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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 September 30, 2003
Commission File No. 0-9989
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SunOpta Inc.
(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 November 6, 2003 registrant had 52,578,460 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 $317,233,375. 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 September 30, 2003 10-Q and the index follows the
cover page.
- --------------------------------------------------------------------------------
1
SUNOPTA INC.
FORM 10-Q
September 30, 2003
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as at September 30, 2003 and December
31, 2002.
Consolidated Statements of Retained Earnings for the nine months
ended September 30, 2003 and 2002, and the year ended December 31,
2002.
Consolidated Statements of Earnings for the three and nine months
ended September 30, 2003 and 2002.
Consolidated Statements of Cash Flow for the three and nine months
ended September 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 September 30, 2003 was CDN $1 = U.S.
$0.7408
- --------------------------------------------------------------------------------
2
PART I - FINANCIAL INFORMATION
Item 1 -
Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
SunOpta Inc.
For the Nine Months Ended September 30, 2003
3
SunOpta Inc.
Consolidated Balance Sheets
As at September 30, 2003 and December 31, 2002
Unaudited
(Expressed in thousands of U.S. dollars)
- -----------------------------------------------------------------------------------------
September 30, December 31,
2003 2002
$ $
- -----------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 38,892 7,012
Short-term investments -- 2,038
Accounts receivable - trade 23,520 18,144
Note receivable -- 1,034
Inventories (note 4) 24,005 22,989
Prepaid expenses and other current assets 1,965 958
Future income taxes -- 115
--------------------------
88,382 52,290
Property, plant and equipment, net 40,055 37,033
Goodwill and intangibles, net 17,220 14,992
Future income taxes 11,440 9,892
Other assets (note 5) 813 1,080
--------------------------
157,910 115,287
==========================
Liabilities
Current liabilities
Bank indebtedness -- 3,963
Accounts payable and accrued liabilities 18,103 19,664
Customer and other deposits 608 421
Current portion of long-term debt (note 6) 2,769 11,650
Current portion of long-term payables (note 7) 872 3,458
--------------------------
22,352 39,156
Long-term debt (note 6) 19,095 25,099
Long-term payables (note 7) 1,454 1,505
--------------------------
42,901 65,760
--------------------------
Shareholders' Equity (note 10)
Capital stock (note 8) 95,786 38,020
Authorized
Unlimited common shares without par value
Issued
52,325,281 (December 31, 2002 - 41,984,118) common shares
Contributed surplus 2,968 2,914
Retained earnings 13,030 7,470
Currency translation adjustment 3,225 1,123
--------------------------
115,009 49,527
--------------------------
157,910 115,287
==========================
Commitments and contingencies (note 12)
(See accompanying notes to consolidated financial statements)
4
SunOpta Inc.
Consolidated Statements of Retained Earnings
For the nine months ended September 30, 2003 and 2002 and the year ended
December 31, 2002 Unaudited
(Expressed in thousands of U.S. dollars)
- -----------------------------------------------------------------------------------------------------
Nine months ended Year ended
----------------- ----------
September 30, September 30, December 31,
2003 2002 2002
$ $ $
- -----------------------------------------------------------------------------------------------------
Retained Earnings - Beginning of the Year 7,470 3,704 3,704
Net earnings for the period 5,560 3,254 3,766
--------------------------------------------
Retained Earnings - End of Period 13,030 6,958 7,470
============================================
(See accompanying notes to consolidated financial statements)
5
SunOpta Inc.
Consolidated Statements of Earnings
For the three months ended September 30, 2003 and 2002
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
- -------------------------------------------------------------------------------------
September 30, September 30,
2003 2002
$ $
- -------------------------------------------------------------------------------------
Revenues 50,384 32,800
Cost of goods sold 41,404 27,510
--------------------------------
Gross profit 8,980 5,290
Selling, general and administrative expenses 5,887 3,240
--------------------------------
Earnings before the following 3,093 2,050
Interest expense (680) (302)
Interest and other income 201 30
Foreign exchange loss (171) (322)
--------------------------------
(650) (594)
--------------------------------
Earnings before income taxes 2,443 1,456
Provision for (recovery of) income taxes 343 (71)
--------------------------------
Net earnings for the period 2,100 1,527
================================
Net earnings per share for the period (note 9)
- Basic 0.05 0.04
================================
- Diluted 0.04 0.04
================================
(See accompanying notes to consolidated financial statements)
6
SunOpta Inc.
Consolidated Statements of Earnings
For the nine months ended September 30, 2003 and 2002
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------------
September 30, September 30,
2003 2002
$ $
- --------------------------------------------------------------------------------------
Revenues 144,436 87,461
Cost of goods sold 119,232 73,431
---------------------------------
Gross profit 25,204 14,030
Selling, general and administrative expenses 17,247 9,446
---------------------------------
Earnings before the following 7,957 4,584
Interest expense (1,664) (1,030)
Interest and other income 411 238
Foreign exchange gain 425 140
---------------------------------
(828) (652)
---------------------------------
Earnings before income taxes 7,129 3,932
Provision for income taxes 1,569 678
---------------------------------
Net earnings for the period 5,560 3,254
=================================
Net earnings per share for the period (note 9)
- Basic 0.13 0.08
=================================
- Diluted 0.12 0.08
=================================
(See accompanying notes to consolidated financial statements)
7
SunOpta Inc.
