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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes |x| No |_|
At April 30, 2003 registrant had 42,616,999 common shares outstanding, the only
class of registrant's common stock outstanding. There were no other classes of
stock outstanding and the aggregate market value of voting stock held by
non-affiliates at such date was $147,661,410. The Company's common shares are
traded on the Nasdaq Smallcap Market tier of the Nasdaq Stock Market under the
symbol STKL and The Toronto Stock Exchange under the symbol SOY.
There are 32 pages in the March 31, 2003 10-Q and the index follows the cover
page.
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1
STAKE TECHNOLOGY LTD.
FORM 10-Q
March 31, 2003
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as at March 31, 2003 and December 31,
2002.
Consolidated Statements of Retained Earnings for the three months
ended March 31, 2003 and 2002, and the year ended December 31, 2002.
Consolidated Statements of Earnings for the three months ended March
31, 2003 and 2002.
Consolidated Statements of Cash Flow for the three months ended
March 31, 2003 and 2002.
Condensed Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
All financial information is expressed in United States Dollars The
closing rate of exchange on April 30, 2003 was CDN $1 = U.S. $0.6976
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2
PART I - FINANCIAL INFORMATION
Item 1 -
Consolidated Financial Statements
Stake Technology Ltd.
For the Three Months Ended March 31, 2003
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3
Stake Technology Ltd.
Consolidated Balance Sheets
As at March 31, 2003 and December 31, 2002
Unaudited
(expressed in thousands of U.S. dollars)
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March 31, December 31,
2003 2002
$ $
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Assets
Current assets
Cash and cash equivalents 1,782 7,012
Short-term investments -- 2,038
Accounts receivable - trade 17,698 18,144
Note receivable 697 1,034
Inventories (note 4) 23,642 22,989
Prepaid expenses and other current assets 1,736 958
Future income taxes -- 115
------------------------------
45,555 52,290
Property, plant and equipment 37,741 37,033
Goodwill and intangibles, net 15,245 14,917
Future income taxes 9,956 9,892
Other assets (note 5) 988 1,155
------------------------------
109,485 115,287
==============================
Liabilities
Current liabilities
Bank indebtedness 9,191 3,963
Accounts payable and accrued liabilities 17,073 19,664
Customer deposits 1,334 421
Current portion of long-term debt (note 6) 2,626 11,650
Current portion of long-term payables (note7) 1,190 3,458
------------------------------
31,414 39,156
Long-term debt (note 6) 24,125 25,099
Long-term payables (note 7) 1,447 1,505
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56,986 65,760
------------------------------
Shareholders' Equity
Capital stock (note 8) 39,150 38,020
Contributed surplus 2,914 2,914
Retained earnings 8,534 7,470
Currency translation adjustment 1,901 1,123
------------------------------
52,499 49,527
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109,485 115,287
==============================
Commitments and contingencies (note 10)
(See accompanying notes to consolidated financial statements)
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4
Stake Technology Ltd.
Consolidated Statements of Retained Earnings
For the three months ended March 31, 2003 and 2002, and the year ended
December 31, 2002
Unaudited
(expressed in thousands of U.S. dollars)
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Three months ended Year ended
-----------------------------------------
March 31, March 31, December 31,
2003 2002 2002
$ $ $
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Retained Earnings - Beginning of the period 7,470 3,709 3,704
Net earnings for the period 1,064 23 3,766
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Retained Earnings - End of the period 8,534 3,732 7,470
=========================================
(See accompanying notes to consolidated financial statements)
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5
Stake Technology Ltd.
Consolidated Statements of Earnings
For the three months ended March 31, 2003 and 2002
Unaudited
(expressed in thousands of U.S. dollars, except per share amounts)
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March 31, March 31,
2003 2002
$ $
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Revenues 41,411 23,283
Cost of good sold 34,293 19,979
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Gross profit 7,118 3,304
Selling, general and administrative expenses 5,485 2,983
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Earnings before the following 1,633 321
Interest expense (491) (422)
Interest and other income 37 111
Foreign exchange gain (loss) 341 (4)
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(113) (315)
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Earnings before income taxes 1,520 6
Provision for (recovery of) income taxes 456 (17)
-----------------------------
Net earnings for the period 1,064 23
=============================
Net earnings per share for the period
- Basic 0.03 0.00
=============================
- Diluted 0.02 0.00
=============================
(See accompanying notes to consolidated financial statements)
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6
Stake Technology Ltd.
