tax benefit of the recorded
assets will be realized.
Property, plant and equipment
In the first six months of 2002, the Company spent $2,152 (June 30, 2001 -
$1,534) on capital expenditures, of which, the Food Group spent $1,444, with the
larger projects being the acquisition of a boiler for the production facility in
Afton, Wyoming ($180) and the acquisition of a CIP system for Nordic Aseptic
($162). During the first six months of 2002, $632 was spent in the Environmental
Industrial Group, of which, $263 was spent on equipment refurbishment for a new
plant in Baltimore, Maryland and the remaining on general additions and
replacements. In the first six months of 2002, $76 was spent by the Steam
Explosion Technology Group and the Corporate Office primarily on office and
computer equipment to accommodate continued expansion.
Investments
Investments remained virtually unchanged at $394 at June 30, 2002 (December 31,
2001 - $366), due to limited activity in the period in the Company's equity
investment in Easton.
Goodwill
Goodwill increased to $9,120 at June 30, 2002 from $8,540 at December 31, 2001.
The increase relates to the profit sharing component related to the acquisition
of Virginia Materials which is booked to goodwill as earned.
Other long-term assets
Trademarks, valued at $2,498 at June 30, 2002 remained unchanged versus December
31, 2001. During the year the Company adopted the new CICA Handbook Section 3062
"Goodwill and Intangible Assets" The new standard eliminates the amortization of
goodwill and certain intangibles. The Company believes that it's trademarks
"Rice Um" and "Soy Um" acquired through the acquisition of First Light Foods
have an indefinite life and in accordance with the standard are no longer
amortized. The Company will assess the carrying value of these marks on an
annual basis to determine if there is an impairment in their value.
In the first six months of 2002 the Company deferred $276 (December 31, 2001 -
$32) in costs related to the start-up of an organic dairy business based in
Canada. Amortization of these costs will commence in July 2002 and will be
amortized on a straight-line basis to December 31, 2003. In 2000, the Company
deferred $482 of pre-operating costs related to Nordic Aseptic, which was
comprised of the portion of the operating losses from April to December 31, 2000
that were related to the start up phase of the plant. This amount is being
amortized equally over a 36-month period. As at June 30, 2002 the unamortized
balance is $241. Readers should note that these pre-operating costs would have
been expensed under U.S. GAAP.
During the first six months the Company deferred financing related costs of $509
and has a balance of $512 at June 30, 2002 (December 31, 2001 - $24). These
costs are related to the conversion and consolidation of substantially all of
the Company's and its subsidiaries outstanding debt to one major Canadian bank
and its U.S. subsidiary. These costs will be amortized over seven years,
consistent with the term of the agreement.
Current liabilities
Accounts payable and accrued liabilities increased to $13,607 at June 30, 2002
from $12,831 at December 31, 2001. The increase is primarily due to the
improvement in trade operations in both the Food and the Environmental
Industrial Groups.
Customer deposits of $299 at June 30, 2002 (December 31, 2001 - $1,389) relate
to cash deposits made by Food Group customers primarily in 2001 for purchases
made throughout the growing season in 2002. No recognition of revenue or accrual
of costs is booked on these transactions until the goods are shipped.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 29 June 30, 2002 10-Q
New Financing Arrangement Replacing Existing Lines of Credit and Long Term Debt
On March 15, 2002, the Company entered into a new financing arrangement with a
major Canadian bank and its U.S. subsidiary. This arrangement included the
following components:
1. $15,000 term loan due May 2005, with scheduled quarterly payments to
amortize the debt over seven years.
Interest on the term loan is payable at the borrower's option at
U.S. dollar base rate or U.S. LIBOR plus a premium based on certain
financial ratios of the Company.
2. CAN $4,000 demand line of credit facility.
Interest on borrowings under this facility is payable monthly and
accrues at the borrower's option based on various reference rates
including Canadian or U.S. bank prime, or Canadian bankers'
acceptances, plus a margin based on certain financial ratios of the
Company.