Consolidated Statements of Cash Flow
For the three months ended September 30, 2003 and 2002
Unaudited
(Expressed in thousands of U.S. dollars)
- ----------------------------------------------------------------------------------------------------------
September 30, September 30,
2003 2002
$ $
- ----------------------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 2,100 1,527
Items not affecting cash
Amortization 1,331 1,054
Future income taxes (867) (498)
Other 354 85
-------------------------------
2,918 2,168
Changes in non-cash working capital (note 11) (3,992) (1,574)
-------------------------------
(1,074) 594
-------------------------------
Investing activities
Acquisition of businesses, net of cash acquired (150) (573)
Acquisition of property, plant and equipment (1,298) (903)
Proceeds from note receivable 358 331
Other 220 364
-------------------------------
(870) (781)
-------------------------------
Financing activities
Decrease in bank indebtedness (10,004) (1,407)
Repayment of term debt facilities (5,674) (297)
Repayment of deferred purchase consideration (243) (322)
Proceeds from the issuance of common shares, net of issuance costs 54,098 1,444
Financing costs (93) --
Purchase and redemption of Preference Shares of subsidiary companies (8) (5)
-------------------------------
38,076 (587)
Foreign exchange gain (loss) on cash held in a foreign currency 111 (65)
-------------------------------
Increase (decrease) in cash and cash equivalents during the period 36,243 (839)
Cash and cash equivalents - Beginning of the period 2,649 7,647
-------------------------------
Cash and cash equivalents - End of the period 38,892 6,808
===============================
See note 11 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
8
SunOpta Inc.
Consolidated Statements of Cash Flow
For the nine months ended September 30, 2003 and 2002
Unaudited
(Expressed in thousands of U.S. dollars)
- -----------------------------------------------------------------------------------------------------------
September 30, September 30,
2003 2002
$ $
- -----------------------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 5,560 3,254
Items not affecting cash
Amortization 3,757 2,917
Future income taxes (543) (715)
Other 247 42
--------------------------------
9,021 5,498
Changes in non-cash working capital (note 11) (8,564) (5,956)
--------------------------------
457 (458)
--------------------------------
Investing activities
Decrease in short term investments 2, 038 6,307
Acquisition of businesses, net of cash acquired (2,894) (1,080)
Acquisition of property, plant and equipment (3,778) (3,055)
Proceeds from note receivable 1,074 1,045
Other 199 101
--------------------------------
(3,361) 3,318
--------------------------------
Financing activities
(Decrease) increase in bank indebtedness (4,285) 258
Repayment of term debt and tender facilities (24,009) (16,209)
Borrowings under term debt facilities 7,800 15,000
Payment of deferred purchase consideration (490) (754)
Proceeds from the issuance of common shares, net of issuance costs 56,028 1,805
Financing costs (343) (499)
Decrease in restricted cash -- 1,147
Purchase and redemption of Preference Shares of subsidiary companies (139) (122)
--------------------------------
34,562 626
Foreign exchange gain (loss) on cash held in a foreign currency 222 (42)
--------------------------------
Increase in cash and cash equivalents during the period 31,880 3,444
Cash and cash equivalents - Beginning of the period 7,012 3,364
--------------------------------
Cash and cash equivalents - End of the period 38,892 6,808
================================
See note 11 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
9
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
1. Interim financial statements
The interim consolidated financial statements of SunOpta Inc. (the
Company) have been prepared in accordance with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X and in accordance with accounting
principles generally accepted in Canada which conform, in all material
respects (except as indicated in note 13, with accounting principles
generally accepted in the U.S.). Accordingly, these financial statements
do not include all of the disclosures required by generally accepted
accounting principles for annual financial statements. In the opinion of
management, all adjustments considered necessary for fair presentation
have been included and all such adjustments are of a normal, recurring
nature. Operating results for the nine months ended September 30, 2003 are
not necessarily indicative of the results that may be expected for the
full year ended 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.
As of October 31, 2003, Stake Technology Ltd. has changed its name to
SunOpta Inc. (SunOpta). The name SunOpta better describes the Company's
commitment to environmental responsibility and natural and organic food
products nourished in the `sun' with `optimal' nutritional value.
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 September 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
inter-company 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.
10
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Inventories, continued
Inventories of grain are valued at market. Changes in market value are
included in cost of goods sold. The Food Group generally follows a policy
of hedging its grain transactions to protect gains and minimize losses due
to market fluctuations. Futures and purchase and sale contracts are
adjusted to market price and gains and losses from such transactions are
included in cost of goods sold. The Company has a risk of loss from hedge
activity if the grower does not deliver the grain as scheduled.
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated
amortization.
Amortization is provided on property, plant and equipment on the
diminishing balance basis or, in the case of certain U.S.-based
subsidiaries, straight-line basis at rates based on the estimated useful
lives of the assets as follows: 10% to 33% for office furniture and
equipment, machinery and equipment and vehicles and 4% to 8% for
buildings. Amortization is calculated from the time the asset is put into
use.
Included in land and buildings at September 30, 2003, are certain
properties held for sale totaling $5,020 (December 31, 2002 - $5,020). The
Company has entered into an option agreement to sell one of the properties
with a net book value of $4,800 (note 12 c).
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.
11
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
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.
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 September 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 September 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.
12
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 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 and other deposits
Customer and other deposits principally include prepayments by the Food
Group's customers for merchandise inventory to be purchased during the
spring planting season and $500 as at September 30, 2003, (December 31,
2002 - nil) related to a deposit received on an option agreement related
to a property held for sale (note 12 c).
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
13
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
transactions are marked to market. Gains and losses on futures
transactions related to grain inventories are included in cost of goods
sold.
Earnings per share
Basic earnings per share are computed by dividing the income available for
common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed
using the treasury stock method whereby the weighted average number of
common shares used in the basic earnings per share calculation is
increased to include the number of additional common shares that would
have been outstanding if the dilutive potential common shares had been
issued.