Consolidated Statements of Cash Flow
For the three months ended March 31, 2003 and 2002
Unaudited
(expressed in thousands of U.S. dollars)
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March 31, March 31,
2003 2002
$ $
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Cash provided by (used in)
Operating activities
Net earnings for the period 1,064 23
Items not affecting cash
Amortization 1,178 934
Future income taxes 51 (21)
Other 45 (24)
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2,338 912
Changes in non-cash working capital (note 9) (2,729) (2,890)
---------------------------
(391) (1,978)
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Investing activities
Decrease in short term investments 2,038 6,307
Acquisition of companies, net of cash acquired (1,871) (214)
Acquisition of property, plant and equipment (1,229) (1,167)
Proceeds from note receivable 358 358
Other (147) (103)
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(851) 5,181
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Financing activities
Increase in bank indebtedness 5,228 2,695
Borrowings under term debt facilities 7,800 15,000
Repayment of term debt and tender facilities (17,819) (15,470)
Repayment of deferred purchase consideration (227) (147)
Proceeds from the issuance of common shares, net of issuance costs 1,130 98
Financing costs (70) (486)
Decrease in restricted cash -- 267
Purchase and redemption of Preference Shares of subsidiary companies (130) (105)
---------------------------
(4,088) 1,852
Foreign exchange gain (loss) on cash held in a foreign currency 100 (65)
---------------------------
(Decrease) Increase in cash and cash equivalents during the period (5,230) 4,990
Cash and cash equivalents - Beginning of the period 7,012 3,364
---------------------------
Cash and cash equivalents - End of the period 1,782 8,354
===========================
See note 9 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
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7
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
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1. Interim financial statements
The interim consolidated financial statements of Stake Technology Ltd.
(the Company) have been prepared in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X and in accordance with
accounting principles generally accepted in Canada which conform, in all
material respects (except as indicated in Note 12, with accounting
principles generally accepted in the U.S.). Accordingly, these financial
statements do not include all of the disclosures required by generally
accepted accounting principles for annual financial statements. In the
opinion of management, all adjustments considered necessary for fair
presentation have been included and all such adjustments are of a normal,
recurring nature. Operating results for the three months ended March 31,
2003 are not necessarily indicative of the results that may be expected
for the full year ending December 31, 2003. For further information, see
the Company's consolidated financial statements, and notes thereto,
included in the Annual Report on Form 10K for the year ended December 31,
2002.
2. Description of business and significant accounting policies
The Company was incorporated under the laws of Canada on November 13, 1973
and operates in three principal businesses. The Food Group 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 March 31, 2003 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 12.
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.
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8
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
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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.
Goodwill and intangibles
The Company adopted the new CICA Handbook Section 3062 "Goodwill and
Intangible Assets" on January 1, 2002. This new standard eliminated 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.
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
were deferred up to June 30, 2002 (2001 - $32). 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 on a straight-line basis commenced in
January, 2001 and will result in these costs being fully amortized
by December 31, 2003.
ii) 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
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9
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
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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.
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.
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10
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
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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.
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.
3. Business acquisitions
On April 11, 2003 the Company announced that it has reached an agreement
to acquire 100% of the outstanding shares of Kettle Valley Dried Fruit
Ltd. (Kettle Valley) and its related companies, subject to completion of
required documentation and definitive agreements.
Kettle Valley produces natural and organic fruit bars and fruit leathers
with an apple base and markets these products under the Kettle Valley Real
Fruit Snack and Frunola brands. The Company operates two production
facilities in Summerland, British Columbia, the heart of the B.C. apple
growing district, and is currently constructing a third plant in the State
of Washington, the center of the apple growing district of the Western
U.S. In addition, Kettle Valley produces a number of private label
products for customers in the U.S., Canada and the United Kingdom. The
company's products are sold through agents and distributors to the health
food and mass markets as well as to various school districts who are
leading the trend in improving the dietary content of student lunches.
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11
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
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4. Inventories
March 31, December 31,
2003 2002
$ $
Raw materials 7,928 7,859
Finished goods 12,225 11,750
Grain 3,489 3,380
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23,642 22,989
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Grain inventories consist of the following:
March 31, December 31,
2003 2002
$ $
Company owned grain 3,550 3,338
Unrealized gain (loss) on
Sales and purchase contracts (150) (79)
Futures contracts 89 121
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3,489 3,380
=============================
5. Other assets
March 31, December 31,
2003 2002
$ $
Pre-operating costs, net of accumulated
amortization of $520 (2002 - $432) 268 358
Deferred financing costs, net of accumulated
amortization of $272 (2002 - $201) 618 619
Other 102 178
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988 1,155
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6. Long-term debt and banking facilities
March 31, December 31,
2003 2002
$ $
Term loan (a) 21,275 13,900
Tender facility (b) -- 15,186
Convertible debenture 4,733 4,697
Other long-term debt (c) 743 2,966
-----------------------------
26,751 36,749
Less: current portion (2,626) (11,650)
-----------------------------
24,125 25,099
=============================
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12
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
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6. Long-term debt and banking facilities, continued
(a) In March 2003 the Company amended its financing arrangement with its
current lenders and entered into a syndication agreement. As part of
the amendment, the term loan increased by $7,800 and a line of
credit facility increased by $4,000. On March 31, 2003 the Company
made a regularly scheduled repayment on the term loan of $425.
(b) During the first quarter of 2003, the Company repaid the tender
facility with proceeds from the amended term loan of $7,800, $3,500
from an increase in a line of credit facility and the utilization of
$3,886 in cash.
(c) During the first quarter the Company repaid certain other long-term
debt of $2,097, in addition to making regularly scheduled repayments
of $111.