Subsequent to June 30, 2002, the Company completed an amendment to
the credit agreement, whereby the CDN $4,000 demand line of credit
facility increased to CDN $5,000.
3. $5,000 demand line of credit facility.
Interest on borrowings under this facility is payable monthly and
accrues at the borrower's option based on various reference rates
including U.S. bank prime, or LIBOR, plus a margin based on certain
financial ratios of the Company.
Total debt of $15,447 outstanding at December 31, 2001 was repaid on March 15,
2002 with the proceeds of the new financing arrangement.
The $15,000 term loan and the Canadian and U.S. line of credit facilities
described above are collateralized by a first priority security against all of
the Company's assets in both Canada and the United States.
Bank indebtedness
Net bank indebtedness at June 30, 2002 is $2,871 (December 31, 2001 - $1,206).
The entire balance resides in the Food Group. The increase relates primarily to
an increase in working capital requirements, capital acquisitions and
refinancing of certain long-term debt within the Group.
Long term debt
At June 30, 2002, the Company's long-term debt, including current portion, is
$15,754, a decrease of $894 from December 31, 2001. The decrease relates to
financing of certain long-term debts on March 15, 2002 through the operating
line of credit in addition to regularly scheduled debt repayment terms. Of the
total of $15,754, $14,650 relates to the term loan referred to above, while
$1,104 relates to a number of small debt and capital lease facilities which are
being discharged on an ongoing basis. The first scheduled quarterly principal
repayment under the new financing arrangement was on June 30, 2002 in the amount
of $350.
Long-term payables
The Company had deferred purchase consideration of $608 at June 30, 2002
(December 31, 2001 - $1,040) related to the acquisition of Virginia Materials.
The deferred purchase consideration is paid on the purchase of the vendor's
inventory as acquired by the Company. It is expected that it will take
approximately 10 months from June 30, 2002 to satisfy this liability.
The Preference Shares of subsidiary companies were reduced to $320 from $416 as
a result of regularly scheduled repurchases in the first six months of $70
(excluding interest and dividend expense) and an additional repurchase of
preferred shares related to one of the Company's subsidiaries for $26.
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STAKE TECHNOLOGY LTD. 30 June 30, 2002 10-Q
Future income tax liability
The future income tax liability of $1,696 at June 30, 2002 (December 31, 2001 -
$1,822) relates principally to the Food Group and represents differences between
the accounting and tax basis of assets and liabilities primarily related to
property, plant and equipment and trademarks offset by the benefit of losses
carried forward and the long term portion of the scientific research
expenditures tax benefit.
Cash flow
For the six months ended June 30, 2002, cash flow provided by operations before
working capital changes was $3,324 (June 30, 2001 - $2,207), an increase of
50.4%. The increase was due primarily to increased net earnings throughout the
Company.
Cash flow used in operations after working capital changes was $1,058 for the
six months ended June 30, 2002 (June 30, 2001 - $1,187), reflecting the
utilization of funds for non-cash working capital of $4,382 (June 30, 2001 -
$3,394). This utilization consists principally of an increase in accounts
receivable ($4,258), a decrease in customer deposits ($1,090), and an increase
in other current items ($80), offset by an increase in accounts payable and
accrued liabilities ($655) and a decrease in inventories ($391). The working
capital deficiencies in the first six months are comparable to the same period
in the prior year, which reflect the impact of seasonality of the business on
working capital, including the purchase and payment method with grain suppliers
in the Food Group and the economic market seasonality in the Environmental
Industrial Group.
Cash provided by investment activities generated $4,098. The Company sold its
marketable securities for proceeds of $6,307 and received payments on a note
receivable of $714 (June 30, 2001 - $691), partially offset by acquisitions of
property, plant and equipment of $2,152 (June 30, 2001 - $1,534), and continued
payment to the former owner of Virginia Materials as part of the Company's
profit sharing arrangement of the acquired business, in the amount of $507.