Use of estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the dates of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
3. Acquisition of businesses
On May 1, 2003, SunOpta reached an agreement to acquire 100% of the
outstanding shares of Kettle Valley Dried Fruit Ltd. (Kettle Valley) and
its related companies.
Kettle Valley produces natural and organic fruit bars and fruit leathers
with an apple base and markets these products under the Kettle Valley Real
Fruit Snack and Frunola brands. The Company operates two production
facilities in Summerland, British Columbia, the heart of the B.C. apple
growing district, and has constructed a third plant in the State of
Washington, the center of the apple growing district of the Western U.S.
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 1,063
Customer relationships and contracts 370
Trademark 401
Bank indebtedness and term debt (583)
Future tax liability (270)
----------
2,669
==========
Consideration given:
Cash 874
Notes payable 975
Common shares 820
----------
2,669
==========
14
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
4. Inventories
September 30, December 31,
2003 2002
$ $
Raw materials 9,093 7,859
Finished goods 12,867 11,750
Grain 2,045 3,380
--------------------------------
24,005 22,989
================================
Grain inventories consist of the following:
September 30, December 31,
2003 2002
$ $
Company owned grain 2,074 3,338
Unrealized gain (loss) on
Sales and purchase contracts (39) (79)
Futures contracts 10 121
--------------------------------
2,045 3,380
================================
5. Other assets
September 30, December 31,
2003 2002
$ $
Pre-operating costs, net of accumulated
amortization of $690 (2002 - $432) 98 358
Deferred financing costs, net of accumulated
amortization of $572 (2002 - $201) 644 619
Other 71 103
--------------------------------
813 1,080
================================
6. Long-term debt and banking facilities
September 30, December 31,
2003 2002
$ $
Term loan (a) 20,325 13,900
Tender facility (b) -- 15,186
Convertible debenture (e) -- 4,697
Other long-term debt (c)(d) 1,539 2,966
--------------------------------
21,864 36,749
Less: current portion (2,769) (11,650)
--------------------------------
19,095 25,099
================================
15
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 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 and the
credit facility increased by $4,000.
(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 (a) above)
and the utilization of $3,886 in cash.
(c) During the first nine months of 2003, the Company repaid certain
other long-term debt of $2,097, in addition to making regularly
scheduled repayments of $202.
(d) As part of the acquisition of Kettle Valley, the Company has
recorded an $872 (CDN $1,174) note payable in other long-term debt.
In addition, the Company increased its Canadian line of credit to
CDN $7,500 from CDN $5,000 as a result of the acquisition.
(e) During the third quarter of 2003, the Company redeemed the
convertible debenture at the face value of $5,000. As a result of
the early redemption a loss on extinguishment of debt of $183,
representing the accelerated interest accretion was recorded.
7. Long-term payables
September 30, December 31,
2003 2002
$ $
Product rebate payable 1,427 1,330
Deferred purchase consideration 177 667
Preference shares of subsidiary companies 152 291
Payable to former shareholders of acquired companies (a) 570 2,675
---------------------------------
2,326 4,963
Less: current portion (872) (3,458)
---------------------------------
1,454 1,505
=================================
(a) During the first quarter $1,871 was paid to the former shareholders
of Opta Food Ingredients, Inc.(Opta) in respect of untendered shares
converted to a right to receive $2.50 per share in cash as a result
of the amalgamation of Stake Acquisition Corp. with Opta.
16
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
8. Capital stock
September 30, December 31,
2003 2002
$ $
(a) Issued and fully paid -
52,325,281 common shares (December 31, 2002 - 41,984,118) 93,813 35,230
3,090,175 warrants (December 31, 2002 - 4,224,600) 1,973 2,790
------------------------------------
95,786 38,020
====================================
(b) In the first nine months of 2003, employees and directors exercised
1,008,215 (September 30, 2002 - 238,540) common share options and an
equal number of common shares were issued for net proceeds of $1,882
(September 30, 2002 - $373).
(c) In the first nine months of 2003, 1,134,425 warrants were exercised
(September 30, 2002 - 655,000) and an equal number of common shares
were issued for net proceeds of $1,963 (September 30, 2002 -
$1,471). In addition, 216,000 (September 30, 2002 - $nil)
compensation warrants were exercised in the first nine months for
net proceeds of $461 (September 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.
(e) On August 28, 2003, the Company issued 7,500,000 common shares at a
price of $7.00 per common share, in respect to a public offering for
gross proceeds of $52,500. The Company incurred $1,806 in share
issuance costs (net of tax).
(f) On August 29, 2003, the Company issued 285,714 common shares
pursuant to a private placement with a significant shareholder, for
proceeds of $2,000.
(g) As at September 30, 2003 there were options vested to employees and
directors to acquire 886,080 common shares at exercise prices of
$1.06 to $9.11. In addition, at September 30, 2003, options to
acquire an additional 985,340 common shares at $1.06 to $9.11 have
been granted to employees and directors but have not yet vested.
(h) In the first nine months of 2003, 731,850 options were granted to
employees at a price range of $3.06 to $9.11.
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 September 29, 2007 and expire two to six years
subsequent to the grant date.
The fair value of the options granted during the first nine 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.