7. Long-term payables
March 31, December 31,
2003 2002
$ $
Product rebate payable 1,361 1,330
Deferred purchase consideration 440 667
Preference shares of subsidiary companies 161 291
Payable to former shareholders of acquired companies (a) 675 2,675
---------------------------
2,637 4,963
Less: Current portion (1,190) (3,458)
---------------------------
1,447 1,505
===========================
(a) During the first quarter $1,871 was paid to the former shareholders
of Opta in respect of untendered shares converted to a right to
receive $2.50 per share in cash as a result of the amalgamation of
Stake Acquisition Corp. with Opta.
8. Capital stock
March 31, December 31,
2003 2002
$ $
(a) Issued and fully paid -
42,547,199 common shares (December 31, 2002 - 41,984,118) 36,449 35,230
4,101,244 warrants (December 31, 2002 - 4,224,600) 2,701 2,790
----------------------------
39,150 38,020
============================
(b) During the quarter ended March 31, 2003, employees and directors
exercised 223,725 (March 31, 2002 - 48,100) common share options and
an equal number of common shares were issued for net proceeds of
$405 (March 31, 2002 - $98). Subsequent to March 31, 2003, employees
exercised 19,800 common share options and an equal number of common
shares were issued for net proceeds of $26.
(c) During the quarter ended March 31, 2003, 123,356 warrants were
exercised and an equal number of common shares were issued for net
proceeds of $207. In addition, 216,000 compensation warrants were
exercised during the quarter for net proceeds of $518. Subsequent to
March 31, 2003, 50,000 warrants were exercised and an equal number
of common shares were issued for net proceeds of $88. Stake
Technology Ltd. Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003 Unaudited (expressed in
thousands of U.S. dollars, except per share amounts)
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13
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
8. Capital stock, continued
(d) During the quarter 398,750 options were granted to employees at a
price range of $3.06 to $3.72.
(e) As at March 31, 2003 there were options vested to employees and
directors to acquire 1,491,930 common shares at exercise prices of
$1.06 to $3.72. In additional, at March 31, 2003, options to acquire
an additional 881,480 common shares at $1.06 to $3.72 have been
granted to employees and directors but have not yet vested.
(f) Employee stock options granted by the Company in 2003 and 2002 were
granted at prices which approximated the value of stock on the grant
date. These options vest at various dates ranging from the date of
the grants to March 20, 2007 and expire two to six years subsequent
to the grant date.
The fair value of the options granted during the first quarter of
2003 was estimated using the Black-Scholes option-pricing model with
the assumptions of a dividend yield of 0% (2002 - 0%), an expected
volatility of 60% (2002 - 60%), a risk-free interest rate of 3%
(2002 - 3%), and an expected life of one to six years.
Pro-forma net earnings (loss) reflecting stock compensation for the
first quarter in 2003 and 2002 are as follows:
Three months ended
------------------------------
March 31, March 31,
2003 2002
Number of options granted 398,750 33,900
==============================
$ $
Total fair value 791 131
==============================
Net earnings for the period as reported 1,064 23
Stock compensation expense:
Options vested in current year from current year grants 40 7
Options vested in current year from prior years grants 60 29
------------------------------
100 36
------------------------------
Pro-forma net earnings (loss) for the period 964 (13)
==============================
Pro-forma net earnings (loss) per common share
- Basic 0.02 (0.00)
==============================
- Diluted 0.02 (0.00)
==============================
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14
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
9. Supplemental cash flow information
Three months ended
---------------------------
March 31, March 31,
2003 2002
$ $
Changes in non-cash working capital, net of businesses acquired:
Accounts receivable - trade 346 (1,036)
Inventories (725) (2,041)
Prepaid expenses and other current assets (785) 461
Accounts payable and accrued liabilities (2,478) (599)
Customer deposits 913 325
--------------------------
(2,729) (2,890)
==========================
Cash paid for:
Interest 304 424
==========================
Income taxes 418 65
==========================
10. 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.
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15
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
10. Commitments and contingencies, continued
(d) Letters of credit:
i) An irrevocable letter of credit for $510 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 1,254
2004 1,595
2005 1,514
2006 1,474
2007 1,339
2008 and thereafter 1,430
--------
8,606
========
- --------------------------------------------------------------------------------
16
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
11. 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.
