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 September 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 October 30, 2002 registrant had 41,974,768 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 $89,361,694. 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 38 pages in the September 30, 2002 10-Q and the index follows the
cover page.
STAKE TECHNOLOGY LTD.
FORM 10-Q
September 30, 2002
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as at September 30, 2002 and
December 31, 2001
Consolidated Statements of Retained Earnings for the nine months
ended September 30, 2002, September 30, 2001 and the year ended
December 31, 2001
Consolidated Statements of Earnings for the three months ended
September 30, 2002 and 2001
Consolidated Statements of Earnings for the nine months ended
September 30, 2002 and 2001
Consolidated Statements of Cash Flow for the three months ended
September 30, 2002 and 2001
Consolidated Statements of Cash Flow for the nine months ended
September 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
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
All financial information is expressed in United States Dollars
The closing rate of exchange on October 30, 2002 was CDN $1 = US
$0.6385
2
PART I - FINANCIAL INFORMATION
Item 1 -
Consolidated Financial Statements
Stake Technology Ltd.
For the Nine Months ended September 30, 2002
3
Stake Technology Ltd.
Consolidated Balance Sheets
As at September 30, 2002 and December 31, 2001
Unaudited
(Expressed in thousands of U.S. dollars)
===========================================================================================
September 30, December 31,
2002 2001
===========================================================================================
Assets (note 7)
Current assets
Cash and cash equivalents $ 6,808 $ 3,364
Restricted cash -- 1,147
Marketable securities -- 6,307
Accounts receivable - trade 13,827 8,377
Current portion of note receivable 1,362 1,256
Inventories (note 4) 13,958 13,821
Other receivables and prepaid expenses 1,299 1,258
Future income taxes 1,462 663
---------------------------
38,716 36,193
Note receivable -- 1,047
PropProperty, plant and equipment - at cost, less accumulated
amortization of $11,450 (December 31, 2001 - $8,785) 31,108 30,883
Goodwill and intangibles (note 5) 11,943 11,038
Other assets (note 6) 1,227 900
---------------------------
$ 82,994 $ 80,061
===========================
Liabilities
Current liabilities
Bank indebtedness (note 7) $ 1,464 $ 1,206
Accounts payable and accrued liabilities 13,817 12,831
Customer deposits 78 1,389
Current portion of long-term debt (note 7) 2,279 2,634
Current portion of long-term payables (note 8) 412 1,067
---------------------------
18,050 19,127
Long-term debt (note 7) 13,117 14,014
Long-term payables (note 8) 1,470 1,598
Future income taxes 1,790 1,822
---------------------------
34,427 36,561
---------------------------
Shareholders' Equity
Capital stock (note 9) 37,680 35,875
Contributed surplus 2,914 2,910
Retained earnings 6,963 3,709
Currency translation adjustment 1,010 1,006
---------------------------
48,567 43,500
---------------------------
$ 82,994 $ 80,061
===========================
Commitments and contingencies (note 11)
(See accompanying notes to consolidated financial statements)
4
Stake Technology Ltd.
Consolidated Statements of Retained Earnings
For the nine months ended September 30, 2002 and 2001 and the year ended
December 31, 2001 Unaudited
(Expressed in thousands of U.S. dollars)
====================================================================================================================
Nine months ended Year ended
--------------------------------------- ---------------
September 30, September 30, December 31,
2002 2001 2001
====================================================================================================================
Retained Earnings - Beginning of the Year $ 3,709 $ 3,690 $ 3,690
Net earnings for the period 3,254 703 19
----------------------------------------------------------
Retained Earnings - End of Period $ 6,963 $ 4,393 $ 3,709
==========================================================
(See accompanying notes to consolidated financial statements)
5
Stake Technology Ltd.
Consolidated Statements of Earnings
For the three months ended September 30, 2002 and 2001
Unaudited
(Expressed in thousands of U.S. dollars)
=====================================================================================
September 30, September 30,
2002 2001
=====================================================================================
Revenues $ 32,800 $ 22,904
Cost of goods sold 27,510 20,093
------------------------------
Gross profit 5,290 2,811
Selling, general and administrative expenses 3,240 2,536
------------------------------
Earnings before the following 2,050 275
Interest expense (302) (398)
Interest and other income 30 102
Foreign exchange (loss) gain (322) 347
------------------------------
(594) 51
------------------------------
Earnings before income taxes 1,456 326
(Recovery of) provision for income taxes (71) 170
------------------------------
Net earnings for the period $ 1,527 $ 156
==============================
Net earnings per share for the period
- Basic $ 0.04 $ 0.00
==============================
- Diluted $ 0.03 $ 0.00
==============================
(See accompanying notes to consolidated financial statements)
6
Stake Technology Ltd.
Consolidated Statements of Earnings
For the nine months ended September 30, 2002 and 2001
Unaudited
(Expressed in thousands of U.S. dollars)
================================================================================
September 30, September 30,
2002 2001
================================================================================
Revenues $ 87,605 $ 66,011
Cost of goods sold 73,600 56,727
------------------------------
Gross profit 14,005 9,284
Selling, general and administrative expenses 9,416 7,410
------------------------------
Earnings before the following 4,589 1,874
Interest expense (1,028) (1,407)
Interest and other income 233 330
Foreign exchange gain 140 336
------------------------------
(655) (741)
------------------------------
Earnings before income taxes 3,934 1,133
Provision for income taxes 680 430
------------------------------
Net earnings for the period $ 3,254 $ 703
==============================
Net earnings per share for the period
- Basic $ 0.08 $ 0.02
==============================
- Diluted $ 0.07 $ 0.02
==============================
(See accompanying notes to consolidated financial statements)
7
Stake Technology Ltd.
