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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 June 30, 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 August 12, 2003 registrant had 43,289,778 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 $226,119,542. 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 42 pages in the June 30, 2003 10-Q and the index follows the cover
page.
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
1
STAKE TECHNOLOGY LTD.
FORM 10-Q
June 30, 2003
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as at June 30, 2003 and December 31, 2002.
Consolidated Statements of Retained Earnings for the six months ended
June 30, 2003 and 2002, and the year ended December 31, 2002.
Consolidated Statements of Earnings for the three and six months ended
June 30, 2003 and 2002.
Consolidated Statements of Cash Flow for the three and six months
ended June 30, 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 June 30, 2003 was CDN $1 = U.S. $0.7421
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
2
PART I - FINANCIAL INFORMATION
Item 1 -
Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
Stake Technology Ltd.
For the Six Months Ended June 30, 2003
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
3
Stake Technology Ltd.
Consolidated Balance Sheets
As at June 30, 2003 and December 31, 2002
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
$ $
- --------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 2,649 7,012
Short-term investments -- 2,038
Accounts receivable - trade 21,316 18,144
Note receivable 354 1,034
Inventories (note 4) 23,892 22,989
Prepaid expenses and other current assets 2,254 958
Future income taxes -- 115
------------------------
50,465 52,290
Property, plant and equipment, net 39,808 37,033
Goodwill and intangibles, net 17,250 14,992
Future income taxes 9,601 9,892
Other assets (note 5) 985 1,080
------------------------
118,109 115,287
========================
Liabilities
Current liabilities
Bank indebtedness 10,152 3,963
Accounts payable and accrued liabilities 20,098 19,664
Customer deposits 118 421
Current portion of long-term debt (note 6) 2,820 11,650
Current portion of long-term payables (note7) 1,392 3,458
------------------------
34,580 39,156
Long-term debt (note 6) 24,460 25,099
Long-term payables (note 7) 1,270 1,505
------------------------
60,310 65,760
------------------------
Shareholders' Equity (note 10)
Capital stock (note 8) 40,770 38,020
Authorized
Unlimited common shares without par value
Issued
43,206,278 (December 31, 2002 - 41,984,118) common shares
Contributed surplus 2,914 2,914
Retained earnings 10,930 7,470
Currency translation adjustment 3,185 1,123
------------------------
57,799 49,527
------------------------
118,109 115,287
========================
Commitments and contingencies (note 12)
(See accompanying notes to consolidated financial statements)
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
4
Stake Technology Ltd.
Consolidated Statements of Retained Earnings
For the six months ended June 30, 2003 and 2002
and the year ended December 31, 2002
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
June 30, June 30, December 31,
2003 2002 2002
$ $ $
- --------------------------------------------------------------------------------
Retained Earnings - Beginning of the Year 7,470 3,704 3,704
Net earnings for the period 3,460 1,727 3,766
-------------------------------------
Retained Earnings - End of Period 10,930 5,431 7,470
=====================================
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
5
Stake Technology Ltd.
Consolidated Statements of Earnings
For the three months ended June 30, 2003 and 2002
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
- -------------------------------------------------------------------------------
June 30, June 30,
2003 2002
$ $
- -------------------------------------------------------------------------------
Revenues 52,641 31,378
Cost of goods sold 43,536 25,942
------------------------
Gross profit 9,105 5,436
Selling, general and administrative expenses 5,874 3,223
------------------------
Earnings before the following 3,231 2,213
Interest expense (493) (306)
Interest and other income 173 97
Foreign exchange gain 254 466
------------------------
Earnings before income taxes 3,165 2,470
Provision for income taxes 769 766
------------------------
Net earnings for the period 2,396 1,704
========================
Net earnings per share for the period (note 9)
- Basic 0.06 0.04
========================
- Diluted 0.05 0.04
========================
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
6
Stake Technology Ltd.
Consolidated Statements of Earnings
For the six months ended June 30, 2003 and 2002
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
- -------------------------------------------------------------------------------
June 30, June 30,
2003 2002
$ $
- -------------------------------------------------------------------------------
Revenues 94,052 54,685
Cost of goods sold 77,829 45,971
------------------------
Gross profit 16,223 8,714
Selling, general and administrative expenses 11,359 6,174
------------------------
Earnings before the following 4,864 2,540
Interest expense (984) (726)
Interest and other income 210 203
Foreign exchange gain 595 460
------------------------
Earnings before income taxes 4,685 2,477
Provision for income taxes 1,225 750
------------------------
Net earnings for the period 3,460 1,727
========================
Net earnings per share for the period (note 9)
- Basic 0.08 0.04
========================
- Diluted 0.08 0.04
========================
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
7
Stake Technology Ltd.
Consolidated Statements of Cash Flow
For the three months ended June 30, 2003 and 2002
Unaudited
(Expressed in thousands of U.S. dollars)
- -----------------------------------------------------------------------------------------------
June 30, June 30,
2003 2002
$ $
- -----------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 2,396 1,704
Items not affecting cash
Amortization 1,248 929
Future income taxes 273 (196)
Other (151) (24)
----------------------
3,766 2,413
Changes in non-cash working capital (note 11) (1,843) (1,492)
----------------------
1,923 921
----------------------
Investing activities
Acquisition of companies, net of cash acquired (874) (293)
Acquisition of property, plant and equipment (1,251) (985)
Proceeds from note receivable 358 356
Other 127 (161)
----------------------
(1,640) (1,083)
----------------------
Financing activities
Increase (decrease) in revolving credit facilities 491 (1,030)
Repayment of term debt facilities (516) (442)
Repayment of deferred purchase consideration (20) (285)
Proceeds from the issuance of common shares, net of issuance costs 800 290
Financing costs (180) (23)
Decrease in restricted cash -- 880
Purchase and redemption of Preference Shares of subsidiary companies (1) (12)
----------------------
574 (622)
Foreign exchange gain on cash held in a foreign currency 10 77
----------------------
Increase (decrease) in cash and cash equivalents during the period 867 (707)
Cash and cash equivalents - Beginning of the period 1,782 8,354
----------------------
Cash and cash equivalents - End of the period 2,649 7,647
======================
See note 11 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
8
Stake Technology Ltd.
Consolidated Statements of Cash Flow
For the six months ended June 30, 2003 and 2002
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------------------------
June 30, June 30,
2003 2002
$ $
- --------------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 3,460 1,727
Items not affecting cash
Amortization 2,426 1,863
Future income taxes 324 (217)
Other (106) (49)
------------------------
6,104 3,324
Changes in non-cash working capital (note 11) (4,572) (4,382)
------------------------
1,532 (1,058)
------------------------
Investing activities
Decrease in short term investments 2,038 6,307
Acquisition of companies, net of cash acquired (2,744) (507)
Acquisition of property, plant and equipment (2,480) (2,152)
Proceeds from note receivable 716 714
Other (21) (264)
------------------------
(2,491) 4,098
------------------------
Financing activities
Increase in revolving credit facilities 5,719 1,665
Repayment of term debt and tender facilities (18,335) (15,912)
Borrowings under term debt facilities 7,800 15,000
Payment of deferred purchase consideration (247) (432)
Proceeds from the issuance of common shares, net of issuance costs 1,930 388
Financing costs (250) (509)
Decrease in restricted cash -- 1,147
Purchase and redemption of Preference Shares of subsidiary companies (131) (117)
------------------------
(3,514) 1,230
Foreign exchange gain on cash held in a foreign currency 110 13
------------------------
(Decrease) increase in cash and cash equivalents during the period (4,363) 4,283
Cash and cash equivalents - Beginning of the period 7,012 3,364
------------------------
Cash and cash equivalents - End of the period 2,649 7,647
========================
See note 11 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
9
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
1. Interim financial statements
The interim consolidated financial statements of Stake Technology Ltd.