Three months ended
March 31, 2003
------------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 29,824 1,994 225 32,043
Canada 4,507 3,382 -- 7,889
Other 1,452 24 3 1,479
------------------------------------------------------------
Total revenues to external customers 35,783 5,400 228 41,411
------------------------------------------------------------
Interest expense 386 90 15 491
------------------------------------------------------------
Provision for (recovery of) income taxes 397 121 (62) 456
------------------------------------------------------------
Segment net earnings (loss) 927 284 (147) 1,064
------------------------------------------------------------
Identifiable assets 82,025 22,685 4,775 109,485
------------------------------------------------------------
Amortization 876 209 93 1,178
------------------------------------------------------------
Expenditures on property, plant and
equipment 1,111 110 8 1,229
============================================================
- --------------------------------------------------------------------------------
17
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
11. Segmented information continued
Three months ended
March 31, 2002
----------------------------------------------------------
Steam
Explosion
Environmental Technology
Industrial Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 17,344 2,287 75 19,706
Canada 75 2,821 -- 2,896
Other 648 33 -- 681
----------------------------------------------------------
Total revenues to external customers 18,067 5,141 75 23,283
----------------------------------------------------------
Interest expense 369 53 -- 422
----------------------------------------------------------
Provision for (recovery of) income taxes 2 176 (195) (17)
----------------------------------------------------------
Segment net earnings (loss) 2 265 (244) 23
----------------------------------------------------------
Identifiable assets 52,651 18,251 11,121 82,023
----------------------------------------------------------
Amortization 712 203 19 934
----------------------------------------------------------
Expenditures on property, plant and
equipment 699 397 71 1,167
----------------------------------------------------------
Geographic segments
March 31, December 31,
2003 2002
----------------------------------------- -----------------------------------
U.S. Canada Total U.S. Canada Total
$ $ $ $ $ $
Property, plant and
equipment 29,713 8,028 37,741 29,568 7,465 37,033
========================================= ===================================
Goodwill and intangibles 11,666 3,579 15,245 11,655 3,262 14,917
========================================= ===================================
Total assets 78,445 31,040 109,485 87,399 27,888 115,287
========================================= ===================================
12. 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 $nil incurred in the
quarter ended March 31, 2003, (2002 - $87), deferred in these financial
statements would be expensed. Amortization of $50 in the quarter ended
March 31, 2003, (2002 - $40) related to pre-operating costs would not have
been expensed.
- --------------------------------------------------------------------------------
18
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. United States generally accepted accounting principles differences,
continued
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.
Accordingly, the following would have been reported under U.S. GAAP:
Three months ended Year ended
-------------------------------------------------
March 31, March 31, December 31,
2003 2002 2002
$ $ $
Net earnings for the period - as reported 1,064 23 3,766
Pre-operating costs amortized 90 40 271
Pre-operating costs capitalized -- (87) (276)
Stock option compensation expense -- -- (62)
Tax effect of above items (27) 19 2
-------------------------------------------------
Net earnings (loss) for the period - U.S. GAAP 1,127 (5) 3,701
=================================================
Net earnings (loss) per share - U.S. GAAP 0.03 0.00 0.09
=================================================
Weighted average number of common shares
Outstanding 42,290,857 41,110,488 41,547,302
=================================================
Shareholders' equity - as reported 52,499 43,701 49,527
Cumulative pre-operating costs, net of amortization,
net of tax (152) (413) (215)
Cumulative stock compensation expense (416) (353) (416)
-------------------------------------------------
Shareholders' equity - U.S. GAAP 51,931 42,935 48,896
=================================================
- --------------------------------------------------------------------------------
19
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. United States generally accepted accounting principles differences,
continued
Comprehensive income
U.S. GAAP requires that a comprehensive income statement be prepared.
Comprehensive income is defined as "The change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner events". It includes all changes in equity
during a period, except those resulting from investments by owners and
distribution to owners. The comprehensive statement reconciles the
reported net income to the comprehensive income.
The following is a comprehensive income statement (prepared in accordance
with U.S. GAAP), which, under U.S. GAAP, would have the same prominence as
other financial statements.
Three months ended Year ended
-------------------------------------------
March 31, March 31, December 31,
2003 2002 2002
$ $ $
Net earnings (loss) for the period - U.S. GAAP 1,127 (5) 3,701
Currency translation adjustment 778 (80) 112
-------------------------------------------
Comprehensive income (loss) for the period 1,905 (85) 3,813
===========================================
Other U.S. GAAP disclosures
March 31, December 31,
2003 2002
$ $
Allowance for doubtful accounts 626 709
===============================
Accrued payroll 1,600 1,235
===============================
13. Adoption of FIN 45 "Accounting for Guarantees"
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which imposes new
disclosure and liability-recognition requirements for financial
guarantees, performance guarantees, indemnifications and indirect
guarantees of the indebtedness of others. The initial recognition and
initial measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for interim and annual periods ending after
December 15, 2002. As the Company did not have any material guarantees
outstanding, the issuance of FIN 45 did not have an effect on the
Company's financial statements.
14. Comparative balances
Certain comparative account balances have been reclassified to achieve
comparability to current year's balances.
- --------------------------------------------------------------------------------
20
PART I - FINANCIAL INFORMATION
Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Significant Developments
On April 11, 2003 the Company announced that it has reached an agreement to
acquire 100% of the outstanding shares of Kettle Valley Dried Fruit Ltd. (Kettle
Valley) and its related companies, subject to completion of required
documentation and definitive agreements.
Kettle Valley produces natural and organic fruit bars and fruit leathers with an
apple base and markets these products under the Kettle Valley Real Fruit Snack
and Frunola brands. The Company operates two production facilities in
Summerland, British Columbia, the heart of the B.C. apple growing district, and
is currently constructing a third plant in the State of Washington, the center
of the apple growing district of the Western U.S. In addition, Kettle Valley
produces a number of private label products for customers in the U.S., Canada
and the United Kingdom. The company's products are sold through agents and
distributors to the health food and mass markets as well as to various school
districts who are leading the trend in improving the dietary content of student
lunches.