Consolidated Statements of Cash Flows
For the three months ended September 30, 2002 and 2001
Unaudited
(Expressed in thousands of U.S. dollars)
=====================================================================================================
September 30, September 30,
2002 2001
=====================================================================================================
Cash provided by (used in)
Operating activities
Net earnings for the period $ 1,527 $ 156
Items not affecting cash
Amortization 1,054 1,015
Provision for future income taxes (498) 162
Other 85 (87)
------------------------------
2,168 1,246
Change in operating assets and liabilities (note 10) (1,574) (1,539)
------------------------------
594 (293)
------------------------------
Investing activities
Acquisition of businesses (note 3) (573) --
Acquisition of property, plant and equipment (903) (952)
Proceeds from note receivable 331 347
Other 364 (23)
------------------------------
(781) (628)
------------------------------
Financing activities
Repayments of revolving credit facilities, net (1,407) (182)
Borrowings under long-term debt facilities -- 62
Repayments of long-term debt (297) --
Payment of deferred purchase consideration (322) --
Proceeds from the issuance of common shares, net of issuance costs 1,444 5,551
Decrease in restricted cash -- 1,129
Purchase and redemption of preference shares of subsidiary
companies (5) (12)
------------------------------
(587) 6,548
Foreign exchange loss on cash held in a foreign currency (65) (26)
------------------------------
(Decrease) increase in cash during the period (839) 5,601
Cash and cash equivalents - Beginning of period 7,647 1,742
------------------------------
Cash and cash equivalents - End of period $ 6,808 $ 7,343
==============================
Supplemental cash flow information (note 10)
(See accompanying notes to consolidated financial statements)
8
Stake Technology Ltd.
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2002 and 2001
Unaudited
(Expressed in thousands of U.S. dollars)
=====================================================================================================
September 30, September 30,
2002 2001
=====================================================================================================
Cash provided by (used in)
Operating activities
Net earnings for the period $ 3,254 $ 703
Items not affecting cash
Amortization 2,917 2,693
Provision for future income taxes (715) 220
Other 42 (162)
------------------------------
5,498 3,454
Change in operating assets and liabilities (note 10) (5,956) (4,933)
------------------------------
(458) (1,479)
------------------------------
Investing activities
Proceeds from disposition of marketable securities 6,307 --
Acquisition of businesses (note 3) (1,080) (322)
Acquisition of property, plant and equipment (3,055) (2,486)
Proceeds from note receivable 1,045 1,038
Other 101 (21)
------------------------------
3,318 (1,791)
------------------------------
Financing activities
Borrowings under revolving credit facilities, net 258 1,589
Repayment of long-term debt facilities (16,209) (2,880)
Borrowings under long-term debt 15,000 123
Payment of deferred purchase consideration (754) --
Proceeds from the issuance of common shares, net of issuance costs
and warrant repurchase 1,805 11,531
Increase in deferred financing costs (499) --
Decrease (increase) in restricted cash 1,147 (262)
Purchase and redemption of preference shares of subsidiary
companies (122) (105)
------------------------------
626 9,996
Foreign exchange loss on cash held in a foreign currency (42) (19)
------------------------------
Increase in cash during the period 3,444 6,707
Cash and cash equivalents - Beginning of period 3,364 636
------------------------------
Cash and cash equivalents - End of period $ 6,808 $ 7,343
==============================
Supplemental cash flow information (note 10)
(See accompanying notes to consolidated financial statements)
9
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 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 13, 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 nine months ended September
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 and other natural and
organic food products. The Environmental Industrial Group processes and
sell 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
September 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 & 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 goods sold. The Food Group generally follows a policy
of hedging its grain transactions to protect gains and minimize losses due
to market fluctuations. Futures, purchase and sale contracts are adjusted
to market price and gains and losses from such transactions are included
in cost of goods sold. The Company has a risk of loss from hedge activity
if the grower does not deliver the grain as scheduled.
10
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
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
need for 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. Certain of 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 these
indefinite life trademarks. As required by the standard, the new rules
related to goodwill and other intangible assets have been applied
prospectively. On a pro-forma basis, the impact of adopting the new
standard on prior period earnings is:
Three months ended
----------------------------
September 30, September 30,
2002 2001
$ $
Net earnings for the quarter 1,527 156
Add back: goodwill and trademark amortization, net of tax -- 85
----------------------------
Adjusted net earnings for the quarter 1,527 241
============================
Adjusted net earnings per common share 0.04 0.01
============================
Nine months ended
----------------------------
September 30, September 30,
2002 2001
$ $
Net earnings for the period 3,254 703
Add back: goodwill and trademark amortization, net of tax -- 238
----------------------------
Adjusted net earnings for the period 3,254 941
============================
Adjusted net earnings per common share 0.08 0.03
============================
11
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 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 commenced in July 2002 and will result in these costs
being 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 and licenses
Costs of acquiring or registering patents, and licenses are capitalized
and amortized on a straight-line basis over their expected lives of 10 to
20 years. Costs of renewing patents 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.
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.
Revenue recognition
i) Food Group
Grain sales are recorded at the time of shipment. Revenues from
custom processing 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.
12
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Change in reporting currency
The Company 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 are 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.
13
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 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 counter party 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 is recorded as an increase to goodwill when
the amount of the contingency is determinable. During the nine
months ended September 30, 2002, the Company paid $783 (three months
ended September 30, 2002 - $276, December 31, 2001 - $89) in respect
of the contingent consideration.