Cash provided by financing activities was $1,230 in the first six months ended
June 30, 2002 (June 30, 2001 - $3,448), which consists primarily of borrowings
from the operating line of credit of $1,665 (June 30, 2001 - $1,771), proceeds
from restricted cash of $1,147 (June 30, 2001 - ($1,391)), partially offset by
net debt repayments of $912 (June 30, 2001 - $2,819), deferred financing costs
of $509 (June 30, 2001 - $nil) and deferred purchase consideration to the former
owner of Virginia Materials of $432 (June 30, 2001 - $nil).
Commitments
a) i) An irrevocable letter of credit for $495 has been placed with the
Ontario Ministry of Environment and Energy as a security deposit for
the Certificate of Approval granted to the Company for certain
recycling activities. This letter of credit must remain in place
indefinitely as a condition of the Certificate of Approval.
ii) An irrevocable letter of credit for $195 has been placed with the
Commonwealth of Virginia Department of Environmental Qualities as a
security deposit for the Certificate of Approval granted to the
Company for certain recycling activities. This letter of credit must
remain in place indefinitely as a condition of the Certificate of
Approval.
iii) Additional letters of credit totalling $855 have been placed with
various third parties as security on transactions in the ordinary
course of business.
b) Commitments under operating leases, principally for distribution centres,
warehouse and equipment, are as follows:
Total
$
-----
2002 523
2003 1,171
2004 1,228
2005 1,174
2006 and thereafter 3,841
-----
7,937
=====
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STAKE TECHNOLOGY LTD. 31 June 30, 2002 10-Q
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk
The primary objective of our investment activities is to preserve principal and
limit risk. To achieve this objective, the company maintains its portfolio in a
variety of securities, including both government and corporate obligations and
money market funds. These securities are generally classified as cash
equivalents and are recorded on the balance sheet at fair value with unrealized
gains or losses reported through profit and loss.
Debt in both fixed rate and floating rate interest carry different types of
interest rate risk. Fixed rate debt may have their fair market value adversely
affected by a decline in interest rates. In general, longer date debts are
subject to greater interest rate risk than shorter dated securities. Floating
rate term debt gives less predictability to cash flows as interest rates change.
As of June 30, 2002, the weighted average interest rate of the fixed rate term
debt was 7.8% and $1,104 of the Company's outstanding term debt is at fixed
interest rates. Variable rate term debt of $14,650 at an interest rate of 3.3%
is partially hedged by variable rate cash equivalent investments. The Company's
looks at varying factors to determine the percentage of debt to hold at fixed
rates including, the interest rate spread between variable and fixed (swap
rates), the Company's view on interest rate trends, the percent of offset to
variable rate debt through holding variable rate investments and the companies
ability to manage with interest rate volatility and uncertainty.
Foreign currency risk
All U.S. subsidiaries use the U.S. dollar as their functional currency and as of
January 1, 2002 the United States dollar has become the Company's reporting
currency. The subsidiaries are subject to risks typical of multi-jurisdiction
businesses, including, but not limited to differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, the Company's
future results could be materially adversely affected by changes in these or
other factors. The Company is exposed to foreign exchange rate fluctuations as
the financial results of the Company and its Canadian subsidiaries are
translated into U.S. dollars on consolidation. A 10% movement in the levels of
foreign currency exchange rates in favour of (against) the Canadian dollar with
all other variables held constant would result in a decrease (increase) in the
fair value of the Company's net assets by $1,209. These changes would flow
through the Company's cumulative translation adjustment account in shareholders'
equity.
The Environmental Group has Canadian based receivables and payables that on a
net basis provide limited exchange exposure. The Food Group has no exposure to
other currencies since all sales are made in U.S. dollars. It is the Company's
intention to hold funds in the currency in which the funds are likely to be
used, which will from time to time, potentially expose the Company to exchange
rate fluctuations when converted into U.S. dollars.
Commodity risk
The Food Group enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on grain transactions to
the extent considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging purposes are purchased and sold
through regulated commodity exchanges. Inventories, however, may not be
completely hedged, due in part to the Company's assessment of its exposure from
expected price fluctuations. Exchange purchase and sales contracts may expose
the Company to risk in the event that counterparty to a transaction is unable to
fulfill its contractual obligation. The Company manages its risk by entering
into purchase contracts with pre-approved producers. The Company has a risk of
loss from hedge activity if a grower does not deliver the grain as scheduled.