In March 2003, the Company amended its financing arrangements. 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 ($21,275 as at March
31, 2003). 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 which had been obtained to finance the
acquisition of Opta Food Ingredients, Inc. The term loan is repayable quarterly
and is intended to amortize over seven years. 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.
Operations For the Three Months ended March 31, 2003 Compared With the Three
Months Ended March 31, 2002
Consolidated
Revenues in the first three months of 2003 increased by 77.9% to $41,411 from
$23,283 in the first three months of 2002 and the Company's net earnings for the
first three months in 2003 were $1,064 or $0.03 per common share compared to $23
or $0.00 per common share for the first three months of 2001. The increase in
the Company's revenues is due to a number of factors including increased sales
of aseptic packaged soymilk products, increased sales of bulk grains and
specialty beans, the impact of the acquisitions of Organic Kitchen, Wild West,
Simply Organic and Opta and the start-up of the Company's organic diary
operation, Sunrich Valley.
Earnings increased significantly over the same period in 2002 due to the turn
around at Nordic Aseptic, improved market/economic conditions that impacted the
Environmental Industrial Group, the earnings from acquisitions noted above and
the foreign exchange gain as a result of the appreciation of the Canadian
dollar.
EBITDA(1) (earnings before interest, taxes, depreciation and amortization)
increased 152% to $3,152 versus $1,251 in 2002.
U.S. readers should note that due to differences between Canadian and U.S. GAAP,
the earnings for the three months ended March 31, 2003 under U.S. GAAP are
$1,127 or $0.03 per common share versus a loss of $5 or $0.00 per common share
in the same period in 2002. Note 12 to the consolidated financial statements
itemizes these differences.
(1) EBITDA is not a recognized measure under Canadian or United States generally
accepted accounting principles (GAAP)/ Management believes that in addition to
net income, EBITDA is a useful supplemental measure as it provides investors
with an indication of earnings from operations prior to debt service,
amortization and income taxes. Investors should be cautioned however, EBITDA
should not be construed as an alternative to net income determined in accordance
with GAAP as an indicator of Stake's performance or to cash flows from
operating, investing and financing activities as a measure of liquidity and cash
flows. Stake's method of calculating EBITDA may differ from other companies and
accordingly, EBITDA may not be comparable to measures used by other companies.
As such, the Company's EBITDA is calculated as follows: Earnings before income
taxes $1,520 (2002 - $6), interest expense $491 (2002 - $422), interest and
other income ($37) (2002 - ($111)) and amortization expense $1,178 (2002 -
$934).
- --------------------------------------------------------------------------------
21
Cost of goods sold increased by 71.6% to $34,293 for the three months ended
March 31, 2003 compared to $19,979 for the three months ended March 31, 2002.
Consistent with the revenue analysis above, the increase in cost of goods sold
is related to the revenue increase resulting from increased sales of certain
food based products and the acquisitions completed in 2002.
The Company's consolidated gross margin increased to 17.2% for the three months
ended March 31, 2003 versus 14.2% in the three months ended March 31, 2002. The
improvement in gross margin is attributable to improvements in efficiencies at
Nordic Aseptic and other Food Group operations, as well as the impact of higher
gross margins in the acquired businesses.
Selling, general and administrative expenditures of $5,485 increased to 13.2% of
revenues in the three months ended March 31, 2003 compared to $2,983 or 12.8% of
revenues for the three months ended March 31, 2002. The increase in
administrative costs is mainly due to the acquisitions completed in 2002 and the
incremental legal costs related to the Company's legal proceeding against a
former supplier for failure to adhere to the terms of a supply contact, as
detailed in Part II - Other Information.
Interest expense increased to $491 in the three months ended March 31, 2003 from
$422 in the three months ended March 31, 2002. The increase in borrowing costs
reflects the increase in borrowings to support the acquisition of Opta in
December of 2002.
Interest and other income decreased to $37 in the three months ended March 31,
2003 from $111 in the three months ended March 31, 2002, primarily due to lower
cash/investment balances versus the prior year.
Foreign exchange gain increased to $341 from a loss of $4 in the same period in
2002 as a result of the significant appreciation of the Canadian dollar.
The provision for income taxes in the first three months of 2003 reflects the
Company's estimated effective tax rate in 2003 of 30%.
Segmented Operations Information
(Note: Certain prior year figures have been adjusted to conform with the current
year presentation which eliminates all intercompany charges for segmented
reporting purposes)
Food Group
The Food Group contributed $35,783 of 86.4% of total Company consolidated
revenues in the first three months of 2002 versus $18,067 or 77.6% in the same
period in 2002. The increase of $17,716 or 98.0% in Food Group revenues was due
primarily to increased sales of aseptic packaged soymilk, an increase in sales
of bulk grains and specialty beans and the acquisitions and start-up completed
in 2002. The increase in food revenues as a percentage of consolidated revenues
reflects the Company's continued growth via acquisitions in the natural and
organic food industry and the inherently higher internal growth rates associated
with these businesses.
