SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 | |
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b02 of the Act).
Yes |X| No | |
At March 7, 2003 the registrant had outstanding 42,489,943 common shares, 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 US$102,730,000. The Company's common shares
traded on Nasdaq Small Cap Market tier of The Nasdaq Stock Market under the
symbol STKL and on the Toronto Stock Exchange under the symbol SOY.
There are 48 pages in the December 31, 2002 10-K including this page and the
index after the cover page.
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Stake Technology Ltd. December 31, 2002 - 10-K
STAKE TECHNOLOGY LTD.
Table of Contents
FORM 10-K Page
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PART I
Item 1. Business......................................................................................4
Item 2. Properties...................................................................................22
Item 3. Legal Proceedings............................................................................23
Item 4. Submission of Matters to a Vote of Security Holders..........................................23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................24
Item 6. Selected Financial Data......................................................................26
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations.......26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................36
Item 8. Financial Statements and Supplementary Data..................................................37
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.........37
PART III
Item 10. Directors and Executive Officers of the Registrant...........................................38
Item 11. Executive Compensation.......................................................................43
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters......................................................................................44
Item 13. Certain Relationships and Related Transactions...............................................45
Item 14. Controls and Procedures......................................................................45
PART IV
Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K.............................46
Index to Financial Statements.............................................................................46
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Stake Technology Ltd. ii December 31, 2002 - 10-K
Currency Presentation
All dollar amounts herein are expressed in United States dollars. Amounts
expressed in Canadian dollars are preceded by the symbol "CDN$". On March 7,
2003, the noon buying rate, in New York City for cable transfers in Canadian
dollars for customs purposes by the Federal Reserve Bank of New York was
US$0.6820 for $1.00 Canadian.
The following table sets forth information with respect to the exchange rate of
the Canadian dollar into United States currency during 2002. (1) The rate of
exchange for the Canadian dollar, expressed in US dollars, in effect at the end
of the year (2) the average of exchange rates in effect on the last day of each
month during the year and (3) the high and low exchange rates during the year.
For previous years, historical results have been restated to U.S. dollars 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.
====================================== ======================================
RATES 2002
- -------------------------------------- --------------------------------------
Last Day (1) $0.6331
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Average (2) $0.6373
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High (3) $0.6618
- -------------------------------------- --------------------------------------
Low (3) $0.6199
====================================== ======================================
Note Regarding Forward-Looking Financial Information
Certain statements included herein may constitute "forward-looking statements"
within the meaning of the United States Private Securities Litigation Reform Act
of 1995. These forward-looking statements include, but are not limited to
references to business strategies, competitive strengths, goals, capital
expenditure plans, business and operational growth plans and references to the
future growth of the business. These forward looking statements are based on
certain assumptions and analyses made by the Company in light of its experience
and its interpretation of current conditions, historical trends and expected
future developments as well as other factors that the Company believes are
appropriate in the circumstance.
However, whether actual results and developments will agree with expectations
and predications of the Company is subject to many risks and uncertainties
including, but not limited to; general economic, business or market risk
conditions; competitive actions by other companies; changes in laws or
regulations or policies of local governments, provinces and states as well as
the governments of United States and Canada; many of which are beyond the
control of the Company. Consequently all forward-looking statements made herein
are qualified by these cautionary statements and there can be no assurance that
the actual results or developments anticipated by the Company will be realized.
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Stake Technology Ltd. 3 December 31, 2002 - 10-K
PART I
Item 1. Business
Overview
Stake Technology Ltd. ("Stake" or the "Company") operates in three principal
businesses; (1) natural and organic food product markets including sourcing,
processing, packaging and distribution, (2) processing, distribution and
recycling of environmentally responsible industrial mineral products and (3)
engineering and marketing of a proprietary clean pulping system using patented
steam explosion technology.
The Company was incorporated under the laws of Canada on November 13, 1973. The
principal executive offices are located at 2838 Highway 7, Norval, Ontario,
Canada, L0P 1K0, telephone: (905) 455-1990, fax: (905) 455-2529, e-mail:
info@staketech.com and web site: www.staketech.com.
The Food Group, which represents approximately 80% of consolidated revenues,
consists of the SunRich Food Group (SunRich), recently acquired Opta Food
Ingredients, Inc. (Opta) and the newly formed Canadian Organic Food Group. These
groups form the backbone of the Company's vertically integrated food operations,
focused on the natural and organic foods markets. SunRich produces organic and
non-genetically modified (non-GMO) food ingredients with a specialization in soy
and other natural and organic food products. SunRich is headquartered at 3824 -
93rd Street S.W., Hope, Minnesota, 56046-0128, telephone: (507) 451-3316, fax:
(507) 451-2910, e-mail: info@sunrich.com and web site: www.sunrich.com. Opta is
the world's largest supplier of oat fiber to the food industry. Its mission is
to resolve its customer's product formulation challenges through innovating,
manufacturing and selling proprietary ingredients to improve the nutritional
content, healthfulness, texture and taste of foods. Opta is headquartered at 25
Wiggins Avenue, Bedford, Massachusetts, 01730, telephone: (781) 276-5100, fax
(781) 276-5101, email: customer_service@opta-food.com and web site:
www.opta-food.com. The Canadian Organic Food Group consists of the 2002
acquisitions of Wild West Organic Harvest Co-operative Association (Wild West)
of Richmond, British Columbia, Simply Organic Co. Ltd. (Simply Organic) of
Toronto, Ontario, Organic Kitchen of Toronto, Ontario and Sunrich Valley, a new
division launched in 2002. Wild West is well established in specializing the
distribution of natural and organic foods throughout Western Canada. Simply
Organic is a growing natural and organic foods distribution business serving the
Central Canada market. Organic Kitchen provides organic feeds and partners with
processors to market organic poultry and other organic meat products. Sunrich
Valley markets a full line of organic dairy products under the brand name mu.
For details contact their respective web sites are as follows:
www.wildwestorganicharvest.com; www.organickitchen.com and www.muorganics.com.
The Environmental Industrial Group, which represents approximately 20% of
consolidated sales, includes BEI/PECAL, a division of the Company, Temisca Inc.,
Virginia Materials Inc. (Virginia Materials) and International Materials &
Supplies, Inc. (International Materials). The Group processes, sells and
distributes abrasives and other industrial minerals to the foundry, steel and
marine/bridge cleaning industries; sources specialty sands and garnets for the
water filtration industry; and recycles inorganic materials under special
permits from government authorities at both its Waterdown, Ontario and Norfolk,
Virginia sites. The Environmental Industrial Group can be contacted at 407
Parkside Drive, Waterdown, Ontario, L0R 2H0, telephone: (905) 689-6661, fax:
(905) 689-0485, e-mail: info@barnesenvironmental.com and web site: www.bei.ca.
The Steam Explosion Technology Group, a division of Stake, is located on the
corporate property of the Company in Norval, Ontario. This division holds
numerous patents on its steam explosion process and is marketing this clean
pulping system with a special focus on China, the world's largest user of
non-woody pulp. The Group is also pursuing opportunities to leverage this
technology in food grade applications in North America. The Steam Explosion
Technology Group can be contacted at 2838 Hwy 7, Norval, Ontario, L0P 1K0,
telephone: (905) 455-1990, fax: (905) 455-2529, e-mail: info@staketech.com and
web site: www.steamexplosion.com.
Segmented Information
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Stake Technology Ltd. 4 December 31, 2002 - 10-K
The Company operates in three industries:
(1) The Food Group produces, packages, markets and distributes a wide
range of natural and organic food products and ingredients with a focus on
soy, oat and corn;
(2) The Environmental Industrial Group processes, sells and distributes
industrial minerals, and recycles inorganic materials for the foundry,
steel, bridge and ship cleaning industries; and
(3) The Steam Explosion Technology Group owns numerous patents on its
proprietary steam explosion technology and designs and subcontracts the
manufacture of these systems for processing non-woody fibers for use in
the paper and food industries.
The Company's operations and assets are located in both Canada and the United
States.
Acquisitions during 2002 and 2001
Food Group
Opta
On December 4, 2002, Stake completed its cash tender offer for Opta (formally
listed on Nasdaq - OPTS) for $2.50 per share in accordance with the terms of its
tender offer for all of the outstanding shares of Opta. Approximately 92.6% of
the outstanding common shares were tendered. On December 18, 2002 the Company
amalgamated Opta with Stake Acquisition Corp., a wholly owned subsidiary. As a
result the remaining 7.4% of outstanding common shares were converted to a right
to receive $2.50 per share in cash from Stake.
Opta is a leading innovator, manufacturer and marketer of proprietary food
ingredients that improve the nutritional content, healthfulness, texture and
taste of its customers' food products. Opta's food ingredients are used by more
than 350 food companies, including 12 of the largest U.S. consumer packaged food
companies and three of the world's largest quick service restaurant chains. For
the nine-month period ended September 30, 2002, Opta's sales were $21.1 million
with an EBITDA of $2.8 million from its four manufacturing plants. As of
September 30, 2002, Opta's net assets were approximately $38 million, which
included approximately $9.5 million in cash and short-term investments. The
acquisition of Opta is expected to be immediately accretive to future earnings
of the Company.
Wild West Organic Harvest
On November 1, 2002 the Company acquired privately owned 632100 B.C. Ltd.,
formally operated as Wild West Organic Harvest Co-Operative Association (Wild
West), a Vancouver (Richmond), British Columbia based distributor of organic and
natural food products. The purchase price included cash and contingent
consideration payable upon achieving certain gross margin targets over the next
two to four years. The acquisition is expected to be accretive to earnings. Wild
West had annualized revenues of approximately $11.0 million in the current
fiscal year.
Wild West distributes 2,400 products throughout Western Canada to both the mass
market and natural food retail outlets. It has a historical annual growth rate
of 43% over the last three years and operates from a newly expanded 38,000
square foot refrigerated and frozen warehouse facility. A natural and organic
industry fresh food pioneer with 26 years of operation, Wild West runs one of
Canada's only certified organic distribution centres.
Simply Organic
On December 1, 2002. the Company acquired privately owned Simply Organic Co.
Ltd. (Simply Organic), a Toronto based distributor of natural and organic food
products. The purchase price included cash and contingent consideration payable
upon achieving certain gross margin targets over the next two to four years.
This acquisition is expected to be accretive to earnings. Simply Organic
celebrated its second year in business in November, 2002 and had annualized
revenues of approximately $3.5 million in the current fiscal year.
Simply Organic distributes a broad range of regionally and internationally grown
and produced certified organic food products including Stake's line of organic
dairy products, sold under the brand name mu, throughout much of Ontario to both
the mass market and natural food retail outlets. It has recently expanded to a
new 14,000 square foot refrigerated warehouse to serve as the distribution hub
for its extensive line of certified organic food products.
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Stake Technology Ltd. 5 December 31, 2002 - 10-K
Organic Kitchen
On July 3, 2002 the Company acquired certain assets and the businesses of Cloud
Mountain Inc. and Organic Kitchen Inc. (together, Organic Kitchen). These two
companies form an integrated unit which sources, blends and supplies proprietary
organic feeds to organic poultry and other meat producers. The companies then
partner with organic processors who package poultry and other meat products and
distribute to mass marketers under private label or the Organic Kitchen(TM)
brand.
Organic Kitchen is one of the only major suppliers of organic chicken in Canada,
a market which is expanding rapidly with the growth in the natural and organic
food industry. The company is currently growing between 40,000 to 80,000
chickens every 8 weeks and intends to expand that significantly in the future.
Under the terms of the acquisition agreement, Stake purchased these assets for
cash and contingent consideration based on profits through December 2005.
Results from operations of the four Food Group acquisitions are included in the
Company's results of operations from the date of acquisition to December 31,
2002 and their respective assets and liabilities are included in the December
31, 2002 consolidated balance sheet.
Jenkins & Gournoe, Inc.
In February, 2001, the Food Group acquired 100% of the common shares of Jenkins
& Gournoe, Inc. (First Light Foods), a private Illinois company that owned
certain soy trademarks including Soy-Um and Rice-Um. The total acquisition
purchase price was $1,813,000 and was paid by the issuance of 833,333 common
shares issued by Stake, 35,000 warrants exercisable at US$1.70 for five years,
$350,000 (including acquisition costs) in cash and a note payable for $659,000,
repayable quarterly over 2 years by payments of $87,500, with interest at 8.5%.
There is also contingent consideration that may be payable on this acquisition
if; (a) certain predetermined profit targets are achieved, up to an additional
140,000 warrants may be issued in 2002 through to 2005, as well as (b) a
percentage of gross profits in excess of $1,100,000 per annum from 2001 to 2005
will be paid to the vendors of First Light Foods. No contingent consideration
was paid in 2001 or 2002. The acquisition of First Light Foods complements the
Food Group's strategy of becoming a vertically integrated business providing
expertise from seed to merchandisable products of soy milk.
As part of the Company's bank refinancing in March 2002, the note payable was
repaid.
Environmental Industrial Group
Virginia Materials
On October 31, 2001, the Company's wholly owned subsidiary, Virginia Materials
acquired certain assets of Virginia Materials and Supplies, Inc. as well as 51%
of the outstanding common shares of International Materials & Supplies, Inc.
(International Materials) for cash consideration (including acquisition costs)
of $1,743,000 plus deferred purchase consideration now estimated to be
$1,754,000 (previously estimated as $1,145,000) and contingent consideration.
The deferred purchase consideration will be paid upon the Company's purchase of
the vendor's inventory. Management estimates that the entire inventory will be
acquired by the end of 2003. On November 1, 2002 Virginia Materials purchased
the remaining 49% outstanding common shares of International Materials.
In addition, the Company agreed to pay 50% of the profits for a two-year period
from the date of the acquisition. The vendor's share of profits is considered
contingent consideration. The Company has amended the arrangement with the
vendor of Virginia Materials and will pay $50,000 per month for the period
January 1, 2003 to October 31, 2003 in lieu of 50% of profits.
Virginia Materials is a supplier of abrasives to the shipbuilding and repair
industry. It has a production facility located in Norfolk, Virginia and a second
plant is scheduled to open during 2003 in Baltimore, Maryland. Virginia
Materials also recycles spent abrasives which are used in the production of
cement and converts aluminum smelting waste into a roofing and abrasive product.
International Materials produces industrial garnets as a by-product from a
mining operation and processes these garnets for sale to the water filtration,
water jet cutting and abrasives markets.
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Stake Technology Ltd. 6 December 31, 2002 - 10-K
New and Amended Banking Agreement and Other Lending Facilities
On March 15, 2002, Stake consolidated most of its existing banking relationships
with a single Canadian lender and its wholly owned U.S. subsidiary
(collectively, "the banks"). Over a number of years Stake had acquired a number
of companies with numerous separate banking and private lending relationships.
The new agreement consolidated these arrangements and resulted in administration
and interest cost savings in 2002 of approximately $450,000, and approximately a
$1,250,000 improvement in cash flow on an annualized basis.
On November 25, 2002, Stake entered into a tender facility agreement with the
banks for a maximum availability of $17 million, to be used solely for the
purchase of the outstanding common shares of Opta, pursuant to the cash tender
offer dated October 25, 2002. As at December 31, 2002, $15.2 million was
outstanding on this facility. This facility expired and was fully repaid on
March 5, 2003 with cash and the incremental proceeds from the amended banking
facility, as described below.
On December 4, 2002, Stake issued to Claridge Israel LLC (Claridge), the
Company's largest shareholder, a $5 million convertible debenture. If not
converted the debenture is due and fully payable on November 30, 2004. Interest
is payable quarterly at an annual rate of 5.5%. The debenture is convertible at
the option of the holder at any time after November 30, 2003 or earlier under
certain circumstances at the conversion price of $3.00 per common share. Stake
has the option to repay the debenture at anytime subject to certain restrictions
within its amended and restated banking facility. In addition, the Company
issued Claridge 250,000 warrants exercisable into an equivalent number of common
shares of Stake at a price of $3.25 per common share. These warrants expire
November 30, 2004. Claridge has collateralised the convertible debenture with a
second priority security interest on certain of Stake's Canadian and U.S
properties.
On March 5, 2003 the Company amended and restated the banking facility entered
into in March 2002 and entered into a bank syndication arrangement. The amended
facility includes a Canadian line of credit for CDN $5 million, a U.S. committed
line of credit for $9 million and a two year term facility for $21.7 million,
with repayments amortized over seven years. Incremental proceeds from this
amended facility were used to repay the tender facility.
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Stake Technology Ltd. 7 December 31, 2002 - 10-K
Food Group
The Food Group has been built over the past four years with the acquisition of
eight companies and the startup of one. The acquisitions include Sunrich Inc. in
August, 1999, the purchase of Nordic Aseptic, Inc. in August, 2000, the
acquisition of Northern Food & Dairy, Inc. in September, 2000 and the
acquisition of First Light Foods (Jenkins & Gournoe) in February, 2001. In
April, 2002, Sunrich Valley, a newly formed Division of Stake, launched a full
line of organic dairy products under the brand name mu. In addition, during
2002, Stake completed the acquisitions of Organic Kitchen, Wild West, Opta, and
Simply Organic. The acquisitions coupled with significant internal growth have
established a unique, vertically integrated natural and organic foods company
with significant presence in both the United States and Canada.
The Food Group is comprised of three business units, the SunRich Food Group,
Opta Food Ingredients and the Canadian Organic Food Group. These units form the
basis of the Company's vertically integrated food operations. The Company
intends on integrating these operations in order to leverage efficiencies and
cost savings, maximize product and processing capabilities and develop a
platform to support continued growth in the natural and organic foods sectors.
[IMAGE]
SunRich Food Group
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Stake Technology Ltd. 8 December 31, 2002 - 10-K
The SunRich Food Group consists of three key vertically integrated business
groups: The Product and Ingredients Group ("Products"), the Technical Processing
Group ("Processing") and the Packaging Group, ("Packaging").
The Products Group specializes in identity-preserved (IP), non-genetically
modified (non-GMO) and organic grain products and natural food ingredients,
including soybeans, corn, soy ingredients, grain sweeteners, milled flours,
meals, grains and vegetable oils.
The Processing Group is one of the largest soymilk concentrate producers in the
U.S.. This group focuses on the technical processing of specialty and functional
food ingredients including soymilk concentrate, soluble fiber products, natural
food preservatives, grain sweeteners, custom drying and blending.
The Packaging Group focuses on the aseptic packaging of shelf stable beverages
and liquid products from the Nordic Aseptic facility. The Nordic Aseptic
facility has been significantly upgraded over the past two years and has entered
into a long-term agreement with a major food company to provide aseptic finished
product. After a period of ongoing operating losses, Nordic Aseptic realized
profitability during 2002.
The SunRich Food Group is well positioned to capitalize on the rapid growth of
the natural and organic food markets. The Company produces a broad offering of
soy-based food products to the U.S. and international markets from field to
table, or seed to retail product. The proliferation of great tasting, healthy
soyfoods has increased the availability of soy products to consumers. The
increase in consumer demand has resulted in soyfoods products experiencing some
of the largest growth rates of any category in the food industry. The FDA allows
soy products containing more than 6.25 grams of soy protein per serving to make
the claim of improving cardiovascular health of consumers.
The SunRich Food Group's major products are as follows:
Grains and Inputs: Included in grain and inputs are specialty soybeans, IP corn,
various other grains (corn, rice and oat), organic corn and milled products, soy
and oat flours and organic feed ingredients. IP specialty grains are sold to
both domestic and foreign food processors.
The demand for non-GMO soybeans from foreign customers and the increased demand
from domestic soyfoods manufacturers has continued to fuel an increase in
business volume. These trends are expected to continue in the future as the soy
and natural foods markets continue to grow.
The Group's grain revenues slow during the period from December to March of the
following year when bulk grain shipments are inhibited by winter weather. Food
ingredient, processing and retail food product revenues are not as seasonal
except for slowdowns in production due to customers utilizing existing
inventories, usually at the beginning of each fiscal quarter.
Bulk commodity products revenues are sensitive to distribution costs. This can
limit their competitiveness in particular markets. Competitive bulk and
container freight costs give the Group access to Japanese and Mexican export
markets but uncompetitive freight costs limit opportunities in European markets.
Soy Milk and Soy Ingredients: Soy milk and soy ingredients are marketed
throughout the United States where the Group has a strong presence. The Food
Group is continuing to develop new product offerings and customers as the demand
for soy based products continue to grow.
Organic and Natural Food Ingredients: The natural and organic foods market is
one of the fastest growing segments in the food industry. The Food Group markets
grain sweeteners and maltodextrins under the names Maisweet, Arrosweet and
Oatsweet. Organic and natural vegetable oils are sold to customers throughout
the United States, Hong Kong and Japan. Organic snack coatings will be launched
during 2003 in response to heavy customer demand.
Custom Ingredients: The Company produces a number of unique functional food
ingredients on a contract basis utilizing customer's proprietary technology.
Products include:
Benefiber: A soluble guar based fiber food ingredient, produced under
license for Japanese and US based customers.
Betatrim: Fractionalized oat based food ingredients produced under
agreement for domestic customers.
Microgard: A natural food preservative.
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Stake Technology Ltd. 9 December 31, 2002 - 10-K
Dairy Blends: The Group produces custom blended powdered dairy ingredients
for several customers in the United States.
Powdered Honey and Molasses: The Group produces and markets dried sweeteners
such as powdered honey and molasses, which are sold to food manufacturers.
Technical Processing and Spray Drying: Technical processing and spray drying is
contracted with various customers to produce a variety of food ingredients.
Aseptic Packaged Products: Processing and packaging of shelf stable liquid
products is performed at Nordic Aseptic. The Sunrich Food Group packages aseptic
products for some of the leading consumer branded food companies in the United
States and also has its own proprietary branded products being marketed under
the trade names Rice Um and Soy Um.
Opta
Opta Food Ingredients, Inc. (Opta) is a market innovator in the value-added food
ingredients market. Opta is the world's largest supplier of oat fiber to the
food industry, a developer of value-added starch-based texturizers and resistant
starches and a manufacturer of proprietary stabilizer blends.
Opta's food ingredients are used by more than 350 customers in the U.S., Canada,
Latin America, Western Europe, the Middle East, Asia and the Pacific Rim,
including 12 of the largest U.S. consumer packaged food companies and 3 of the
world's largest quick service restaurant chains. Opta has an excellent
reputation for product quality, and innovation and technical expertise in
developing value-added solutions for major food and food service companies.
Opta works closely with consumer food and foodservice companies to identify
product formulation, cost and/or productivity issues and develop solutions to
these problems based on proprietary, value-added, highly functional food
ingredients and ingredient systems.