14
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 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 $1,260 ($2,000 CDN). This
contingent consideration will be recorded as an increase to
intangibles assets when the amount of the contingency is
determinable. The allocation of the purchase price is not final due
to the estimates used in determining the fair value of the net
assets acquired and may vary from the amounts disclosed below.
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 natural and organic food
business in Canada.
The net assets acquired are summarized below:
$
Net assets acquired
Inventory 133
Trademark 164
---------
297
=========
4. Inventories
September 30, December 31,
2002 2001
$ $
Raw materials 7,067 6,026
Finished goods 6,350 6,323
Grain 541 1,472
-----------------------------------
13,958 13,821
===================================
Grain inventories consist of the following:
September 30, December 31,
2002 2001
$ $
Company owned grain 390 1,338
Unrealized gain on
Sales and purchase contracts 91 100
Futures contracts 60 34
-----------------------------------
541 1,472
===================================
5. Goodwill and intangibles
September 30, December 31,
2002 2001
$ $
Goodwill - at cost, less accumulated
amortization of $985
(December 31, 2001 - $985) 9,291 8,540
Trademarks (indefinite life) 2,498 2,498
Trademarks (definite life) - at cost, less
accumulated amortization of $3 (December
31, 2001 - $nil) 154 --
-----------------------------------
11,943 11,038
===================================
15
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
6. Other assets
September 30, December 31,
2002 2001
$ $
Pre-operating costs, net of accumulated amortization of $342
(December 31, 2001 - $161) 446 353
Deferred financing costs, net of accumulated amortization of $40
(December 31, 2001 - $nil) 483 24
Investments 103 366
Other 195 157
-----------------------------------
1,227 900
===================================
7. Long-term debt and banking facilities
September 30, December 31,
2002 2001
$ $
Term debt 14,300 --
Other long-term debt 1,096 16,648
-----------------------------------
15,396 16,648
Less: current portion (2,279) (2,634)
-----------------------------------
13,117 14,014
===================================
During 2002, the Company entered into a new financing arrangement with a
major Canadian bank and the bank's U.S. subsidiary. Under the terms of
this financing arrangement, total debt of $15,447 was repaid on March 15,
2002 with the proceeds of the new agreement, which included 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. As at September 30, 2002, $14,300
(December 31, 2001 - $nil) was still outstanding.
ii) CDN $5,000 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 September 30, 2002 $nil (December 31, 2001 - $nil) of
this facility has been utilized.
iii) $5,000 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 September 30, 2002 $1,464
(December 31, 2002 - $nil) of this facility has been utilized.
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.
16
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
7. Long-term debt and banking facilities, continued
As at September 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 $127 was utilized at September 30, 2002 (December 31,
2001 - $200) and is included in the current portion of the long-term debt.
8. Long-term payables
September 30, December 31,
2002 2001
$ $
Product rebate payable 1,299 1,209
Deferred purchase consideration 286 1,040
Preference shares of subsidiary companies 297 416
---------------------------------
1,882 2,665
Less: current portion (412) (1,067)
---------------------------------
1,470 1,598
=================================
9. Capital stock
September 30, December 31,
2002 2001
$ $
(a) Issued and fully paid -
41,974,768 common shares
(December 31, 2001 - 41,081,228) 35,184 32,929
3,975,750 warrants
(December 31, 2001 - 4,690,750) 2,496 2,946
---------------------------------
37,680 35,875
=================================
(b) In the first nine months of 2002, employees and directors exercised
238,540 options and 238,540 common shares were issued for net
proceeds of $373.
(c) In the nine months ended September 30, 2002, 655,000 shareholder
warrants were exercised and 655,000 common shares were issued for
net proceeds of $1,471. 580,000 of the shareholder warrants were
exercised in the third quarter of 2002 and 580,000 common shares
were issued for net proceeds of $1,340.
(d) On April 2, 2002, 60,000 shareholder warrants with an exercise price
of $1.75 per unit, were repurchased by the Company for a net cost of
$39.
(e) As at September 30, 2002 there were options vested to employees and
directors to acquire 1,496,005 common shares at exercise prices of
$1.06 to $3.07. In addition, at September 30, 2002 options to
acquire an additional 505,080 common shares at $1.06 to $3.07 have
been granted to employees and directors but have not yet vested.
(f) 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.
17
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
9. Capital stock continued
(g) 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 225,600 (2001 - 1,238,125) stock options that
were granted by the Company to employees and directors during 2002
was $208 (2001 - $508). Of this total amount, the cost of stock
compensation expense for the nine months ended September 30, 2002
would be $89 (December 31, 2001 - $410). The unrecognised value of
$119 (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 $86 (December 31, 2001 - $65). The resulting pro
forma net earnings (loss) and basic earnings (loss) per share for
the nine months ended September 30, 2002 are $3,079 December 31,
2001 - ($456)) and $0.07 (December 31, 2001 - ($0.01)) respectively.