Gross margin in the Food Group increased by $3,825 in the three months ended
March 31, 2003 to $5,825 or 16.3% compared to $2,000 or 11.1%, in the same
period in 2002. The increase in gross margin reflects the turnaround at the
Nordic Aseptic packaging operation and the acquisitions completed in 2002.
Selling, general and administrative expenses increased to $4,116 in the three
months ended March 31, 2003 versus $1,679 in the three months ended March 31,
2002. The increase is due primarily to acquisitions completed in 2002 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 increased to $386 in the three months ended March 31, 2003
versus $369 in the three months ended March 31, 2002. The increase was due to
the acquisitions completed in 2002.
Net earnings in the Food Group were $927 in the three months ended March 31,
2003 compared to earnings of $2 in the three months ended March 31, 2002 due to
the factors noted above.
- --------------------------------------------------------------------------------
22
Environmental Industrial Group
The Environmental Industrial Group contributed $5,400 or 13.0% of the total
Company consolidated revenues in the first three months of 2003, versus $5,141
or 22.1% in 2002. Revenues were favourably impacted by the improvement in the
market and economic conditions in the steel and foundry businesses and a
resurgence in demand for abrasives.
Gross margin in the Environmental Industrial Group was $1,066 in the three
months ended March 31, 2003 versus $1,229 in the three months ended March 31,
2002. As a percentage of revenues, gross margin decreased to 19.7% in the first
three months of 2003 from 23.9% in the first three months of 2002. The decrease
in margin is due primarily to a relocation of certain plant operating costs from
selling, general and administrative expenses to cost of goods sold in 2003 of
approximately $200 (after adjustment for the reallocation, 2002 gross margin was
20.0%).
Selling, general and administrative expenses decreased to $536 in the three
months ended March 31, 2003 versus $729 in the three months ended March 31,
2002. The decrease is mainly due to the reallocation noted above.
Interest expense increased to $90 in the first three months of 2003 versus $53
in the first three months of 2002. The increase was mainly due to cash
utilization due to payments made as part of the acquisition of Virginia
Materials in 2001.
Net earnings were $284 in the three months ended March 31, 2003 versus $265 in
the three months ended March 31, 2002.
Steam Explosion Technology Group
Revenues of $228 for the three months ended March 31, 2003 were primarily
derived from licence fees earned in the quarter in addition to licence fees of
$150 relating to 2002 recorded in 2003 as collection has become reasonably
assured.
Selling, general and administrative expenses were $66 for the first three months
of 2003 compared to $57 for the same period in 2002. These costs reflect payroll
and related expenses required to manage and maintain the business.
Net earnings were $113 versus net earnings of $11 in the same period in 2002.
Corporate Activities
Selling, general and administration expenses were $767 in the three months ended
March 31, 2003 versus $518 in the three months ended March 31, 2002. The
increase was due to an increase in the costs of administering a growing public
company and an increase in the amortization of financing fees.
Liquidity and Capital Resources at March 31, 2003
Current assets
Cash and cash equivalents decreased to $1,782 at March 31, 2003 (December 31,
2002 - $7,012), primarily due to the repayment of the tender facility in March
2003.
The short term investments held at December 31, 2002 consisted of short-term
money market investments with maturity dates greater than 90 days from
acquisition, obtained in the acquisition of Opta. These short term investments
matured prior to March 31, 2003.
Trade accounts receivable decreased to $17,698 at March 31, 2003 from $18,144 at
December 31, 2002. Trade receivables at March 31, 2003 attributable to the Food
Group were $14,026 (December 31, 2002 - $14,889). The decrease was primarily due
to the collection of a contract cancellation fee subsequent to year-end, offset
by the impact of increased sales in the quarter. Trade receivables in the
Environmental Industrial Group were $3,447 (December 31, 2002 - $3,255). The
Steam Explosion Technology Group has a receivable of $225 related to the license
fee revenue recorded in the quarter (December 31, 2002 - $nil).
The note receivable of $697 (December 31, 2002- $1,034) and the product rebate
payable in long-term payables of $1,361 (December 31, 2002 - $1,330) are related
to an agreement with a major European based company to supply
- --------------------------------------------------------------------------------
23
product. This agreement required the Food Group to expand a food processing
plant to the customer's specifications, which was completed in 2001. In
accordance with the terms of the agreement the customer pays 36 monthly
instalments of $119. The agreement also requires the Company to provide the
customer with a product rebate beginning October 2003 until $1,720 is repaid.
Upon the application of purchase accounting in 2000, both the receivable and
payable were fair valued using a discount rate of 9.5 %.
Inventories increased $653 to $23,642 at March 31, 2003 versus December 31,
2002. The Food Group accounts for $19,125 of the consolidated balance (December
31, 2002 - $18,492) and the Environmental Industrial Group $4,517 (December 31,
2002 - $4,497). The Steam Explosion Technology Group is not required to carry
significant inventories. The higher balances in the Food Group are primarily due
to increased inventory of finished aseptic packaged goods, raw materials and
ingredients to support the increase in production and sales and higher grain
inventories.