Opta has added a unique portfolio of products which expanded the Food Group's
specialty food ingredient business on the basis of two main technology
platforms: fiber-based texturizers which include Canadian Harvest(TM) Oat Fibers
and Stabilized Bran products, and Opta Ingredient Systems(TM) which include
OptaGrade(R), OptaMist(R), OptaFil(R), CrystaLean(R), OptaMax(R), Shimizu Konjac
Flour, Blanver's Best microcrystalline cellulose (MCC) and other proprietary
stabilizer blends
In addition to helping food manufacturers improve the healthfulness of their
food products, Opta's family of texturizing ingredients can improve the overall
quality of food products, reduce formulation costs and meet specific processing
requirements. The Company believes that all of its products are GRAS (Generally
Regarded As Safe, see Regulation section for a further description) under
current FDA regulations.
Opta's major products are as follows:
Fiber-Based Products
Canadian Harvest: Canadian Harvest Oat Fibers are a family of insoluble fiber
products derived from oat hulls. Oat Fibers are used commercially to increase
yield and enhance texture in ground meat products, to add strength and reduce
breakage of taco shells and ice cream cones, and to enhance texture and increase
the fiber content of cereals, breads, cookies and crackers. Opta also offers
Canadian Harvest Stabilized Brans derived from oat, wheat and corn, as well as
wheat germ. The Stabilized Brans are heat-treated to extend shelf life and
ground to meet customer needs for appropriate particle size.
Opta Ingredient Systems
Opta Ingredient Systems are proprietary blends of texturizing agents and other
ingredients that are primarily developed and sold for use in the dairy, salad
dressing and soy-based product categories. Many of the Ingredient Systems
contain one of Opta's unique and proprietary starch-based texturizers which are
described below.
OptaGrade: OptaGrade is a natural, starch-based texturizing agent that is used
commercially in a variety of dairy products including natural, imitation and
processed cheeses, sour cream, cream cheese and cottage cheese. Fat free cheeses
made with OptaGrade have shown superb meltability with none of the off-taste or
rubbery texture
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Stake Technology Ltd. 10 December 31, 2002 - 10-K
found in most fat free and reduced fat cheeses. By using OptaGrade in cottage
cheese, food manufacturers are able to reduce total formulation costs while
delivering excellent taste, texture and appearance. OptaGrade is also used to
improve the taste and texture of reduced fat and fat free cream cheeses. In sour
cream, OptaGrade is used to create a smooth, creamy texture, and allows for a
"cleaner" all natural ingredient label.
OptaMist: OptaMist is also a starch-based texturizing agent that improves the
taste, texture and appearance of dairy products, yogurt, natural and processed
cheese products, salad dressings and mayonnaise. While the functionality of
OptaMist is similar to that of OptaGrade, its unique processing flexibility
allows it to be used in food products made within a wide variety of processing
systems.
OptaFil: OptaFil is a starch-based opacifying agent and whitener used in reduced
fat or fat free dairy and non-dairy creamers, whipped toppings, puddings,
beverages, cheeses and salad dressings.
CrystaLean: CrystaLean is an enzyme-resistant, starch-based bulking and
texturizing agent designed to enhance texture and add fiber to food products
including baked goods and extruded products such as cereals and snack foods.
CrystaLean is being used commercially in a nutrition bar specifically marketed
to diabetics as well as a nutritional beverage marketed to individuals with
insulin resistance.
OptaMax: OptaMax is a starch-based texturizing agent developed to increase
yields and improve the texture of reduced fat natural cheese including
Mozzarella, Cheddar, Colby, Monterey Jack and Feta.
Konjac Flour: Under a distribution agreement with Shimizu International, Inc. of
Japan, Opta is the exclusive North American distributor for konjac flour. A
unique and very versatile texturizing agent obtained from the konjac plant
commonly cultivated in East Asia, konjac flour provides excellent heat and
freeze thaw stability when used to thicken or gel processed foods.
Microcrystalline Cellulose (MCC): Under a distribution agreement with Blanver
Farmoquimica, Ltda. of Brazil, Opta is the exclusive distributor of MCC for food
related applications in the United States. MCC, commonly known and labeled as
cellulose gel, is a naturally derived stabilizer, texturizing agent and fat
replacer. It is used extensively in reduced fat salad dressings, numerous dairy
products including cheese, frozen desserts and whipped toppings and bakery
products.
Canadian Organic Food Group
The Canadian Organic Food Group was recently formed with the objective of
becoming the dominant player in the Canadian natural and organic foods sector,
vertically integrated from supply through distribution.
With the recent acquisitions of Wild West and Simply Organic, the Company is
building a Canadian organic and natural foods distribution network that will
support the organization's current branded products as well as further
integrated product developments.
Wild West is a well-established business specializing in the distribution of
organic and natural foods throughout Western Canada and Simply Organic is a
growing certified organic distribution business serving the Central Canada
market. Numerous combined purchasing and product sourcing opportunities exist
for these operations.
In April 2002 the Company launched a full line of organic dairy products under
the brand name mu, and in July 2002 acquired certain assets and the business of
Organic Kitchen Inc., a company that provides organic feeds and partners with
processors to market organic poultry and other meat products to the mass
markets.
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Stake Technology Ltd. 11 December 31, 2002 - 10-K
The Canadian Organic Food Group's major products are as follows:
Organic Dairy - Full line of packaged organic milk and organic butter products
under the tradename mu.
Organic Poultry - Current products include organic chicken and organic turkey
sold under the Organic Kitchen trademark and various private label names.
Fresh Organic Produce - Both Simply Organics and Wild West distribute a full
line of organic fruits and vegetables.
Natural and Organic Grocery - Wild West distributes approximately 2,400 natural
and organic grocery items from a broad range of North American suppliers. Simply
Organic also distributes a select number of organic and natural grocery items.
Major Developments during 2002
The three Canadian acquisitions and one startup business in 2002 have given the
Company a major presence in Canada in the rapidly growing organic and natural
foods market. The acquisition of Opta has further strengthened and enhanced the
Company's presence and profile in the value-added food ingredients industry,
including a greater global presence, as 15 to 20% of Opta's sales are
internationally based.
During 2002, the Food Group commenced commercial application of its three year
contract with a major customer for the supply of aseptic soy milk from its
Nordic Aseptic facility. The production from this contract has contributed to
improved performance at this facility, which had operating and startup losses of
approximately $3 million in the 16 months prior to April, 2002.
Competition
The Food Group's specialty grain and inputs operation competes with large
companies in the U.S. commercial grain procurement market. Within the last
several years competition from other suppliers sourcing U.S., Canadian, South
American and Chinese origin product has increased. The Food Group's organic
specialty grains compete in the smaller niche U.S. commercial organic grains
market. Key to competing in these markets is access to transportation, supply
and relationships with organic producers.
The grain and inputs business is centered in Hope, Minnesota alongside the Union
Pacific Railroad. The railroad is used for the grain elevator business and
distribution of products nationally. The Hope facility is 70 miles south of
Minneapolis/St. Paul, which gives it access to the Mississippi River for grain
transporting and "containerized" shipments to the west coast for export. The
facility is centrally located within the heart of soy and corn producers. The
Group has an established IP grain producer network with approximately 1,500
producers, with many relationships existing for over 20 years. The Group has
also been an organic certified handler and processor for a number of years and
has ample grain processing and storage facilities to meet the needs of its
producers and customers.
Specialty food ingredients are unique niche items usually developed or processed
for specific customers. The Food Group competes with other product developers
and specialty processors for the specialty ingredient business. The food
ingredients industry is intensely competitive. Competitors include major
chemical companies with food ingredient divisions, other food ingredient
companies, stabilizer companies and those consumer food companies that also
engage in the development and sale of food ingredients. Many of these
competitors have financial and technical resources as well as production and
marketing capabilities that are greater than those of the Company. In addition,
many of the Company's competitors have experience that is significantly greater
than that of the Company in the testing of new or improved products.
The Company's Aseptic packaged products compete with numerous other
manufacturers of similar aseptic packaged products.
The Canadian Organic Food Group competes against conventional food distributors
that are much larger than Wild West and Simply Organic and other organic and
natural foods distributors which are approximately the same size. Organic
Kitchen and Sunrich Valley compete against other providers of organic meat and
organic dairy products as well as significantly larger food companies that
provide specialty or high end products that compete with organic products.
The Food Group's competitive advantages are:
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Stake Technology Ltd. 12 December 31, 2002 - 10-K
o Integrated from the seed through finished product.
o Established IP grain producer network.
o Focus on natural and organic food products.
o Technical staff and expertise that identifies product specifications
to meet the needs of the end user and create innovative products and
processes.
o Flexible manufacturing facilities.
Distribution, Marketing and Sales
The Food Group grains and inputs unit ensures that it provides its customers
with the highest quality organic, non-GMO and IP specialty grains, by serving as
a grower's supplier of seed, purchaser of the grower's specialty crops and
distributor of IP specialty products. The Food Group's "full circle" approach
allows it to satisfy the specific needs of foreign and domestic food
manufacturers and processors by providing products in the varieties and quantity
needed in a timely fashion; transporting products to meet customers' needs by
being able to package in containers, truck, rail or barge; providing product
information and technical support during the growing, processing, and marketing
phases, and offering complete service of product, including grading,
formulation, processing, quality control and packaging.
Utilizing a technically sophisticated customer account team, the Food Group
believes that the most effective way to solve each customer's problem is to gain
a thorough understanding of the customer at all levels, build solid working
relationships throughout the customer's organization, be knowledgeable of the
market segment in which the customer competes, and have a detailed technical
understanding of the customer's problem as well as its preferred solution. The
Company takes a multidisciplinary approach in order to achieve this level of
customer understanding and service. Members of the Food Group's direct sales
force are teamed up with the appropriate technical personnel to work as
"consultants" in defining and developing a range of potential solutions to their
formulation and product development problems. In all cases, the Food Group's
strategy is to provide outstanding service and responsiveness, which the Company
believes, will lead to additional opportunities with existing and prospective
customers.
The Canadian Organic Food Group's primary distribution coverage includes central
and western Canada. It competes through the breadth of its product line,
providing excellent product quality and consistency and by maintaining strong
relationships with customers, growers, and suppliers.
Suppliers
The Food Group's raw materials and packaging needs are sourced from various
suppliers who provide products that contractually are required to comply with
certain specifications. Products are sourced from over 1,000 suppliers with
availability subject to world market conditions. There are a number of
alternative sources of supply for all raw materials with critical customer
supply relationships highlighted below.
IP and organic grains are primarily sourced from over 1,500 North American
growers and suppliers via annual contracts or spot market purchases. There is
ample supply of grains to satisfy the Food Group's needs with expanding
production in other parts of the world to provide additional supply if crop or
market conditions limit the North American supply. The Food Group has the
ability to divert available product based on market demand and customer
requirements in order to maximize return.
Dairy ingredients are purchased from a number of suppliers, primarily dairy
producer cooperatives. Product is purchased in the spot market with certain
ingredients purchased via short-term supply contracts.
Oat hulls are primarily sourced from a major food company and there is ample
supply to meet production requirements.
Maltodextrin is purchased on contract from several suppliers. There is
substantial production capacity among these suppliers for maltodextrin. Organic
maltodextrins are produced by the Food Group from organic grains sourced from
contract growers.
Honey, molasses, high fructose corn syrup and flour are purchased based on
required specifications in the spot market. The supply for these ingredients is
sufficient to meet current demand. Supply shortfalls would have an effect on
availability and price and would be reflected in finished product pricing for
the Group.
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Stake Technology Ltd. 13 December 31, 2002 - 10-K
Other ingredients such as guar, oat flour and carbon are supplied by process
customers and are not sourced directly from Food Group suppliers.
The Canadian Organic Food Group sources products from over 500 suppliers.
Overall supply is sufficient. Supply related to fresh produce items is
controlled through spot pricing and changes are reflected in prices to end
customers.
Regulation
The Food Group is affected by governmental agricultural regulations and
policies. State and federal fertilizer, pesticide, food processing, grain buying
and warehousing, and wholesale food regulations are examples of regulations that
affect this Group. Government-sponsored price supports and acreage set aside
programs are two examples of policies that may affect this Group. There can be
no assurance that government policies will not change from time to time in a
manner adverse to the Food Group's business regulations or that may present
delays and costs that could adversely affect this Group.
In addition, several of the Food Group's business activities are subject to U.S.
environmental regulations. The Food Group is involved in the manufacture,
supply, processing and marketing of organic seed and food products and, as such,
is voluntarily subject to certain organic quality assurance standards. The Food
Group is currently in compliance with all state and federal fertilizer,
pesticide, food processing, grain buying and warehousing, and wholesale
food-handling regulations. Regulatory agencies include the United States
Department of Agriculture (USDA), which monitors both the food processing and
agricultural grain business.
Certain food ingredient products are regulated under the 1958 Food Additive
Amendments to the Federal Food, Drug and Cosmetic Act of 1938 (the "Act"), as
administered by the FDA. Under the Act, pre-marketing approval by the FDA is
required for the sale of a food ingredient which is a food additive unless the
substance is GRAS under the conditions of its intended use by experts qualified
by scientific training and experience to evaluate the safety of food
ingredients. A food additive is any substance, "the intended use of which
results or may reasonably be expected to result, directly or indirectly, in its
becoming a component or otherwise affecting the characteristics of any food."
Such pre-marketing approval for ingredients that are not GRAS, which is issued
in the form of formal regulation, requires a showing both that the food
ingredient is safe under its intended conditions of use and that it achieves the
function for which it is intended. GRAS status can be established in two ways,
either by "self-affirmation" in which the producer determines on its own that
the ingredient is GRAS, or by the issuance of a "GRAS affirmation regulation" by
the FDA in response to a GRAS petition. A food ingredient may be deemed GRAS
under the conditions of its intended use based upon its history of common use in
foods prior to 1958, or based upon scientific procedures which produce the same
quantity and quality of scientific evidence as would be required for the FDA to
issue a pre-market approval of the sale of a food additive.
In either case, in order to establish that a product is GRAS, it must not only
actually be safe in its intended use, but it must be generally recognized as
such. If a food ingredient is not entitled to GRAS status, pre-market approval
must be sought through the filing of a Food Additive Petition.
Countries other than the U.S. also regulate the sale of food ingredients.
Regulations vary substantially from country to country, and the Company takes
appropriate steps to comply with such regulations as necessary.
Many of the Food Group products are being marketed pursuant to GRAS
self-affirmation. The Food Group believes that most products for which it has
retained commercial rights are GRAS. However, such status cannot be determined
until actual formulations and uses are finalized. Thereafter, the group decides
whether self-affirmation procedures or a GRAS petition will be appropriate.
Certain of the Company's products may require a Food Additive Petition and in
the event that one is required, the Company may elect to sell or license its
rights to another party. There can be no assurance that the Company will be
successful in bringing its products to market based on its determination that
such products meet these criteria.
While the Food Group endeavours to comply in all material respects with
applicable environmental, safety and health regulations, there can be no
assurance that existing environmental regulations will not be revised or that
new regulations will not be adopted or become applicable that may have a
material adverse effect on the Food Group's business or financial condition.
Research and Development
The Food Group has developed a number of new soy ingredients and alternatives to
accommodate new product adaptation of these ingredients into various food items.
The expanding interest to incorporate soy based foods in consumers' diets
creates numerous opportunities to develop soy ingredients that can be
incorporated into food developer's menu items. The Food Group continues to
research products and processing systems that are
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Stake Technology Ltd. 14 December 31, 2002 - 10-K
required to serve the growing natural and organic foods markets and continues to
expand in areas such as organic oils and organic snack coatings.
The nature of a number of the Food Groups products and processes requires the
Company to create and maintain a number of patents and trade secrets. The
Group's policy is to protect its technology by, among other things, filing
patent applications for technology relating to the development of its business
in the U.S. and in selected foreign jurisdictions.
The Group's success will depend, in part, on its ability to protect its products
and technology under U.S. and international patent laws and other intellectual
property laws. The Company believes that it owns or has the right to use all
proprietary technology necessary to manufacture and market its products under
development. There can be no assurance, however, that patent applications
relating to the Company's products or technology will result in patents being
issued or that current or additional patents will afford protection against
competitors with similar technology.
The Company also relies on trade secrets and proprietary know-how and
confidentiality agreements to protect certain of its technologies and processes.
There can be no assurance that the Company's outside partners and contract
manufacturers will be prevented from gaining access to the Company's proprietary
technology and confidential information.
Employees
The Food Group has 475 full-time employees. There is one union at the Company's
St. Thomas, Ontario facility that covers approximately 11 employees. This
contract was renewed in August 2002 and expiries in 2004. Many of the Company's
management and professional employees have had extensive prior experience with
consumer food companies. Management considers relations with its employees to be
good.
Properties
The Food Group operates from eleven processing facilities (10 owned, 1 leased)
in five U.S. states and one Canadian province. The Group also owns and leases a
number of office and distribution locations and also leases and utilizes public
warehouses to satisfy its storage needs. For more details please see Item 2. -
Properties.
The Environmental Industrial Group
The Environmental Industrial Group has two principal business lines:
(1) The manufacture and distribution of industrial mineral based
products such as specialty sands, bentonite clays, silica free
abrasives, garnets and other products for the foundry, shipbuilding,
bridge repair and steel industries. Many of these products can
subsequently be recycled; and
(2) The recycling of waste industrial mineral by-products and materials
from site reclamation projects; these materials are cleaned, crushed
and blended to specific chemistry for resale to cement, steel and
related industries.
This Group, like the Food Group, has also been built through several
acquisitions starting with the initial acquisition of Barnes Environmental and
Industrial in 1995. In 2000, Pecal and Temisca, Inc. were acquired followed by
the acquisitions of Virginia Materials and 51% of International Materials in
2001. In late 2002, the 49% minority interest in International Materials was
also acquired.
The Environmental Industrial Group's processing of cement additives and certain
abrasives slows down during the January to March period, corresponding to
reduced cement production and difficult winter operating conditions. The foundry
and steel businesses are not considered seasonal. The establishment of the
Louisiana manufacturing facility during 1998 and the subsequent acquisition of
Virginia Materials helps to mitigate the seasonality of the Environmental
Industrial Group sales.
The distribution of products is freight sensitive for lesser value added
products and is focused on the Ontario and Quebec markets while the higher value
products such as abrasives and garnets are shipped throughout the U.S.. The
annual volume of materials processed and distributed is approximately 180,000
tonnes.
Major Developments during 2002
During the year the Company acquired the 49% minority interest in International
Materials.
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Stake Technology Ltd. 15 December 31, 2002 - 10-K
From its acquisition of Virginia Materials in October 2001 the Group planned on
adding a second plant location in Baltimore, Maryland, close to its supply of
coal slag. Due to regulatory delays this plant has not yet become operational.
Management is hopeful that approval will be obtained in 2003.
Major Products
Barshot/Crystalgrit: The Environmental Industrial Group has a licence agreement
with the patent holder of "Specular Hematite as an Impact Material" which gives
the Group the exclusive right to market this material in the two central
Canadian provinces, Great Lakes and Northeast Atlantic region states and the
state of Alabama and the non-exclusive right for the balance of North America.
The Group also has the first right of refusal for a licence in 5 other US
states.
Specular Hematite: Marketed under the name "Barshot" or "Crystalgrit" as a
recyclable abrasive providing higher profit margins for the user and competing
with existing materials such as garnet, staurolite, aluminum oxide, various
slags and steel grit.
The Group is continuing to develop agents/distributors primarily for the U.S.
exclusive territory, focusing on companies and contractors capable of recycling
Barshot or Crystalgrit.
Slag Abrasives: The Environmental Industrial Group markets copper slag abrasives
under the name "Ebony Grit" into the Ontario and Quebec markets. With the
acquisition of Virginia Materials the Environmental Industrial Group expanded
its product offering with a coal slag abrasive under the name of "Blackblast".
This product is marketed primarily into the Virginia, North Carolina, West
Virginia and Alabama markets and will be expanded and offered across the entire
Environmental Industrial Group network going forward.
Garnets: The Environmental Industrial Group is a producer of garnets for the
water jet cutting, water filtration and abrasive industries. The Group also has
an exclusive agreement with a garnet supplier in China, complimenting this with
a Distributor Agreement with a garnet sand supplier in India. These high value
products are sold to the water jet cutting and wet and dry abrasive blasting
markets.
Silica Sands: The Environmental Industrial Group supplies major foundry
customers in Quebec and Ontario with silica products. The acquisition of Temisca
Inc. in 2000 provided the Group with a lower cost and secured supply of silica
raw materials which has allowed the Group to remain a key supplier in this
market. The properties of the Temisca silica sands are suited to the filtration,
frac sand, golf course sand and abrasive applications.
Resin Coated Sand: The Group is a dominant supplier of resin coated sand in
Ontario and Quebec with the products manufactured at the PECAL Hamilton facility
and through the distribution of a U.S. sourced product. Resin coated sand is
used exclusively by the foundry industry.
Zircon Sands: The Group recycles high value added products, and in this regard
has an agreement with a large automobile manufacturer in southern Ontario to
recycle very high value zircon sand used in the manufacturing of engine
castings. This product is produced at the Waterdown location, with a portion of
the recycled product sold back to the automobile manufacturer, and the remainder
sold into the industrial materials market.
The Environmental Industrial Group is committed to providing quality products
and services. The Environmental Industrial Group is ISO-9002 registered at its
Waterdown and Hamilton locations. By the end of 2003, the Group is striving to
have all of its operations ISO-9002 registered.
Competition
The Environmental Industrial Group conducts business throughout North America
with a focus on key regions. Key regions comprise the Quebec-Detroit corridor,
New York, Norfolk, Virginia and the Louisiana Gulf region, all of which are
areas of high volume ship repairs and bridge cleaning activities. The Group is
competitive in abrasive and value added products in surrounding areas such as
Michigan, New Jersey and Ohio.
The Group competes against a variety of competitors servicing the foundry,
steel, abrasive, water jet and filtration industries. Each of these product
categories are normally served by as many as three competitors. The Group
competes through a combination of exceptional product quality and customer
service combined with competitive pricing in these markets.
In 1994, the Waterdown site was awarded a Certificate of Approval from the
Ontario Ministry of Environment and Energy to recycle non-hazardous and
hazardous solid waste. The significance of this Certificate of Approval is that
the Environmental Industrial Group can recycle certain types of solid waste,
which could not be recycled
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Stake Technology Ltd. 16 December 31, 2002 - 10-K
without a Certificate of Approval, as many materials have been declared
hazardous by the Ontario Ministry of Environment and Energy. The Certificate of
Approval has no fixed expiry date, however the Company must comply with
requirements listed in the terms of the Certificate of Approval to maintain its
good standing.