10. Supplemental cash flow information
Three months ended
--------------------------------
September 30, September 30,
2002 2001
$ $
Change in operating assets and liabilities:
Accounts receivable - trade (1,192) 478
Inventories (536) (520)
Other receivables and prepaid expenses 41 (300)
Accounts payable and accrued liabilities 334 (1,113)
Customer deposits (221) (84)
--------------------------------
(1,574) (1,539)
================================
Cash paid for:
Interest 368 525
================================
Income Taxes 808 132
================================
Nine months ended
--------------------------------
September 30, September 30,
2002 2001
$ $
Change in operating assets and liabilities:
Accounts receivable - trade (5,450) (2,553)
Inventories (145) 363
Other receivables and prepaid expenses (39) (974)
Accounts payable and accrued liabilities 989 (1,019)
Customer deposits (1,311) (750)
--------------------------------
(5,956) (4,933)
================================
Cash paid for:
Interest 1,253 1,308
================================
Income Taxes 873 139
================================
18
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
11. Commitments and 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 the amount of potential liability, if any, to the
Company is not determinable. Management believes 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 September 30, 2002, the balance due on
these loans was $199.
f) Letters of credit:
i) An irrevocable letter of credit for $473 ($750 CDN) 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.
g) Commitments under operating leases, principally for distribution
centres, warehouse and equipment, are as follows:
Total
$
2002 249
2003 1,114
2004 1,169
2005 1,118
2006 and thereafter 3,656
-------------
7,306
=============
19
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. 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
September 30, 2002
----------------------------------------------------------------------
Steam Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 24,985 3,323 76 28,384
Canada 386 3,258 -- 3,644
Other 686 86 -- 772
----------------------------------------------------------------------
Total sales to external customers 26,057 6,667 76 32,800
----------------------------------------------------------------------
Interest expense 216 86 -- 302
----------------------------------------------------------------------
Segment net income (loss) 1,437 677 (586) 1,527
----------------------------------------------------------------------
Identifiable assets 53,366 20,859 8,769 82,994
----------------------------------------------------------------------
Expenditures on property, plant and
equipment 722 162 19 903
----------------------------------------------------------------------
Three months ended
September 30, 2001
---------------------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
---------------------------------------------------------------------
External revenues by market
U.S. 15,849 1,253 3 17,105
Canada 55 3,204 17 3,276
Other 2,496 27 - 2,523
---------------------------------------------------------------------
Total sales to external customers 18,400 4,484 20 22,904
---------------------------------------------------------------------
Interest expense 340 58 - 398
---------------------------------------------------------------------
Segment net income (loss) 61 212 (117) 156
---------------------------------------------------------------------
Identifiable assets 49,193 12,422 10,665 72,280
---------------------------------------------------------------------
Expenditures on property, plant and
equipment 721 230 1 952
---------------------------------------------------------------------
20
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. Segmented information, continued
Nine months ended
September 30, 2002
---------------------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 65,831 8,744 226 74,801
Canada 652 9,608 -- 10,260
Other 2,370 174 -- 2,544
---------------------------------------------------------------------
Total sales to external customers 68,853 18,526 226 87,605
---------------------------------------------------------------------
Interest expense 806 222 -- 1,028
---------------------------------------------------------------------
Segment net income 2,316 1,497 (559) 3,254
---------------------------------------------------------------------
Expenditures on property, plant and
equipment 2,169 794 92 3,055
---------------------------------------------------------------------
Nine months ended
September 30, 2001
---------------------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 48,191 3,451 285 51,927
Canada 134 10,719 17 10,870
Other 3,119 95 -- 3,214
---------------------------------------------------------------------
Total sales to external customers 51,444 14,265 302 66,011
---------------------------------------------------------------------
Interest expense 1,184 223 -- 1,407
---------------------------------------------------------------------
Segment net income (loss) 591 579 (467) 703
---------------------------------------------------------------------
Expenditures on property, plant and
equipment 2,007 470 9 2,486
---------------------------------------------------------------------
Geographic segments
September 30, 2002 December 31, 2001
------------------------------------------- --------------------------------------
U.S. Canada Total U.S. Canada Total
$ $ $ $ $ $
Property, plant and
equipment 24,033 7,075 31,108 24,009 6,874 30,883
===================================================================================
Goodwill and intangibles 10,175 1,768 11,943 9,429 1,609 11,038
===================================================================================
Total assets 57,454 25,540 82,994 55,300 24,761 80,061
===================================================================================
21
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
13. 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 pre-operating costs of $nil and
$276 incurred in the three months and nine months ended September 30,
2002, respectively (three months ended September 30, 2001 - $nil; nine
months ended September 30, 2001 - $nil; December 31, 2001 - $32), deferred
in these financial statements would be expensed. Amortization of $90 and
$170 in the three months and nine months ended September 30, 2002 (three
months ended September 30, 2001 - $53; nine months ended September 30,
2001 - $159; year ended December 31, 2001 - $212) related to the
development and pre-operating 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 employee's 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, for the
three and nine months ended September 30, 2002 - $nil (three months ended
September 30, 2001 - $255 recovery; nine months ended September 30, 2001 -
$304; year ended 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 Nine months ended Year ended
------------------------------------------------------------------
Sept 30, Sept 30, Sept 30, Sept 30, December 31,
2002 2001 2002 2001 2001
$ $ $ $ $
Net earnings for the period - as reported 1,527 156 3,254 703 19
Development and pre-operating costs amortized 90 53 170 159 212
Pre-operating costs capitalized -- -- (276) -- (32)
Stock option compensation expense -- 255 (59) (304) (321)
Tax effect of above items (36) (21) 42 (64) (72)
------------------------------------------------------------------
Net earnings (loss) for the period - US. GAAP 1,581 443 3,131 494 (194)
==================================================================
Net earnings (loss) per share = U.S. GAAP 0.04 0.01 0.08 0.02 (0.01)
==================================================================
Weighted average number of common shares outstanding 41,879,000 34,423,000 41,402,000 30,569,000 32,456,000
==================================================================
Shareholders' equity - as reported 48,567 33,969 43,500
Cumulative development and pre-operating costs, net of
related amortization, net of tax (268) (217) (212)
Cumulative stock compensation expense (412) (358) (353)
------------------------------------------
Shareholders' equity - U.S. GAAP 47,887 33,394 42,935
==========================================
22
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2002
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
13. 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
distribution to owners. The comprehensive 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 Nine months ended Year ended
-----------------------------------------------------------------
Sept 30, Sept 30, Sept 30, Sept 30, Dec 31,
2002 2001 2002 2001 2001
$ $ $ $ $
Net earnings (loss) for the period - U.S. GAAP 1,581 341 3,131 616 (207)
Currency translation adjustment (587) (507) 4 39 971
-----------------------------------------------------------------
Comprehensive income (loss) 994 (166) 3,135 655 764
=================================================================
Other U.S. GAAP disclosures
September 30, December 31,
2002 2001
$ $
Allowance for doubtful accounts 1,184 1,117
=====================================
Accrued payroll 902 1,059
=====================================
14. Subsequent events
On October 28, 2002, the Company announced a tender offer to acquire all
of the outstanding common shares of Opta Food Ingredients, Inc., a leading
developer and manufacturer of proprietary food ingredients, at the tender
price of $2.50 cash per share. The total cost of this acquisition will be
approximately $28,000. Opta Food Ingredients, Inc. is traded on the NASDAQ
stock exchange under the symbol OPTS. Assuming shareholder approval, the
completion of this transaction is expected to take place by year end.