Prepaid expenses and other current assets increased $778 to $1,736 at March 31,
2003 from $958 at December 31, 2002. The increase is mainly due to an increase
in prepaid insurance as a result of policy renewals in the first quarter and
timing of a prepaid inventory in the Food Group.
Property, plant and equipment
In the first quarter of 2003 the Company expended $1,229 (March 31, 2002 -
$1,167) on property, plant and equipment, of which, the Food Group comprised of
$1,111. Key projects in the quarter included the micro filter sweetener project
at the Group's operation in Alexandria, MN and the expansion of the grain
cleaning and transfer system in Hope, MN. During the first quarter of 2003, $110
was expended by the Environmental Industrial Group on general additions and
replacements. $8 was spent by the Steam Explosion Technology Group and the
Corporate Office on computer equipment.
Goodwill and intangibles
Goodwill and intangibles increased to $15,245 March 31, 2003 from $14,917 at
December 31, 2002. The increase is due primarily to foreign exchange valuation
of Canadian goodwill and intangibles.
Future income taxes
The future income tax asset relates primarily to loss carry-forwards recorded on
the acquisition of Opta Food Ingredients, Inc. and scientific research and
development credits available in Canada.
Other assets
Other assets decreased by $167 to $988, primarily due to amortization of
pre-operating costs and financing fees and a decrease in other items, offset by
the capitalization of $70 in financing fees.
Current liabilities
Bank indebtedness
Bank indebtedness at March 31, 2003 was $9,191 (December 31, 2002 - $3,963). The
increase relates primarily to the utilization of the line of credit facilities
to repay the tender facility which occurred in March 2003.
Accounts payable and accrued liabilities decreased to $17,073 at March 31, 2003
from $19,664 at December 31, 2002. The decrease is primarily due to deferred
payments to grain suppliers at December 31, 2002 , the payment of bonuses
related to 2002 and the disbursement of acquisition based accruals.
Customer deposits of $1,334 at March 31, 2003 (December 31, 2002 - $421) relate
to cash deposits made by Food Group customers for purchases made throughout the
growing season in 2003. No recognition of revenue or accrual of costs is booked
on these transactions until the goods are shipped.
Long term debt
At March 31, 2003, the Company's long-term debt, including current portion, is
$26,751, a net decrease of $9,998 from December 31, 2002. The decrease relates
to the repayment of the tender facility and certain other debt
- --------------------------------------------------------------------------------
24
instruments, offset by the increase in the term debt facility of $7,800 as a
result of the refinancing completed in March 2003.
Long-term payables
The Company had deferred purchase consideration of $440 at March 31, 2003
(December 31, 2002 - $667) related to the acquisition of Virginia Materials. The
deferred purchase consideration is paid on the purchase of the vendor's
inventory as acquired by the Company. It is expected that it will take
approximately 4 to 6 months from March 31, 2003 to satisfy this liability.
The Preference Shares of subsidiary companies were reduced to $161 from $291 as
a result of regularly scheduled repurchases in the quarter and an additional
repurchase of preferred shares related to a settlement with a former director
relating to certain actions taken while he was the president of an operating
division.
Payable to former shareholders of acquired companies decreased by $2,000 to $675
at March 31, 2003. The reduction is due primarily to the payment for the
untendered shares of the former shareholders of Opta, in addition to payments
related to the acquisition of Virginia Materials.
Cash flow
For the quarter ended March 31, 2003, cash flow provided by operations before
working capital changes was $2,338 an increase of 156% versus 2002 (March 31,
2002 - $912). The increase is due primarily to improvement in earnings and
higher amortization charges in the first quarter of 2003 versus 2002.
Cash flow used in operations after working capital changes was ($391) for the
three months ended March 31, 2003 (March 31, 2002 - ($1,978)), reflecting the
utilization of funds for non-cash working capital of ($2,729) (March 31, 2002 -
($2,890)). This utilization consists principally of an increase in inventory of
($725), a decrease in accounts payable and accrued liabilities of ($2,478) and
an increase in prepaids and other current assets of ($785), offset by a decrease
in accounts receivable of $346 and an increase in customer deposits of $913. The
working capital deficiencies in the first quarter are comparable to the same
period in the prior year, which reflects the impact of seasonality of the
business on working capital, including the purchase and payment method with
grain suppliers in the Food Group and the economic market seasonality in the
Environmental Industrial Group.
Cash used in investing activities was ($851). The Company sold its short term
investments for proceeds of $2,038 (March 31, 2002 - $6,307) and received
payments on a note receivable of $358 (March 31, 2002 - $358), partially offset
by acquisitions of property, plant and equipment of ($1,229) (March 31, 2002 -
($1,167)), and payment for the acquisition of Companies, in this case to the
former shareholders of Opta, of ($1,871) (March 31, 2002 - ($214)).
Cash used in financing activities was ($4,088) in the quarter (March 31, 2002 -
$1,852), which consists primarily of an increase in bank indebtedness of $5,228
(March 31, 2002 - $2,695), proceeds from the issuance of common shares of $1,130
(March 31, 2002 - $98), offset by net debt repayments of ($10,019) (March 31,
2002 - ($470)), deferred purchase consideration payments of ($227) (March 31,
2002 - ($147)) and financing costs of ($70) (March 31, 2002 - ($486)).