17
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
8. Capital stock, continued
Pro-forma net earnings reflecting stock compensation for the three and
nine months ended September 30, 2003 and 2002 are as follows:
Three months ended Nine months ended
--------------------------------------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
$ $ $ $
Number of options granted 152,400 -- 731,850 110,000
==============================================================
$ $ $ $
Total fair value 715 -- 2,049 118
==============================================================
Net earnings for the period as reported 2,100 1,527 5,560 3,254
Stock compensation expense:
Options vested in current period from current year grants 179 12 306 36
Options vested in current period from prior years grants 60 22 181 66
--------------------------------------------------------------
239 34 487 102
--------------------------------------------------------------
Pro-forma net earnings for the period 1,861 1,493 5,073 3,152
==============================================================
Pro-forma net earnings per common share
- Basic 0.04 0.04 0.12 0.08
==============================================================
- Diluted 0.04 0.03 0.11 0.07
==============================================================
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 Nine months ended
------------------------------------------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
$ $ $ $
Weighted average number of shares used in
basic earnings per share 46,394,941 41,879,000 43,903,794 41,402,000
Dilutive potential of the following
Warrants 2,342,159 765,519 1,904,963 765,519
Employee/director stock options 1,184,910 648,597 947,313 648,597
------------------------------------------------------------------
Weighted average number of shares used in
diluted earnings per share 49,922,010 43,293,116 46,756,700 42,816,116
==================================================================
Earnings per share:
- Basic 0.05 0.04 0.13 0.08
==================================================================
- Diluted 0.04 0.04 0.12 0.08
==================================================================
For the three months ended September 30, 2003, 90,000 options have been
excluded from the calculation due to their anti-dilutive nature. For the
nine months ended September 30, 2003, 152,400 options have been excluded
from the calculation due to their anti-dilutive nature.
18
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 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 1,882 -- -- -- 1,882
Warrants exercised 1,963 -- -- -- 1,963
Compensation warrants exercised 461 -- -- -- 461
Shares issued to acquire Kettle Valley 820 -- -- -- 820
Proceeds of equity issue, net of issuance costs 50,694 -- -- -- 50,694
Proceeds of private placement 2,000 -- -- -- 2,000
Elimination of convertible right (54) 54 -- -- -
Net earnings for the period -- -- 5,560 -- 5,560
Currency translation adjustment -- -- -- 2,102 2,102
-------------------------------------------------------------------------
Balance at September 30, 2003 95,786 2,968 13,030 3,225 115,009
=========================================================================
11. Supplemental cash flow information
Three months ended
-------------------------------------
September 30, September 30,
2003 2002
$ $
Changes in non-cash working capital:
Accounts receivable - trade (2,621) (1,192)
Inventories 71 (536)
Prepaid expenses and other current assets 105 41
Accounts payable and accrued liabilities (2,037) 334
Customer and other deposits 490 (221)
-------------------------------------
(3,992) (1,574)
=====================================
Cash paid for:
Interest 611 401
=====================================
Income taxes 1,041 793
=====================================
Nine months ended
-------------------------------------
September 30, September 30,
2003 2002
$ $
Changes in non-cash working capital:
Accounts receivable - trade (5,526) (5,450)
Inventories (408) (145)
Prepaid expenses and other current assets (893) (39)
Accounts payable and accrued liabilities (1,924) 989
Customer and other deposits 187 (1,311)
-------------------------------------
(8,564) (5,956)
=====================================
Cash paid for:
Interest 1,329 1,253
=====================================
Income taxes 2,099 873
On May 1, 2003, the Company issued 196,809 common shares in respect of the
acquisition of Kettle Valley.
19
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 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 wastewater.
The Company has applied for increased discharge limits and is also
re-engineering certain processes and installing 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) During the quarter the Company's subsidiary, Opta Food Ingredients,
Inc. (Opta) entered into an option agreement whereby a Purchaser was
granted a one year option to purchase the former Opta Corporate
Headquarters and Development Centre (45,000 square feet) at a price
of $4,850. The option was granted for a period of one year and
expires on September 22, 2004.
As per the terms of the option agreement, as of September 30, 2003
Opta has received a $500 non-refundable option deposit which will be
applied to the sale price at closing should the option be exercised.
Opta will also receive non-refundable monthly option payments of
$30, which will not be applied to the purchase price. An option
deposit in the amount of $700 is due on or before December 15, 2003
and Opta will also receive monthly option deposits of $20, all of
which will be applied to the purchase price if exercised. The $500
is recorded on the Company's balance sheet under customer and other
deposits.
(d) In the normal course of business, the Food Group holds grain for the
benefit of others. The Company is liable for any deficiencies of
grade or shortage of quantity that may arise in connection with such
grain.
(e) Letters of credit:
i) An irrevocable letter of credit for $555 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.
20
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. Commitments and contingencies, continued
iii) Additional letters of credit totalling $28 have been placed
with third parties as security on transactions occurring in
the ordinary course of operations.