Materials that can be recycled under the Certificate of Approval represent
approximately 25% of the materials processed by the Environmental Industrial
Group. The Certificate of Approval serves as a barrier to entry for other
operators.
In general, the Environmental Industrial Group's competitive advantages include:
o Geographic location of facilities, strategically located near raw
material sources.
o Superior knowledge of many industrial minerals and the markets for
these materials.
o Long-standing relationships with both generators and users of
industrial waste streams.
o Efficient and cost effective material handling and processing
skills.
o Expertise necessary to provide customers with materials of a
consistent and reliable quality and the ability to adjust chemical
composition as required.
o Exclusive licence and supply arrangements.
Suppliers
Most of the Environmental Industrial Group's critical raw materials are
purchased through approved suppliers to ensure the highest quality and the
supplier's ability to adhere to the Group's requirements.
There is an abundance of inorganic materials that are increasingly becoming
subject to federal, provincial and state legislative restrictions. The Group
expects the supply of contaminated materials from remediation projects to
continue to increase, due to increased awareness by the general public and the
resulting laws that will require these wastes to be recycled in the future.
The Environmental Industrial Group receives materials from in excess of 2,000
suppliers. While the Group has several alternative sources of supply for many of
the inputs it requires, it also has several key supplier relationships, which
are summarized below.
The Group obtains its key abrasive raw materials from certain Canadian mines and
a U.S. power plant. Ebony Grit, a product produced from copper slag is supplied
on an exclusive basis by a Canadian mining and refining company. Specular
Hematite reserves at the current mine supplier are estimated to be sufficient to
supply the Group's needs for many years. Blackblast, a product produced from
coal slag is supplied on an exclusive basis by a U.S. power plant.
The Group has the exclusive right to distribute certain high purity silica sand
to the foundry industry in Quebec and Ontario for US Silica.
The Group represents Bentonite Performance Minerals, focusing on sales to the
foundry market, as well as other bentonite sales to the industrial market in
Quebec and Ontario.
The Group produces industrial garnet derived a waste mining stream at it's
Keesville, New York facility. In addition the group has an exclusive North
American Agreement to market garnet from a supplier in India and a second
agreement with a supplier in China.
Regulation
The Environmental Industrial Group's business primarily involves the handling of
materials, which are inorganic and mineral based. These types of materials are
generally benign and do not give rise to environmental problems.
Accordingly, to date there has been low potential for environmental liabilities
to arise. The Ontario Ministry of Environment and Energy has the right to
inspect the Waterdown site and review the results of third party monitoring and
perform its own testing. Similar rights of inspection exist at the facility in
Norfolk, Virginia.
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Stake Technology Ltd. 17 December 31, 2002 - 10-K
Based on known existing conditions and the Group'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, or the
discovery of changed conditions on the Company's real property or in its
operations, will not result in the occurrence of significant costs.
Research and Development
Environmental: In 2002, the Environmental Industrial Group continued to evaluate
the processing and recycling of a number of waste mineral streams into higher
value added products. These spent materials, originating primarily from the
foundry, steel and industrial sectors can often be separated back into their
original composition, which increases the value of the recycled product and can
lead to a greater number of markets.
Specular Hematite: In 2002, the Environmental Industrial Group continued to
study the use of Specular Hematite in a number of value-added markets, requiring
fast cutting and cleaning speed, as well as developing new markets in nuclear
shielding, non-slip flooring and ballast products.
Employees
The Environmental Industrial Group has 77 employees. The Environmental
Industrial Group has two union sites, one in Waterdown, Ontario and one at its
Hamilton, Ontario location. Both contracts have been extended to 2005.
Management considers relations with employees to be good.
Properties
The Environmental Industrial Group operates from seven locations. The primary
operating facility with administrative, laboratory and principal production is
located in Waterdown, Ontario. In addition, the Group owns a production facility
in Hamilton, Ontario, a distribution/warehouse facility in Lachine (Montreal),
Quebec and the Temisca sand property in located in northern Quebec. The Group
also leases production/distribution facilities in New Orleans, Louisiana,
Norfolk, Virginia and Keesville, New York. For more details please see Item 2
Properties.
Steam Explosion Technology Group
The Company has developed a steam explosion technology known as the "StakeTech
System", including process engineering and the hardware required.
The patented StakeTech System provides a method for the rapid and continuous
steam treatment of biomass under high pressure. The suitable raw materials
include wood chips, sugarcane bagasse, cereal straws and waste paper. In their
natural state, these materials are not easily separated into their component
parts. By processing with the addition of high-pressure steam, the StakeTech
System breaks the chemical and physical bonds that exist between the components
of these materials allowing their subsequent separation and processing into
products and components that potentially have wide and diverse applications. The
Company has demonstrated its equipment and technology on a commercial scale in
several applications.
For the past several years the group has focussed its marketing efforts on the
production of pulp for paper firm non-woody fibers and the production of
celluose derivatives. The Group is also pursing a number of food based
applications with both external parties and internally through the Company's
Food Group.
StakeTech's steam explosion business is not affected by seasonality.
Major Developments in Steam Explosion Technology in 2002
In 2002, the Steam Explosion Technology Group continued to focus on marketing
pulping systems to China through its agent, Pacitec Inc. (Pacitiec). In 2002,
Pacitec maintained its exclusive rights for the Chinese market and continues to
actively pursue the sale of Staketech systems.
In conjunction with Pacitec, the Company is currently pursuing equipment sales
to several separate projects in China. The final stage of these contracts is to
establish irrevocable lines of credit with the Chinese clients.
Competition
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Stake Technology Ltd. 18 December 31, 2002 - 10-K
The Company is focussing its marketing efforts on applying the Steam Explosion
Technology to the production of pulp for paper from non-woody fibres. The
Company believes the ability of StakeTech Systems to operate at high pressure
presents advantages in terms of reducing chemical requirements and improving
product yields.
The Company's success in marketing to the pulp and paper industry will depend on
the extent to which the StakeTech System can be shown to have advantages over
the technology of existing suppliers. These existing suppliers include,
Ahlstrom, Kvaerner, Metso and Andritz. The Company is aware of other groups that
are attempting to develop and market new pulping processes. These include the
NACO process from Italy, the Saicca process from Spain and the Anbokem process
from Canada.
It is anticipated that competition from suppliers of alternative systems and
equipment in these markets will be strong and that the potential advantages for
the StakeTech System will have to be demonstrated.
Suppliers
Waste biomass such as straw is currently available in abundant supply in many
parts of the world. If other economic uses for waste biomass increase, the
Company may find that the supply of such raw materials is reduced and this could
have a materially adverse effect on the Company's steam explosion technology
business.
In respect of the manufacturing of the customized steam explosion technology
systems, the Company provides equipment fabricators with detailed drawings and
equipment specifications. All major equipment components have at least two
alternate suppliers.
Regulation
Stake steam explosion technology may use chemicals in addition to steam to treat
fibrous material. This technology does not generally produce appreciable
pollutants and the Company believes that its existing facilities are in full
compliance with applicable laws concerning the environment. To date the Company
has not found it necessary to spend significant amounts in order to comply with
applicable environmental laws. It is anticipated that future sales or licenses
of the Company's technology will be made where the StakeTech System is but one
part of a larger process, as for example in the manufacture of pulp. In these
instances, the overall project may be subject to federal, state or local
provisions regulating the discharge of materials into the environment.
Compliance with such provisions may result in significant increases in the costs
associated with the overall project.
Proprietary Technology
The Company recognizes that there exists a threat of others attempting to copy
the Company's proprietary StakeTech System and/or appropriate the technology. To
mitigate this risk, the normal business practice of the Steam Explosion
Technology Group includes the signing of confidentiality agreements with all
parties to which confidential information is supplied including all customers
and licensees. The Company also holds several patents on its equipment and
process technology.
In 2000, the Company received approval of a patent application made under the
Patent Cooperation Treaty (PCT) agreement. This patent application covers
certain proprietary equipment designs relating to the StakeTech System and this
approval served as the basis for a patent application made in China in January
2001. China is a signatory to the PCT.
Financial Exposure Related to Bonding and Guarantees
To enter markets such as China, the Company expects to have to provide
substantial performance guarantees in the form of process guarantees and
equipment guarantees. These guarantees will need to be backed by bank guarantees
and/or surety bonds. The Company endeavours to reduce the associated risks,
however there will always remain a possibility that the Company's guarantees or
bonds could be called, rightfully or wrongfully and/or the equipment supplied
fails to meet the guarantees and warranties provided resulting in potential
financial losses to the Company.
Research and Development
During 2002, Steam Explosion research and development activities related to
client specific investigations and focused on the production of pulp from straw
from China and other food based applications.
Employees
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Stake Technology Ltd. 19 December 31, 2002 - 10-K
The Steam Explosion Technology Group has 3 employees; 2 engaged in technical
support, systems design and R&D, and 1 engaged in marketing, sales and
engineering. Since the division subcontracts out the production of its
equipment, it does not anticipate significantly increasing the size of its work
force until it receives a contract for its equipment. Stake has engaged other
engineering and sales resources to assist in product testing and contractual
negotiations for the Company's Steam Explosion Technology Group.
Corporate Office
The corporate office of Stake is located in owned premises in Norval, Ontario.
Nine staff are employed in a variety of management, financial and administration
roles.
Environmental Hazards
The Company believes, with respect to both its operations and real property,
that it is in material compliance with environmental laws at all of its
locations and specifically with the requirements of its Certificate of Approval
issued by the Ontario Ministry of the Environment and Energy on the
Environmental Industrial Group property in Waterdown, Ontario.
Employees
As of March 7, 2003 the Company had 564 employees broken out by division below:
- ----------------------------------------------------- -------------------------
Divisions Number of Employees
- ----------------------------------------------------- -------------------------
Food Group 475
- ----------------------------------------------------- -------------------------
Environmental Industrial Group 77
- ----------------------------------------------------- -------------------------
Steam Explosion and Corporate Office 12
- ----------------------------------------------------- -------------------------
Total 564
- ----------------------------------------------------- -------------------------
- --------------------------------------------------------------------------------
Stake Technology Ltd. 20 December 31, 2002 - 10-K
Item 2. Properties
Food Group
The Food Group operates from the following locations:
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Location State/Province Group/Sub Group Description
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Hope Minnesota SunRich Food Group Head office and grain processing
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Alexandria (2) Minnesota SunRich Food Group Soymilk processing and aseptic packaging
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Bertha Minnesota SunRich Food Group Drying and blending
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Fosston Minnesota SunRich Food Group Processing and drying
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Cambridge Minnesota Opta Oat fiber processing
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Cresco Iowa SunRich Food Group Milling
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Afton Wyoming SunRich Food Group Soymilk processing
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Bedford Massachusetts Opta Head office and development center
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Louisville Kentucky (Leased) Opta Oat fiber production
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Galesburg Illinois Opta Starch based production
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
British Columbia
Richmond (Leased) Wild West Office and distribution
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Mississauga Ontario (Leased) Simply Organic Office and distribution
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
St. Thomas Ontario Opta Brans and wheat germ production
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
SunrichValley and Organic
Norval Ontario Kitchen Head office
- ------------------------ ---------------------- ---------------------------- --------------------------------------------
Environmental Industrial Group
The Environmental Industrial Group operates from the following locations:
- ----------------------- ---------------------- --------------------- ----------------------------------------------------
Location State/Province Group Description
- ----------------------- ---------------------- --------------------- ----------------------------------------------------
Waterdown Ontario EIG Head office, processing and distribution
- ----------------------- ---------------------- --------------------- ----------------------------------------------------
Hamilton Ontario EIG Processing and distribution
- ----------------------- ---------------------- --------------------- ----------------------------------------------------
Lachine Quebec EIG Distribution
- ----------------------- ---------------------- --------------------- ----------------------------------------------------
Bruno de Guiges Quebec EIG Specialty sands
- ----------------------- ---------------------- --------------------- ----------------------------------------------------
New Orleans Louisiana (Leased) EIG Abrasives processing
- ----------------------- ---------------------- --------------------- ----------------------------------------------------
Norfolk Virginia (Leased) EIG Processing and distribution
- ----------------------- ---------------------- --------------------- ----------------------------------------------------
Keeseville New York (Leased) EIG Garnet processing and distribution
- ----------------------- ---------------------- --------------------- ----------------------------------------------------
Steam Explosion Technology Group and Executive Offices
The Company's Executive Group, Steam Explosion Technology Group, Sunrich Valley
and Organic Kitchen operations are located at 2838 Highway 7, Norval, Ontario, a
property owned by the Company.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 21 December 31, 2002 - 10-K
Item 3. Legal Proceedings
The SunRich Food Group. has commenced a suit against a supplier for
failure to adhere to the terms of a contract. The Company and its legal counsel
believe that this claim has merit. The Company has ceased co-packing
arrangements under the existing contract and has commenced packing under
separate arrangements. It cannot however be determined if there will be any
recovery by the Company at this time and the Group is expensing the costs of
pursuing this suit on a monthly basis. Other than this action, the Group has not
been and is not currently a party to any material litigation other than stated
above.
The supplier has counter-sued the Company for breach of contract. The
Company believes this suit is without merit.
Opta has filed a claim against a former wholesaler in Germany for
non-payment of invoices totalling $77,000 and the former wholesaler has filed a
counterclaim alleging that they are eligible for compensation based on Opta
Foods purported termination of the distribution agreement, which they allege
existed. Under German law the maximum award the wholesaler could be entitled to
receive is $130,000.
The Canadian Organic Food Group which includes Sunrich Valley, Organic
Kitchen, Simply Organic and Wild West has not been and is not currently a party
to any material litigation.
The Environmental Industrial Group has not been and is not currently a
party to any material litigation.
The Steam Explosion Technology Group has not been and is not currently a
party to any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of the year ended December 31, 2002.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 22 December 31, 2002 - 10-K
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common shares trade in US$ on The Nasdaq Small Cap Market tier of
The Nasdaq Stock Market under the symbol STKL, and in CDN$ under the symbol SOY
on the Toronto Stock Exchange. The following table indicates the high and low
bid prices for Stake's common shares for each quarterly period during the past
two years as reported by Nasdaq. The prices shown are representative
inter-dealer prices, do not include retail mark ups, markdowns or commissions
and do not necessarily reflect actual transactions.
Trade Prices on Nasdaq (US Dollars)
======================================== ===================================== =====================================
2002 HIGH LOW
- ---------------------------------------- ------------------------------------- -------------------------------------
First Quarter $2.68 $1.97
- ---------------------------------------- ------------------------------------- -------------------------------------
Second Quarter $3.48 $2.58
- ---------------------------------------- ------------------------------------- -------------------------------------
Third Quarter $3.07 $2.31
- ---------------------------------------- ------------------------------------- -------------------------------------
Fourth Quarter $3.41 $2.39
- ---------------------------------------- ------------------------------------- -------------------------------------
2001 HIGH LOW
- ---------------------------------------- ------------------------------------- -------------------------------------
First Quarter $1.75 $1.38
- ---------------------------------------- ------------------------------------- -------------------------------------
Second Quarter $2.45 $1.49
- ---------------------------------------- ------------------------------------- -------------------------------------
Third Quarter $2.05 $1.41
- ---------------------------------------- ------------------------------------- -------------------------------------
Fourth Quarter $2.17 $1.63
======================================== ===================================== =====================================
The following table indicates the high and low bid prices for Stake's common
shares for each quarterly period since the company's listing on the Toronto
Stock Exchange. The Company listed on the Toronto Stock Exchange on November 6,
2001, therefore information is only provided for the fourth quarter of 2001.
Trade Prices on TSX (Canadian Dollars)
- -------------------------------------- -------------------------------------- -------------------------------------
2002 HIGH LOW
- -------------------------------------- -------------------------------------- -------------------------------------
First Quarter $4.17 $3.15
- -------------------------------------- -------------------------------------- -------------------------------------
Second Quarter $5.39 $3.74
- -------------------------------------- -------------------------------------- -------------------------------------
Third Quarter $4.75 $3.48
- -------------------------------------- -------------------------------------- -------------------------------------
Fourth Quarter $5.27 $3.75
- -------------------------------------- -------------------------------------- -------------------------------------
2001 HIGH LOW
- -------------------------------------- -------------------------------------- -------------------------------------
Fourth Quarter - 11/06/01 forward $3.85 $2.65
- -------------------------------------- -------------------------------------- -------------------------------------
At December 31, 2002, the Company has approximately 650 record holders. Based on
proxy requests from shareholders and nominee holders at the last annual meeting
date, the Company estimates that there are at least an additional 4,000
beneficial holders of the Company's common shares.
Stake has never paid dividends on its common stock and does not anticipate
paying dividends for the foreseeable future. The receipt of cash dividends by
United States shareholders from a Canadian corporation, such as Stake, may be
subject to Canadian withholding tax.
Issuance of securities and use of proceeds
- --------------------------------------------------------------------------------
Stake Technology Ltd. 23 December 31, 2002 - 10-K
Claridge Convertible Debenture
In December 2002, Stake issued Claridge a $5 million convertible debenture due
November 30, 2004, bearing interest at the rate of 5.5% per annum convertible
into common shares of the Company at a price of $3.00 per share on and after
November 30, 2003. The funds were specifically used for the acquisition of Opta.
In conjunction with the debenture, the Company issued 250,000 common share
purchase warrants with an exercise price of $3.25, expiring November 30, 2004.
Options and warrants exercised during the year
During the year ended December 31, 2002, employees and directors exercised
246,740 common share options and an equal number of common shares were issued
for net proceeds of $397,000. Subsequent to December 31, 2002, directors,
officers and employees exercised 214,825 common share options and an equal
number of common shares were issued for net proceeds of $392,000.
During the year ended December 31, 2002, 656,150 warrants were exercised and an
equal number of common shares were issued for net proceeds of $1,474,000.
Subsequent to December 31, 2002, 291,000 warrants were exercised and an equal
number of common shares were issued for net proceeds of $641,000.
These funds were used for general business purposes including working capital
and capital expenditures in existing businesses and for the recent Food Group
acquisitions.
Bank Financing
The Company completed two bank financings in 2002 and has completed a further
financing in March 2003.
The first refinancing in March 2002 and was used to consolidate a number of
separate banking and private lending relationships. This facility included a
CDN$5 million line of credit, a U.S. $5 million line of credit, and a $15
million reducing term facility.
In November 2002, Stake entered into a tender facility agreement with the banks
for $17 million, to be used solely for the purchase of Opta's outstanding common
shares pursuant to the cash tender offer.
In February 2003 the Company entered into an amended and restated banking
agreement. This amended facility increased the term debt to $21.7 million and
the U.S. line of credit to $9 million. The incremental proceeds from this
facility, in addition to cash on hand were used, to repay the tender facility.
The term of the facility is two years with a renewal option by the lender and
the Company. Principal payments are made quarterly and amortize over 7 years.
The Company fully intends to renew the facility which matures in March, 2005.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 24 December 31, 2002 - 10-K
Item 6. Selected Financial Data
The following information has been summarized from the Company's consolidated
financial statements.
Summary (expressed in thousands of U.S. dollars)
- ----------------------------- ---------- ------------ --------------- --------------- --------------
2002 2001 2000 1999 1998
- ----------------------------- ---------- ------------ --------------- --------------- --------------
Total revenues 120,898 89,822 63,821 29,699 13,860
- ----------------------------- ---------- ------------ --------------- --------------- --------------
Net earnings - CDN GAAP 3,766 19 2,118 957 516
- ----------------------------- ---------- ------------ --------------- --------------- --------------
Net earnings - U.S. GAAP 3,701 (225) 1,743 910 478
- ----------------------------- ---------- ------------ --------------- --------------- --------------
Total assets 115,287 80,061 58,304 22,246 10,105
- ----------------------------- ---------- ------------ --------------- --------------- --------------
Long-term debt (includes
current portion) 36,749 16,648 19,811 2,582 1,318
- ----------------------------- ---------- ------------ --------------- --------------- --------------
Other long-term obligations
including future taxes
(includes current portion) 4,963 4,487 2,516 895 619
- ----------------------------- ---------- ------------ --------------- --------------- --------------
Basic earnings per share -
CDN GAAP $0.09 $0.00 $0.09 $0.06 $0.04
- ----------------------------- ---------- ------------ --------------- --------------- --------------
Basic earnings (loss) per
share - U.S. GAAP $0.09 $(0.01) $0.07 $0.05 $0.03
- ----------------------------- ---------- ------------ --------------- --------------- --------------
Cash dividends -- -- -- -- --
- ----------------------------- ---------- ------------ --------------- --------------- --------------
Note: The above table for the years 1998 to 2001 have been converted from
Canadian to U.S. at a rate of convenience of 1.5928 $U.S. to $CDN.
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Overview
The Company's consolidated financial statements include the results of the
organizations three principal operating groups; the Food Group, accounting for
approximately 80% of 2002 revenues, with a focus on vertically integrated
sourcing, processing and selling of soy and other natural and organic food
products; the Environmental Industrial Group accounting for approximately 20% of
2002 revenues, with a focus on processing, distributing and recycling industrial
minerals; and the Steam Explosion Technology Group accounting for less than 1%
of 2002 revenues, with a focus on developing and commercializing proprietary
steam explosion technology for processing of biomass into higher value products.
All three operating groups are considered high growth ethical businesses,
focused on environmental responsibility and the health and well being of its
communities.
The Management's Discussion and Analysis (MD&A), detailed below, is presented in
four parts; Results of Operations, Liquidity and Capital Resources, Business
Outlook and Risks and Uncertainties, and should be read in conjunction with the
audited consolidated financial statements and accompanying notes contained on
pages F-1 to F-36 of this Annual Report.
In 2002, the Company adopted the United States dollar as its reporting currency
for presentation of its consolidated financial statements. With the acquisitions
completed in 2001 and 2002, a significant portion of the Company's revenues,
assets and earnings are attributable to its U.S. based 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 $1.00 U.S. to $1.5928 CDN.
In 2002, the Company completed four acquisitions; Organic Kitchen, Wild West,
Simply Organic and Opta, and also launched a new business unit, Sunrich Valley.
All four acquisitions and the business launch served to complement the Company's
vertically integrated growth strategy in the rapidly vertically integrated
growing, value-added natural and organic foods markets. The acquisitions of
Organic Kitchen, an integrated organic poultry producer, Wild West, a Western
Canada based natural and organic foods distributor and Simply Organic, a
Central Canada based natural and organic foods distributor, in addition to the
start-up of Sunrich Valley, which markets organic dairy products, have
positioned Stake Technology Ltd. as a major player in the Canadian natural
- --------------------------------------------------------------------------------
Stake Technology Ltd. 25 December 31, 2002 - 10-K
and organic foods markets. The acquisition of Opta, with operations in both the
United States and Canada, further strengthened the Company's presence in the
value-added food ingredients market. Opta is the world's largest supplier of oat
fiber to the food industry.