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk
The primary objective of our investment activities is to preserve principal and
limit risk. To achieve this objective, the company maintains its portfolio in a
variety of securities, including both government and corporate obligations and
money market funds. These securities are generally classified as cash
equivalents and are recorded on the balance sheet at fair value with unrealized
gains or losses reported through profit and loss.
Debt in both fixed rate and floating rate interest carry varying degrees of
interest rate risk. Fixed rate debt may have their fair market value adversely
affected by a decline in interest rates. In general, longer date debts are
subject to greater interest rate risk than shorter dated securities. Floating
rate term debt gives less predictability to cash flows as interest rates change.
As of March 31, 2003, the weighted average interest rate of the fixed rate term
debt including the convertible debenture was 9.10% and $5,476 of the Company's
outstanding term debt is at fixed interest rates. Variable rate term debt of
$21,275 at an interest rate of 3.78% is outstanding at March 31, 2003. The
Company's looks at varying
- --------------------------------------------------------------------------------
25
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
since January 1, 2002 the United States dollar has been the Company's reporting
currency. Canadian subsidiaries and corporate office use the Canadian dollar as
their functional currency. The subsidiaries are subject to risks typical of
multi-jurisdiction businesses, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely affected by changes
in these or other factors. The Company is exposed to foreign exchange rate
fluctuations as the financial results of the Company and its Canadian
subsidiaries are translated into U.S. dollars on consolidation. During the first
quarter the Canadian dollar has appreciated significantly against the U.S.
dollar with closing rates moving from CDN $1.5776 at December 31, 2002 to CDN
$1.4678 at March 31, 2003 for each U.S. dollar. The net effect of this
appreciation has been a $341 exchange gain and a $1,119 increase in net assets.
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 an increase (decrease) in the fair value of the Company's net assets
by $1,886. These changes would flow through the Company's cumulative translation
adjustment account in shareholders' equity.
The Food Group and the Environmental Group Canadian operations have U.S. based
receivables and payables that on a net basis provide limited exchange exposure.
The Food Group U.S. operations have no exposure to other currencies since all
sales are made in U.S. dollars. It is the Company's intention to hold funds in
the currency in which the funds are likely to be used, which will from time to
time, potentially expose the Company to exchange rate fluctuations when
converted into U.S. dollars.
Commodity risk
The Food Group enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on grain transactions to
the extent considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging purposes are purchased and sold
through regulated commodity exchanges. Inventories, however, may not be
completely hedged, due in part to the Company's assessment of its exposure from
expected price fluctuations. Exchange purchase and sales contracts may expose
the Company to risk in the event that counterparty to a transaction is unable to
fulfill its contractual obligation. The Company manages its risk by entering
into purchase contracts with pre-approved producers. The Company has a risk of
loss from hedge activity if a grower does not deliver the grain as scheduled.
Sales contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated. All futures transactions are marked
to market. Gains and losses on futures transactions related to grain inventories
are included in cost of goods sold. As at March 31, 2003, the quantity of grain
not hedged is not significant and therefore a change in the market price would
not have a material impact. There are no futures contracts in the Environmental
Industrial Group or the Steam Explosion Technology Group or related to Corporate
activities.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of disclosure controls
pursuant to Exchange Act Rules 13a-14 and 15d-14. Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
disclosure controls and procedures are effective in ensuing 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.
PART II - OTHER INFORMATION.
Item 1. Legal proceedings
The Food Group continues to pursue 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
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pursuing this suit on a monthly basis. Other than this action, the Group has not
been and is not currently 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.
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 2. Changes in securities and use of proceeds - Not applicable
Item 3. Defaults on senior securities - Not applicable
Item 4. Submission of matters to a vote of security holders - Not applicable
Item 5. Other - Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K -
i) Form 8-K filed February 5, 2003 resignation of John D. Taylor,
President & C.O.O.
ii) Form 8-K amendment filed February 14, 2003 relating to the Agreement
and Plan of Merger among Opta Food Ingredients, Inc., Stake
Technology and Stake Acquisition Corp.
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 May 7, 2003
Stake Technology Ltd.
by Steven R. Bromley
Executive Vice President
& Chief Financial Officer
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Certification
I, Jeremy N. Kendall, Chairman of the Board and Chief Executive Officer of Stake
Technology Ltd., certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Stake
Technology Ltd. for the quarter ended March 31, 2003,
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Jeremy N. Kendall
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Chairman & Chief Executive Officer
Stake Technology Ltd.
May 7, 2003
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Certification
I, Steven R. Bromley, Executive Vice President and Chief Financial Officer of
Stake Technology Ltd., certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Stake
Technology Ltd. for the quarter ended March 31, 2003,
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Steven R. Bromley
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Executive Vice President & Chief Financial Officer
Stake Technology Ltd.
May 7, 2003
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EXHIBIT INDEX
Exhibit No.
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99.1 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.
99.2 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.
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