(the Company) have been prepared in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X and in accordance with
accounting principles generally accepted in Canada which conform, in all
material respects (except as indicated in note 14, 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 six months ended June 30, 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 10-KA4 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, markets and distributes a wide range of natural and organic food
products and ingredients via its vertically integrated operations with a
focus on soy, oat and corn based products. The Environmental Industrial
Group processes, distributes and recycles industrial minerals. The Steam
Explosion Technology Group engineers and markets proprietary steam
explosion technology systems for the pulp and food processing industries.
The Company's assets, operations and employees at June 30, 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 14.
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.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
10
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
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. 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.
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
11
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
iii) Investments
The Company has a 32% (2002 - 32%) investment in Easton Minerals
Limited ("Easton). This investment is considered impaired and the
carrying value at June 30, 2003 is $nil (2002 - $nil). The
investment was accounted for using the equity method of accounting.
The Company does not have any guaranteed obligations with respect to
Easton or any commitment to provide further financial support, thus
it is not anticipated that further losses will be recorded on this
investment.
All other subsidiaries are 100% owned at June 30, 2003. On November
1, 2002, the Company acquired the remaining 49% minority interest in
International Materials & Supplies, Inc. Investments in these
subsidiaries are recorded using the consolidation method, whereby
revenues and expenses are consolidated with the results of the
Company.
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. Revenues are generally recorded at the time of
shipment unless there is a specific agreement with the customer for FOB
destination. Customer rebates are recorded at the earlier of when the
related revenue is recognized and when the rebate is determinable or when
a reasonable estimate is available.
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.
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
12
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(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. The functional currency of all
operations located in the United States of America is the United States
dollar. The functional currency of all operations located in Canada is the
Canadian dollar.
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.
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.
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
13
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
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 May 1, 2003, the Company acquired 100% of the outstanding shares of
Integrated Drying Systems Inc. and its subsidiaries, Kettle Valley Dried
Fruits Ltd. and Kettle Valley Dried Fruits Inc. (together Kettle Valley)
for total purchase consideration of $2,669. Consideration consisted of
$874 in cash, a note payable of $820, interest at 5%, repayable
semi-annually over five years, a note payable of $155, interest of 2.5%,
due in February 2004 and the issuance of 196,809 common shares for $820.
Kettle Valley's results since the date of acquisition have been included
in the Company's consolidated financial statements.
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. Kettle Valley 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. Kettle
Valley'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.
The preliminary purchase price allocation of the net assets acquired and
consideration given is summarized below:
$
Net assets acquired:
Non-cash working capital 471
Property, plant and equipment 1,217
Goodwill and intangibles 1,564
Bank indebtedness and term debt (583)
-------
2,669
=======
Consideration given:
Cash 874
Notes payable 975
Common shares 820
-------
2,669
=======
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
14
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
4. Inventories
June 30, December 31,
2003 2002
$ $
Raw materials 9,032 7,859
Finished goods 11,673 11,750
Grain 3,187 3,380
-------------------------
23,892 22,989
=========================
Grain inventories consist of the following:
June 30, December 31,
2003 2002
$ $
Company owned grain 3,183 3,338
Unrealized gain (loss) on
Sales and purchase contracts (79) (79)
Futures contracts 84 121
-------------------------
3,187 3,380
=========================
5. Other assets
June 30, December 31,
2003 2002
$ $
Pre-operating costs, net of accumulated
amortization of $592 (2002 - $432) 196 358
Deferred financing costs, net of accumulated
amortization of $372 (2002 - $201) 698 619
Other 91 103
-------------------------
985 1,080
=========================
6. Long-term debt and banking facilities
June 30, December 31,
2003 2002
$ $
Term loan (a) 20,800 13,900
Tender facility (b) -- 15,186
Convertible debenture 4,767 4,697
Other long-term debt (c)(d) 1,713 2,966
-------------------------
27,280 36,749
Less: current portion (2,820) (11,650)
-------------------------
24,460 25,099
=========================
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
15
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
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. On March
31, 2003 and June 30, 2003 the Company made regularly scheduled
repayments on the term loan of $425 and $475, respectively.
(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 (noted in (e) below)
and the utilization of $3,886 in cash.
(c) During the first six months of 2003 the Company repaid certain other
long-term debt of $2,097, in addition to making regularly scheduled
repayments of $152.
(d) As part of the acquisition of Kettle Valley, the Company has
recorded a $820 note payable in other long-term debt.
(e) As part of the amended financing arrangement noted above in (a), the
Company also increased a line of credit facility by $4,000.
(f) During the second quarter of 2003, the Company increased its
Canadian line of credit to CDN $7,500 from CDN $5,000, due to the
acquisition of Kettle Valley.
7. Long-term payables
June 30, December 31,
2003 2002
$ $
Product rebate payable 1,361 1,330
Deferred purchase consideration 420 667
Preference shares of subsidiary companies 160 291
Payable to former shareholders of acquired companies (a) 688 2,675
-----------------------
2,662 4,963
Less: Current portion (1,392) (3,458)
-----------------------
1,270 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 merger of Stake
Acquisition Corp. with Opta.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
16
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
8. Capital stock
June 30, December 31,
2003 2002
$ $
(a) Issued and fully paid -
43,206,278 common shares (December 31, 2002 - 41,984,118) 38,232 35,230
3,916,244 warrants (December 31, 2002 - 4,224,600) 2,538 2,790
-------------------------
40,770 38,020
=========================
(b) In the first six months of 2003, employees and directors exercised
500,995 (June 30, 2002 - 165,300) common share options and an equal
number of common shares were issued for net proceeds of $887 (June
30, 2002 - $296).
(c) In the first six months of 2003, 308,356 warrants were exercised
(June 30, 2002 - 75,000) and an equal number of common shares were
issued for net proceeds of $582 (June 30, 2002 - $131). In addition,
216,000 (June 30, 2002 - $nil) compensation warrants were exercised
in the first six months for net proceeds of $461 (June 30, 2002 -
$nil).
(d) On May 1, 2003, the Company issued 196,809 common shares at a price
of $4.17 per common share, in respect of the acquisition of Kettle
Valley (see note 3).
(e) As at June 30, 2003 there were options vested to employees and
directors to acquire 1,265,800 common shares at exercise prices of
$1.06 to $5.24. In addition, at June 30, 2003, options to acquire an
additional 941,040 common shares at $1.06 to $5.24 have been granted
to employees and directors but have not yet vested.
(f) In the first six months of 2003, 557,450 options were granted to
employees at a price range of $3.06 to $5.24.
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 May 7, 2007 and expire two to six years subsequent to
the grant date.