Revenues in 2002 increased by 34.6% to $120,898,000 from $89,822,000 in 2001.
Gross margin on revenues improved to 16.1% from 13.8% in the prior year. Net
earnings for the year increased to $3,766,000 or $0.09 per common share compared
to $19,000 or $0.00 per common share in 2001.
Operating results in 2002 improved significantly over 2002 due to a number of
factors including the turnaround at the Company's aseptic packaging operation,
Nordic Aseptic, and improved results in other Food Group operations, including
grain sales and food ingredients. The Environmental Industrial Group also
reported improved earnings due in most part to the acquisition of Virginia
Materials in the fourth quarter of 2001. The growth of the Group was partially
offset in 2002 by the general economic slowdown in the foundry and steel
industries and the impact of the September 11th tragedy on the bridge repair and
shipbuilding industries, however, these industries have shown improvement in the
latter half of 2002.
Three of the four acquisitions noted above were completed late in fiscal 2002
and therefore did not have a significant impact on operating results in 2002.
The assets of the Company increased by $35,226,000 or 44.0% to $115,287,000 at
December 31, 2002, due primarily to growth within existing operations and the
acquisitions completed during the year, all in accordance with the Company's
growth strategy. Long-term debt increased to $36,749,000, mainly as a result of
financing related to acquisitions.
Results of Operations
2002 Operations Compared With 2001 Operations
Consolidated
Revenues in the year ended December 31, 2002, increased by 34.6% to $120,898,000
from $89,822,000 in 2001. Earnings increased to $3,766,000 or $0.09 per common
share from $19,000 or $0.00 per common share in 2001.
The increase in the Company's revenues of $31,076,000 in 2002 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 three
acquisitions and one start-up within the Canadian natural and organic foods
business in 2002, the acquisition of Opta Food Ingredients, Inc. in December
2002 and the acquisitions of the business and certain assets of Virginia
Materials & Supplies, Inc. and the outstanding common shares of International
Materials and Supplies, Inc. (Virginia Materials) in October, 2001.
Net earnings for the year ended December 31, 2002 increased to $3,766,000 from
$19,000 in 2001, due to improved financial performance at Nordic Aseptic, the
Company's aseptic packaging operations, as well as improved volumes and margins
in dietary fiber and certain grain and agronomy products. In addition, cost
reduction programs implemented throughout the Company and certain price
increases in the Environmental Industrial Group combined with the October 2001
Virginia Materials acquisitions contributed to improved earnings. The Company
realized reduced borrowing costs as a result of new banking arrangements
implemented in 2002 and had a reduced effective tax rate due to the recognition
of previously unrecorded tax loss carry forwards and tax planning strategies,
partially offset by the write-off of the Company's 32% investment in Easton
Minerals Limited.
EBITDA(1) (earnings before interest expense, interest and other income, taxes,
depreciation and amortization) for the year ended December 31, 2002 increased
79.4% to $9,492,000 from $5,291,000 in the prior year.
U.S. readers should note that due to differences between Canadian and U.S. GAAP,
the net earnings for the year ended December 31, 2002 under U.S. GAAP were
$3,701,000 or $0.09 per common share versus a loss of ($225,000) or ($0.01) per
common share in 2001. Note 18 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 earnings, 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 earnings determined in
accordance with GAAP as an indicator of the Company's performance or to cash
flows from operating, investing and financing activities as a measure of
liquidity and cash flows. The Company's method of calculating EBITDA may differ
from other companies and, accordingly, EBITDA may not be comparable to measures
used by other companies.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 26 December 31, 2002 - 10-K
Cost of goods sold increased by 31.0% to $101,431,000 for the year ended
December 31, 2002 compared to $77,450,000 for the year ended December 31, 2001.
Consistent with the revenue increase, the increase in cost of sales resulted
from increased sales of certain food based products, the acquisitions completed
during 2002 and a full year's revenue relating to acquisitions made in 2001.
The Company's consolidated gross margin improved to 16.1% in the year ended
December 31, 2002 from 13.8% in 2001. The key drivers of this improvement are
provided in the segmented operations information detailed below.
Selling, general and administrative expenditures increased 28.2% in the year
ended December 31, 2002 to $14,281,000 from $11,142,000 in 2001. The increase in
administrative costs is consistent with the growth in food operations, the 2002
acquisitions, the Virginia Materials acquisition completed in October 2001 and
increased Corporate costs to support a rapidly growing 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 no longer amortized. Amortization of goodwill and indefinite
life intangibles included in selling, general and administrative expenses in the
year ended December 31, 2001 was $492,000.
Interest expense decreased to $1,413,000 in the year ended December 31, 2002
from $1,745,000 in 2001. The decrease in borrowing costs relates mainly to a
decrease in the effective borrowing rate due to the consolidation of a number of
loans under the new financing arrangements which resulted in lower interest
rates and a decrease in floating interest rates on certain debt instruments
versus 2001.
Interest and other income was $218,000 in the year ended December 31, 2002,
compared to $326,000 in the year ended December 31, 2001. Included in the
results for the year ended December 31, 2002 is a write-down of the Company's
32% investment in Easton Minerals Limited of $366,000, offset by a gain in the
sale of non-core assets of $285,000.
Provision for income taxes increased to $401,000 in the year ended December 31,
2002, compared to $147,000 in 2001. The effective tax rate decreased from 88.6%
in 2001 (2001 included a tax refund of $85,000 related to the reassessment of an
acquired business) to 9.6% in 2002 mainly due to the realization of certain loss
carry-forwards including the realization of the previously unrecorded Nordic
loss carry-forwards of $550,000 and tax planning strategies implemented by the
Company.
Segmented Operations Information
Food Group
The Food Group contributed $96,319,000 or 79.7% of total Company consolidated
revenues in the year ended December 31, 2002 versus $69,973,000 or 77.9% in the
same period in 2001. The increase of $26,346,000 or 37.7% (of which 31.4% was
generated through internal growth), was due primarily to increased sales of
aseptic packaged soymilk at Nordic Aseptic of $12,808,000, an increase in sales
of bulk grains and specialty beans, a supply contract cancellation fee of
$1,557,000 and the acquisitions of the Canadian natural and organic food
companies and Opta in the second half of 2002.
Gross margin in the Food Group increased by $4,364,000 in the year ended
December 31, 2002 to $13,197,000, or 13.7%, from $8,833,000 or 12.6% in 2001.
The increase in gross margin reflects the positive impact of improved product
margins on organic feed, dietary fiber and various other specialty processed
products, the impact of the turnaround at Nordic Aseptic, cost reduction
initiatives undertaken throughout the Group, the supply contract cancellation
fee and acquisitions completed in 2002, offset by lower margins on bulk grains
and certain retail consumer products.
Selling, general and administrative expenses increased to $8,301,000 in the year
ended December 31, 2002 versus $6,297,000 in the year ended December 31, 2001.
The increase is due primarily to an increase in payroll and related costs (as
the organization continues to support the growth in operations), selling,
general and administrative expenses incurred through acquisitions 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 $1,034,000 in the year ended December 31, 2002
from $1,42,000 in the year ended December 31, 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.
The Food Group net earnings increased to $3,166,000 in the year ended December
31, 2002 from $310,000 in 2001 as a result of the improved financial performance
at Nordic Aseptic, improved volumes and margins on
- --------------------------------------------------------------------------------
Stake Technology Ltd. 27 December 31, 2002 - 10-K
grains, specialty beans and dietary fiber. Net earnings also benefited from
internal cost control programs, the supply contract cancellation fee, a one-time
gain on sale of property and the reversal of a valuation allowance on the Nordic
loss carry-forwards that was previously provided.
Environmental Industrial Group
The Environmental Industrial Group contributed $24,422,000 or 20.2% of the
Company's consolidated revenues in the year ended December 31, 2002, versus
$19,490,000 or 21.7% in 2001, an increase of $4,932,000 or 25.3%. 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 economic impact of the September 11th tragedy on the
demand for abrasives and continued competition in the silica and coated sands
markets.
Gross margin in the Environmental Industrial Group increased to $6,112,000 in
the year ended December 31, 2002 versus $3,256,000 in the year ended December
31, 2001, an increase of $2,856,000 or 87.7%. The increase in margin resulted
primarily from the acquisition of Virginia Materials 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
25.0% in 2002 from 16.7% in 2001.
Selling, general and administrative expenses increased to $2,933,000 in the year
ended December 31, 2002 from $2,326,000 in 2001. The increase is due in most
part to a full year of expenses in relation to Virginia Materials.
Interest expense was $320,000 in the year ended December 31, 2002 compared to
$291,000 in 2001. The increase was due to an increase in debt as a result of the
acquisition of Virginia Materials.
Net earnings improved significantly in the year ended December 31, 2002 to
$1,741,000 versus $491,000 in 2001, due in most part to 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 $157,000 in the year ended December 31, 2002 and $359,000 in 2001
were derived primarily from licence fees. The decrease in revenues over the
prior year is due to the uncertainty of collection of the second half of the
annual licence fees. The remainder of the licence fee revenue will be recorded
once collection becomes certain.
Cost of goods sold for the year ended December 31, 2002 was nil versus $76,000
in 2001 (mainly amortization charges). The asset was fully amortized in 2001,
and therefore no amortization was recorded in 2002.
Selling general and administrative expenses were $332,000 in the year ended
December 31, 2002 compared to $270,000 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 year ended December 31, 2002 the Group had a net loss before taxes of
$204,000 compared to a net loss before taxes of $17,000 in 2001.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 28 December 31, 2002 - 10-K
Corporate Activities
Selling, general and administration expenses were $2,715,000 in the year ended
December 31, 2002 compared to $2,249,000 in the year ended December 31, 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, professional fees and financing costs, in addition to accrued costs
in the settlement of a legal action as detailed in Part II - Other Information.
Commitments and contingencies
(a) Various 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. Legal counsel has concluded the
outcome of these claims or potential claims is not determinable.
(b) 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 consolidated financial statements for these
future costs since such costs, if any, are not determinable at this
time.
(c) 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.
(d) Letters of credit:
i) An irrevocable letter of credit for $475 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 $28 have been placed
with third parties as security on transactions occurring in
the ordinary course of operations.
(e) Commitments under operating leases, principally for distribution
centres, warehouse and equipment, are as follows:
$
2003 1,672
2004 1,595
2005 1,514
2006 1,474
2007 1,339
2008 and thereafter 1,430
-------------
9,024
=============
2001 Operations Compared With 2000 Operations
Consolidated
- --------------------------------------------------------------------------------
Stake Technology Ltd. 29 December 31, 2002 - 10-K
Revenues in 2001 increased by $26,002,000 or 40.7% to $89,822,000, from
$63,820,000 in 2000. Net earnings in 2001 decreased to $19 or $0.00 per common
share compared to $2,118,000 or $0.09 per common share for the year ended
December 31, 2000. The increase in the Company's revenues in 2001 was due to a
number of factors including the acquisitions of First Light Foods ($6,031,000)
and Virginia Materials ($883,000) plus the full year impact of the acquisitions
completed in 2000. (PECAL, Northern, Nordic and Temisca).
Earnings decreased due to a number of factors including the significant
operating issues at Nordic Aseptic, weak market/economic conditions that
impacted the Environmental Industrial Group, increased costs of operating a
growing public organization and the benefit of certain previously unrecognized
income tax loss carry forwards having been fully realized in 2000.
EBITDA increased by 36.5% to $5,291,000 from $3,875,000 in 2000. The increase
was due to increased amortization and interest expenses offset by lower earnings
as noted above.
U.S. readers should note that due to differences between Canadian and U.S. GAAP,
the loss for 2001 under U.S. GAAP was ($225,000) or ($0.01) per common share
versus earnings of $1,743,000 or $0.07 per common share in 2000. Note 18 to the
audited financial statements itemizes these differences.
Cost of sales increased by 41.7% to $77,450,000 for the year ended December 31,
2001 compared to $54,650,000 for the year ended December 31, 2000. Consistent
with the revenue analysis above, the increase in cost of sales was related to
the sales increase resulting from the acquisitions completed in 2000 and 2001.
The Company's consolidated gross margin was 13.8% in 2001 compared to 14.4% in
2000. Excluding the impact of the losses incurred related to Nordic Aseptic,
gross margin increased to in excess of $13,000,000 or 14.8%.
Selling, general and administration expenditures increased 57.1% in 2001 to
$11,142,000 compared to $7,091,000 for the year ended December 31, 2000. The
increase in administrative costs was due to the acquisitions made in 2000 and
2001, increased bad debt provisions, the higher costs of operating a larger
public company and increased amortization of trademarks, patents and goodwill.
Interest expense increased to $1,745,000 in 2001 from $959,000 in 2000. The bulk
of this increase was due to the Food Group's debt obligations related to
acquisitions completed in 2000. Interest expense related to the increase in the
Food Group totalled $1,423,000 ($698,000 in 2000). Canadian debt held by the
Environmental Industrial Group and Corporate Office represents $322,000 of
interest expense in 2001 ($261,000 in 2000).
Interest and other income decreased to $326,000 in 2001 from $407,000 in 2000.
The effective income tax rate increased in 2001 to 88.6% (2000 - (34.6%)) due in
most part to loss carry forward benefits realized in 2000 and a proportionate
increase in non-deductible expenses in 2001. In 2000 the Company recorded the
benefit of previously unrecognized Canadian tax loss carry forwards of
$1,129,000 and provided a tax provision of $542,000 on the net earnings of the
Food Group. Due to the complex US tax structure, the Company was unable to
recognize the tax benefit of Nordic Aseptic's start-up losses. The Company has
since restructured the Food Group, which provides for more effective tax
strategies.
Liquidity and Capital Resources (at December 31, 2002)
Current assets
Cash and cash equivalents increased to $7,012,000 at December 31, 2002 (2001 -
$3,364,000), primarily due to the conversion of $6,307,000 of short term
investments held at December 31, 2001 to cash and the removal of the restriction
on $1,147,000 of cash, as detailed below, offset by funding of certain working
capital, capital projects and acquisitions.
As of December 31, 2002 the Company had restricted cash of $nil (2001 -
$1,147,000) and short term investments of $2,038,000 (2001 - $6,307,000). 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 the Form S-3 registration statement being
declared effective and clearance of the Ontario Securities Commission hold
period.
The short term investments held at December 31, 2002 consist of short-term money
market investments with maturity dates greater than 90 days from acquisition,
obtained in the acquisition of Opta. The short term
- --------------------------------------------------------------------------------
Stake Technology Ltd. 30 December 31, 2002 - 10-K
investments held at December 31, 2001 were funds held in a mutual fund
corporation which held cash equivalents. These securities were disposed in 2002
and the proceeds invested in cash equivalents, as noted above.
Trade accounts receivable increased to $18,144,000 at December 31, 2002 from
$8,377,000 at December 31, 2001. Trade receivables attributable to the Food
Group as at December 31, 2002 were $14,889,000 (2001 - $5,088,000). The increase
was primarily due to an increase in grain sales late in the year, an increase in
sales of aseptic and soy concentrate products, the supply contract cancellation
fee of $1,557,000 which was received in early 2003 and the impact of
acquisitions completed in 2002. Trade receivables in the Environmental
Industrial Group were $3,255,000 compared to $3,289 in 2001.
The note receivable of $1,034,000 at December 31, 2002 (2001 - $2,303,000) and
the product rebate payable included in long-term payables of $1,330,000 (2001 -
$1,209,000) are related to an agreement with a major customer 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 committed to pay 36 monthly instalments of
$119,000, expiring September 2003. The agreement also requires the Company to
provide the customer with a rebate based on product purchases beginning in
October 2003 until such time as $1,720,000 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 $9,168,000 to $22,989,000 at December 31, 2002.
Inventories in the Food Group increased $8,167,000 to $18,492,000, primarily due
to increased inventory of aseptic packaging goods, the acquisition of Opta, an
increase in natural and organic product inventories in Canada as a result of
acquisitions and seasonal grain inventories. Inventories in the Environmental
Industrial Group increased $1,001,000 to $4,497,000, due in most part to the
committed purchase of raw material inventories from the previous owner of
Virginia Materials, as agreed in the October 2001 acquisition. The Steam
Explosion Technology Group is not required to carry significant inventories.
Property, plant and equipment
In the year ended December 31, 2002, the Company spent $4,464,000 (2001 -
$3,907,000) on capital expenditures. Of this, the Food Group expended
$3,306,000, 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. The Environmental Industrial Group expended $1,058,000, of
which, $268,000 was spent on equipment refurbishment for a new plant to be
opened in Baltimore, Maryland and the remaining on general additions and
replacements. The Corporate Office and Steam Explosion Technology Group expended
$100,000, primarily on office and computer equipment to accommodate continued
expansion.
Goodwill and intangibles
Goodwill increased to $12,212,000 at December 31, 2002 from $8,540,000 at
December 31, 2001. The increase relates to the contingent consideration
component and revised estimate of the deferred purchase consideration related to
the acquisition of Virginia Materials and the Canadian natural and organic food
acquisitions. No goodwill was recorded on the acquisition of Opta.
Indefinite life trademarks, valued at $2,498,000 at December 31, 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 being 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 and the acquisition of Wild West in November 2002, increased to $207,000 at
December 31, 2002 (2001 - $nil). These trademarks are being amortized over the
life of the asset.
Future income taxes
Net future income tax assets of $10,007,000, (including current portion of
$115,000) as at December 31, 2002 (2001 - net future income taxes liability of
$1,159,000) relate principally to loss carry-forwards recorded on the
acquisition of Opta, loss carry-forwards available in the Food Group, scientific
research expenditures credits available in Canada and differences between the
accounting and tax basis of assets and liabilities primarily related to
property, plant and equipment and intangibles.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 31 December 31, 2002 - 10-K
Other assets
Other assets increased to $1,155,000 at December 31, 2002 versus $900,000 as at
December 31, 2001. In 2002 the Company deferred $276,000 (December 31, 2001 -
$32,000) 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
$482,000 of pre-operating costs related to Nordic Aseptic, which comprised 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 December 31, 2002, the unamortized balance of these items
is $358,000 (2001 - $353,000). Readers should note that these pre-operating
costs would have been expensed under U.S. GAAP.
In 2002 the Company deferred financing related costs of $796,000 and has a net
balance remaining of $619,000 at December 31, 2002 (2001 - $24,000). 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. While the amortization period for the term loan is seven
years, these costs are being written off over two years, which represents the
first renewal date of the agreement.
Investments decreased to $nil at December 31, 2002 from $366,000 at December 31,
2001 as a result of a write-down in the Company's equity investment in Easton
Minerals Limited.
At December 31, 2002, other items were $178,000 versus $157,000 at December 31,
2001.
Current liabilities
Accounts payable and accrued liabilities increased to $19,664,000 at December
31, 2002 from $12,831,000 at December 31, 2001. The increase is primarily due to
an increase in base business and the acquisitions completed in 2002.
Customer deposits of $421,000 at December 31, 2002 (2001 - $1,389,000) relate to
cash deposits made by Food Group customers in 2002 for purchases to be completed
throughout the 2003 season. No recognition of revenue or accrual of costs is
booked on these transactions until the goods are shipped. The significant
decrease from the prior year relates to one particular customer who chose not to
place funds on deposit prior to December 31, 2002 due to a change in internal
policy, but is expected to continue to purchase goods from the Food Group
throughout 2003.
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. Subsequent to December 31, 2002,
the Company entered into an amended financing arrangement with the existing
lenders and a bank syndication agreement. The amended arrangement increased the
term loan by $7,800,000 to $21,700,000 and the U.S. line of credit facility by
$4,000,000 to $9,000,000. The Canadian line of credit facility remained
unchanged at CDN $5,000,000. The term loan is repayable quarterly and amortizes
over seven years. All three facilities bear interest at various reference rates
including U.S. bank prime, U.S. LIBOR and/or Canadian bank prime plus a premium
based on certain financial ratios of the Company. The term loan has a two year
maturity at which point the facility is renewable at the option of the lender
and the Company. The Company fully expects to renew this facility.
Total debt of $15,447,000 outstanding at December 31, 2001 was repaid during
2002 with the proceeds of the new financing arrangement.
The three facilities described above are collateralised by a first priority
security against substantially all of the Company's assets in both Canada and
the United States.
Bank indebtedness
Net bank indebtedness at December 31, 2002 is $3,963,000 (2001 - $1,206,000).
The increase relates primarily to an increase in working capital requirements
and capital acquisitions.
Long term debt
At December 31, 2002, the Company's long-term debt, including current portion,
is $36,749,000, an increase of $20,101,000 from December 31, 2001. Included in
long-term debt is a $13,900,000 term loan, noted above prior to
- --------------------------------------------------------------------------------
Stake Technology Ltd. 32 December 31, 2002 - 10-K
the amended arrangement, a $5,000,000 convertible debenture with a fair value at
December 31, 2002 of $4,697,000, $15,186,000 in a tender facility obtained to
facilitate the December 2002 acquisition of Opta, and $2,966,000 in other
long-term debt. The tender facility was repaid subsequent to December 31, 2002
with cash and the incremental proceeds from the amended facilities as noted
above. The increase from the prior year relates primarily to incremental
financing obtained to finance the acquisition of Opta in the form of the
convertible debenture and the tender facility.
Long-term payables
Total long-term payables (including current portion) at December 31, 2002 were
$4,963,000, compared to $2,665,000 at December 31, 2001. Long-term payables
consist of (1) the product rebate payable to a major customer as previously
discussed, (2) deferred purchase consideration related to the acquisition of
Virginia Materials, (3) preference shares of subsidiary companies, and (4)
amounts payable to former shareholders of acquired companies.
The increase in 2002 is due in most part to the increase in amounts due to
former shareholders of acquired companies of $2,675,000, of which $1,871,000 is
due to former shareholders of Opta for untendered shares, which was paid
subsequent to December 31, 2002. The remaining amount payable to former
shareholders of acquired companies relates to the contingent consideration
portions of the acquisitions of Virginia Materials completed in 2001, and Wild
West and Simply Organic completed in 2002.
Cash flows
Net cash and cash equivalents increased $3,648,000 during fiscal 2002 (2001 -
$272,000) to $7,012,000 as at December 31, 2002 (2001 - $3,364,000).
For the year ended December 31, 2002, cash provided by operations before working
capital changes was $6,989,000 (2001 - $3,394,000), an increase of $3,595,000 or
106%. The increase was due primarily to increased net earnings throughout the
Company and the non-cash write-off of the Easton Minerals Limited investment,
offset by the non-cash realization of loss carry-forwards.