(f) Commitments under operating leases, principally for distribution
centres, warehouse and equipment, are as follows:
$
2003 247
2004 1,665
2005 1,597
2006 1,516
2007 1,320
2008 and thereafter 1,433
---------------
7,778
===============
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
September 30, 2003
---------------------------------------------------------------------------------
Steam Explosion
Technology
Environmental Group and
Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 36,118 3,798 82 39,998
Canada 6,274 2,609 -- 8,883
Other 1,434 69 -- 1,503
------------------------------------------------------------------------------
Total revenues to external customers 43,826 6,476 82 50,384
------------------------------------------------------------------------------
Interest expense 362 96 222 680
------------------------------------------------------------------------------
Provision for (recovery of) income taxes 457 124 (234) 343
------------------------------------------------------------------------------
Segment net earnings (loss) 2,451 638 (989) 2,100
------------------------------------------------------------------------------
Identifiable assets 101,508 23,523 32,879 157,910
------------------------------------------------------------------------------
Amortization 864 277 190 1,331
------------------------------------------------------------------------------
Expenditures on property, plant and
equipment 1,097 185 16 1,298
------------------------------------------------------------------------------
21
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
13. Segmented information, continued
Three months ended
September 30, 2002
------------------------------------------------------------------------------
Steam Explosion
Technology
Environmental Group and
Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 24,985 3,323 76 28,384
Canada 386 3,258 -- 3,644
Other 686 86 -- 772
------------------------------------------------------------------------------
Total revenues to external customers 26,057 6,667 76 32,800
------------------------------------------------------------------------------
Interest expense 216 86 -- 302
------------------------------------------------------------------------------
Provision for (recovery of) income taxes (130) 451 (392) (71)
------------------------------------------------------------------------------
Segment net earnings (loss) 1,530 726 (729) 1,527
------------------------------------------------------------------------------
Identifiable assets 53,366 20,859 8,769 82,994
------------------------------------------------------------------------------
Amortization 793 220 41 1,054
------------------------------------------------------------------------------
Expenditures on property, plant and
equipment 722 162 19 903
------------------------------------------------------------------------------
Nine months ended
September 30, 2003
------------------------------------------------------------------------------
Steam Explosion
Technology
Environmental Group and
Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 103,800 8,335 383 112,518
Canada 17,305 10,060 -- 27,365
Other 4,406 144 3 4,553
------------------------------------------------------------------------------
Total revenues to external customers 125,511 18,539 386 144,436
------------------------------------------------------------------------------
Interest expense 1,165 277 222 1,664
------------------------------------------------------------------------------
Provision for income taxes 1,561 454 (446) 1,569
------------------------------------------------------------------------------
Segment net earnings 5,532 1,608 (1,580) 5,560
------------------------------------------------------------------------------
Amortization 2,663 686 408 3,757
------------------------------------------------------------------------------
Expenditures on property, plant and
equipment 3,208 513 57 3,778
------------------------------------------------------------------------------
22
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
13. Segmented information, continued
Nine months ended
September 30, 2002
--------------------------------------------------------------------------
Steam Explosion
Technology
Environmental Group and
Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 65,687 8,744 226 74,657
Canada 652 9,608 -- 10,260
Other 2,370 174 -- 2,544
--------------------------------------------------------------------------
Total revenues to external customers 68,709 18,526 226 87,461
--------------------------------------------------------------------------
Interest expense 808 222 -- 1,030
--------------------------------------------------------------------------
Provision for (recovery of) income taxes 352 909 (583) 678
--------------------------------------------------------------------------
Segment net earnings (loss) 2,583 1,589 (918) 3,254
--------------------------------------------------------------------------
Amortization 2,174 640 103 2,917
--------------------------------------------------------------------------
Expenditures on property, plant and
equipment 2,169 794 92 3,055
--------------------------------------------------------------------------
Geographic segments
September 30, December 31,
2003 2002
-------------------------------------- ---------------------------------------
U.S. Canada Total U.S. Canada Total
$ $ $ $ $ $
Property, plant and
equipment 29,520 10,535 40,055 29,568 7,465 37,033
====================================== =======================================
Goodwill and intangibles 11,669 5,551 17,220 11,655 3,337 14,992
====================================== =======================================
Total assets 92,782 65,128 157,910 87,399 27,888 115,287
====================================== =======================================
Customer concentration
The Company has one customer in the Food Group whose purchases were 14.8%
(September 30, 2002 - 13.6%) of the Company's third quarter total revenue
and 12.7% of the Company's total revenue in the first nine months of 2003
(September 30, 2002 - 14.0%).
23
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 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 nine
months ended September 30, 2003, (2002 - $276), deferred in these
financial statements would be expensed. Amortization of $258 in the nine
months ended September 30, 2003, (2002 - $170) related to pre-operating
costs would not have been expensed.
In conjunction with the issuance of the convertible debenture in 2002 for
Canadian GAAP purpose, the fair value of the convertible right was
determined to be $54. For U.S. GAAP purposes, the convertible right would
not be recorded until the option right is exercisable.
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 Nine months ended Year ended
---------------------------------------------------------------------------------
September 30, September 30, September 30, September 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Net earnings for the period - as reported 2,100 1,527 5,560 3,254 3,766
Pre-operating costs expensed 98 90 258 170 271
Pre-operating costs capitalized -- -- -- (276) (276)
Accretion on convertible debenture 54 -- 54 -- --
Stock option compensation expense -- -- -- (62) (62)
Tax effect of above items (58) (36) (119) 42 42
----------------------------------------------------------------------------
Net earnings for the period - U.S. GAAP 2,194 1,581 5,753 3,128 3,701
============================================================================
Net earnings per common share - U.S. GAAP
- Basic 0.05 0.04 0.13 0.08 0.09
============================================================================
- Diluted 0.04 0.04 0.12 0.07 0.09
============================================================================
Shareholders' equity - as reported 115,009 43,701 49,527
Cumulative pre-operating costs, net of
amortization, net of tax (61) (268) (215)
Cumulative stock compensation expense (416) (416) (416)
----------------------------------------------
Shareholders' equity - U.S. GAAP 114,532 43,017 48,896
==============================================
24
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 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 Nine months ended Year ended
----------------------------------------------------------------------------------
September 30, September 30, September 30, September 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Net earnings for the period-U.S. GAAP 2,194 1,581 5,753 3,128 3,701
Currency translation adjustment 40 (587) 2,102 4 112
----------------------------------------------------------------------------------
Comprehensive income for the period 2,234 994 7,855 3,132 3,813
==================================================================================
Other U.S. GAAP disclosures
Changes in reserves Three months ended Nine months ended Year ended
----------------------------------------------------------------------------------
September 30, September 30, September 30, September 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Allowance for doubtful accounts
Balance - beginning of period 675 510 709 367 367
Additions charged to expense including
effects of foreign exchange rate 322 674 427 817 450
differences
Accounts receivable charged off, net (230) -- (369) -- (108)
of recoveries
----------------------------------------------------------------------------------
Balance - end of period 767 1,184 767 1,184 709
==================================================================================
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 -- -- -- -- (479)
----------------------------------------------------------------------------------
Balance - end of period 4,107 479 4,107 479 4,107
==================================================================================
25
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
14. United States generally accepted accounting principles differences,
continued
September December 31,
30, 2003 2002
$ $
Accrued payroll 2,167 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 Nine months ended Year ended
-------------------------------------------------------------------------------------
September 30, September 30, September 30, September 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Revenues 50,384 44,185 145,760 120,278 153,686
Net earnings 2,100 1,837 5,622 4,060 4,875
Earnings per share
- Basic 0.05 0.04 0.13 0.10 0.12
- Diluted 0.04 0.04 0.12 0.09 0.11
15. Subsequent Events
On October 10, 2003, the Company acquired 100% of the outstanding shares
of Pro Organics Marketing Inc, and related companies ("Pro Organics") for
cash consideration of approximately $5,000 including transaction costs.