The fair value of the options granted during the first six months 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.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
17
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
8. Capital stock, continued
Pro-forma net earnings reflecting stock compensation for the three
and six months ended June 30, 2003 and 2002 are as follows:
Three months ended Six months ended
------------------------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
Number of options granted 158,700 -- 557,450 110,000
------------------------------------------
$ $ $ $
Total fair value 481 -- 1,272 118
==========================================
Net earnings for the period as reported 2,396 1,704 3,460 1,727
Stock compensation expense:
Options vested in current period from current year grants 64 12 127 24
Options vested in current period from prior years grants 60 22 121 44
------------------------------------------
124 34 248 68
------------------------------------------
Pro-forma net earnings for the period 2,272 1,670 3,212 1,659
==========================================
Pro-forma net earnings per common share
- Basic 0.05 0.04 0.08 0.04
==========================================
- Diluted 0.05 0.04 0.07 0.04
==========================================
9. 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. The number of
shares for the diluted earnings per share was calculated as follows:
Three months ended Six months ended
------------------------------------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
Weighted average number of shares used in
basic earnings per share 42,871,386 41,198,000 42,448,394 41,156,000
Dilutive potential of the following
Employee/director stock options 1,214,409 847,455 1,036,986 765,519
Warrants 2,213,031 928,689 1,852,812 648,597
Convertible debenture 1,666,667 -- -- --
------------------------------------------------------
Weighted average number of shares used in
diluted earnings per share 47,965,493 42,974,144 45,338,192 42,570,116
======================================================
For the six months ended June 30, 2003 options to purchase 158,700 common
shares (June 30, 2002 - nil) have been excluded from the calculation of
dilutive earnings per share due to their anti-dilutive effect. The
convertible debenture, convertible into 1,666,667 common shares has been
excluded from the calculation of diluted earnings per share in the six
months ended June 30, 2003 due to its anti-dilutive effect. However, the
convertible debenture has been included in the three months ended June 30,
2003 due to its dilutive effect.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
18
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
10. Shareholders' equity
Cumulative
Capital Contributed Retained Translation
Stock Surplus Earnings Adjustment Total
$ $ $ $ $
Balance at December 31, 2002 38,020 2,914 7,470 1,123 49,527
Options exercised 887 -- -- -- 887
Warrants exercised 582 -- -- -- 582
Compensation warrants exercised 461 -- -- -- 461
Shares issued to acquire Kettle Valley 820 -- -- -- 820
Net earnings for the period -- -- 3,460 -- 3,460
Cumulative translation adjustment -- -- -- 2,062 2,062
------------------------------------------------------------
Balance at June 30, 2003 40,770 2,914 10,930 3,185 57,799
============================================================
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
19
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
11. Supplemental cash flow information
Three months ended
-----------------------
June 30, June 30,
2003 2002
$ $
Changes in non-cash working capital, net of businesses
acquired:
Accounts receivable - trade (3,251) (3,222)
Inventories 246 2,432
Prepaid expenses and other current assets (213) (541)
Accounts payable and accrued liabilities 2,591 1,254
Customer deposits (1,216) (1,415)
-----------------------
(1,843) (1,492)
=======================
Cash paid for:
Interest 416 428
=======================
Income taxes 654 15
=======================
Six months ended
-----------------------
June 30, June 30,
2003 2002
$ $
Changes in non-cash working capital, net of businesses
acquired:
Accounts receivable - trade (2,905) (4,258)
Inventories (479) 391
Prepaid expenses and other current assets (998) (80)
Accounts payable and accrued liabilities 113 655
Customer deposits (303) (1,090)
-----------------------
(4,572) (4,382)
=======================
Cash paid for:
Interest 718 852
=======================
Income taxes 1,058 80
=======================
On May 1, 2003, the Company issued 196,809 common shares in respect of the
acquisition of Kettle Valley (see note 3).
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
20
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. 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, with the exception of its processing and
packaging facilities located in Alexandria, Minnesota. These
facilities are currently not in complete compliance with the
industrial permit limits for the discharge of industrial waste
water. The Company has applied for increased discharge limits and is
also re-engineering certain processes and considering installation
of pre-treatment equipment to remedy this issue. Other than this,
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 $538 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 1,278
2004 1,716
2005 1,649
2006 1,547
2007 1,474
2008 and thereafter 1,472
--------
9,136
========
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
21
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
13. Segmented information
Industry segments
The Company operates in three 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, engineers and markets proprietary steam explosion
technology systems for the pulp and food processing industries. Management
has identified its segments based on the nature of the products and
services being sold and its organizational structure in support of these
segments. Operating segments have been aggregated within the Food Group
segment. The Company's assets, operations and employees are located in
Canada and the United States.
Three months ended
June 30, 2003
---------------------------------------------------------------------
Steam Explosion
Technology
Environmental Group and
Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 37,858 2,543 76 40,477
Canada 6,523 4,070 -- 10,593
Other 1,520 51 -- 1,571
---------------------------------------------------------------------
Total revenues to external customers 45,901 6,664 76 52,641
---------------------------------------------------------------------
Interest expense 317 91 85 493
---------------------------------------------------------------------
Provision for (recovery of) income taxes 719 217 (167) 769
---------------------------------------------------------------------
Segment net earnings (loss) 2,251 677 (532) 2,396
---------------------------------------------------------------------
Identifiable assets 87,934 23,477 6,698 118,109
---------------------------------------------------------------------
Amortization 923 201 124 1,248
---------------------------------------------------------------------
Expenditures on property, plant and
equipment 1,001 218 32 1,251
---------------------------------------------------------------------
Three months ended
June 30, 2002
---------------------------------------------------------------------
Steam Explosion
Technology
Environmental Group and
Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 23,358 3,134 75 26,567
Canada 191 3,529 -- 3,720
Other 1,036 55 -- 1,091
---------------------------------------------------------------------
Total revenues to external customers 24,585 6,718 75 31,378
---------------------------------------------------------------------
Interest expense 223 83 -- 306
---------------------------------------------------------------------
Provision for income taxes 482 282 2 766
---------------------------------------------------------------------
Segment net earnings 1,074 630 -- 1,704
---------------------------------------------------------------------
Identifiable assets 51,493 20,124 11,010 82,627
---------------------------------------------------------------------
Amortization 716 203 10 929
---------------------------------------------------------------------
Expenditures on property, plant and
equipment 747 234 4 985
---------------------------------------------------------------------
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
22
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
13. Segmented information, continued
Six months ended
June 30, 2003
---------------------------------------------------------------------
Steam Explosion
Technology
Environmental Group and
Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 67,682 4,537 301 72,520
Canada 11,031 7,452 -- 18,483
Other 2,972 75 2 3,049
---------------------------------------------------------------------
Total revenues to external customers 81,685 12,064 303 94,052
---------------------------------------------------------------------
Interest expense 704 180 100 984
---------------------------------------------------------------------
Provision for (recovery of) income taxes 1,116 338 (229) 1,225
---------------------------------------------------------------------
Segment net earnings (loss) 3,177 962 (679) 3,460
---------------------------------------------------------------------
Amortization 1,799 409 218 2,426
---------------------------------------------------------------------
Expenditures on property, plant and
equipment 2,111 327 42 2,480
---------------------------------------------------------------------
Six months ended
June 30, 2002
---------------------------------------------------------------------
Steam Explosion
Technology
Environmental Group and
Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 40,726 5,421 150 46,297
Canada 266 6,351 -- 6,617
Other 1,684 87 -- 1,771
---------------------------------------------------------------------
Total revenues to external customers 42,676 11,859 150 54,685
---------------------------------------------------------------------
Interest expense 593 133 -- 726
---------------------------------------------------------------------
Provision for (recovery of) income taxes 485 458 (193) 750
---------------------------------------------------------------------
Segment net earnings (loss) 1,076 894 (243) 1,727
---------------------------------------------------------------------
Amortization 1,428 406 29 1,863
---------------------------------------------------------------------
Expenditures on property, plant and
equipment 1,444 632 76 2,152
---------------------------------------------------------------------
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
23
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
13. Segmented information, continued
Geographic segments
June 30, December 31,
2003 2002
------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total
$ $ $ $ $ $
Property, plant and
equipment 29,725 10,082 39,808 29,568 7,465 37,033
============================== ===============================
Goodwill and intangibles 11,668 5,581 17,250 11,655 3,337 14,992
============================== ===============================
Total assets 80,786 37,323 118,109 87,399 27,888 115,287
============================== ===============================
Customer concentration
The Company has one customer in the Food Group whose purchases were 11.5%
(June 30, 2002 - 17.2%) of the Company's second quarter total revenue and
11.6% of the Company's total revenue in the first six months of 2003 (June
30, 2002 - 14.3%).