Cash provided by operations after working capital changes was $72,000 for the
year ended December 31, 2002 (2001 - $320,000), reflecting the utilization of
funds for non-cash working capital of ($6,917,000) (2001 - $3,074,000). This
utilization consists principally of an increase in accounts receivable
($4,712,000), an increase in inventories ($3,086,000) and a decrease in customer
deposits ($969,000), offset by a an increase in accounts payable and accrued
liabilities ($1,271,000) and decrease in other current assets ($579,000). The
usage of cash flows to fund working capital in 2002 reflects the increase in
working capital requirements required to fund the rapid growth in operations and
the supply contract cancellation fee which was subsequently collected in January
2003.
Cash used in investment activities of $18,546,000 in 2002 (2001 - $11,042,000),
reflects cash used to complete acquisitions, net of cash acquired, of
$21,919,000 (2001 - $2,172,000) and acquisitions of property, plant and
equipment of $4,464,000 (2001 - $3,907,000), offset by a decrease of short term
investments for proceeds of $6,307,000 (2001 - increase of ($6,307,000)) and
payments received on a note receivable of $1,425,000 (2001 - $1,393,000).
Cash provided by financing activities was $22,031,000 in the year ended December
31, 2002 (2001 - $13,383,000), consisting primarily of net borrowings from
long-term facilities of $17,943,000 (2001 - net repayments of ($5,146,000)), net
increase in operating lines of credit of $2,757,000 (2001 - net decrease of
($1,020,000)), decrease in restricted cash of $1,147,000 (2001 - increase of
($1,147,000)), net proceeds from the issuance of common shares of $2,091,000
(2001 - $20,813,000), offset by payment of deferred purchase consideration to
the former owner of Virginia Materials of ($982,000) (2001 - $nil), deferred
financing costs of ($796,000) (2001 - $nil) and the purchase and redemption of
preference shares of subsidiary companies of ($129,000) (2001 - ($117,000)).
Business Outlook
The natural and organic foods industries in the North American market are
currently estimated to be in excess of $10 billion, with a large number of
companies competing in specific segments of the market. However, there are
relatively few companies well positioned to take advantage of this rapidly
growing market, currently estimated to be growing at 15 to 20% annually. The
Food Group's vertically integrated business model coupled with its growth
strategy based on a combination of internal growth and acquisitions, has
positioned the Company as a leader in the North American natural and organic
foods market.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 33 December 31, 2002 - 10-K
The Company plans to continue to exercise this growth strategy in the future.
Based on current market projections and annualized results of the acquisitions
completed in 2002, the Company expects revenues in 2003, excluding additional
potential acquisitions, to be approximately $175,000,000, a 45% increase over
2002. In addition, the Company's business plan includes strategies and
initiatives designed to improve the underlying performance of the operations and
to improve the quality of earnings. Specifically, the Company is looking to
improve the strategic synergies across its Food Group operations, vertically
integrating wherever possible. Initiatives to improve the productivity of the
operations include continued training and development of employees, consolidated
procurement and internal services programs, improved information systems to
provide better analysis and timely decision-making and plant rationalization
programs.
The Company expects to continue its rapid growth through an effective balance of
internal growth and acquisitions, all in support of its vertically integrated
field to table strategy. Growth will be financed by internally generated cash
resources and a combination of debt and equity financing, as required,
maintaining a target debt to equity ratio of 0.6 to 1. The Company will continue
to devote significant effort to increase returns on capital by improving its
investment in working capital and capital projects with increased accountability
and measurement.
As previously stated, the Company will continue to pursue strategic alternatives
for its non-core operations; the Environmental Industrial Group and the Steam
Explosion Technology Group. However, the Company will only divest itself of
these operations if and when a strategy that is beneficial to the shareholders
of Stake Technology Ltd. is identified. In 2002, the Environmental Industrial
Group provided approximately 20% of the Company's consolidated revenues and net
earnings of $1,657,000. Based on current market projections, the Company
anticipates the Group's results in 2003 will improve upon 2002 results. The
Steam Explosion Technology Group continues to focus on selling the steam
explosion technology to the China market and is also pursuing a number of
potential food applications. The outlook for the Group for 2003 is uncertain due
to the time and effort required to complete the signing of each contract.
Risks and Uncertainties
The Common Shares of the Company are speculative in nature and involve a high
degree of risk. Accordingly, in analyzing an investment in these securities,
prospective investors should carefully consider the following risk factors,
together with all of the other information appearing, or incorporated by
reference, in this document, in light of his or her particular financial
circumstances and/or investment objectives.
Future Capital Needs
Certain of the Company's operations operate at, or near, capacity. Continued
growth in these operations is reliant upon the Company's ability to increase
capacity through internal capital projects or acquisition. The Company's ability
to raise capital, through equity and/or debt financing, is directly related to
its ability to continue to grow and improve returns from operations. Additional
capital through equity financing may also result in additional dilution to the
Company's shareholders.
Competition
The Company carries on its businesses in competition with companies and
individuals with financial resources and staffs larger than the Company's and
the Company is, therefore, subject to competitive factors over which it has
little control or can otherwise affect.
Product Liability Claims
The Company's Food Group operates in a highly sterilized environment. However,
the sourcing, processing, testing and sale of food products entail an inherent
risk of allegations of product liability, and there can be no assurance that
product liability claims will not be asserted against the Company. While the
Company currently has product liability insurance coverage, it will be required
to expand such coverage as new products are introduced into the market and/or
additional capacity is added. The availability of such insurance coverage in the
future at cost effective prices may have a negative impact on results.
Furthermore, there can be no assurance that such insurance coverage will be
adequate, or that a product liability claim, even one without merit, would not
materially and adversely affect the Company's operations or financial condition.
Technological Innovation and Protection of Intellectual Property and Proprietary
Rights
Competitors include major chemical companies, other food ingredient companies
and consumer food companies that also engage in the development and sale of food
ingredients. Many of these companies are engaged in the
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Stake Technology Ltd. 34 December 31, 2002 - 10-K
development of texturizers and other food ingredients and have introduced a
number of texturizers into the market. There can be no assurance that existing
products or products under development by our competitors will not prove to be
more effective or less costly than any products which have been or are being
developed by us.
The Company and particularly the Food Group and Steam Technology Group depend in
part, on their ability to protect intellectual property rights. We rely
primarily on patent, copyright, trademark and trade secret laws to protect our
proprietary technologies. We cannot be sure that such measures will provide
meaningful protection for our proprietary technologies and processes. The
failure of any patents to provide protection to our technology would make it
easier for our competitors to offer similar products.
Governmental Regulation and Policies
The Company and its subsidiaries are, and are expected to continue to be,
subject to substantial federal, state, provincial and local environmental
regulation. These regulations exist in virtually all the Company's operational
business locations throughout North America and can present delays and costs
that can adversely affect business development. Any changes to current
regulations may impact the development, manufacturing and marketing of the
Company's products, and may have a negative impact on future results.
Stake's Steam Explosion Technology Group
The Steam Explosion Technology Group has yet to gain wide acceptance within the
industry and consequently earnings can fluctuate from quarter to quarter. Its
patented steam technology, while proven, has yet to develop a firm customer
base. The success of this division will depend upon its ability to promote
commercial acceptance of the StakeTech System.
Lack of Dividends; Dividend Restrictions
Stake has never paid dividends on its common shares and does not contemplate
paying cash dividends in the foreseeable future. Moreover, Stake is precluded
under the terms of various agreements with its creditors from paying dividends
until the related indebtedness has been satisfied. It is the Company's intention
to retain future earnings to fund growth. Accordingly, investors will not
receive a return on investment in Stake common shares through the payment of
dividends in the foreseeable future and may not realize a return on investment
even if they sell their shares. Any future payment of dividends to Stake
security holders will depend on decisions that will be made by the Board of
Directors and will depend on then existing conditions, including the Company's
financial condition, contractual restrictions, capital requirements and business
prospects. The receipt of cash dividends by United States shareholders from a
Canadian corporation, such as Stake, is subject to a 15% Canadian withholding
tax.
Customer Concentration
A portion of the Company's revenues in the Food Group are derived from a
relatively low number of customers. Although the Company has a good working
relationship with these customers, the loss of one of these customers would have
a negative impact on the results of the Company. The Company plans to continue
to mitigate this risk going forward by broadening its customer base and product
offering.
Integration of Acquired Companies
The Company's growth strategy inherently asserts that acquisitions will be
integrated successfully. However, the Company's ability to integrate current and
future acquisitions will have a direct impact on the Company's future results.
Failure to integrate acquisitions in a timely and efficient manner may have a
negative impact on the future results of the Company.
Item 7A - 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 and cash
equivalents or short-term investments and are recorded on the balance sheet at
fair value with unrealized gains or losses reported through profit and loss.
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Stake Technology Ltd. 35 December 31, 2002 - 10-K
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 at December 31, 2002, the weighted average interest rate of the fixed rate
term debt was 7.5% and $7,663,000 of the Company's outstanding term debt is at
fixed interest rates. Variable rate term debt of $29,086,000 at an interest rate
of 3.2% is partially hedged by variable rate cash equivalent investments. The
Company's looks at varying factors to determine the percentage of debt to hold
at fixed rates including, the interest rate spread between variable and fixed
(swap rates), the Company's view on interest rate trends, the percent of offset
to variable rate debt through holding variable rate investments and the
companies ability to manage with interest rate volatility and uncertainty.
Foreign currency risk
All U.S. subsidiaries use the U.S. dollar as their functional currency and as of
January 1, 2002 the United States dollar has become the Company's reporting
currency. The subsidiaries are subject to risks typical of multi-jurisdiction
businesses, including, but not limited to differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, the Company's
future results could be materially adversely affected by changes in these or
other factors. The Company is exposed to foreign exchange rate fluctuations as
the financial results of Stake's Canadian Corporate office 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 $2,263,000.
The Environmental Group has Canadian based receivables and payables that on a
net basis provide limited exchange exposure. The Canadian Organic Food Group has
exposure of U.S. dollars as its U.S. payables are greater than U.S. receivables.
U.S. based Food operations have no exposure to other currencies since almost all
sales and purchases are made in U.S. dollars. It is the Company's intention to
hold excess 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 December 31, 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 other
Food Group segments, Environmental Industrial Group, the Steam Explosion
Technology Group or related to Corporate office activities.
Item 8. Financial Statements and Supplementary Data
Financial statements are set forth on pages F-1 through F-36 of this Report and
are incorporated herein by reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
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Stake Technology Ltd. 36 December 31, 2002 - 10-K
PART III
10. Directors and Executive Officers of the Registrant
(a) Identification of directors and executive officers as at March 7, 2003 is
set forth below:
=============================== ============= ============================= =========== =========================== ==========
Year First
Elected Position Number of Shares
Name Director/ With Company Class of Beneficially Owned/Number % of
Directors: Officer Shares of Vested Options Class (1)
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Chairman of the Board, CEO
Jeremy N. Kendall 1978 & Director Common 457,317 / 369,000 1.90%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Cyril A. Ing 1984 Secretary and Director Common 61,335 / 68,875 0.30%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Joseph Riz 1986 Independent Director Common 33,600 / 69,500 0.24%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
James Rifenbergh 1996 Independent Director Common 313,448 / 119,500 0.99%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Director and President of
Allan Routh 1999 the SunRich Food Group Common 553,781 / 140,000 1.59%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Director and Executive Vice
President - SunRich Food
Dennis Anderson 2000 Group Common 3,806,335 / 6,000 8.73%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Director and Vice President
Larry (Andy) Anderson 2000 of the SunRich Food Group Common 367,089 / 4,500 0.85%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Katrina Houde 2000 Independent Director Common 0 / 22,000 0.05%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Camillo Lisio 2001 Independent Director Common 0 / 22,000 0.05%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Stephen Bronfman (A) 2001 Director Common 0 / 16,000 0.04%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Robert Fetherstonhaugh (A) 2001 Director Common 0 / 16,000 0.04%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Other executive officers:
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Executive Vice President,
Steven R. Bromley 2001 Chief Financial Officer Common 10,000 / 35,000 0.10%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
President, CEO
Environmental Industrial
David Kruse 2000 Group Common 0 / 23,500 0.05%
- ------------------------------- ------------- ----------------------------- ----------- --------------------------- ----------
Arthur J. McEvily 2002 President, CEO - Opta Common 0 / 0 0%
=============================== ============= ============================= =========== =========================== ==========
All Directors and Executive
Officers as a group Common 5,602,905 / 911,875 14.94%
=============================== ============= ============================= =========== =========================== ==========
(1) Percentage ownership is calculated based on 41,984,118 total common shares
outstanding at December 31, 2002, plus all common shares subject to an
option currently exercisable, which at December 31, 2002 totaled 1,613,480
of which 911,875 are related to directors and officers noted above and
described below. The remaining 701,605 are options vested to other
employees of the Company. This calculation does not include options that
have not vested or warrants or underwriter options/warrants currently
outstanding. Therefore, the "Percentage of Class" column is based on
43,597,598 common shares.
(A) Pursuant to a subscription agreement between the Company and
Claridge and the Claridge Group dated September 28, 2001, so long as
any member of the Claridge Group remains the beneficial owner of at
least five percent (5%) of the Company's issued and outstanding
common shares, the Company will nominate for election and recommend
to its shareholders a person designated by Claridge to serve on the
Company's Board of Directors. For so long as the beneficial holdings
of Claridge shall be at least fifteen percent (15%) of the Company's
issued and outstanding common shares, the Company shall nominate a
second designee of Claridge. Claridge currently beneficially owns
more than fifteen percent (15%) of the Company's issued and
outstanding common shares. Messrs. Bronfman and Fetherstonhaugh
presently serve on the Company's Board pursuant to this agreement.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 37 December 31, 2002 - 10-K
The Chart below details the number of vested director and executive officer
options by plan and option price:
============================================ ============= ================== =====================
Employee/Director Plan Option Price Vested Options
- ----------------- ---- ------------ --------------
Jeremy Kendall 1998 $1.06 6,000
2001 $1.86 355,000
2002 $3.00 8,000
---------------------
369,000
- -------------------------------------------- ------------- ------------------ ---------------------
Cyril Ing 1996 $1.31 10,000
1998 $1.06 6,875
2001 $1.86 40,000
2002 $2.10 6,000
2002 $3.00 6,000
---------------------
68,875
- -------------------------------------------- ------------- ------------------ ---------------------
Joseph Riz 1996 $1.31 10,000
1998 $1.06 7,500
2001 $1.86 40,000
2002 $2.10 6,000
2002 $3.00 6,000
---------------------
69,500
- -------------------------------------------- ------------- ------------------ ---------------------
James Rifenbergh 1996 $1.31 10,000
1998 $1.06 7,500
1999 $1.06 50,000
2001 $1.86 40,000
2002 $2.10 6,000
2002 $3.00 6,000
---------------------
119,500
- -------------------------------------------- ------------- ------------------ ---------------------
Allan Routh 1999 $1.06 140,000
- -------------------------------------------- ------------- ------------------ ---------------------
Dennis Anderson 1999 $1.31 6,000
- -------------------------------------------- ------------- ------------------ ---------------------
Larry (Andy) Anderson 1999 $1.31 4,500
- -------------------------------------------- ------------- ------------------ ---------------------
Katrina Houde 1996 $1.31 10,000
2002 $2.10 6,000
2002 $3.00 6,000
---------------------
22,000
- -------------------------------------------- ------------- ------------------ ---------------------
Camillo Lisio 2001 $1.61 10,000
2002 $2.10 6,000
2002 $3.00 6,000
---------------------
22,000
- -------------------------------------------- ------------- ------------------ ---------------------
Stephen Bronfman 2002 $2.10 10,000
2002 $3.00 6,000
---------------------
16,000
- -------------------------------------------- ------------- ------------------ ---------------------
Robert Fetherstonhaugh 2002 $2.10 10,000
2002 $3.00 6,000
---------------------
16,000
- -------------------------------------------- ------------- ------------------ ---------------------
David Kruse 1993 $1.31 12,500
2001 $1.06 6,000
2001 $1.86 5,000
---------------------
23,500
- -------------------------------------------- ------------- ------------------ ---------------------
Steven R. Bromley 1999 $1.53 20,000
2002 $2.15 6,000
2002 $3.07 4,000
2002 $3.00 5,000
---------------------
35,000
- -------------------------------------------- ------------- ------------------ ---------------------
911,875
============================================ ============= ================== =====================
Summary of Employee/Director Executive Officer Vested Stock Option Plans:
- --------------------------------------------------------------------------------
Stake Technology Ltd. 38 December 31, 2002 - 10-K
- ------------ ------------------------------ -------------- ----------------- ---------------------
# Held by #Held by
Executive Directors / Employees
Expiry date Exercise Price Officers /Consultants Total
- ------------ ------------------------------ -------------- ----------------- ---------------------
2003 $1.06 - $2.10 513,125 236,325 749,450
- ------------ ------------------------------ -------------- ----------------- ---------------------
2004 $1.06 - $1.86 42,500 138,460 180,960
- ------------ ------------------------------ -------------- ----------------- ---------------------
2005 $1.06 - $1.38 259,000 151,900 410,900
- ------------ ------------------------------ -------------- ----------------- ---------------------
2006 $1.53 - $2.10 32,250 123,300 155,550
- ------------ ------------------------------ -------------- ----------------- ---------------------
2007 $2.15 - $3.07 65,000 51,620 116,620
- ------------ ------------------------------ -------------- ----------------- ---------------------
Total 911,875 701,605 1,613,480
- ------------ ------------------------------ -------------- ----------------- ---------------------
(b) Set forth below is a biographical description of each director and officer
of the Company:
Jeremy Kendall has served as a Director of the Company since September 1978. In
June 1983, he was elected Chairman of the Board and Chief Executive Officer of
the Company. He is Chairman of the Board of all of the Company's subsidiaries
except 1108176 Ontario Limited. He is also Chairman of Jemtec Inc. (6/91 to
present) and Easton Minerals Ltd. (1/95 to present). In the past 5 years, Mr.
Kendall has served on the following Board of Directors: BI Inc. (9/81 to 11/00),
Brigdon Resources Inc. (6/93 to 2/99), Redaurum Ltd. (6/94 to 12/98) and Wisper
Inc. (6/95 to 3/02). Mr. Kendall is also a Director of a number of private and
charitable organizations.
Cyril Ing is a Professional Engineer and was elected a Director in January 1984
and became an employee in August 1985. He was an independent consultant
specializing in engineering projects involving the combustion of biomass from
May of 1982 to August 1985. Mr. Ing retired from full time employment in March
1990. For the 10 years prior to retirement he was President of the Conat Group,
a holding company, whose major subsidiary, Westair Systems Inc., is a
distributor and manufacturer of industrial dehumidification equipment. In the
past 5 years, Mr. Ing has served on the following Board of Directors: Wisper
Inc. (11/99 to present), and Jemtec Inc. (11/99 to present).
Joseph Riz was elected a Director of the Company in July 1986 and currently
serves as Chairman of the Company's Audit Committee. He is presently Managing
Director of Tricapital Management Ltd., a merchant banking and financial
advisory firm. From 1983 to 1985 he was an Executive Vice President of Crowntek,
Inc.. In the past 5 years, Mr. Riz has served on the Board of Directors of
Telepanel Systems Inc. (4/89 to present).
Jim Rifenbergh was elected to the Board of Directors in April 1996. Mr.
Rifenbergh is past President and Chairman of Brown Printing Company of Waseca,
Minnesota, a large printing company with plants throughout the United States. He
is also a Director of a number of other private companies and organizations. In
the past 5 years, Mr. Rifenbergh has served on the Board of Directors of ARC
Capital Inc. (6/96 to 12/96).
Allan Routh was elected to the Board of Directors in September 1999. Mr. Routh
is President and Chief Executive Officer of the SunRich Food Group, Inc., a
wholly owned subsidiary of the Company. Mr. Routh has been involved in the soy
industry since 1984. Mr. Routh is presently serving a term on the Board of
Directors of the Soyfoods Association of North America and served as its
President between 1999 and 2000. In the past 5 years, Mr. Routh has not served
on any other reporting issuers Board of Directors.
Dennis Anderson was elected to the Board of Directors in September 2000. Mr.
Anderson is the Executive Vice President of the SunRich Food Group, Inc., a
wholly owned subsidiary of the Company. Mr. Anderson was the owner of Northern
Food & Dairy, Inc. for five years prior to the Company's acquisition. In the
past 5 years, Mr. Anderson has not served on any other reporting issuers Board
of Directors.
Larry (Andy) Anderson was elected to the Board of Directors in September 2000.
Mr. Anderson is a CPA and acts as a Vice President to the SunRich Food Group,
Inc.. Prior to his involvement with the SunRich Food Group, Mr. Anderson was a
partner in a Minneapolis CPA firm. In the past 5 years, Mr. Anderson has not
served on any other reporting issuers Board of Directors.
Katrina Houde was elected to the Board of Directors in December 2000. Ms. Houde
is currently an independent consultant. For the five years prior to her election
to the Stake Board, Ms. Houde was with Cuddy International Corp., a large
international poultry company with 2,200 employees worldwide. Ms. Houde held
several senior executive positions at Cuddy International Corp., and served as
President of Cuddy Food Products. In the past 5 years, Ms. Houde has not served
on any other reporting issuers Board of Directors.
Camillo Lisio spent 18 years with Saputo Inc., most recently as President and
Chief Operating Officer, until his decision to pursue other business and
personal interests. Mr. Lisio has been active in business and civic affairs.
Other than serving on the Board of Directors of Saputo Inc., he was also a
director of the Santa Cabrini Hospital, the International Dairy Foods
Association and the National Dairy Council of Canada. Early in his career, he
was with CFMB, a multilingual radio station in Montreal, where as interim
President, he transitioned the station
- --------------------------------------------------------------------------------
Stake Technology Ltd. 39 December 31, 2002 - 10-K
following the death of the founder. In the past 5 years, Mr. Lisio has served on
Board of Directors: of Saputo Inc. (3/98 to 4/01) and Uniforet Inc. (10/98 to
4/01).
Stephen Bronfman is Chairman of Claridge SRB Investments Inc., a privately held
company with worldwide interests, formed in 1998 to manage his existing holdings
and to evaluate future investment opportunities. The Claridge Group currently
owns approximately 17.1% of the issued and outstanding common shares of Stake
Technology Ltd.. Mr. Bronfman has been active in numerous business and civic
affairs. Mr. Bronfman sits on the Board of Directors of The David Suzuki
Foundation; The Saidye Bronfman Centre for the Arts; The Samuel and Saidye
Bronfman Family Foundation; and The Summit School Foundation. Previously Mr.
Bronfman served on the Board of Directors of The Seagram Company, Ltd. and was
Co-Chairman of the Executive Committee of the Montreal Expos Baseball Club.