The terms of the agreement also provide for an earn out during the three
year period commencing January 1, 2004. Pro Organics results will be
included in the Company's consolidated financial statements from the date
of acquisition.
Pro Organics is a leading distributor of certified organic fresh foods in
Canada with distribution facilities located in Vancouver, Toronto and
Montreal.
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.
26
PART I - FINANCIAL INFORMATION
Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Significant Developments
Effective October 31, 2003 the Company changed it's name from Stake Technology
Ltd. to SunOpta Inc. The new name combines the names of two of the Company's
historical operating food groups, the Sunrich Food Group and Opta Food
Ingredients. The change reflects the Company's commitment to environmental
responsibility and to the natural and organic foods markets.
On October 10, 2003, the Company acquired 100% of the outstanding shares of Pro
Organics Marketing Inc, and related companies ("Pro Organics") for cash
consideration of approximately $5,000,000. The terms of the agreement also
provide for an earn out during the three year period commencing January 1, 2004.
Pro Organics results will be included in the Company's consolidated financial
statements from the date of acquisition.
Pro Organics is a distributor of certified organic fresh foods in Canada with
distribution facilities located in Vancouver, Toronto and Montreal. Pro Organics
supplies a range of certified organic produce as well as offerings in organic
bulk foods and dairy.
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. Funds from the
public offering were received on August 28, 2003. The Company also granted the
underwriters an over-allotment of 500,000 shares which was exercised on
September 4, 2003, for gross proceeds of $3,500,000. Total transaction costs
were $1,806,000, net of tax.
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 sold 285,714 common shares at $7.00 per
common share for gross proceeds of $2,000,000.
On May 1, 2003, the Company acquired 100% of the outstanding shares of Kettle
Valley Dried Fruits Ltd. and its related companies ("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 and has constructed 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.
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, the Company amended its financing arrangements. The amendment
syndicated the financing arrangements to a group of banks, which includes
existing lenders and increased the term loan by $7,800,000 to $21,700,000
($20,325,000 as at September 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
27
point the facility is renewable at the option of the lender and the Company. The
Company fully expects to renew this facility.
Operations For the Three Months Ended September 30, 2003 Compared With the Three
Months Ended September 30, 2002
Consolidated
Revenues in the three months ended September 30, 2003 increased by 53.6% or
$17,584,000 to $50,384,000 from $32,800,000 in the three months ended September
30, 2002. Net earnings for the three months ended September 30, 2003 were
$2,100,000 or $0.05 per basic common share compared to $1,527,000 or $0.04 per
basic common share for the three months ended September 30, 2002. The increase
in revenues is due to an increase in grain sales of $1,749,000, an increase in
sales of aseptic packaged product of $3,203,000, the acquisitions of Opta, Wild
West, Simply Organic and Kettle Valley, totalling $13,797,000, offset by a
decrease in certain consumer products revenues of $776,000 and other revenues of
$389,000.
Net earnings before income taxes in the three month period ended September 30,
2003 were $2,443,000, compared to $1,456,000 over the same period in 2002, an
increase of $987,000 or 67.8%. The increase is primarily attributable to an
increase in margin in certain food processing gross profit of $215,000, earnings
resulting from the acquisitions noted above of $1,241,000 and a reduction in the
foreign exchange loss as a result of fluctuations in the Canadian dollar of
$151,000. Significant offsetting factors include a reduction of $272,000 in
gross profit due to weak abrasive sales in the U.S. East coast, an increase in
selling general and administration costs of $355,000 due to increased bank
financing fees, public company and other expenses, and an increase in borrowing
costs of $194,000, primarily attributable to the accretion of interest on
extinguishment of debt repaid in the quarter.
Net earnings for the three months ended September 30, 2003 increased by $573,000
or 37.5% over the same period in 2002 as a result of the factors noted above,
offset by an increase in the effective income tax rate in the third quarter of
2003 to 14% from (4.9%) in the same period in 2002. The effective income tax
rate for the third quarter 2003 reflects the cumulative year-to-date impact of
the recognition of certain loss carry-forwards and the implementation of tax
planning strategies. The effective rate in third quarter 2002 of (4.9%) reflects
the recognition of certain tax loss carry-forwards in the amount of $600,000.