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
24
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
14. 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 six
months ended June 30, 2003, (2002 - $276), deferred in these financial
statements would be expensed. Amortization of $160 in the six months ended
June 30, 2003, (2002 - $80) 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.
Accordingly, the following would have been reported under U.S. GAAP:
Three months ended Six months ended Year ended
-------------------------------------------------------------
June 30, June 30, June 30, June 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Net earnings for the period - as reported 2,396 1,704 3,460 1,727 3,766
Pre-operating costs expensed 70 40 160 80 271
Pre-operating costs capitalized -- (189) -- (276) (276)
Stock option compensation expense -- (62) -- (62) (62)
Tax effect of above items (18) 45 (42) 59 2
------------------------------------------------------------
Net earnings for the period - U.S. GAAP 2,448 1,538 3,578 1,528 3,701
============================================================
Net earnings per common share - U.S. GAAP
- Basic 0.06 0.04 0.08 0.04 0.09
============================================================
- Diluted 0.05 0.03 0.08 0.03 0.09
============================================================
Shareholders' equity - as reported 57,799 46,206 49,527
Cumulative pre-operating costs, net of
amortization, net of tax (97) (349) (215)
Cumulative stock compensation expense (416) (416) (416)
----------------------------------
Shareholders' equity - U.S. GAAP 57,286 45,441 48,896
=================================
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
25
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
14. 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
distributions 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 Six months ended Year ended
--------------------- -----------------------------------
June 30, June 30, June 30, June 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Net earnings for the period-U.S. GAAP 2,448 1,538 3,578 1,528 3,701
Currency translation adjustment 1,297 671 2,062 591 112
----------------------------------------------------------
Comprehensive income for the period 3,745 2,209 5,640 2,119 3,813
==========================================================
Other U.S. GAAP disclosures
Changes in reserves Three months ended Six months ended Year ended
--------------------- -----------------------------------
June 30, June 30, June 30, June 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Allowance for doubtful accounts
Balance - beginning of period 731 383 709 367 367
Additions charged to expense, including effects of
foreign exchange rate differences 35 127 105 143 450
Accounts receivable charged off, net recoveries (166) -- (214) -- (108)
----------------------------------------------------------
Balance - end of period 600 510 600 510 709
==========================================================
Future income tax valuation allowance
Balance - beginning of period 4,107 479 4,107 479 479
Additions to valuation allowance -- -- -- -- 4,107
Adjustments to valuation allowance, including
effects of foreign exchange rate differences -- -- -- -- (479)
----------------------------------------------------------
Balance - end of period 4,107 479 4,107 479 4,107
==========================================================
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
26
Stake Technology Ltd.
Condensed Notes to Consolidated Financial Statements
For the six months ended June 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
$ $
Accrued payroll 1,939 1,235
==========================
Proforma data (unaudited)
Condensed proforma income statement, as if the acquisitions of Opta, Wild
West, Organic Kitchen, Simply Organic and Kettle Valley had occurred at
the beginning of 2002, is as follows:
Three months ended Six months ended Year ended
---------------------- ------------------------------------
June 30, June 30, June 30, June 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Revenues 52,948 43,126 95,376 76,093 153,686
Net earnings 2,396 2,112 3,522 2,223 4,875
Earnings per share
- Basic 0.06 0.05 0.08 0.05 0.12
- Diluted 0.05 0.05 0.08 0.05 0.11
15. Subsequent event note (financing) to come
On August 11, 2003, the Company entered into a public offering in the
United States and certain provinces of Canada to sell 7,000,000 common
shares at $7.00 per common share, for gross proceeds of $49,000. The
common shares were offered in the United States pursuant to a registration
statement on Form S-3 filed by the Company with the Securities and
Exchange Commission, which became effective on July 30, 2003. In
connection with the offering, the Company also filed a preliminary short
form prospectus in Canada on August 11, 2003 and a prospectus supplement
in the United States on August 12, 2003. Transaction costs are expected to
be approximately 5% of gross proceeds, including underwriters' commission.
The Company has granted the underwriters an over-allotment of 500,000
shares expiring 30 days subsequent to the offering, for gross proceeds of
up to $3,500.
Concurrent with the offering described above, the Company entered into an
agreement with a trust of which Mr. Stephen Bronfman, a director of the
Company, is the beneficiary, whereby the Company will sell 285,714 common
shares at $7.00 per common share for gross proceeds of $2,000, conditional
upon the above referenced offering closing on or before August 31, 2003.
16. Comparative balances
Certain line items in the prior year consolidated balance sheet and prior
years consolidated statements of earnings and consolidated statements of
cash flows have been combined to achieve comparability to current year's
presentation. The reclassifications of these prior year balances did not
have a significant impact on the presentation of the consolidated
financial statements.
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
27
PART I - FINANCIAL INFORMATION
Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Significant Developments
On August 11, 2003, the Company entered into a public offering in the United
States and certain provinces of Canada to sell 7,000,000 common shares at $7.00
per common share, for gross proceeds of $49,000,000. The common shares were
offered in the United States pursuant to a registration statement on Form S-3
filed by the Company with the Securities and Exchange Commission, which became
effective on July 30, 2003. In connection with the offering, the Company also
filed a preliminary short form prospectus in Canada on August 11, 2003 and a
prospectus supplement in the United States on August 12, 2003. Transaction costs
are expected to be approximately 5% of gross proceeds, including underwriters'
commission. The Company has granted the underwriters an over-allotment of
500,000 shares expiring 30 days subsequent to the offering, for gross proceeds
of up to $3,500,000.
Concurrent with the offering described above, the Company entered into an
agreement with a trust of which Mr. Stephen Bronfman, a director of the Company,
is the beneficiary, whereby the Company will sell 285,714 common shares at $7.00
per common share for gross proceeds of $2,000,000, conditional upon the above
referenced offering closing on or before August 31, 2003.
On May 1, 2003, the Company acquired 100% of the outstanding shares of
Integrated Drying Systems Inc. and its subsidiaries, Kettle Valley Dried Fruits
Ltd. and Kettle Valley Dried Fruits Inc. (together Kettle Valley) for a total
purchase consideration of $2,669,000. Consideration consisted of $874,000 in
cash, a note payable of $820,000, interest at 5%, repayable semi-annually over
five years, a note payable of $155,000, interest of 2.5% due in February 2004
and the issuance of 196,809 common shares for $820,000. Kettle Valley's results
since the date of acquisition have been included in the Company's consolidated
financial statements.
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. Kettle Valley 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. Kettle Valley'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.