On October 15, 2002, the Company announced that it has signed an agreement
to acquire privately owned Simply Organic Co. Ltd, a Toronto based
distributor of organic and natural food products. The completion of this
transaction is expected to take place by the end of November, 2002.
On October 10, 2002, the Company announced that is has signed an agreement
to acquire privately owned Wild West Organic Harvest Co-Operative
Association, a Vancouver, British Columbia based distributor of organic
and natural food products. The completion of this transaction is expected
to take place by the end of November, 2002.
15. Comparative balances
Certain comparative account balances have been reclassified to achieve
comparability to current period balances.
23
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
All figures, except per share amounts, are expressed in thousands of United
States dollars.
Recent Corporate Developments
On October 28, 2002, the Company announced a tender offer to acquire all of the
outstanding common shares of Opta Food Ingredients, Inc., a leading developer
and manufacturer of proprietary food ingredients, at the tender price of $2.50
cash per share. The total cost of this acquisition will be approximately
$28,000. Opta Food Ingredients, Inc. is traded on the NASDAQ stock exchange
under the symbol OPTS. The transaction is subject to certain closing conditions,
including the tender of a majority of Opta's shares. Assuming shareholder
approval, the completion of this transaction is expected to take place by year
end.
On October 15, 2002, the Company announced that it has signed an agreement to
acquire privately owned Simply Organic Co. Ltd, a Toronto based distributor of
organic and natural food products, subject to completion of mutual and customary
due diligence. This acquisition is intended to supplement the acquisition of
Wild West, announced on October 10, 2002, in creating an organic and natural
foods distribution network across Canada. The completion of this transaction is
expected to take place by the end of November, 2002.
On October 10, 2002, the Company announced that is has signed an agreement to
acquire privately owned Wild West Organic Harvest Co-Operative Association, a
Vancouver, British Columbia based distributor of organic and natural food
products, subject to completion of mutual and customary due diligence. This
acquisition represents the first step in creating a unique organic and natural
foods distribution network across Canada. The completion of this transaction is
expected by the end of November, 2002.
On October 1, 2002, Sunrich Valley, the Company's organic dairy products
division, signed a distribution agreement with Natrel, a division of Agropur
cooperative. Under the agreement, Natrel acquired certain exclusive rights for
the distribution of Sunrch Valley certified organic dairy products in Ontario
and Quebec.
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 and natural 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 and butter products. These products are marketed under the
brandname "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 various 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 consisted of the following
components; i) $15,000 term loan due May 2005, with scheduled quarterly
repayments to amortize over seven years; ii) CDN $5,000 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.
As a result of the departure of Mr. Boyd, Mr. Joe Riz was appointed chairman of
the Audit Committee and Mr. James Rifenbergh was appointed to the Committee. All
members of the Audit Committee (three) are independent external directors.
24
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 are 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 in 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 third quarter of
2002, this facility achieved record earnings and has now been profitable for
five consecutive months. This represents a major milestone for the Food Group as
cumulative losses at Nordic Aseptic for the 16 months 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 dietary fiber 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.
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, but may be impacted in the future by a potential over
supply of locally grown Japanese product, thus reducing margins on excess crop
sold to the North American domestic market. 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.
The Company has commenced the building of a Canadian natural and organic foods
business, vertically integrated from supply through distribution. The launch of
Sunrich Valley's MU organic dairy product line was the first step in this regard
and the recently signed distribution agreement with Natrel is expected to
increase sales of these products. The July, 2002 acquisition of Organic Kitchen
and Cloud Mountain further expanded the range of organic products available to
the Canadian market place. The recently announced agreements to acquire both
Wild West Organic Harvest Co-operative Association and Simply Organic Co. Ltd
further serve to expand the natural and organic foods distribution network
across Canada.
Developments in 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.
Sale of abrasives from Canadian operations to the bridge cleaning markets in the
Northeast U.S., improved significantly over the beginning of the year but have
not returned to pre-September 11, 2001 levels. Environmental recycling was also
slow in the beginning of the year due to a number of economic factors, but
showed improvement during the past two quarters. This is expected to continue
into the fourth quarter as the Group aggressively pursues a number of additional
opportunities.
During 2002, BEI/PECAL management signed new 3-year collective bargaining
agreements with the unions representing the unionized workforce of these
facilities.