Robert Fetherstonhaugh is a Chartered Accountant and is the Executive Vice
President of The Claridge Group. Mr. Fetherstonhaugh has a broad business
background both in North America and internationally, previously serving as
Deputy Chairman of Trader.com, an international publishing company, and a former
partner at KPMG. Mr. Fetherstonhaugh is also currently a director of Trader.com
and Unity Wireless Corporation.
David Kruse is a Certified Management Accountant and joined the Company in 1997.
Mr. Kruse was appointed President of the Environmental Industrial Group in 2002
and Vice President and Chief Operating Officer of the Environmental Industrial
Group in 2000. In the past 5 years, Mr. Kruse has not served on any reporting
issuers Board of Directors
Steven Bromley is a Certified General Accountant and joined Stake in June 2001.
The Board of Directors appointed Mr. Bromley Executive Vice President and Chief
Financial Officer in November 2002. Mr Bromley was appointed Vice President,
Finance and Chief Financial Officer in September 2001. Prior to joining the
Company, Mr. Bromley spent over 13 years in the Canadian dairy industry in a
wide range of financial and operational roles with both Natrel Inc. and Ault
Foods Limited. From 1997 to 1999 he served on the Board of Directors of Natrel,
Inc.. In the past 5 years, Mr. Bromley has not served on any other reporting
issuers Board of Directors.
Arthur McEvily was named President and Chief Executive Officer of Opta Foods in
February 2000. Previously, he was named Executive Vice President in January
1999, Senior Vice President, Commerical Development in December 1997 and served
as Vice President Applications, Technical Service and New Product
Commercialization from August 1996 to December 1997. He served as Vice President
Sales and Business Development of the Opta from December 1993 to July 1996. Mr.
McEvily received a B.Sc. in Biochemistry from Marlboro College, Marlboro,
Vermont and a a Ph.D. in chemistry at the University of North Carolina at Chapel
Hill. He was a postdoctoral fellow at Harvard Medical School.
Audit Committee
The following three independent Directors are members of the audit committee:
Joseph Riz, Jim Rifenbergh and Katrina Houde.
Mr. Riz is chairman of the Audit Committee. The Audit Committee's duties and
responsibilities are documented in a formal audit committee charter. These
duties include (a) providing oversight of the financial reporting process and
management's responsibility for the integrity, accuracy and objectivity of
financial reports and related financial reporting practices; (b) recommending to
the Board of Directors the appointment of the Company's auditors; (c) providing
oversight of the adequacy of the Company's system of internal controls; and (d)
providing oversight of management practices relating to ethical considerations
and business conduct, including compliance with laws and regulations.
The audit committee meets formally four times a year, once to review the Form
10K and annual audited financial statements and before each quarter's earnings
are filed to review interim financial statements and Form 10Q which is filed
with the Securities and Exchange Commission/Nasdaq in the U.S. and the Toronto
Stock Exchange and Ontario Securities Commission in Canada. Other meetings may
be held as at the discretion of the Chair of the Audit Committee. During, 2002,
the audit committee met four times. The Audit Committee has free and unfettered
access to PricewaterhouseCoopers, the Company's auditors.
During 2002 the committee implemented a company wide policy related to reporting
of concerns in accounting or internal controls. This policy gives all employees
of the Company direct access to the Audit Committee for concerns dealing with
accounting practices, internal controls or other matters affecting the Company's
well being.
Corporate Governance (Executive Committee) and Compensation Committee
- --------------------------------------------------------------------------------
Stake Technology Ltd. 40 December 31, 2002 - 10-K
The following three independent Directors are members of the Corporate
Governance (Executive Committee) and Compensation Committee: Camillo Lisio,
Joesph Riz and Robert Fetherstonhaugh.
On September 13, 2001 the Company created, by board resolution, the Corporate
Governance Committee. This committee also acts as the Company's Compensation
Committee. The Company and the Corporate Governance Committee have developed a
set of formal Corporate Governance Policies that are monitored on an ongoing
basis to ensure that the Company is in compliance with its Corporate Governance
Policies.
The function of the Compensation Committee is to determine the compensation of
the CEO as well as to review and approve the compensation recommended by the CEO
for all other senior officers and employees of the Company. In addition, this
committee oversees the Option Plans of the Company.
The Governance Committee met formally four times during 2002. In addition,
several telephone meetings were held during the year for administrative matters
connected to the responsibilities of this Committee.
Board Compensation
In addition to annual grants of options, Directors who are not Company officers
receive an annual retainer of $4,000, a director fee of $1,500 for each board
meeting attended in person as well as $500 for participating in committee
meetings and telephone meetings. In addition, all Directors are reimbursed for
travel and administrative expenses to attend meetings and manage their board
responsibilities. The Corporate Secretary receives an additional $500 per
quarter for his additional responsibilities.
(c) Identification of Executive Officers of Registrant:
The following table shows certain information with respect Stake's Executvie
Officers as of March 7, 2003:
=========================== ====== ==================== ======================================================================
Year First Elected
Name Age Director/Officer Executive Officers of Stake
- --------------------------- ------ -------------------- ----------------------------------------------------------------------
Jeremy N. Kendall * 63 1978 Chairman of the Board, CEO & Director
=========================== ====== ==================== ======================================================================
Allan Routh * 52 1999 Director, President and CEO of the SunRich Food Group
=========================== ====== ==================== ======================================================================
Dennis Anderson * 58 2000 Director and Executive Vice President of the SunRich Food Group
=========================== ====== ==================== ======================================================================
David Kruse * 35 2000 President and CEO of the Environmental Industrial Group
=========================== ====== ==================== ======================================================================
Steven R. Bromley * 43 2001 Executive Vice President & Chief Financial Officer
=========================== ====== ==================== ======================================================================
Arthur J. McEvily * 51 2002 President and Chief Executive Officer of Opta Foods
=========================== ====== ==================== ======================================================================
* Director and Executive Officer biographies are detailed in the preceding
pages
There are no family relationships between any of the Officers or Directors of
the Company.
Executive Officers of the Company are elected by the Board of Directors at its
first meeting after each Annual Meeting of Shareholders and serve a term of
office until the next Annual Meeting. Executive officers elected by the Board of
Directors at any other time serve a term of office until the next Annual
Meeting.
John D. Taylor, former President and COO of Stake, resigned from the Company and
Board of Directors in January, 2003. Mr. Taylor received no additional stock
options in 2002 and exercised 201,000 vested options in 2003. During 2002, Mr.
Taylor's total compensation was approximately $121,000.
The Annual Meeting of Shareholders for 2003 will be held on June 18, 2003 at a
location in downtown Toronto, Ontario, Canada.
Item 11. Executive Compensation
The following tables set forth all remuneration paid by the Company and its
subsidiaries during the last three years ended December 31, 2002, 2001, and 2000
to its C.E.O. and top four Executive Officers as well as top two divisional
employees earning in excess of US$100,000:
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
Stake Technology Ltd. 41 December 31, 2002 - 10-K
Annual Compensation Awards Payouts
======================================= ========= ============ ========== ============= ========== ========= ======== ==============
Other
Annual Restricted Option All Other
Compensation Stock LTIP Compensation
Name and Principal Occupation Year Salary Bonus (3) Awards SARs Pay-outs (4)
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
Jeremy N. Kendall - CEO 2002 $176,391 $18,149 $11,173 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
2001 $167,332 $13,347 $14,001 -- -- -- $269,123
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
2000 $169,263 $45,590 $6,910 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
Steven R. Bromley - Executive Vice
President & CFO 2002 $118,926 $6,992 $18,056 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
2001 $60,282 $6,236 $10,425 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
David Kruse - President, CEO
Environmental Industrial Group 2002 $86,730 3,828 $10,246 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
2001 $83,925 $1,358 $11,049 -- -- -- $12,345
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
2000 $62,618 $8,457 $12,345 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
Allan Routh - Director and President
of the Sunrich Food Group 2002 $130,000 -- $2,906 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
2001 $116,923 $40,000 $5,370 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
2000 $110,000 $20,000 $6,555 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
Dennis Anderson - Director and
Executive Vice President of
Operations of the Sunrich Food Group
(1) 2002 -- $19,878 -- -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
2001 $130,960 $18,689 $2,619 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
2000 $18,689 -- $761 -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
Arthur J. McEvily - President (2) 2002 $17,833 -- -- -- -- -- --
- --------------------------------------- --------- ------------ ---------- ------------- ---------- --------- -------- --------------
(1) Mr. Dennis Anderson did not receive a salary in 2002.
(2) Arthur McEvily joined the Company in December 2002; therefore his
compensation reflects the month of December, 2002 only.
(3) Other annual compensation represents taxable benefits for automobile
use or reimbursement of costs, life insurance, retirement savings
contributions, and interest on short-term loans.
(4) All Other compensation is the value received over exercise price of
stock options exercised.
Executive employment contracts
Mr. Jeremy Kendall, Chairman & CEO, entered into an employment contract with the
Company in October 2001 for a period through February 26, 2020. The contract
anticipates that on February 26, 2005, his 65th birthday, Mr. Kendall may elect
to relinquish the role of CEO and maintain being the Chairman of the Board,
subject to shareholder and Board approval, at a reduced level of compensation.
The contract provides for consulting fees to be paid on a sliding scale over
time until February 20, 2020 to Mr. Kendall or his spouse. These consulting fees
are to be paid even if Mr. Kendall retires fully, the Company no longer requires
his services or if Mr. Kendall passes away before February 26, 2020.
Mr Allan Routh, President of the Sunrich Food Group, Inc. has an annual
employment contract of a minimum $100,000 renewable on a mutual basis between
Mr. Routh and the Company each August 1st.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 42 December 31, 2002 - 10-K
Opta Foods has change in control agreements with Mr. McEvily and four other
officers of Opta. These contracts entitle the employees to a predetermined
compensation benefit if their job descriptions change materially after the
acquisition by Stake.
None of the other executives listed in the Summary Compensation Table above have
employment contacts.
The following table contains information concerning individual grants of stock
options made during the last completed fiscal year, to the following executive
officers:
OPTION GRANTS IN PAST FISCAL YEAR TO EXECUTIVE OFFICERS
============================ ======================= ====================== =============== ===================================
% of Total Options Exercise on
Granted to Employees base price
Name Options Granted in Fiscal Year (US$/Share) Expiration Date
- ---------------------------- ----------------------- ---------------------- --------------- -----------------------------------
Jeremy N. Kendall - C.E.O. 40,000 9.7% $3.00 December 16, 2007
- ---------------------------- ----------------------- ---------------------- --------------- -----------------------------------
Steven R. Bromley 30,000 18.1% $2.15 March 11, 2007
- - Executive Vice President 20,000 $3.07 August 13, 2007
& C.F.O 25,000 $3.00 December 16, 2007
============================ ======================= ====================== =============== ===================================
No options were granted to Mr. Kruse, Mr. Routh, Mr. Anderson or Mr. McEvily
during 2002.
DECEMBER 31, 2002 OPTION VALUES
======================================= ==================================== ==================================================
(a) (b) (c)
- --------------------------------------- ------------------------------------ --------------------------------------------------
Number of Unexercised Options at Value of Unexercised in the Money Options at
Name 12/31/02 Vested/Not Yet Vested 12/31/02 Vested/Not Yet Vested
- --------------------------------------- ------------------------------------ --------------------------------------------------
Jeremy N. Kendall - CEO 369,000 / 33,500 $471,672 / $5,025
======================================= ==================================== ==================================================
Steven R. Bromley - Executive Vice 35,000 / 90,000 $39,470 / $72,600
President & CFO
======================================= ==================================== ==================================================
David Kruse - President and CEO 23,500 / 1,500 $41,941 / $3,131
Environmental Industrial Group
======================================= ==================================== ==================================================
Allan Routh - Director and President 140,000 / 60,000 $292,180 / $125,220
of the Sunrich Food Group
======================================= ==================================== ==================================================
Dennis Anderson- Director and 6,000 / 4,000 $11,022 / $7,348
Executive Vice President of the
Sunrich Food Group
======================================= ==================================== ==================================================
Except for the options exercised by Mr. Taylor, no other executive officers
exercised options during 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information concerning share ownership of
all persons known by the Company to own beneficially 5% or more of the Company's
outstanding Common Shares and all directors and officers of the Company as a
group as of March 7, 2003.
================================================ =============== =========================== ==========================
Name and Address
of Beneficial Holder Class of Share Amount of Ownership Percent of Class (2)
- ------------------------------------------------ --------------- --------------------------- --------------------------
Claridge Israel LLC Common 7,281,812 17.1%
C/o Davies Ward Phillips and Vineberg
625 Madison Avenue Floor 12
New York, New York 10022
================================================ =============== =========================== ==========================
Gruber & McBaine Capital Management Common 3,928,600 9.2%
50 Osgood Place, San Francisco
California USA 94133
================================================ =============== =========================== ==========================
Dennis Anderson Common 3,806,335 9.0%
2214 Geneva Road NE, Alexandria
Minnesota USA 56308
================================================ =============== =========================== ==========================
All Directors and Executive Officers Common (1) 1,796,570(a) 4.2% (a)
As a group (sixteen) - (a) excluding Dennis
Anderson who is disclosed above and (b) 5,602,905(b) 13.2% (b)
not excluding Mr. Anderson's shares
================================================ =============== =========================== ==========================
- --------------------------------------------------------------------------------
Stake Technology Ltd. 43 December 31, 2002 - 10-K
(1) For details of shares owned by executive officers and directors -
Identification of Directors and Executive Officers.
(2) Percentage ownership is calculated based on total Common Shares
outstanding at March 7, 2003 of 42,489,943. It does not include warrants
or options that have vested or have not yet vested.
Item 13. Certain Relationships and Related Transactions
Rental property
The Company leases certain real estate to a shareholder under operating leases
that expire in August 2010. Annual rental under each of the leases is
negligible.
Item 14 - 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.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 44 December 31, 2002 - 10-K
Item 15. Exhibits, Financial Statements and Reports on Form 8-K
STAKE TECHNOLOGY LTD. Form 10-K
(a) Documents filed as part of this Report Page
1. Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as at
December 31, 2002 and 2001 F-3
Consolidated Statements of Retained Earnings -
For the Years ended December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Earnings -
For the Years ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows -
For the Years ended December 31, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements -
For the Years ended December 31, 2002 and 2001 F-7 - F-36
3. Exhibits
2.1 - Agreement and Plan of Merger dated as of October 25,
2002 among Opta Food Ingredients, Inc., Stake
Technology Ltd. and Stake Acquisition Corp. (A)
3.1 - Amalgamation of Stake Technology Ltd and 3754481
Canada Ltd. (formerly George F. Pettinos (Canada)
Limited) (B)
3.3 - Bylaw No. 14 approved by shareholders - June 17, 1997
(C)
10.1(a) - 1993 Employee/Director Stock Option Plan dated May
19, 1993 (D)
10.1(b) - 1996 Employee/Director Stock Option Plan dated
September 27, 1996 (E)
10.1(c) - 1998 Stock Option Plan dated December 12, 1997 (F)
10.1(d) - 1999 Stock Option Plan dated February 18, 1999 (G)
10.1(e) - 2001 Stock Option Plan dated March 13, 2001 (H)
10.1(f) - 2002 Stock Option Plan dated March 26, 2002 (I)
10.3(a) - Credit Agreement with Bank of Montreal dated February
28, 2002 (H)
10.3(b) - Facility B Loan Authorization Agreement with Harris
Trust and Savings Bank (H)
10.3(c) - Credit Agreement dated as of November 25, 2002 among
Stake Acquisition Corp., certain Lenders and Harris
Trust and Savings Bank, as Administrative Agent (I)
10.3(d) - Debenture Purchase Agreement dated as of December 4,
2002 between Stake Technology Ltd. and Claridge
Israel LLC (I)
10.3(e) - Amended and Restated Credit Agreement dated as of
February 21, 2003 among Stake Technology Ltd. (the
"Company"), certain affiliates of the Company, Bank
of Montreal and Harris Trust and Savings Bank. (I)
- --------------------------------------------------------------------------------
Stake Technology Ltd. 45 December 31, 2002 - 10-K
Exhibits (continued)
21 - List of subsidiaries (I)
24 - Powers of Attorney (I)
(A) Previously filed as an Exhibit to Company's Form 8K filed
November 6, 2002.
(B) Previously filed as an Exhibit to Company's annual report on
Form 10-KSB for the year ended December 31, 2000 and
incorporated herein by reference.
(C) Previously filed as an Exhibit to Company's annual report on
Form 10-KSB for the year ended December 31, 1997 and
incorporated herein by reference.
(D) Previously filed as an Exhibit to Company's annual report on
Form 10-KSB for the year ended December 31, 1995 and
incorporated herein by reference.
(E) Previously filed as an Exhibit to Company's annual report on
Form 10-KSB for the year ended December 31, 1996 and
incorporated herein by reference.
(F) Previously filed as an Exhibit to Company's annual report on
Form 10-KSB for the year ended December 31, 1998 and
incorporated herein by reference.
(G) Previously filed as an Exhibit to Company's annual report on
Form 10-KSB for the year ended December 31, 1999 and
incorporated herein by reference.
(H) Previously filed as an Exhibit to Company's annual report on
Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference.
(I) Filed herewith
Filings of Form 8K in the last Quarter of 2002
Form 8K filed November 6, 2002 relating to the Agreement and Plan of
Merger dated as of October 25, 2002 among Opta Food Ingredients, Inc.,
Stake Technology Ltd. and Stake Acquisition Corp.
- --------------------------------------------------------------------------------
Stake Technology Ltd. 46 December 31, 2002 - 10-K
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1984, the registrant has duly caused this report to be signed on its
behalf by the undersigned. Thereunto duly authorized.
STAKE TECHNOLOGY LTD.
Steven R. Bromley /s/ Steven R. Bromley
Executive Vice President and Chief Financial Officer ---------------------
Date: March 27, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated have signed this report below.
Signature Title Date
- ------------------------------------------------------------------------------------------------------------------------------
/s/ Jeremy N. Kendall March 27, 2003
- ----------------------------------
Jeremy N. Kendall Chairman, Chief Executive Officer
And Director (Principal Executive Officer)
/s/ Steven R. Bromley March 27, 2003
- ----------------------------------
Steven R. Bromley Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
/s/ Cyril A. Ing March 27, 2003
- ----------------------------------
Cyril A. Ing Director and Corporate Secretary
/s/ Joseph Riz March 27, 2003
- ----------------------------------
Joseph Riz Director
/s/ Jim Rifenbergh
- ----------------------------------
Jim Rifenbergh Director March 27, 2003
/s/ Allan Routh
- ----------------------------------
Allan Routh Director March 27, 2003
/s/ Dennis Anderson
- ----------------------------------
Dennis Anderson Director March 27, 2003
/s/ Larry Anderson
- ----------------------------------
Larry Anderson Director March 27, 2003
/s/ Katrina Houde
- ----------------------------------
Katrina Houde Director March 27, 2003
/s/ Camillo Lisio
- ----------------------------------
Camillo Lisio Director March 27, 2003
/s/ Stephen Bronfman
- ----------------------------------
Stephen Bronfman Director March 27, 2003
/s/ Robert Fetherstonhaugh
- ----------------------------------
Robert Fetherstonhaugh Director March 27, 2003
- --------------------------------------------------------------------------------
Stake Technology Ltd. 47 December 31, 2002 - 10-K
* By his signature set forth below, Steven R. Bromley, pursuant to a duly
executed power of attorney filed with the Securities and Exchange Commission as
an exhibit to this report, has signed this report on behalf of and as
Attorney-In-Fact for this person.
/s/ Steven R. Bromley - Steven R. Bromley -Attorney-in-Fact
- ---------------------
- --------------------------------------------------------------------------------
Stake Technology Ltd. 48 December 31, 2002 - 10-K
Stake Technology Ltd.
Consolidated Financial Statements
(expressed in US dollars)
F-1
[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP]
February 28, 2003 (except as to note 8, which is of March 5, 2003)
Auditors' Report
To the Shareholders of Stake Technology Ltd.
We have audited the consolidated balance sheets of Stake Technology Ltd. as at
December 31, 2002 and 2001 and the consolidated statements of earnings, retained
earnings and cash flows for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada and the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2002
and 2001 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2002 in accordance with Canadian
generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
F-2
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and the other member firms of PricewaterhouseCoopers International Limited, each
of which is a separate and independent legal entity.
Stake Technology Ltd.
Consolidated Balance Sheets
As at December 31, 2002 and 2001
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
2002 2001
$ $
Assets (note 8)
Current assets
Cash and cash equivalents 7,012 3,364
Restricted cash -- 1,147
Short-term investments 2,038 6,307
Accounts receivable - trade 18,144 8,377
Current portion of note receivable (note 3) 1,034 1,256
Inventories (note 4) 22,989 13,821
Prepaid expenses and other current assets 958 1,258
Future income taxes (note 11) 115 663
------- -------
52,290 36,193
Note receivable (note 3) -- 1,047
Property, plant and equipment, net (note 5) 37,033 30,883
Goodwill and intangibles, net (note 6) 14,917 11,038
Future income taxes (note 11) 9,892 --
Other assets (note 7) 1,155 900
------- -------
115,287 80,061
======= =======
Liabilities
Current liabilities
Bank indebtedness (note 8) 3,963 1,206
Accounts payable and accrued liabilities 19,664 12,831
Customer deposits 421 1,389
Current portion of long-term debt (note 8) 11,650 2,634
Current portion of long-term payables (note 9) 3,458 1,067
------- -------
39,156 19,127
Long-term debt (note 8) 25,099 14,014
Long-term payables (note 9) 1,505 1,598
Future income taxes (note 11) -- 1,822
------- -------
65,760 36,561
Shareholders' Equity
Capital stock (note 10) 38,020 35,875
Contributed surplus 2,914 2,910
Retained earnings 7,470 3,704
Currency translation adjustment 1,123 1,011
------- -------
49,527 43,500
------- -------
115,287 80,061
======= =======
Commitments and contingencies (note 14)
F-3
(See accompanying notes to consolidated financial statements)
Stake Technology Ltd.
Consolidated Statements of Retained Earnings
For the years ended December 31, 2002, 2001 and 2000
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
2002 2001 2000
$ $ $
Retained earnings - Beginning of the year 3,704 3,685 1,567
Net earnings for the year 3,766 19 2,118
----- ----- -----
Retained earnings - End of the year 7,470 3,704 3,685
===== ===== =====
F-4
(See accompanying notes to consolidated financial statements)
Stake Technology Ltd.