During the second quarter, due to the acquisition of Kettle Valley the Company
increased its Canadian line of credit to CDN $7,500,000 from CDN $5,000,000.
In March 2003, Stake 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 $7,800,000 to $21,700,000 ($20,800,000 as
at June 30, 2003). In addition, the U.S. line of credit facility was increased
by $4,000,000 to $9,000,000. The Company used the incremental proceeds on the
term loan, utilized the U.S. line of credit facility to the extent of $3,500,000
and utilized $3,886,000 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 in quarterly installments and is intended to amortize the debt
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 Stake. Stake fully expects
to renew this facility.
Operations For the Three Months Ended June 30, 2003 Compared With the Three
Months Ended June 30, 2002
Consolidated
Revenues in the three months ended June 30, 2003 increased by 67.8% or
$21,263,000 to $52,641,000 from $31,378,000 in the three months ended June 30,
2002. Net earnings for the three months ended June 30, 2003 were $2,396,000 or
$0.06 per basic common share compared to $1,704,000 or $0.04 per basic common
share for the three months ended June 30, 2002. The increase in revenues is due
to an increase in grain sales of $6,804,000, an increase in sales of aseptic
packaged product of $1,766,000, the acquisition of Opta in December of 2002 of
$8,318,000, the acquisitions of Organic Kitchen, Wild West and Simply Organic in
the latter part of 2002 and Kettle Valley in May
- --------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
28
of 2003, totalling $5,977,000 and an increase in other revenues of $35,000,
partially offset by decreases in certain toll processing revenues of $776,000
and a decrease in soy concentrate revenues of $861,000 due to timing and
customer mix.
Net earnings before income taxes in the three month period ended June 30, 2003
were $3,165,000, compared to $2,470,000 over the same period in 2002, an
increase of $695,000 or 28.1%. The increase is primarily attributable to
improved volumes and margins in aseptic packaged products of $571,000, an
increase in margins as a result of the increase in grain sales of $283,000, a
gain on the sale of non-core property of $134,000 and earnings resulting from
the acquisitions noted above of $746,000. Significant offsetting factors include
a reduction of $382,000 in margin due to weak abrasive sales in the U.S. East
coast, a reduction on certain toll processing margins of $252,000 due to the
shortage in volume noted above, a reduction in the foreign exchange gain as a
result of fluctuations in the Canadian dollar of $212,000 and an increase in
borrowing costs of $187,000.
Net earnings for the three months ended June 30, 2003 increased by $692,000 over
the same period in 2002 as a result of the factors noted above, in addition to a
reduction in the effective income tax rate in the second quarter of 2003 to
24.3% from 31.0% in the same period in 2002. The decrease reflects the deduction
of share issue costs, the recognition of certain loss carry-forwards and the
implementation of tax planning strategies.
U.S. readers should note that due to differences between Canadian and U.S. GAAP,
the earnings for the three months ended June 30, 2003 under U.S. GAAP are
$2,448,000 or $0.06 per basic common share versus $1,538,000 or $0.04 per basic
common share in the same period in 2002. Note 14 to the consolidated financial
statements itemizes these differences.
Cost of goods sold increased by 67.8% to $43,536,000 for the three months ended
June 30, 2003 compared to $25,942,000 for the three months ended June 30, 2002.
The increasing factors are consistent with the revenue factors noted above.
The Company's consolidated gross margin of 17.3% for the three months ended June
30, 2003 was consistent with the same period in 2002. Improvements attributable
to higher margins in the businesses acquired in 2002 and 2003 and improvements
in efficiencies and volumes at the Company's aseptic packaging operation, were
offset by the significant increase in grain sales, a lower margin business
averaging less than 10% in gross margin.
Selling, general and administrative expenses increased to $5,874,000 or 11.2% of
revenues in the three months ended June 30, 2003 compared to $3,223,000 or 10.3%
of revenues for the three months ended June 30, 2002. The increase in
administrative costs is mainly due to the acquisitions completed in 2002 and
2003 of $2,561,000, and additional amortization charges related to deferred bank
financing costs of $81,000.
Interest expense increased to $493,000 in the three months ended June 30, 2003
from $306,000 in the three months ended June 30, 2002. The increase in borrowing
costs reflects the increase in borrowings to support the acquisitions completed
in 2002 and 2003.
Interest and other income increased to $173,000 in the three months ended June
30, 2003 from $97,000 in the three months ended June 30, 2002, primarily due to
a gain on sale of non-core property of $134,000, offset by a decrease in
interest income as a result of lower cash and short term investment balances
versus the prior year.
Foreign exchange gain decreased to $254,000 from $466,000 in the same period in
2002 as a result of fluctuations in the Canadian dollar.
The provision for income taxes reflects the Company's estimated effective tax
rate in fiscal 2003 of 26.1%.
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)
The Company currently treats the Food Group as one reporting segment. With the
continued expansion of the Food Group, the Company is in the process of
transitioning its management structure and related reporting systems in support
of its vertically integrated food model. The Company intends to expand segmented
reporting once this transition is complete and information is compiled and
reviewed accordingly and intends to provide expanded segments no later than
December 31, 2003.
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
29
Food Group
Revenues in the Food Group were $45,901,000 in the three months ended June 30,
2003 versus $24,585,000 in the same period in 2002. The increase of $21,316,000
or 86.7% in Food Group revenues was due to an increase in grain sales of
$6,804,000, an increase in sales of aseptic packaged product of $1,766,000, the
acquisition of Opta in December of 2002 of $8,318,000, the acquisitions of
Organic Kitchen, Wild West, Simply Organic and Kettle Valley, totalling
$5,977,000, partially offset by decreases in certain toll processing revenues of
$776,000, and a decrease in soy concentrate revenues as a result of customer mix
of $861,000. The increase in Food Group revenues as a percentage of consolidated
revenues reflects the Company's focus on the natural and organic food markets
through internal growth projects and acquisitions.
Gross profit in the Food Group increased by $4,135,000 in the three months ended
June 30, 2003 to $7,661,000 or 16.7% of revenues compared to $3,526,000 or 14.3%
of revenues in the same period in 2002. The increase in gross margin reflects
the higher gross margins of the acquired businesses and improvements in
efficiencies and volumes at the Company's aseptic packaging operation, partially
offset by the significant increase in grain sales, a lower margin business.
Selling, general and administrative expenses increased to $4,353,000 in the
three months ended June 30, 2003 versus $1,797,000 in the three months ended
June 30, 2002. The increase of $2,835,000 is due primarily to acquisitions
completed in 2002 and 2003 of $2,561,000.
Interest expense increased to $317,000 in the three months ended June 30, 2003
from $223,000 in the three months ended June 30, 2002, primarily as a result of
the acquisitions completed in 2002 and 2003.
Net earnings in the Food Group were $2,251,000 in the three months ended June
30, 2003 compared to net earnings of $1,074,000 in the three months ended June
30, 2002 due to the factors noted above.
Environmental Industrial Group
Revenues in the Environmental Industrial Group were $6,664,000 for the three
months ended June 30, 2003, compared to $6,718,000 in 2002. Improved abrasive
and mineral sales from the Canadian operations of $395,000 were offset by weak
abrasive sales in the U.S. East coast as a result of the continuing war efforts
in the Middle East of $617,000. Specialty sands revenues including water
filtration sands and garnets improved by $157,000 over the same period in 2002.