25
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.
The project will commence upon the client providing an initial 10% down payment
and provision of a letter of credit for 100% of the purchase price. Numerous
delays have occurred related to the delivery of the letter of credit by the
client, thus manufacturing has not commenced to date. The Company has issued
various performance guarantees to support the manufacturing and quality
performance phases of the project. Manufacturing of the system will only
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 Company has informed the client that if there are not substantial
developments and the letter of credit is not received by November 30, 2002, the
Company may elect to cancel the contract and demand the return of the
performance guarantees.
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 Nine Months ended September 30, 2002 Compared With the Nine
Months Ended September 30, 2001
Consolidated
Revenues in the quarter ended September 30, 2002, increased by 43.2% to $32,800
from $22,904 in 2001. Earnings for the third quarter of 2002 were $1,527 or
$0.04 per common share compared to $156 or $0.00 per common share in the third
quarter of 2001.
Revenues in the first nine months of 2002 increased by 32.7% to $87,605 from
$66,011 in the first nine months of 2001. The Company's net earnings for the
first nine months in 2002 were $3,254 or $0.08 per common share compared to $703
or $0.02 per common share for the first nine months of 2001.
The increase in the Company's revenues of $9,896 in the third quarter is due to
a number of factors including increased sales of aseptic packaged soymilk
products, increased sales of bulk grains, specialty beans and dietary fiber, the
growth of the Canadian organic foods business and the impact of the acquisitions
of the business and certain assets of Virginia Materials & Supplies, Inc. and
51% of the outstanding common shares of International Materials and Supplies,
Inc. (Virginia Materials) in October, 2001.
Earnings for the nine month period ended September 30, 2002 increased by $2,551
or 363% to $3,254, 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, certain price increases
in the Environmental Industrial Group and the reduced borrowing costs as a
result of the new banking arrangements implemented earlier this year.
EBITDA(1) (earnings before interest and other income, taxes, deprecation and
amortization) for the nine months ended September 30, 2002 increased 55.9% to
$7,646 versus $4,903 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 nine months ended September 30, 2002 under U.S. GAAP is
$3,131 or $0.08 per common share versus earnings of $494 or $0.02 per common
share in the same period in 2001. Note 13 to the consolidated financial
statements itemizes the nature of these differences.
- ----------
(1) EBITDA is not a recognized measure under Canadian or United States
generally accepted accounting principles (GAAP). Management believes that
in addition to net income, EBITDA is a useful supplemental measure as it
provides investors with an indication of earnings from operations prior to
debt service, amortization and income taxes. Investors should be cautioned
however, that EBITDA should not be construed as an alternative to net
income determined in accordance with GAAP as an indicator of Stake's
performance or to cash flows from operating, investing and financing
activities as a measure of liquidity and cash flows. Stake's method of
calculating EBITDA may differ from other companies and, accordingly,
EBITDA may not be comparable to measures used by other companies.
26
Cost of good sold increased by 29.7% to $73,600 for the nine months ended
September 30, 2002 compared to $56,727 for the nine months ended September 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 16.0% for the nine months
ended September 30, 2002 compared to 14.1% in the nine months ended September
30, 2001.
Selling, general and administrative expenditures increased 27.1% for the nine
months ended September 30, 2002 to $9,416 compared to $7,410 for the nine months
ended September 30, 2001. The increase in administrative costs is consistent
with the growth in food operations, 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
indefinite life intangibles are not amortized. Amortization of goodwill and
indefinite life intangibles in the nine months ended September 30, 2001 was
$238.
Interest expense decreased to $1,028 in the first nine months of 2002 from
$1,407 in the first nine 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, lower debt
loads versus the prior year and a decrease in floating interest rates on certain
debt instruments versus 2001.
Interest and other income was $233 in the nine months ended September 30, 2002,
compared to $330 in the nine months ended September 30, 2001. Included in the
results for the nine months ended September 30, 2002 is a write-down of the
Company's 32% investment in Easton Minerals Limited of $297, offset by a gain in
the sale of non-core assets of $239.
Provision for income taxes increased to $680 in the nine months ended September
30, 2002, compared to $430 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 38.0% in 2001, before the aforementioned
reassessment, to 17.3% in 2002 as a result of the realization of certain loss
carry-forwards including the realization of the Nordic loss carry-forwards of
$600 previously unrecorded, and tax planning strategies implemented by the
Company.
Segmented Operations Information
Food Group
The Food Group contributed $68,853 or 78.6% of total Company consolidated
revenues in the first nine months of 2002 versus $51,444 or 77.9% in the same
period in 2001. The increase of $17,410 or 33.8%, in Food Group sales was due
primarily to increased sales of aseptic packaged soymilk at Nordic Aseptic of
$9,893, and an increase in sales of bulk grains, specialty beans and food
ingredients of $5,063.
Gross margin in the Food Group increased by $2,178 in the nine months ended
September 30, 2002 to $8,813 (12.8%) compared to $6,635 (12.9%) in the same
period in 2001. The increase in total gross margin reflects the positive impact
of improved product margins on organic feed, dietary fiber and various other
specialty processed products, coupled with cost reduction initiatives undertaken
throughout the Group, offset by lower margins on bulk grains, aseptic product
due to the losses incurred at Nordic in the first four months of 2002 and a
decline in margins in certain retail consumer products.
Selling, general and administrative expenses increased to $5,750 in the nine
months ended September 30, 2002 versus $5,008 in the nine months ended September
30, 2001. The increase is due primarily to an increase in 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 $806 in the nine months ended September 30, 2002
versus $1,184 in the nine months ended September 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.