Sales contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated. All futures transactions are marked
to market. Gains and losses on futures transactions related to grain inventories
are included in cost of goods sold. As at June 30, 2002, the quantity of grain
not hedged is not significant and therefore a change in the market price would
not have a material impact. There are no futures contracts in the Environmental
Industrial Group or the Steam Explosion Technology Group or related to Corporate
activities.
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STAKE TECHNOLOGY LTD. 32 June 30, 2002 10-Q
PART II - OTHER INFORMATION.
Item 1. Legal proceedings
The Company has filed a claim against a former director relating to certain
actions taken when he was the President of its operating division, BEI. The
former director has counter-claimed against the Company and its subsidiaries,
the Chairman of the Company and Easton, the Company's 32% equity investment. The
Company and its legal counsel believe that the counter-claim is without merit.
During 2001, the Food Group commenced an action against a supplier for failure
to adhere to the terms of a supply contract. The Company and its legal counsel
believe that this claim has merit. It cannot however be determined if there will
be any recovery by the Company at this time and the Group is providing for the
costs of pursuing this suit on a monthly basis. The supplier has counter-claimed
against the Company. The Company and its legal counsel believe that the
counter-claim is without merit. Other than this action, the Food Group is not
currently a party to any material litigation.
The Environmental Industrial Group is not currently a party to any material
litigation.
The Steam Explosion Technology Group is not currently a party to any material
litigation.
Item 2. Changes in securities and use of proceeds
Options exercised during the year
During the six months ended June 30, 2002, employees and directors exercised
165,300 common share options and an equal number of common shares were issued
for net proceeds of $283. Subsequent to June 30, 2002, employees and directors
exercised 113,500 common share options and an equal number of common shares were
issued for net proceeds of $196.
Warrants exercised during the year
During the six months ended June 30, 2002, 75,000 warrants were exercised, and
an equal number of common shares were issued for net proceeds of $131.
Subsequent to June 30, 2002, 500,000 warrants were exercised, and an equal
number of common shares were issued for net proceeds of $1,200. During the six
months ended June 30, 2002, 60,000 warrants were repurchased by the Company for
a net cost of $39.
All proceeds have been used to reduce outstanding operating lines of credit, or
other general purposes.
Item 3. Defaults on senior securities
Not applicable
Item 4. Submission of matters to a vote of security holders
Not applicable
Item 5. Other
Forward-looking information
This form may contain forward-looking information. Actual future results may
differ materially. The risks, uncertainties, and other factors that could
influence actual results are described in the Company's Annual Report to
shareholders and in SEC reports.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - Not applicable
(b) Reports on Form 8-K - No current report on Form 8-K was filed by the
Company during the six month period ended June 30, 2002.
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STAKE TECHNOLOGY LTD. 33 June 30, 2002 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STAKE TECHNOLOGY LTD.
Date August 13, 2002 /s/ Steven R. Bromley
-----------------------------
Stake Technology Ltd.
by Steven R. Bromley
Vice President, Finance
& Chief Financial Officer
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STAKE TECHNOLOGY LTD. 34 June 30, 2002 10-Q
August 13, 2002
Securities and Exchange Commission
Dear Sirs,
We have reviewed the attached quarterly report of Stake Technology Ltd. for the
period ending June 30, 2002. Based on our knowledge, the report contains no
material misrepresentations or omissions, the financial statements and other
financial information in the report fully comply with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the
information contained in the reports fairly present, in all material respects,
the financial condition and results of operations of the Company.
/s/ Steven R. Bromley
---------------------------
Vice President, Finance
& Chief Financial Officer
Stake Technology Ltd.
/s/ Jeremy N. Kendall
---------------------------
Chairman and CEO
Stake Technology Ltd.
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STAKE TECHNOLOGY LTD. 35 June 30, 2002 10-Q
June 30, 2002 10-Q