Gross profit in the Environmental Industrial Group was $1,368,000 in the three
months ended June 30, 2003 versus $1,835,000 in the three months ended June 30,
2002. As a percentage of revenues, gross margin decreased to 20.5% in the three
months ended June 30, 2003 from 27.3% in the three months ended June 30, 2002.
The decrease in margin is partially due to the shift in revenues to the Canadian
operations, which have inherently lower margins, and a reallocation of certain
plant operating costs from selling, general and administrative expenses to cost
of goods sold in 2003 of approximately $159,000 (after adjustment for the
reallocation, 2002 gross margin was 24.9%).
Selling, general and administrative expenses decreased to $493,000 in the three
months ended June 30, 2003 from $779,000 in the three months ended June 30,
2002, primarily due to the allocation noted above of $159,000, and net cost
reduction programs implemented throughout the Group of $127,000.
Interest expense increased to $91,000 in the three months ended June 30, 2003
from $83,000 in the three months ended June 30, 2002, mainly due to cash
utilization as a result of payments made as part of the acquisition of Virginia
Materials in 2001.
Net earnings were $677,000 in the three months ended June 30, 2003 versus
$630,000 in the three months ended June 30, 2002.
Steam Explosion Technology Group
Revenues of $76,000 for the three months ended June 30, 2003 (2002 - $75,000)
were primarily derived from licence fees.
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
30
Selling, general and administrative expenses were $107,000 for the three months
ended June 30, 2003 compared to $98,000 for the same period in 2002. These costs
reflect payroll and related expenses required to manage and maintain the
business.
Net loss for the period was $24,000, which is consistent with the same period in
2002.
Corporate Activities
Selling, general and administration expenses were $922,000 in the three months
ended June 30, 2003 compared to $549,000 in the three months ended June 30,
2002. The increase of $373,000 reflects the additional amortization of deferred
bank financing charges of $82,000, and an increase in other administrative costs
$291,000 including public company, insurance and professional fees.
Operations For the Six Months Ended June 30, 2003 Compared With the Six Months
Ended June 30, 2002
Consolidated
Revenues in the first six months of 2003 increased by 72.1% or $39,391,000 to
$94,052,000 from $54,661,000 in the first six months of 2002, and the Company's
net earnings for the first six months in 2003 were $3,460,000 or $0.08 per basic
common share compared to $1,727,000 or $0.04 per basic common share for the
first six months of 2002. The increase in revenues is due to an increase in
grain sales of $10,874,000, an increase in sales of aseptic packaged product of
$4,705,000, the acquisition of Opta in December of 2002 of $15,424,000, the
acquisitions of Organic Kitchen, Wild West, Simply Organic and Kettle Valley,
totalling $10,07l,000 and an increase in other revenues of $307,000, partially
offset by decreases in certain toll processing revenues of $1,990,000.
Net earnings before income taxes in the six month period ended June 30, 2003
were $4,685,000, compared to $2,477,000 over the same period in 2002, an
increase of $2,208,000 or 89.1%. The increase is primarily attributable to
improved volumes and margins in aseptic packaged products of $1,708,000, an
increase in margins as a result of the increase in grain sales of $277,000,
earnings derived from the acquisitions noted above of $1,104,000 and an increase
in the foreign exchange gain as a result of the appreciation in the Canadian
dollar of $135,000. Significant offsetting factors include a reduction in
certain toll processing margins of $679,000 due to the shortage in volume noted
above, and an increase in administrative and other costs of $337,000, excluding
acquisitions.
Net earnings for the six months ended June 30, 2003 increased by $1,733,000 over
the same period in 2002 as a result of the factors noted above, in addition to a
reduction in the effective income tax rate to 26.1% in 2003 from 30.3% in 2002.
U.S. readers should note that due to differences between Canadian and U.S. GAAP,
the earnings for the six months ended June 30, 2003 under U.S. GAAP are
$3,578,000 or $0.08 per basic common share versus $1,528,000 or $0.04 per basic
common share in the same period in 2002. Note 14 to the consolidated financial
statements itemizes these differences.
Cost of goods sold increased by 69.5% to $77,829,000 for the six months ended
June 30, 2003 compared to $45,921,000 for the six months ended June 30, 2002.
The increasing factors are consistent with the revenue factors noted above.
The Company's consolidated gross margin increased to 17.2% of revenue for the
six months ended June 30, 2003 versus 16.0% of revenues in the six months ended
June 30, 2002. The improvement in gross margin is attributable to the higher
gross margins in the businesses acquired in 2002 and 2003 and improvements in
efficiencies and volumes at the Company's aseptic packaging operation, offset by
the significant increase in grain sales, a lower margin business averaging less
than 10% in gross margin.
Selling, general and administrative expenses increased to $11,359,000 or 12.1%
of revenues in the six months ended June 30, 2003 compared to $6,174,000 or
11.3% of revenues for the six months ended June 30, 2002. The increase in
administrative costs is mainly due to the acquisitions completed in 2002 and
2003 of $4,647,000, incremental legal costs of $150,000 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, additional
amortization charges related to deferred bank financing costs of $150,000 and
incremental administrative costs applicable to managing a growing public
company.
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
31
Interest expense increased to $984,000 in the six months ended June 30, 2003
from $726,000 in the six months ended June 30, 2002. The increase in borrowing
costs reflects the increase in borrowings to support the acquisitions completed
in 2002 and 2003.
Interest and other income increased to $210,000 in the six months ended June 30,
2003 from $203,000 in the six months ended June 30, 2002, primarily due to a
gain on sale of non-core property of $134,000, offset by a decrease in interest
income as a result of lower cash and short term investment balances versus the
prior year.
Foreign exchange gain increased to $595,000 from $460,000 in the same period in
2002 as a result of the 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 26.1% due to the
aforementioned factors.
Segmented Operations Information
Food Group
The Food Group contributed $81,685,000 or 87.0% of total Company consolidated
revenues in the first six months of 2003 versus $42,676,000 or 78.0% in the same
period in 2002. The increase of $39,009,000 or 91.4% in Food Group revenues was
due to an increase in grain sales of $10,874,000, an increase in sales of
aseptic packaged product of $4,705,000, the acquisition of Opta in December of
2002 of $15,424,000, the acquisitions of Organic Kitchen, Wild West and Simply
Organic in the latter part of 2002 and Kettle Valley in May of 2003, totalling
$10,071,000, partially offset by decreases in certain toll processing revenues
of $1,990,000 and a net decrease in other revenues of $75,000.
Gross profit in the Food Group increased by $7,960,000 in the six months ended
June 30, 2003 to $13,486,000 or 16.5% of revenues compared to $5,526,000 or
13.0% of revenues in the same period in 2002. The increase in gross margin
reflects the higher gross margins of the acquired businesses and improvements in
efficiencies and volumes at the Company's aseptic packaging operation, partially
offset by the significant increase in grain sales, a lower margin business.
Selling, general and administrative expenses increased to $8,468,000 in the six
months ended June 30, 2003 versus $3,474,000 in the six months ended June 30,
2002. The increase of $4,994,000 is due primarily to acquisitions completed in
2002 and 2003 of $4,647,000 and legal costs of $150,000 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 $704,000 in the six months ended June 30, 2003
from $593,000 in the six months ended June 30, 2002, primarily as a result of
the acquisitions completed in 2002 and 2003.
Net earnings in the Food Group were $3,177,000 in the six months ended June 30,
2003 compared to net earnings of $1,076,000 in the six months ended June 30,
2002 due to the factors noted above.