U.S. readers should note that due to differences between Canadian and U.S. GAAP,
the earnings for the three months ended September 30, 2003 under U.S. GAAP are
$2,194,000 or $0.05 per basic common share versus $1,581,000 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 50.5% to $41,404,000 for the three months ended
September 30, 2003 compared to $27,510,000 for the three months ended September
30, 2002. The increase is consistent with the revenue factors noted above.
The Company's consolidated gross profit margin of 17.8% for the three months
ended September 30, 2003 was higher than the 16.1% recognized in the same period
in 2002. Improvements attributable to higher margins in the businesses acquired
in 2002 and 2003 and improvements in 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% gross profit margin.
Selling, general and administrative expenses increased to $5,887,000 in the
three months ended September 30, 2003 compared to $3,240,000 for the three
months ended September 30, 2002. The increase in administrative costs is mainly
due to the acquisitions completed in 2002 and 2003 of $2,292,000, additional
amortization charges related to bank financing fees of $129,000 and an increase
of public company, insurance and other corporate expenses of $226,000.
Interest expense increased to $680,000 in the three months ended September 30,
2003 from $302,000 in the three months ended September 30, 2002. The increase in
borrowing costs reflects the loss on extinguishment of debt of $183,000, and the
increase in borrowings to support the acquisitions completed in 2002 and 2003.
Interest and other income of $202,000 in the three months ended September 30,
2003 is $172,000 greater than the $30,000 recognized in the three months ended
September 30, 2002. The increase is primarily due to a gain
28
recognized on a discharged liability and proceeds recorded on unexercised
foreign exchange option agreements entered into during the quarter.
Foreign exchange improved in the three months ended September 30, 2003 to a loss
of $171,000 compared to a loss of $322,000 in the three months ended September
30, 2002.
The provision for income taxes reflects the Company's estimated effective tax
rate in fiscal 2003 of 22%.
Segmented Operations Information
(Note: Certain prior year figures have been adjusted to conform with the current
year presentation which eliminates all inter-company 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.
Food Group
Revenues in the Food Group were $43,826,000 or 87% of total revenues in the
three months ended September 30, 2003 versus $26,057,000, or 79% of total
revenues in the same period in 2002. The increase of $17,769,000 or 68.2% in
Food Group revenues was due to an increase in grain sales of $1,749,000, an
increase in sales of aseptic packaged product of $3,203,000, the acquisition of
Opta, Wild West, Simply Organic and Kettle Valley, totalling $13,797,000, offset
by a decrease in consumer products revenues of $776,000 and a decrease in other
revenues of $204,000. The increase in Food Group revenues as a percentage of
consolidated revenues reflects the Company's focus on the natural and organic
food markets via a combination of internal growth projects and acquisitions.
Gross profit in the Food Group increased by $4,088,000 in the three months ended
September 30, 2003 to $7,401,000 or 16.9% of revenues compared to $3,313,000 or
13.0% of revenues in the same period in 2002. The increase in gross profit as a
percentage of sales reflects the higher 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 $4,257,000 in the
three months ended September 30, 2003 versus $1,953,000 in the three months
ended September 30, 2002. The increase of $2,304,000 is due primarily to
acquisitions completed in 2002 and 2003 of $2,292,000.
Interest expense increased to $362,000 in the three months ended September 30,
2003 from $216,000 in the three months ended September 30, 2002, primarily as a
result of the acquisitions completed in 2002 and 2003.
Net earnings in the Food Group increased by 60.2% to $2,451,000 in the three
months ended September 30, 2003 compared to net earnings of $1,530,000 in the
three months ended September 30, 2002 due to the factors noted above. Net
earnings in the three months ended September 30, 2002 reflect the recognition of
certain tax loss carry forwards in the amount of $600,000.
Environmental Industrial Group
Revenues in the Environmental Industrial Group were $6,476,000 for the three
months ended September 30, 2003, compared to $6,667,000 in 2002. Improved
abrasive and mineral sales from the Canadian operations of $229,000 were offset
by weak abrasive sales in the U.S. East coast of $523,000. Weak abrasive sales
in the U.S. operations resulted from fewer ships in port undergoing cleaning and
maintenance as a result of the war effort and extreme weather conditions late in
the quarter. Specialty sands revenues including water filtration sands and
garnets improved by $94,000 over the same period in 2002.
Gross profit in the Environmental Industrial Group was $1,495,000 in the three
months ended September 30, 2003 versus $1,902,000 in the three months ended
September 30, 2002. As a percentage of revenues, gross margin decreased to 23.1%
in the three months ended September 30, 2003 from 28.5% in the three months
ended September
29
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 $104,000.
Selling, general and administrative expenses decreased to $642,000 in the three
months ended September 30, 2003 compared to $703,000 in the three months ended
September 30, 2002. The decrease in expenses was due to the reallocation of
certain plant costs noted above offset by incremental professional fees and
information system costs.
Interest expense increased to $96,000 in the three months ended September 30,
2003 from $86,000 in the three months ended September 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 $638,000 in the three months ended September 30, 2003 versus
$726,000 in the three months ended September 30, 2002 due to the factors noted
above.
Steam Explosion Technology Group
Revenues of $82,000 for the three months ended September 30, 2003 (2002 -
$76,000) were primarily derived from licence fees.
Selling, general and administrative expenses were $91,000 for the three months
ended September 30, 2003 compared to $72,000 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 of $8,000 fell short of the profit of $9,000 recognized
in the same period in 2002.
Corporate Activities
Selling, general and administration expenses were $898,000 in the three months
ended September 30, 2003 compared to $513,000 in the three months ended
September 30, 2002. The increase of $385,000 reflects the additional
amortization of bank financing fees of $129,000, and an increase in other
administrative costs of $256,000 including investor relations, public company,
insurance and professional fees.