27
The Food Group net earnings increased to $2,316 in the first nine months of 2002
from $591 in the first nine months of 2001 as a result of the improved financial
performance at Nordic Aseptic, improved volume on grain and specialty beans and
internal cost control programs, the one-time gain on sale of property, and the
realization of the Nordic loss carry-forwards.
Environmental Industrial Group
The Environmental Industrial Group contributed $18,526 or 21.1% of the total
Company consolidated revenues in the first nine months of 2002, versus $14,265
or 21.6% in 2001, an increase of $4,260 or 29.9%. Revenues were favourably
impacted by the acquisition of Virginia Materials in October 2001, partially
offset by weak market and economic conditions in the Canadian 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 $4,966 in the
nine months ended September 30, 2002 versus $2,399 in the nine months ended
September 30, 2001, an increase of 107%. The increase in margin resulted
primarily from the acquisition noted above and improvements in price and sales
mix, offset by a decrease in volume as a result of the economic conditions noted
above. As a percentage of revenues, gross margin improved to 26.8% in the first
nine months of 2002 from 16.8% in the first nine months of 2001.
Selling, general and administrative expenses increased to $2,311 in the nine
months ended September 30, 2002 versus $1,444 in the nine months ended September
30, 2001. The increase is due in most part to the acquisition of Virginia
Materials in 2001.
Interest expense was $222 in the first nine months of 2002 compared to $223 in
the first nine months of 2001.
Net earnings were $1,497 in the nine months ended September 30, 2002 versus $579
in the nine months ended September 30, 2001 as a result of the addition of
Virginia Materials and improved price and sales margins on certain products,
offset by unfavourable economic and market conditions in the Canadian steel and
foundry businesses and increased competitive pressures in key product groups.
Steam Explosion Technology Group
Revenues of $226 for the nine months ended September 30, 2002 and $302 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 good sold for the nine months ended September 30, 2001 of $52 consisted
of amortization charges. The asset was fully amortized in 2001, and therefore
there were no amortization charges in the first nine months ended September 30,
2002.
Selling general and administrative expenses were $251 for the first nine months
of 2002 compared to $230 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.
For the nine months ended September 30, 2002 the Group had a net loss of $15
compared to net earnings of $43 for the same period in 2001.
Corporate Activities
Selling, general and administration expenses were $1,104 in the nine months
ended September 30, 2002 versus $728 in the nine months ended September 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.
28
Liquidity and Capital Resources at September 30, 2002
Current assets
Cash and cash equivalents increased to $6,808 at September 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, capital projects and acquisitions.
As of September 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 $13,827 at September 30, 2002 from $8,377
at December 31, 2001. Trade receivables at September 30, 2002 attributable to
the Food Group were $9,840 (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 $3,916 (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 $71 as the Company recorded 25% of its
annual $300 license fee due in the third quarter.
The note receivable of $1,362 (December 31, 2001- $2,303) and the product rebate
payable in long-term payables of $1,299 (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,
expiring September 2003. 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 increased $137 to $13,958 at September 30, 2002. The Food Group
accounts for $9,710 of the total balance (December 31, 2001 - $10,325) and the
Environmental Industrial Group $4,248 (December 31, 2001 - $3,496). The Steam
Explosion Technology Group is not required to carry significant inventories. The
higher balances in the Food Group are primarily due to increased inventory of
aseptic packaging goods, increase in organic inventories in Canada and seasonal
grain inventories. The increase in the Environmental Industrial Group is due in
most part to seasonal inventory levels.
Future income tax assets of $1,462 at September 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 September 30,
2002, realized loss carry-forwards of Nordic Aseptic, and certain 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 nine months of 2002, the Company spent $3,055 (September 30, 2001 -
$2,486) on capital expenditures, of which, the Food Group spent $2,169, with the
larger projects being the acquisition of a boiler for the production facility in
Afton, Wyoming and the acquisition of a CIP system for Nordic Aseptic. During
the first nine months of 2002, $794 was spent in the Environmental Industrial
Group, of which, $268 was spent on equipment refurbishment for a new plant in
Baltimore, Maryland and the remaining on general additions and replacements. In
the first nine months of 2002, $92 was spent by the Steam Explosion Technology
Group and the Corporate Office primarily on office and computer equipment to
accommodate continued expansion.
Goodwill and intangibles
Goodwill increased to $9,291 at September 30, 2002 from $8,540 at December 31,
2001. The increase relates to the contingent consideration component related to
the acquisition of Virginia Materials which is booked to goodwill as earned.
29
Indefinite life trademarks, valued at $2,498 at September 30, 2002 remained
unchanged from 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 trademarks on an annual basis to determine if there is an impairment in
their value.
Definite life trademarks, obtained in the acquisition of Organic Kitchen in July
2002 increased to $154 at September 30, 2002 (December 31, 2001 - $nil). These
trademarks are being amortized over the life of the trademarks.
Other assets
In the first nine 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 commenced 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 September 30, 2002 the unamortized balance
of these items is $446 (December 31, 2001 - $353). Readers should note that
these pre-operating costs would have been expensed under U.S. GAAP.
During the first nine months the Company deferred financing related costs of
$499 and has a balance of $483 at September 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.
Investments decreased to $103 at September 30, 2002 from $366 at December 31,
2001 as a result of a write-down in the Company's equity investment in Easton
Minerals Limited.
At September 30, 2002, other items were $195 versus $157 as at December 31,
2001.