Environmental Industrial Group
The Environmental Industrial Group contributed $12,064,000 or 12.8% of the total
Company consolidated revenues in the first six months of 2003, compared to
$11,859,000 or 21.7% in 2002. Improved abrasive and mineral sales from the
Canadian operations of $524,000 were offset by weak abrasive sales in the U.S.
East coast as a result of the continuing war efforts in the Middle East of
$477,000. Specialty sands revenues, including coated sands, water filtration
sands and garnets improved by $154,000 over the same period in 2002.
Gross profit in the Environmental Industrial Group was $2,434,000 in the six
months ended June 30, 2003 versus $3,063,000 in the six months ended June 30,
2002. As a percentage of revenues, gross margin decreased to 20.2% in the first
six months of 2003 from 25.8% in the first six months of 2002. The decrease in
margin is partially due to the shift in revenues to the Canadian operations,
which have inherently lower margins, and a reallocation of certain plant
operating costs from selling, general and administrative expenses to cost of
goods sold in 2003 of approximately $330,000 (after adjustment for the
reallocation, 2002 gross margin was 23.1%).
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
32
Selling, general and administrative expenses decreased to $1,029,000 in the six
months ended June 30, 2003 from $1,508,000 in the six months ended June 30,
2002, primarily due to the allocation noted above of $330,000, and net cost
reduction programs implemented throughout the Group of $149,000.
Interest expense increased to $181,000 in the first six months of 2003 from
$136,000 in the first six months of 2002, mainly due to cash utilization as a
result of payments made as part of the acquisition of Virginia Materials in
2001.
Net earnings were $962,000 in the six months ended June 30, 2003 versus $894,000
in the six months ended June 30, 2002.
Steam Explosion Technology Group
Revenues of $304,000 for the six months ended June 30, 2003 (2002 - $150,000)
were primarily derived from licence fees. The increase in 2003 over the prior
year is primarily derived from the recognition of $150,000 in license fees
relating to 2002 in 2003.
Selling, general and administrative expenses were $173,000 for the first six
months of 2003 compared to $155,000 for the same period in 2002. These costs
reflect payroll and related expenses required to manage and maintain the
business.
Net earnings were $89,000 compared to a net loss of ($13,000) in the same period
in 2002.
Corporate Activities
Selling, general and administration expenses were $1,689,000 in the six months
ended June 30, 2003 compared to $1,067,000 in the six months ended June 30,
2002. The increase of $622,000 reflects the additional amortization of deferred
bank financing charges of $150,000, an increase in costs related to the
administration of a growing public company of $220,000 and an increase in
insurance and professional fees of $252,000.
Liquidity and Capital Resources at June 30, 2003
Current assets
Cash and cash equivalents decreased to $2,649,000 at June 30, 2003 (December 31,
2002 - $7,012,000), primarily due to the repayment of the tender facility in
March 2003.
The short term investments held at December 31, 2002 of $2,038,000 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 June 30, 2003.
Trade accounts receivable increased to $21,316,000 at June 30, 2003 from
$18,144,000 at December 31, 2002. Trade receivables at June 30, 2003
attributable to the Food Group were $16,811,000 (December 31, 2002 -
$14,889,000). Trade receivables in the Environmental Industrial Group were
$4,183,000 (December 31, 2002 - $3,255,000). The increases in trade account
receivables in the Food Group and the Environmental Industrial Group are
consistent with the increase in sales in the respective Groups, as a result of
seasonality and acquisitions. The Steam Explosion Technology Group has a
receivable of $322,000 related to the license fee revenues (December 31, 2002 -
$nil).
The note receivable of $354,000 (December 31, 2002 - $1,034,000) and the product
rebate payable in long-term payables of $1,394,000 (December 31, 2002 -
$1,330,000) are related to an agreement with a major European based company to
supply product. This agreement required the Food Group to expand a food
processing plant to the customer's specifications, which was completed in 2001.
In accordance with the terms of the agreement, the customer pays 36 monthly
instalments of $119,000. The agreement also requires the Company to provide the
customer with a product rebate beginning October 2003 until $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 $903,000 to $23,892,000 at June 30, 2003 from $22,989,000
at December 31, 2002. The Food Group accounts for $18,881,000 of the
consolidated balance (December 31, 2002 - $18,492,000) and the Environmental
Industrial Group accounts for $5,011,000 (December 31, 2002 - $4,497,000). The
Steam Explosion
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
33
Technology Group is not required to carry significant inventories. The higher
inventories balance in the Food Group is primarily due to the acquisition of
Kettle Valley. The increase in inventories in the Environmental Industrial Group
is due to timing of supply shipments. In order to achieve more efficient and
competitive cost structures, inventories are purchased in large quantities less
frequently, and therefore timing of these shipments can result in significant
fluctuations from quarter to quarter.
Prepaid expenses and other current assets increased to $2,254,000 at June 30,
2003 from $958,000 at December 31, 2002. The increase is mainly due to an
increase in prepaid insurance as a result of policy renewals in the first six
months, receivables from the sale of non-core properties and the acquisition of
Kettle Valley.
Property, plant and equipment
In the first six months of 2003, the Company expended $2,480,000 (June 30, 2002
- - $2,152,000) on property, plant and equipment, of which, the Food Group
comprised of $2,112,000. Key projects in the period 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 six
months of 2003, $327,000 was expended by the Environmental Industrial Group on
general additions, betterments and replacements and $41,000 was spent by the
Steam Explosion Technology Group and the Corporate Office on computer equipment
and furniture.
Goodwill and intangibles
Goodwill and intangibles increased to $17,250,000 at June 30, 2003 from
$14,992,000 at December 31, 2002. The increase is due to the acquisition of
Kettle Valley of $1,564,000, a foreign exchange valuation increase of Canadian
goodwill and intangibles of $710,000, less amortization of $8,000.
Future income taxes
The future income tax asset relates primarily to loss carry-forwards recorded on
the acquisition of Opta Food Ingredients, Inc., loss carry-forwards in Canada
and scientific research and development credits available in Canada.
Other assets
Other assets decreased to $985,000 at June 30, 2003 from $1,080,000 at December
31, 2003, due in most part to amortization of pre-operating costs and financing
fees of $331,000, offset by the capitalization of $250,000 in bank financing
fees.
Current liabilities
Bank indebtedness at June 30, 2003 was $10,152,000 (December 31, 2002 -
$3,963,000). The increase relates primarily to the utilization of the line of
credit facilities to repay the tender facility in March 2003, of $3,500,000,
$190,000 due to the acquisition of Kettle Valley and addition of their third
facility and the balance to support ongoing business growth.
Accounts payable and accrued liabilities increased to $20,098,000 at June 30,
2003 from $19,664,000 at December 31, 2002. The increase is primarily due to the
acquisition of Kettle Valley and the increase in current supplier payables as a
result of the increase in operations, partially offset by the payment of
deferred payments to grain suppliers at December 31, 2002, and the disbursement
of acquisition based accruals.
Customer deposits of $118,000 at June 30, 2003 (December 31, 2002 - $421,000)
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. Deposits
decrease during the planting season as customers purchase seeds and agronomy
products.
Long term debt
At June 30, 2003, the Company's long-term debt, including current portion, is
$27,280,000, a net decrease of $9,469,000 from December 31, 2002. The decrease
relates primarily to the repayment of the tender facility of $15,186,000 and
certain other term debt, offset by the increase in the term debt facility of
$7,800,000 as a result of the refinancing completed in March 2003, and the note
payable to the former shareholders of Kettle Valley of $820,000.