Consolidated Statements of Earnings
For the years ended December 31, 2002, 2001 and 2000
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
2002 2001 2000
$ $ $
Revenues 120,898 89,822 63,821
Cost of goods sold 101,431 77,450 54,650
-------- -------- --------
Gross profit 19,467 12,372 9,171
Selling, general and administrative expenses 14,281 11,142 7,091
-------- -------- --------
Earnings before the following 5,186 1,230 2,080
Interest expense (1,413) (1,745) (959)
Interest and other income 218 326 407
Foreign exchange gain 176 355 45
-------- -------- --------
(1,019) (1,064) (507)
-------- -------- --------
Earnings before income taxes 4,167 166 1,573
Provision for (recovery of) income taxes
(note 11) 401 147 (545)
-------- -------- --------
Net earnings for the year 3,766 19 2,118
======== ======== ========
Net earnings per share for the year (note 15)
Basic 0.09 0.00 0.09
======== ======== ========
Diluted 0.09 0.00 0.09
======== ======== ========
F-5
(See accompanying notes to consolidated financial statements)
Stake Technology Ltd.
Consolidated Statements of Cash Flows
For the years ended December 31, 2002, 2001 and 2000
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
2002 2001 2000
$ $ $
Cash provided by (used in)
Operating activities
Net earnings for the year 3,766 19 2,118
Items not affecting cash
Amortization 4,130 3,706 1,750
Future income taxes (1,000) (142) (876)
Write-down of investment 366 -- --
Other (273) (189) (218)
------- ------- -------
6,989 3,394 2,776
Changes in non-cash working capital, net of businesses
acquired (note 12) (6,917) (3,074) (2,741)
------- ------- -------
72 320 35
Investing activities
Decrease (increase) in short-term investments 6,307 (6,307) --
Acquisition of companies, net of cash acquired (21,919) (2,172) (3,365)
Acquisition of property, plant and equipment (4,464) (3,907) (3,361)
Proceeds from notes receivable 1,425 1,393 341
Other 105 (49) (409)
------- ------- -------
(18,546) (11,042) (6,794)
Financing activities
Increase (decrease) in line of credit facilities 2,757 (1,020) 1,243
Borrowings under long-term debt and tender facility 34,883 1,042 11,027
Repayment of long-term debt (16,940) (6,188) (7,135)
Repayment of deferred purchase consideration (982) -- --
Proceeds from the issuance of common shares, net of
issuance costs 2,091 20,813 606
Financing costs (796) -- --
Decrease (increase) in restricted cash 1,147 (1,147) 251
Purchase and redemption of Preference Shares of subsidiary
Companies (129) (117) (173)
------- ------- -------
22,031 13,383 5,820
Foreign exchange gain on cash held in foreign currency 91 67 28
Increase (decrease) in cash and cash equivalents during the year 3,648 2,728 (911)
Cash and cash equivalents - Beginning of year 3,364 636 1,547
------- ------- -------
Cash and cash equivalents - End of year 7,012 3,364 636
======= ======= =======
See note 12 for supplemental cash flow information
F-6
(See accompanying notes to consolidated financial statements)
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
1. Description of business and significant accounting policies
Stake Technology Ltd. (the Company) was incorporated under the laws of
Canada on November 13, 1973 and operates in three principal businesses.
The Food Group processes, packages and distributes a wide range of natural
and organic food products via its vertically integrated operations with a
focus on soy and other natural and organic food products. The
Environmental Industrial Group processes, distributes and recycles
industrial minerals. The Steam Explosion Technology Group markets
proprietary steam explosion technology systems for the pulp and food
processing industries. The Company's assets, operations and employees at
December 31, 2002 are located in the United States and Canada.
The Company's significant accounting policies are outlined below. These
consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada. Differences arising
from the application of accounting principles generally accepted in the
United States are described in note 18.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. 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.
Short-term investments
Short-term investments consist of portfolio investments in other companies
and deposits with a maturity at acquisition of greater than 90 days, and
are valued at market.
Inventories
Raw materials and finished goods inventories 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 and 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.
Property, plant and equipment
Property, plant and equipment are 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 to 8% for buildings.
Amortization is calculated from the time the asset is put into use.
F-7
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
Goodwill and intangibles
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 the purchase price over the assigned
value of net assets acquired. Under the transitional provisions of the
standard, a goodwill impairment test was carried out and no impairment was
identified on January 1, 2002.
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 December 31, 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 year's earnings is:
2001 2000
$ $
Net earnings for the year 19 2,118
Add back: goodwill and trademark amortization,
net of tax 492 329
----- -----
Adjusted net earnings for the year 511 2,447
===== =====
Adjusted net earnings per common share 0.02 0.11
===== =====
Other assets
i) Pre-operating costs
Net costs incurred in the pre-operating stage of a start-up business
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 totaling $308
(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.
F-8
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
ii) 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 8 to 20 years. Costs of renewing patents are
expensed as incurred.
iii) Deferred financing costs
Costs incurred in connection with obtaining long-term financing are
deferred and amortized over the term of the related financing
agreement.
Revenue recognition
i) Food Group
Grain revenues are recorded at the time of shipment. Revenues from
custom processing services are recorded upon provision of services
and upon completion of quality testing. All other Food Group
revenues are recognized upon the sale and shipment of a product or
the providing of a service to a customer.
ii) Environmental Industrial Group
Revenues from the sale of industrial minerals are recognized upon
the sale and shipment of the related minerals. Revenues from
recycling activities are recognized upon the sale and shipment or
the disposal of non-hazardous material received.
iii) Steam Explosion Technology Group
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.
Revenues from consulting and contract research are recognized when
the service is completed.
License fees related to the right to sell the Company's technologies
are recorded as revenues over the term of the license, when
collectibility is reasonably assured.
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 companies 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.
F-9
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
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 Corporate office 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
translating self-sustaining operations are accumulated and reported as
currency translation adjustment in shareholders' equity. Unrealized gains
or losses resulting from translating the Corporate office accounts 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 closing market price of the shares on
the day prior to the grant date. Any consideration paid by employees on
exercise of stock options or purchase of stock is credited to capital
stock. No compensation expense is recorded upon issuance of stock options
to employees. Stock options granted have a maximum life of six years and
usually vest over a four year period.
F-10
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(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 consolidated 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
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
2. Business acquisitions
2002
During 2002, the Company acquired four businesses (2001 - three
businesses). The acquisitions have been accounted for using the purchase
method, and accordingly, the consolidated financial statements include the
results of operations of the acquired businesses from the date of the
acquisitions. The purchase price has been allocated to the assets acquired
and the liabilities assumed based on management's best estimate of fair
values.
F-11
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
2. Business acquisitions, continued
The net assets acquired in 2002 and the consideration given are summarized
below:
Opta Food Other
Ingredients, Inc. Acquisitions
(a) (b) Total
$ $ $
Net assets acquired
Cash 7,611 (188) 7,423
Short term investments 2,038 -- 2,038
Non-cash working capital 5,580 49 5,629
Property, plant and equipment 5,020 410 5,430
Goodwill and intangibles -- 1,790 1,790
Future income tax asset 10,056 -- 10,056
Long-term debt (1,705) (258) (1,963)
------- ------- -------
28,600 1,803 30,403
======= ======= =======
Consideration given
Contingent consideration -- 304 304
Due to former shareholders 1,871 -- 1,871
Cash 26,729 1,499 28,228
------- ------- -------
28,600 1,803 30,403
======= ======= =======
(a) Opta Food Ingredients, Inc.
On December 4, 2002 the Company completed a cash tender offer for the
outstanding common shares of Opta Food Ingredients, Inc. (Opta).
Approximately 92.6% of the outstanding common shares were tendered on
December 4, 2002 for $2.50 per share in cash in accordance with the tender
offer. On December 18, 2002 the Company amalgamated Opta with Stake
Acquisition Corp, a wholly owned subsidiary. As a result of this
amalgamation, the 7.4% of the outstanding common shares of Opta were
converted to a right to receive $2.50 per share in cash from the Company,
amounting to $1,871. This amount was disbursed subsequent to December 31,
2002.
Opta is a leading innovator, manufacturer and marketer of proprietary food
ingredients that improve the nutritional content, healthfulness, texture
and taste of its customers' food products. Opta is the world's largest
supplier of oat fiber to the food industry.
(b) Simply Organic Co. Ltd.
On December 1, 2002 the Company acquired 100% of the outstanding common
shares of Simply Organic Co. Ltd. for cash consideration of $187. In
addition, contingent consideration of $160 may be payable if certain
predetermined profit targets are achieved by the acquired business. The
full amount of contingent consideration has been accrued at December 31,
2002, however, no contingent consideration was paid in 2002.
F-12
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
2. Business acquisitions, continued
Simply Organic Co. Ltd. is an Ontario, Canada based distributor of a
broad range of regionally and internationally grown and produced
certified organic food products, distributed throughout much of
Ontario to mass market and natural food retail outlets.
Wild West
On November 1, 2002, the Company acquired 100% of the outstanding
common shares of 632100 B.C. Ltd., successor to Wild West Organic
Harvest Co-Operative Association (Wild West) for cash consideration
of $889. In addition, contingent consideration of $144 may be
payable if certain predetermined profit targets are achieved by the
acquired business. The full amount of contingent consideration has
been accrued at December 31, 2002, however, no contingent
consideration was paid in 2002.
Wild West is a British Columbia, Canada based distributor of
certified organic and natural food products throughout Western
Canada to mass market and natural food retail outlets.
Virginia Materials and International Materials
Under the terms of the Virginia Materials acquisition completed on
October 31, 2001, the Company agreed to pay the vendor contingent
consideration equivalent to 50% of the pre-tax profit generated by
these businesses for a two year period from the date of acquisition.
In December 2002, the Company reached an agreement with the vendor
to fix the contingent consideration for the period from January 1,
2003 to October 31, 2003 at $500. This amount has been reflected in
accounts payable and accrued liabilities at December 31, 2002 and an
equivalent amount has been reflected in goodwill. During the year
ended December 31, 2002, the Company paid $1,031 (2001 - $89) in
respect of the contingent consideration. The payment of this amount
resulted in an equivalent increase in goodwill.
On November 1, 2002, the Company acquired the remaining 49% minority
interest in International Materials & Supplies, Inc. (International
Materials), for cash consideration of $125.
Organic Kitchen
On July 2, 2002, the Company acquired certain assets and the
businesses of Organic Kitchen Inc. and Cloud Mountain Inc.
Consideration consisted of $297 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 $1,268. This contingent
consideration will be recorded as an increase to goodwill when the
amount of the contingency is determinable. No contingent
consideration was paid in 2002.
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.
F-13
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
2. Business acquisitions, continued
2001
The net assets acquired in 2001 and the consideration given are summarized
below:
Virginia
Materials and
International First Light
Materials Foods
(a) (b) Total
$ $ $
Net assets acquired
Cash 9 -- 9
Non-cash working capital 342 -- 342
Property, plant and equipment 1,440 -- 1,440
Other long-term assets 43 -- 43
Goodwill and intangibles 1,562 2,511 4,073
Long-term debt (338) -- (338)
Net future income tax liability (81) (698) (779)
------ ------ ------
2,977 1,813 4,790
====== ====== ======
Consideration given
Common shares -- 796 796
Warrants -- 8 8
Note payable -- 659 659
Deferred purchase consideration 1,145 -- 1,145
Contingent consideration paid 89 -- 89
Cash 1,743 350 2,093
------ ------ ------
2,977 1,813 4,790
====== ====== ======
(a) Virginia Materials and International Materials
On October 31, 2001, the Company's wholly owned subsidiary, Virginia
Materials, Inc. (Virginia Materials), acquired certain assets of
Virginia Materials and Supplies, Inc. as well as 51% of the
outstanding common shares of International Materials and Supplies,
Inc. (International Materials) for cash consideration (including
acquisition costs) of $1,743, deferred purchase consideration of
$1,145 and contingent consideration.
The deferred purchase consideration will be paid on the purchase of
the vendor's inventory. During 2002, the Company recorded an
additional $609 in deferred purchase consideration. The recording of
this liability in 2002, resulted in a corresponding increase in
goodwill. During the year the Company paid $982 (2001 - $109) in
deferred purchase consideration. The remaining deferred purchase
consideration will be paid in 2003.
Virginia Materials is a supplier of abrasives to the shipbuilding
and bridge repair industry. International Materials produces
industrial garnets as a by-product from a mining operation and
processes these garnets for sale to the water filtration, water jet
cutting and abrasives markets.
F-14
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
2. Business acquisitions, continued
(b) First Light Foods
On February 1, 2001, the Company acquired 100% of the common shares
of Jenkins and Gournoe, Inc., which operated in the United States
under the name of First Light Foods. Consideration consisted of the
issuance of 833,333 common shares, $350 in cash, a $659 note payable
plus interest at 8.5% (subsequently paid in 2002) and 35,000
warrants exercisable at $1.70 for five years to February 2006. In
addition, contingent consideration may be payable on this
acquisition; (a) if certain predetermined profit targets are
achieved by the acquired business, up to an additional 140,000
warrants may be issued in 2002 through to 2005, and (b) a percentage
of gross profits in excess of $1,100 per annum from 2001 to 2005
will be paid to the vendors of First Light Foods. Contingent
consideration will be recorded as an increase to trademarks, when
the amount of the contingency is determinable. No contingent
consideration was paid in 2002 (2001 - $nil).
First Light Foods owns several trademarked brands that are marketed
as the private label brands of a major food chain. The acquisition
of First Light Foods complemented the Food Group's a vertically
integrated soymilk strategy.
3. Note receivable
Prior to the Company's acquisition of Northern Food & Dairy Inc.
(Northern) on September 15, 2000, Northern signed an agreement with a
major customer to supply a natural food product. This agreement required
Northern to expand its food processing plant to the customer's
specifications. In accordance with the terms of the agreement, the
customer is required to pay Northern 36 monthly instalments of $119
commencing October 2000. The agreement also requires Northern to provide
the customer with a product rebate beginning three years after production
at the new plant commences until $1,720 is repaid.
Upon acquisition of Northern on September 15, 2000, the Company assigned
fair values of $3,425 to the note receivable and $1,075 to the product
rebate payable based on the cash flows associated with these financial
instruments discounted at a rate of 9.5%.
During 2002, Northern received payments of $1,425 (2001 - $1,393) and
recorded imputed interest income of $156 (2001 - $271) on the note
receivable. Imputed interest expense of $121 (2001 - $106) was recorded on
the product rebate payable.
F-15
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
4. Inventories
2002 2001
$ $
Raw materials 7,859 6,026
Finished goods 11,750 6,323
Grain 3,380 1,472
------- -------
22,989 13,821
======= =======
Grain inventories consist of the following:
2002 2001
$ $
Company owned grain 3,338 1,338
Unrealized gain (loss) on
Sales and purchase contracts (79) 100
Futures contracts 121 34
------- -------
3,380 1,472
======= =======
5. Property, plant and equipment
2002
---------------------------------
Accumulated
Cost Amortization Net
$ $ $
Land and buildings 22,423 1,033 21,390
Machinery and equipment 24,904 10,714 14,190
Office furniture and equipment 1,546 640 906
Vehicles 575 28 547
------ ------ ------
49,448 12,415 37,033
====== ====== ======
2001
---------------------------------
Accumulated
Cost Amortization Net
$ $ $
Land and buildings 14,211 1,720 12,491
Machinery and equipment 23,707 6,128 17,579
Office furniture and equipment 1,205 630 575
Vehicles 545 307 238
------ ------ ------
39,668 8,785 30,883
====== ====== ======
Included in land and buildings at December 31, 2002, are certain
properties held for sale totaling $5,020 (2001 - $nil).
F-16
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
6. Goodwill and intangibles
2002 2001
$ $
Goodwill - at cost, less accumulated amortization of $985
(2001 - $985) 12,212 8,540
Trademarks (indefinite life) 2,498 2,498
Trademarks (definite life) - at cost, less accumulated
amortization of $6 (2001 - $nil) 207 --
------ ------
14,917 11,038
====== ======
7. Other assets
2002 2001
$ $
Pre-operating costs, net of accumulated amortization of $432
(2001 - $161) 358 353
Deferred financing costs, net of accumulated amortization of $201
(2001 - $nil) 619 24
Investments -- 366
Other 178 157
----- -----
1,155 900
===== =====
8. Long-term debt and banking facilities
2002 2001
$ $
Term loan (a) 13,900 --
Tender facility (b) 15,186 --
Convertible debenture (c) 4,697 --
Other long-term debt (d) 2,966 16,648
------- -------
36,749 16,648
Less: current portion (11,650) (2,634)
------- -------
25,099 14,014
======= =======
(a) 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) Term loan
Principal payable quarterly based on a seven year
amortization. The term loan has a two year maturity and is
renewable at the option of the lender and the Company.
Interest on the term loan is payable at the borrower's option
at U.S. dollar base rate or U.S. LIBOR plus a margin based on
certain financial ratios of the Company (3.0% as at December
31, 2002). As at December 31, 2002, $13,900 (2001 - $nil) was
still outstanding.
F-17
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
8. Long-term debt and banking facilities, continued
ii) $3,169 (CDN $5,000) line of credit facility
Interest on borrowings under this facility 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
(3.2% as at December 31, 2002). As at December 31, 2002 $494
(CDN $780) of this facility has been utilized. This amount has
been offset with cash on hand at the same institution for
financial statement presentation purposes.
iii) $5,000 line of credit facility
Interest on borrowings under this facility 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 (3.0% as at December 31,
2002). As at December 31, 2002 $3,963 of this facility has
been utilized.
Subsequent to December 31, 2002, the Company amended its financing
arrangement. The amendment syndicated the financing arrangement to a
group of banks which includes existing lenders and increased the
term loan by $7,800 to $21,700. In addition, the U.S. line of credit
facility was increased by $4,000 to $9,000. The Company used the
incremental proceeds on the term loan, drew on the U.S. line of
credit facility to the extent of $3,500 and utilized $3,886 of cash
on hand to repay the tender facility obtained to finance the
acquisition of Opta (note 2). As part of the amendment, the term
loan matures in March of 2005. The Company fully intends to renew
this term loan at that time. However, for financial statement
purposes, the principal payments have been categorized as due in
2005.
The term loan and the Canadian and U.S. line of credit facilities
described above are collateralized by a first priority security
against substantially all of the Company's assets in both Canada and
the United States.
(b) On December 4, 2002, the Company entered into a tender financing
arrangement with its principal lender to facilitate the Company's
tender offer to purchase all of the outstanding common shares of
Opta (note 2).
The tender facility had a maximum borrowing base of $17,000. As at
December 31, 2002, $15,186 of this facility had been utilized.
Interest on borrowings under this facility accrues at the borrower's
option based on various reference rates including the bank's prime
plus 100 basis points, or LIBOR plus 200 basis points (3.3% as at
December 31,2002).
Subsequent to December 31, 2002, the tender facility was repaid with
cash and the incremental proceeds from the amended term loan and
line of credit facilities, as described above.
(c) On December 4, 2002, in conjunction with the acquisition of Opta,
the Company issued a $5,000 convertible debenture, with interest
payable quarterly at 5.5% per annum. The debenture is convertible at
the option of the holder at any time after November 30, 2003, or
earlier under certain circumstances at the conversion price of $3.00
per share. The Company has the option to repay the debenture at any
time subject to certain restrictions within its amended banking
arrangement. The convertible debenture expires and is fully payable
on November 30, 2004.
In conjunction with the issuance of the convertible debenture, the
Company issued 250,000 share purchase warrants with an exercise
price of $3.25. The warrants and the convertible right inherent in
the debenture have been fair valued at $317, as at December 4, 2002,
and have been classified as a component of shareholders' equity. As
a result, the fair value attributed to the debt component of the
convertible debenture was $4,683.
F-18
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
8. Long-term debt and banking facilities, continued
At December 31, 2002 the accreted fair value of the convertible
debenture was $4,697. The effective interest rate on the debenture
at December 31, 2002 was 9.6%.
The convertible debenture is collateralized by a second priority
security against certain of the Company's assets in the United
States and Canada.
(d) Other long-term debt consists of the following:
2002 2001
$ $
Note payable with required annual payments of $95, interest at
5% payable semi-annually, uncollateralized 285 377
Term loan assumed on acquisition of Wild West, payable in monthly
instalments of $4 until July 2007. Interest payable monthly at
the Canadian prime rate plus 11%, collateralized by certain
assets in Canada. This loan was
fully repaid subsequent to December 31, 2002 299 --
Term loan assumed on acquisition of Opta, payable in quarterly
instalments of $27 including interest at 7.4% due June 2003,
collateralized by certain assets in the United States. This
loan was fully repaid subsequent to December
31, 2002 1,705 --
Other debt with a weighted average interest rate of 9.2%, due
in varying instalments through July 2007 354 490
Capital lease obligations due in monthly payments through 2006,
with a weighted average interest rate of 8.5% 323 334
Long-term debt repaid on March 15, 2002 with proceeds from the new
financing arrangement (as detailed in (a)) with a
weighted average interest rate of 8.5% -- 15,447
------ ------
2,966 16,648
====== ======
(e) In addition to the line of credit facilities noted above, the
Company has a $200 margin financing facility, of which $93 was
utilized as at December 31, 2002 (2001 - $200) and is included in
the current portion of the long-term debt.
(f) The loans and capital leases detailed above require payments as
follows:
$
2003 11,650
2004 7,251
2005 17,671
2006 90
2007 and thereafter 87
-------
36,749
=======
(g) Interest expense on long-term debt for the year ended December 31,
2002 was $1,292.
F-19
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
(h) The fair value of long-term debt is not materially different from
the carrying amount.
9. Long-term payables
2002 2001
$ $
Product rebate payable 1,330 1,209
Deferred purchase consideration 667 1,040
Preference shares of subsidiary companies 291 416
Payable to former shareholders of acquired companies 2,675 --
------ -----
4,963 2,665
Less: Current portion (3,458) (1,067)
------ -----
1,505 1,598
====== =====
10. Capital stock
The Company is authorized to issue an unlimited number of common shares
without par value and an unlimited number of special shares without par
value.