Current liabilities
Accounts payable and accrued liabilities increased to $13,817 at September 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 $78 at September 30, 2002 (December 31, 2001 - $1,389)
relate to cash deposits made by Food Group customers in 2001 for purchases made
throughout the 2002 season. No recognition of revenue or accrual of costs is
booked on these transactions until the goods are shipped.
New Financing Arrangement Replacing Existing Lines of Credit and Long Term Debt
During 2002, the Company entered into a new financing arrangement with a major
Canadian bank and the bank's 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 $5,000 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.
30
3. $5,000 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 ~ollateralised 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 September 30, 2002 is $1,464 (December 31, 2001 -
$1,206). The entire balance resides in the Food Group. The increase relates
primarily to an increase in working capital requirements and capital
acquisitions.
Long term debt
At September 30, 2002, the Company's long-term debt, including current portion,
is $15,396, a decrease of $1,252 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 long term debt, $14,300 relates to the term loan referred to above, while
$1,096 relates to a number of small debt and capital lease facilities which are
being discharged on an ongoing basis.
Long-term payables
In addition to the product rebate payable previously discussed, the Company had
deferred purchase consideration of $286 at September 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 five
months from September 30, 2002 to satisfy this liability.
The Preference Shares of subsidiary companies were reduced to $297 from $416 as
a result of regularly scheduled repurchases in the first nine months of $93
(excluding interest and dividend expense) and an additional repurchase of
preferred shares related to one of the Company's subsidiaries for $26.
Future income tax liability
The future income tax liability of $1,790 at September 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 nine months ended September 30, 2002, cash flow provided by operations
before working capital changes was $5,498 (September 30, 2001 - $3,454), an
increase of 59.2%. The increase was due primarily to increased net earnings
throughout the Company, offset by the non-cash realization of loss
carry-forwards.
Cash flow used in operations after working capital changes was $458 for the nine
months ended September 30, 2002 (September 30, 2001 - $1,479), reflecting the
utilization of funds for non-cash working capital of $5,956 (September 30, 2001
- - $4,933). This utilization consists principally of an increase in accounts
receivable ($5,450), a decrease in customer deposits ($1,311), an increase in
inventories ($145), and an increase in other current items ($39), offset by an
increase in accounts payable and accrued liabilities of $989. The working
capital deficiencies in the first nine months reflect the impact of seasonality
of the business on working capital, and the increase in working capital
requirements as a result of the growth in operations.
31
Cash provided by investment activities generated $3,318. The Company sold its
marketable securities for proceeds of $6,307 and received payments on a note
receivable of $1,045 (September 30, 2001 - $1,038), partially offset by
acquisitions of property, plant and equipment of $3,055 (September 30, 2001 -
$2,486), continued payments to the former owner of Virginia Materials as part of
the Company's profit sharing arrangement of the acquired business in the amount
of $783, and the acquisition of Organic Kitchen of $297.
Cash provided by financing activities was $626 in the first nine months ended
September 30, 2002 (September 30, 2001 - $9,996), which consists primarily of
borrowings from the operating line of credit of $258 (September 30, 2001 -
$1,589), decrease in restricted cash of $1,147 (September 30, 2001 - increase of
$262), net proceeds from the issuance of common shares of $1,805 (September 30,
2001 - $11,531), partially offset by net debt repayments of $1,209 (September
30, 2001 - $2,757), deferred financing costs of $499 (September 30, 2001 - $nil)
deferred purchase consideration to the former owner of Virginia Materials of
$754 (September 30, 2001 - $nil), and purchase and redemption of preference
shares of subsidiary companies of $122 (September 30, 2001 - $105).
Commitments
a) Letters of Credit:
i) An irrevocable letter of credit for $473 ($750 CDN) 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 249
2003 1,114
2004 1,169
2005 1,118
2006 and thereafter 3,656
---------
7,306
=========
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 September 30, 2002, the weighted average interest rate of the fixed rate
term debt was 7.8% and $1,096 of the Company's outstanding term debt is at fixed
interest rates. Variable rate term debt of $14,300 at an interest rate of 3.19%
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.
32
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 $2,600.
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 a counter-party 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 September 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.
Item 4 - Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of disclosure controls
pursuant to Exchange Act Rules 13a-14 and 15d-14. Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
disclosure controls and procedures are effective in ensuring that all material
information has been made known to them in a timely fashion. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date the Chief Executive Officer and
Chief Financial Officer completed their evaluation.
33
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 Minerals Ltd., 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. 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 nine months ended September 30, 2002, employees and directors
exercised 238,540 common share options and an equal number of common shares were
issued for net proceeds of $373.
Warrants exercised during the year
During the nine months ended September 30, 2002, 655,000 warrants were
exercised, and an equal number of common shares were issued for net proceeds of
$1,471. During the nine months ended September 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 and
debt facilities or for other general operating 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
Not applicable
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits -
1.1 Certification of the Principal Executive Officer, Jeremy N. Kendall,
pursuant 18 U.S.C. Section 1350, as enacted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
1.2 Certification of the Principal Financial Officer, Steven R. Bromley,
pursuant 18 U.S.C. Section 1350, as enacted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K - No current reports on Form 8-K were filed by the
Company during the nine months ended September 30, 2002.
34
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.
/s/ Steven R. Bromley
Date October 31, 2002
Stake Technology Ltd.
By Steven R. Bromley
Vice President, Finance
& Chief Financial Officer
35
EXHIBIT INDEX
1.1 Certification of the Principal Executive Officer, Jeremy N. Kendall,
pursuant 18 U.S.C. Section 1350, as enacted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
1.2 Certification of the Principal Financial Officer, Steven R. Bromley,
pursuant 18 U.S.C. Section 1350, as enacted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
36