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
34
Long-term payables
The Company had deferred purchase consideration of $420,000 at June 30, 2003
(December 31, 2002 - $667,000) 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 3 to 4 months from June 30, 2003 to satisfy this liability.
The Preference Shares of subsidiary companies were reduced to $160,000 from
$291,000 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.
Payables to former shareholders of acquired companies decreased by $1,987,000 to
$688,000 at June 30, 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, offset by a note payable to
former shareholders of Kettle Valley of $165,000 ($155,000 at acquisition plus
foreign exchange valuation of $10,000).
Cash flow
For the six months ended June 30, 2003, cash flow provided by operations before
working capital changes was $6,104,000, an increase of 84% from $3,324,000 in
the same period in 2002. The increase is due primarily to improvements in
earnings and higher amortization charges in the first six months of 2003 versus
2002.
Cash flow provided by operations after working capital changes was $1,532,000
for the six months ended June 30, 2003 (June 30, 2002 - ($1,058,000)),
reflecting the utilization of funds for non-cash working capital of ($4,572,000)
(June 30, 2002 - ($4,382,000)). This utilization consists principally of an
increase in accounts receivable of ($2,905,000), an increase in prepaid expenses
and other current assets of ($998,000), a decrease in inventories of ($479,000),
a decrease in customer deposits of ($303,000), offset by an increase in accounts
payable and accrued liabilities of $113,000. The working capital deficiencies in
the first six months 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, the
growth in the operations and the economic market seasonality in the
Environmental Industrial Group.
Cash used in investing activities was ($2,491,000). The Company sold its short
term investments for proceeds of $2,038,000 (June 30, 2002 - $6,307,000) and
received payments on a note receivable of $716,000 (June 30, 2002 - $714,000),
partially offset by acquisitions of property, plant and equipment of
($2,480,000) (June 30, 2002 - ($2,152,000)), and payment for the acquisition of
companies of ($2,744,000) (June 30, 2002 - ($507,000)).
Cash used in financing activities was ($3,514,000) in the six months ended June
30, 2003 (June 30, 2002 - $1,230,000), which consists primarily of an increase
in bank indebtedness of $5,719,000 (June 30, 2002 - $1,665,000), proceeds from
the issuance of common shares of $1,930,000 (June 30, 2002 - $388,000), offset
by net debt repayments of ($10,535,000) (June 30, 2002 - ($912,000)), deferred
purchase consideration payments of ($247,000) (June 30, 2002 - ($432,000)) and
financing costs of ($250,000) (June 30, 2002 - ($509,000)).
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. At June 30, 2003 the Company
had no short term investments.
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 June 30, 2003, the weighted average interest rate of the fixed rate term
debt including the convertible debenture was 8.4% and $6,480,000 of the
Company's outstanding term debt is at fixed interest rates. Variable rate term
debt of $20,800,000 at an interest rate of 3.70% is outstanding at June 30,
2003. The Company looks at varying factors to determine the percentage of debt
to hold at fixed rates including the interest rate spread between
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
35
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 Company's ability to manage the business with interest rate
volatility and uncertainty. For every 1% increase (decrease) in interest rates,
the Company's after-tax earnings would decrease (increase) by approximately
$154,000. Given the short duration of fixed rate debt, changes in interest rates
would have a negligible affect on fixed rate debt valuations.
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
$1.3475 at June 30, 2003 for each U.S. dollar. The net effect of this
appreciation has been a $595,000 exchange gain and a $2,062,000 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 $2,164,000. Changes would flow through the Company's cumulative
translation adjustment account in shareholders' equity for self sustaining
operations and through the statement of earnings for integrated operations.
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 a counterparty to a transaction is unable
to fulfill its contractual obligation. The Company manages its risk by entering
into purchase contracts with pre-approved producers. The Company has a risk of
loss from hedge activity if a grower does not deliver the grain as scheduled.
Sales contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated. All futures transactions are marked
to market. Gains and losses on futures transactions related to grain inventories
are included in cost of goods sold. At June 30, 2003, the Company owned 81,743
bushels of corn with a weighted average price of $2.18 and 295,864 bushels of
soy beans with a weighted average price of $7.14. The Company has at June 30,
2003 net long positions on corn and soy beans of 5,351 bushels and 266 bushels,
respectively. Therefore, a change in the commodity prices would not have a
material impact on the Company. 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, conducted an evaluation, as of the end of the period covered
by this report, of the effectiveness of the Company's disclosure controls (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective, as of the
end of the period covered by this report, in ensuring that information required
to be disclosed by the Company in reports it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the required time
periods. During the period covered by this report, there have been no changes in
internal controls, or other factors that have materially affected, or are
reasonably likely to material to affect, the Company's internal controls over
financial reporting.
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
36
PART II - OTHER INFORMATION.
Item 1. Legal proceedings
The Food Group continues to pursue a suit against a former 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 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.
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
The Company's Annual and Special Meeting of Shareholders was held in Toronto on
June 18, 2003.
The following persons were elected to serve as directors of the Company until
the next Annual Meeting of Shareholders or until their successors are elected:
Jeremy N. Kendall (33,057,304 votes "FOR", 90,270 votes "WITHHELD"); Cyril A.
Ing (33,126,924 votes "FOR", 20,650 votes "WITHHELD"); Joseph Riz (33,125,499
votes "FOR", 22,075 votes "WITHHELD"); James Rifenbergh (33,125,849 votes "FOR",
21,725 votes "WITHHELD"); Allan Routh (33,050,554 votes "FOR", 97,020 votes
"WITHHELD"); Dennis Anderson (31,353,644 votes "FOR", 1,793,930 votes
"WITHHELD"); Katrina Houde (33,124,624 votes "FOR", 22,950 votes "WITHHELD");
Camillo Lisio (33,124,849 votes "FOR", 22,725 votes "WITHHELD"); Stephen
Bronfman (31,345,069 votes "FOR", 1,802,505 votes "WITHHELD"); and Robert
Fetherstonhaugh (33,053,479 votes "FOR", 94,095 votes "WITHHELD").
In addition to the election of directors, the following matters were voted upon:
1. The appointment of PricewaterhouseCoopers LLP as auditors for the Company
for 2003. There were 33,086,074 shares voted "FOR" the appointment, 38,950
shares voted "AGAINST" the appointment and 22,550 shares "ABSTAINED".
2. An amendment to the Company's Articles to change the Company's name to
"SunOpta Inc.". There were 32,323,732 shares voted "FOR" the amendment;
753,867 shares voted "AGAINST" the amendment; and 69,975 shares
"ABSTAINED".
3. The adoption of the Company's Employee Stock Purchase Plan. There were
24,634,599 shares voted "FOR" the adoption of the Plan; 573,946 shares
voted "AGAINST" the adoption of the Plan; and 194,436 shares "ABSTAINED".
Item 5. Other - Not applicable
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
37
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned hereunto duly authorized.
STAKE TECHNOLOGY LTD.
(Registrant)
/s/ Steven R. Bromley
Date August 14, 2003
Stake Technology Ltd.
by Steven R. Bromley
Executive Vice President
& Chief Financial Officer
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
38
EXHIBIT INDEX
Exhibit No. Page No.
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31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 40
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 41
32.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 42
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STAKE TECHNOLOGY LTD. June 30, 2003 10-Q
39