The following is a summary of changes in capital stock:
Warrants
and rights Common shares Total
------------------------ ----------------------- ----------
Number $ Number $ $
Balance as at December 31, 1999 331,404 -- 20,653,788 7,008 7,008
Warrants exercised (a) (234,959) -- 234,959 332 332
Warrants expired (96,445) -- -- -- --
Options exercised (b) -- -- 298,225 274 274
Shares and warrants issued to
acquire Northern (a) 500,000 19 7,000,000 6,625 6,644
---------- ---------- ---------- ---------- ----------
Balance as at December 31, 2000 500,000 19 28,186,972 14,239 14,258
---------- ---------- ---------- ---------- ----------
Shares and warrants issued to
acquire First Light Foods (a) 35,000 8 833,333 796 804
Options exercised (b) -- -- 999,425 1,037 1,037
April 2001 private placement (c) 705,750 507 1,411,498 1,157 1,664
May 2001 private placement (c) 1,200,000 762 2,400,000 3,462 4,224
September 2001 private
placement (c) 2,250,000 1,650 3,000,000 3,901 5,551
December 2001 private
placements (c) -- -- 4,250,000 8,337 8,337
---------- ---------- ---------- ---------- ----------
Balance as at December 31, 2001 4,690,750 2,946 41,081,228 32,929 35,875
---------- ---------- ---------- ---------- ----------
Warrants exercised (c) (656,150) (430) 656,150 1,904 1,474
Warrants issued (a) 250,000 263 -- -- 263
Warrants repurchased (a) (60,000) (43) -- -- (43)
Options exercised (b) -- -- 246,740 397 397
Convertible right associated
with convertible debenture -- 54 -- -- 54
---------- ---------- ---------- ---------- ----------
Balance as at December 31, 2002 4,224,600 2,790 41,984,118 35,230 38,020
========== ========== ========== ========== ==========
F-20
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
10. Capital stock, continued
(a) During 2002, 656,150 warrants were exercised at prices ranging from
$1.75 to $2.40 for net proceeds of $1,474. (2001 - nil warrants,
$nil net proceeds; 2000 - 234,959 warrants, $332 net proceeds).
In conjunction with the convertible debenture issued in 2002 (note
8) the Company issued 250,000 warrants with a fair value of $263, an
exercise price of $3.25, and an expiry date of November 30, 2004.
The convertible right issued in conjunction with the convertible
debenture has a fair value of $54.
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.
(b) Employee/director option plans
The Company grants options to employees and directors from time to
time under employee/director stock option plans. The Company has
authorized 3,586,800 (2001 - 2,086,800) shares to be made available
for the stock option plans. The following is a summary of grants
during the year.
Number of
Grant date Expiry date Exercise price options
March 11, 2002 March 11, 2007 $2.15 114,000
August 13, 2002 August 13, 2007 $3.07 98,100
November 7, 2002 November 7, 2007 $3.04 43,000
December 16, 2002 December 16, 2007 $3.00 160,000
---------
415,100
=========
Employee/director stock options granted by the Company contain an
exercise price, which is equivalent to the closing market price of
the shares on the day prior to the grant date. Any consideration
paid by employees on exercise of stock options or purchase of stock
is credited to capital stock.
The 415,100 options granted during 2002 vest as follows: 116,620
options vested in 2002, 74,620 vest per annum in 2003 to 2006.
During 2002, 246,740 (2001 - 999,425; 2000 - 298,225) options were
exercised and the equivalent number of common shares were issued for
net proceeds of $397 (2001 - $1,037; 2000 - $274).
Details of changes in vested employee/director stock options are as
follows:
2002 2001 2000
Balance - Beginning of year 1,575,425 1,385,425 1,501,850
Granted with immediate vesting 116,620 1,066,525 108,000
VestVested from prior year grants 185,975 137,900 76,800
Exercised (246,740) (999,425) (298,225)
Retracted (17,800) (15,000) (3,000)
---------- ---------- ---------
Balance - End of year 1,613,480 1,575,425 1,385,425
========== ========== =========
F-21
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
10. Capital stock, continued
Details of employee/director stock options exercisable as at
December 31 are as follows:
Expiry date Exercise price Options
2003 $1.06 to $2.10 749,450
2004 $1.06 to $1.86 180,960
2005 $1.06 to $1.38 410,900
2006 $1.53 to $2.10 155,550
2007 $2.15 to $3.07 116,620
----------
1,613,480
==========
Weighted average exercise price $ 1.69
At December 31, 2002, options to acquire an additional 587,780
common shares at $1.06 to $3.07 have been granted but have not yet
vested. Options that have not vested are excluded from the above
table. The weighted average exercise price of the 587,780 (2001 -
475,900; 2000 - 472,100) options granted but not vested is $2.14
(2001 - $1.44; 2000 - $1.17).
On January 7, 2000, all options with an option price in excess of
$1.06 were repriced to $1.06. In addition, on March 5, 2000, the
Board approved a resolution extending the exercise period of 304,375
options from March 10, 2001 to December 31, 2003.
Subsequent to year-end, 213,225 options were exercised to acquire an
equivalent number of common shares for net proceeds of $389.
The fair value of the options granted during 2002, 2001 and 2000 was
estimated using the Black-Scholes option-pricing model with the
assumptions of a dividend yield of 0% for each year, an expected
volatility of 60% (2001 - 30%; 2000 - 51%), a risk-free interest
rate of 3% (2001 - 3%; 2000 - 5%), and an expected life of one to
six years.
Pro-forma net earnings (loss), reflecting stock compensation expense
for 2002, 2001 and 2000 are as follows:
2002 2001 2000
Number of options granted 415,100 1,238,125 295,500
--------- ---------- --------
$ $ $
Total fair value 630 508 163
======== ========== ========
Net earnings for the year as reported 3,766 19 2,118
Stock compensation expense:
Options vested in current year from current year grants 126 410 67
Options vested in current year from prior years grants 115 65 54
-------- ---------- --------
241 475 121
-------- ---------- --------
Pro-forma net earnings (loss) for the year 3,525 (456) 1,997
======== ========== ========
Pro-forma net earnings (loss) per common share 0.08 (0.01) 0.09
======== ========== ========
F-22
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
10. Capital stock, continued
(c) In 2001, the Company completed four private placements. The Company
issued 11,061,498 common shares and 4,155,750 warrants to acquire
4,155,750 common shares for total proceeds of $19,776 net of
issuance costs. The following is a summary of the warrants issued:
Expiry date Exercise price Warrants $
March 31, 2004 $1.75 705,750 507
March 31, 2004 $2.40 1,200,000 762
September 30, 2004 $2.40 2,250,000 1,650
--------- -----
4,155,750 2,919
========= =====
In addition, pursuant to the private placement agreements, the
Company granted to their agents:
i) Compensation warrants exercisable until June 8, 2003 to
purchase 144,000 option units at $2.00 per unit. If exercised
in full, the Company will issue 144,000 common shares and
72,000 warrants exercisable at $2.40 to acquire 72,000 common
shares, which expire on March 31, 2004.
Subsequent to December 31, 2002, these warrants were exercised
in full and the subsequently issued warrants were also
exercised. The Company issued 246,000 shares for net proceeds
of $533.
ii) Compensation warrants exercisable until September 28, 2003 to
purchase 150,000 option units at $2.00 per unit. If exercised
in full, the Company will issue 150,000 common shares and
112,500 warrants exercisable at $2.40 to acquire 112,500
common shares, which expire on September 30, 2004.
(d) During 1997, the shareholders of the Company agreed to reduce the
stated capital account of the Company's common shares by $15,712
through the elimination of the deficit.
11. Income taxes
The Company's effective income tax rate on consolidated earnings has been
determined as follows:
2002 2001 2000
Canadian statutory income tax rate 39.0% 42.0% 42.0%
Increase (decrease) by the effects of
Reduction in valuation allowance (13.2%) (25.8%) (71.7%)
Differences in foreign, capital gains manufacturing
and processing and future income tax rates (3.7%) (1.5%) (2.5%)
Application of prior years losses and scientific
research expenditures carried forward -- -- (27.7%)
Current year non-capital loss not recognized -- -- 18.2%
Other (12.5%) (74.1%) 7.1%
------- ------- -------
Effective income tax rate 9.6% 88.9% (34.6%)
======= ======= =======
Net earnings before income taxes 4,167 166 1,573
======= ======= =======
Provision for (recovery of) income taxes 401 147 (545)
======= ======= =======
F-23
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
11. Income taxes, continued
Future income taxes of the Company comprise the following:
2002 2001
$ $
Differences in property, plant and equipment basis 4,946 (2,829)
Capital and non-capital losses 6,443 759
Tax benefit of scientific research expenditures 2,112 1,334
Other 613 56
------- -------
14,114 (680)
Valuation allowance (4,107) (479)
------- -------
10,007 (1,159)
------- -------
2002 2001
$ $
Future income tax asset 10,007 663
Future income tax liabilities -- (1,822)
------- -------
10,007 (1,159)
------- -------
The Company has approximately $5,020 (2001 - $4,090) in Canadian
scientific research expenditures, which can be carried forward
indefinitely to reduce future years' taxable income. The Company also has
approximately $120 (2001 - $95) in Canadian scientific research investment
tax credits.
The Company has U.S. non-capital loss carry-forwards of approximately
$20,963 as at December 31, 2002 (2001 - $1,664) available to reduce future
federal and state income taxes and expire in varying amounts from 2008 to
2020.
A valuation allowance of $4,107 (2001 - $479) has been recorded to reduce
the net benefit recorded in the se consolidated financial statements
related to the capital and non-capital loss carry-forwards. The valuation
allowance is deemed necessary as a result of the uncertainty associated
with the ultimate realization of these future tax assets.
F-24
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. Supplemental cash flow information
2002 2001 2000
$ $ $
Changes in non-cash working capital, net of
businesses acquired:
Accounts receivable - trade (4,712) 315 1,138
Inventories (3,086) (3,383) (1,506)
Prepaid expenses and other current assets 579 (404) (295)
Accounts payable and accrued liabilities 1,271 (135) (1,817)
Customer deposits (969) 533 (261)
------ ------ ------
(6,917) (3,074) (2,741)
====== ====== ======
Cash paid for:
Interest 1,632 1,789 851
====== ====== ======
Income taxes 1,373 405 279
====== ====== ======
13. Related party transactions and balances
In addition to transactions disclosed elsewhere in these consolidated
financial statements, the Company entered into the following related party
transactions:
(a) During 2002, the Company charged affiliated companies $nil for
services rendered (2001 - $84).
(b) Included in other current assets as at December 31, 2002 is $75
(2001 - $33) due from officers/directors of the Company. Subsequent
to December 31, 2002, $50 was received in respect of this amount.
(c) Included in other long-term debt as at December 31, 2001 were
uncollateralized loans of $1,097 due to shareholders, which were
repaid during 2002.
F-25
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
14. Commitments and contingencies
(a) Various 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. Legal counsel has concluded the
outcome of these claims or potential claims is not determinable.
(b) 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 consolidated financial statements for these
future costs since such costs, if any, are not determinable at this
time.
(c) 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.
(d) Letters of credit:
i) An irrevocable letter of credit for $475 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 totaling $28 have been placed
with third parties as security on transactions occurring in
the ordinary course of operations.
F-26
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
14. Commitments and contingencies, continued
(e) Commitments under operating leases, principally for distribution
centres, warehouse and equipment, are as follows:
$
2003 1,672
2004 1,595
2005 1,514
2006 1,474
2007 1,339
2008 and thereafter 1,430
------
9,024
======
15. Earnings per share
The calculation of basic earnings per share is based on the weighted
average number of shares outstanding. Diluted earnings per share reflect
the dilutive effect of the exercise of warrants and options as disclosed
in note 10. The number of shares for the diluted earnings per share was
calculated as follows:
2002 2001 2000
Weighted average number of shares used in
basic earnings per share 41,547,302 32,220,352 22,975,986
Dilutive potential of the following
Employee/director stock options 765,034 150,191 381,744
Warrants 747,459 85,392 --
---------- ---------- ----------
Weighted average number of shares used in
diluted earnings per share 43,059,795 32,455,935 23,357,730
========== ========== ==========
Warrants to purchase 250,000 common shares, options to purchase 301,100
common shares and the convertible debenture convertible into 1,666,667
common shares have been excluded from the calculations of diluted earnings
per share due to their anti-dilutive effect.
16. Financial Instruments
The Company's financial instruments recognized in the consolidated balance
sheets and included in working capital consist of cash and cash
equivalents, restricted cash, short term investments, accounts receivable,
other receivables, accounts payable and accrued liabilities and customer
deposits. The fair values of these instruments approximate their carrying
value due to their short-term maturities.
The Company's financial instruments that are exposed to credit risk
include cash and cash equivalents, short term investments and accounts
receivable. The Company places its cash, cash equivalents and short term
investments with institutions of high creditworthiness. The Company's
trade accounts receivable are not subject to a high concentration of
credit risk. The Company routinely assesses the financial strength of its
customers and, as a consequence, believes that it accounts receivable
credit risk exposure is limited. The Company maintains an allowance for
losses based on the expected collectibility of the accounts.
Information on the Company's other financial instruments is contained in
other notes to the consolidated financial statements.
F-27
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
17. Segmented information
Industry segments
The Company operates in three industry segments: (a) the Food Group,
processes, packages and distributes a wide range of natural and organic
food products via its vertically integrated operations with a focus on
soy, natural and organic food products; (b) the Environmental Industrial
Group, processes, distributes, and recycles industrial minerals; and (c)
the Steam Explosion Technology Group, markets proprietary steam explosion
technology systems for the pulp and food processing industries. The
Company's assets, operations and employees are located in Canada and the
United States.
2002
-------------------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 89,088 8,305 157 97,550
Canada 2,936 15,902 -- 18,838
Other 4,295 215 -- 4,510
---------- ---------- ---------- ----------
Total revenue to external customers 96,319 24,422 157 120,898
---------- ---------- ---------- ----------
Interest expense 1,034 320 59 1,413
---------- ---------- ---------- ----------
Provision for (recovery of) income
taxes 1,146 1,115 (1,860) 401
---------- ---------- ---------- ----------
Segment net earnings (loss) 3,166 1,741 (1,141) 3,766
---------- ---------- ---------- ----------
Identifiable assets 85,040 21,981 8,266 115,287
---------- ---------- ---------- ----------
Amortization 2,995 861 274 4,130
---------- ---------- ---------- ----------
Expenditures on property, plant and
equipment 3,306 1,058 100 4,464
---------- ---------- ---------- ----------
2001
-------------------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 66,408 5,365 359 72,132
Canada 200 14,124 -- 14,324
Other 3,365 1 -- 3,366
---------- ---------- ---------- ----------
Total sales to external customers 69,973 19,490 359 89,822
---------- ---------- ---------- ----------
Interest expense 1,423 291 31 1,745
---------- ---------- ---------- ----------
Provision for (recovery of) income
taxes 186 170 (209) 147
---------- ---------- ---------- ----------
Segment net earnings (loss) 310 491 (782) 19
---------- ---------- ---------- ----------
Identifiable assets 51,073 16,948 12,040 80,061
---------- ---------- ---------- ----------
Amortization 2,889 705 112 3706
---------- ---------- ---------- ----------
Expenditures on property, plant and
equipment 2,590 1,290 27 3,907
---------- ---------- ---------- ----------
Equity accounted investment -- -- 366 366
F-28
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
17. Segmented information, continued
2000
-------------------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 42,388 3,602 236 46,226
Canada 249 16,040 106 16,395
Other 1,199 -- -- 1,199
---------- ---------- ---------- ----------
Total sales to external customers 43,836 19,642 342 63,820
---------- ---------- ---------- ----------
Interest expense 698 261 -- 959
---------- ---------- ---------- ----------
Provision for (recovery of) income
taxes 542 41 (1,128) (545)
---------- ---------- ---------- ----------
Segment net earnings 230 1,578 310 2,118
---------- ---------- ---------- ----------
Amortization 1,075 537 138 1,750
---------- ---------- ---------- ----------
Expenditures on property, plant and
equipment 2,907 419 35 3,361
---------- ---------- ---------- ----------
Geographic segments
2002 2001
--------------------------- ---------------------------
U.S. Canada Total U.S. Canada Total
$ $ $ $ $ $
Property, plant and
equipment 29,568 7,465 37,033 24,009 6,874 30,883
======= ======= ======= ======= ======= =======
Goodwill and intangibles 11,655 3,262 14,917 9,429 1,609 11,038
======= ======= ======= ======= ======= =======
Total assets 87,399 27,888 115,287 55,300 24,761 80,061
======= ======= ======= ======= ======= =======
F-29
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
18. United States generally accepted 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 pre-operating costs of $276 incurred in the year
ended December 31, 2002, (2001 - $32), deferred in these financial
statements would be expensed. Amortization of $271 in the year ended
December 31, 2002, (2001 - $161) related to pre-operating costs would not
have been expensed.
On March 11, 2002, the Company committed to grant certain employees
114,000 options to acquire 114,000 common shares at $2.15. These options
were provided to employees contingent upon approval by the shareholders of
the 2002 stock option plan. This approval was received 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, $62 would be recorded under U.S. GAAP in 2002 as stock option
compensation expense.
During 2001, the Company repriced certain options. As a result, for the
year ended December 31, 2002 - $nil (2001 - $321; 2000 - $33) would be
recognized as stock option compensation expense under U.S. GAAP.
In conjunction with the issuance of the convertible debenture described in
note 8 and 10 for Canadian GAAP purposes, the fair value of the
convertible right was determined to be $54. For U.S. GAAP purposes, the
value of the right was determined to be $383. For U.S. GAAP this amount
has been measured and disclosed but will not be recorded until the option
right is exercisable on November 30, 2003.
Under U.S. GAAP, the gain on dilution in the amount of $nil in 2002 (2001
- $nil; 2000 - $88) resulting from the dilution of the Company's ownership
of the common share equity of Easton would have been excluded from income
and included as a separate component of shareholder's equity as Easton is
a development stage exploration company.
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. The effect of this adjustment would not be material.
F-30
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
18. United States generally accepted accounting principles differences,
continued
Accordingly, the following would have been reported under U.S. GAAP:
2002 2001 2000
$ $ $
Net earnings for the year - as reported 3,766 19 2,118
Dilution gain -- -- (88)
Pre-operating costs amortized 271 161 --
Pre-operating costs capitalized (276) (32) (482)
Stock option compensation expense (62) (321) (33)
Tax effect of above items 2 (52) 228
----------- ----------- -----------
Net earnings (loss) for the year - US. GAAP 3,701 (225) 1,743
=========== =========== ===========
Net earnings (loss) per share = U.S. GAAP 0.09 (0.01) 0.07
=========== =========== ===========
Weighted average number of common shares
Outstanding 41,547,302 32,220,352 22,975,986
=========== =========== ===========
Shareholders' equity - as reported 49,527 43,500 20,892
Cumulative pre-operating costs, net of amortization, net of tax 215 212 289
Cumulative stock compensation expense (416) (354) (33)
----------- ----------- -----------
Shareholders' equity - U.S. GAAP 49,326 43,358 21,148
=========== =========== ===========
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.
2002 2001 2000
$ $ $
Net earnings (loss) for the year - U.S. GAAP 3,701 (225) 1,743
Currency translation adjustment 112 971 162
----- ----- -----
Comprehensive income for the year 3,813 746 1,905
===== ===== =====
Other U.S. GAAP disclosures
2002 2001
$ $
Allowance for doubtful accounts 1,491 1,117
----- -----
Accrued payroll 1,235 1,059
===== =====
F-31
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
19. Comparative balances
Certain comparative account balances have been reclassified to achieve
comparability to current year's balances.
Recent accounting developments
Effective January 1, 2003, the Company will adopt, SFAS no. 143, "Accounting for
Asset Retirement Obligations." Under SFAS No. 143, retirement obligations will
be recognized when incurred and recorded as liabilities at fair value. The
liability will be accreted over time through periodic charges to earnings. In
addition, the asset retirement cost will be capitalized as part of the asset's
carrying value and depreciated over the asset's useful life. The adoption of the
new standard will not have a significant impact on the Company's results of
operations or financial condition.
Effective January 1, 2003, the Company will adopt SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 applies to
costs associated with an exit activity that does not involve an entity newly
acquired in a business combination, an asset retirement obligation covered by
SFAS No. 143 or with a disposal activity covered by SFAS No. 144. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity shall be recognized and measured initially at its fair value in the
period in which the liability is incurred provided that such fair value can be
reasonably estimated. An exception applies for certain one-time termination
benefits that are incurred over time. The adoption of the new standard is not
expected to have a significant impact on the Company's results of operations or
financial condition.
Effective January 1, 2003, the Company will adopt SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FAS 123."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company currently
discloses proforma net earnings and earnings per share data and will comply with
the further disclosures as required by SFAS No. 148 starting in January 1, 2003.
F-32
Stake Technology Ltd.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Supplemental Financial Information (Unaudited)
Quarter ended Quarter ended
December 31 September 30
------------------ ------------------
2002 2001 2002 2001
Revenues 33,293 23,811 32,800 22,904
Cost of goods sold 27,831 20,723 27,510 20,093
------- ------- ------- -------
Gross profit 5,462 3,088 5,290 2,811
Selling, general and administrative expenses 4,865 3,732 3,240 2,536
------- ------- ------- -------
Earnings (loss) before the following 597 (644) 2,050 275
Interest expense (385) (338) (302) (398)
Interest and other income (expense) (15) (4) 30 102
Foreign exchange gain (loss) 36 19 (322) 347
------- ------- ------- -------
(364) (323) (594) 51
------- ------- ------- -------
Earnings (loss) before income taxes 233 (967) 1,456 326
Provision for (recovery of) income taxes 279 283 (71) 170
------- ------- ------- -------
Net earnings (loss) for the year 512 (684) 1,527 156
======= ======= ======= =======
Net earnings (loss) per share for the year
Basic 0.01 (0.02) 0.04 0.00
======= ======= ======= =======
Diluted 0.01 (0.02) 0.04 0.00
======= ======= ======= =======
Quarter ended Quarter ended
June 30 March 31
------------------ ------------------
2002 2001 2002 2001
Revenues 31,378 23,988 23,283 19,119
Cost of goods sold 25,942 20,180 19,979 16,454
------- ------- ------- -------
Gross profit 5,436 3,808 3,304 2,665
Selling, general and administrative expenses 3,223 2,494 2,983 2,380
------- ------- ------- -------
Earnings before the following 2,213 1,314 321 285
Interest expense (306) (519) (422) (489)
Interest and other income 97 143 111 87
Foreign exchange gain (loss) 466 (41) (4) 27
------- ------- ------- -------
257 (417) (315) (375)
------- ------- ------- -------
Earnings before income taxes 2,470 897 6 (90)
Provision for income taxes 766 372 17 112
------- ------- ------- -------
Net earnings for the year 1,704 525 23 22
======= ======= ======= =======
Net earnings per share for the year
Basic 0.04 0.02 0.00 0.00
======= ======= ======= =======
Diluted 0.04 0.02 0.00 0.00
======= ======= ======= =======
F-33
PART I - FINANCIAL INFORMATION
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 March 7, 2003
Stake Technology Ltd.
By Steven R. Bromley
Executive Vice President
& Chief Financial Officer
F-34
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.
F-35