Operations For the Nine Months Ended September 30, 2003 Compared With the Nine
Months Ended September 30, 2002
Consolidated
Revenues in the first nine months of 2003 increased by 65.1% or $56,975,000 to
$144,436,000 from $87,461,000 in the first nine months of 2002, and the
Company's net earnings for the first nine months in 2003 were $5,560,000 or
$0.13 per basic common share compared to $3,254,000 or $0.08 per basic common
share for the first nine months of 2002. The increase in revenues is due to an
increase in grain sales of $12,480,000, an increase in sales of aseptic packaged
product of $7,908,000, the acquisitions of Opta, Organic Kitchen, Wild West,
Simply Organic and Kettle Valley, totalling $39,291,000, offset by decreases in
certain customer products, toll processing, and other revenues of $2,704,000.
Net earnings before income taxes in the nine-month period ended September 30,
2003 were $7,129,000, compared to $3,932,000 over the same period in 2002, an
increase of $3,197,000 or 81.3%. The increase is primarily attributable to
improved volumes and margins in aseptic packaged products of $1,752,000, net
increase in gross profit as a result of the increase in grain sales and change
of customer mix totalling $298,000, earnings derived from the acquisitions noted
above of $2,345,000 and an increase in the foreign exchange gain as a result of
the appreciation in the Canadian dollar of $285,000. Significant offsetting
factors include a reduction in dairy blend processing margins of $649,000 due to
low competitive costs, a shortfall in earnings due to weak abrasive sales in the
U.S. East Coast of $635,000, and an increase in administrative and other costs
of $199,000, excluding acquisitions.
Net earnings for the nine months ended September 30, 2003 increased by
$2,306,000 or 70.9% over the same period in 2002. The increase in earnings was
as a result of the factors noted above, offset by an increase in the effective
income tax rate to 22% in 2003 from 17% in 2002.
30
U.S. readers should note that due to differences between Canadian and U.S. GAAP,
the earnings for the nine months ended September 30, 2003 under U.S. GAAP are
$5,753,000 or $0.13 per basic common share versus $3,128,000 or $0.08 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 62.4% to $119,232,000 for the nine months ended
September 30, 2003 compared to $73,431,000 for the nine months ended September
30, 2002. The increasing factors are consistent with the revenue factors noted
above.
The Company's consolidated gross profit margin increased to 17.4% of revenue for
the nine months ended September 30, 2003 versus 16.0% of revenues in the nine
months ended September 30, 2002. The improvement in gross margin is attributable
to the higher gross profit margin 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 $17,247,000 of
revenues in the nine months ended September 30, 2003 compared to $9,446,000 of
revenues for the nine months ended September 30, 2002. The increase in
administrative costs is mainly due to the acquisitions completed in 2002 and
2003 of $6,940,000, 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 bank financing fees of $278,000 and incremental
administrative costs applicable to managing a growing public company of
$433,000.
Interest expense increased to $1,664,000 in the nine months ended September 30,
2003 from $1,030,000 in the nine months ended September 30, 2002. The increase
in interest expense reflects the loss on extinguishment of debt of $183,000 and
the increase in borrowings to support the acquisitions completed in 2002 and
2003.
Interest and other income increased to $411,000 in the nine months ended
September 30, 2003 from $238,000 recognized in the nine months ended September
30, 2002. The gains recorded in 2003 are primarily attributable to a gain on
sale of non-core property of $134,000, a gain recognized on a discharged
liability of $133,000, proceeds on an unexercised option agreement and interest
recognized on cash balances.
Foreign exchange gain increased to $425,000 from $140,000 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 22% due to the aforementioned
factors.
Segmented Operations Information
Food Group
The Food Group contributed $125,511,000 or 86.9% of total Company consolidated
revenues in the first nine months of 2003 versus $68,709,000 or 78.6% in the
same period in 2002. The increase of $56,802,000 or 82.7% in Food Group revenues
was due to an increase in grain sales of $12,480,000, an increase in sales of
aseptic packaged product of $7,908,000, the acquisitions of Opta, Organic
Kitchen, Wild West, Simply Organic and Kettle Valley totalling $39,291,000,
partially offset by decreases in certain toll processing revenues of $2,134,000,
a decrease in certain consumer products of $446,000 and a net decrease in other
revenues of $297,000.
Gross profit in the Food Group increased by $12,047,000 in the nine months ended
September 30, 2003 to $20,887,000 or 16.6% of revenues compared to $8,840,000 or
12.9% of revenues in the same period in 2002. The increase in gross profit
reflects the higher gross profit 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 $12,727,000 in the
nine months ended September 30, 2003 versus $5,492,000 in the nine months ended
September 30, 2002. The increase of $7,235,000 is due primarily to
31
acquisitions completed in 2002 and 2003 of $6,940,000 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 $1,170,000 in the nine months ended September 30,
2003 from $808,000 in the nine months ended September 30, 2002, primarily as a
result of additional borrowings to fund the acquisitions completed in 2002 and
2003.
Net earnings in the Food Group were $5,532,000 in the nine months ended
September 30, 2003 compared to net earnings of $2,583,000 in the nine months
ended September 30, 2002 due to the factors noted above.
Environmental Industrial Group
The Environmental Industrial Group contributed $18,539,000 or 12.8% of the total
Company consolidated revenues in the first nine months of 2003, compared to
$18,526,000 or 21.2% in 2002. Improved abrasive and mineral sales from the
Canadian operations of $752,000 were offset by weak abrasive sales in the U.S.
East coast as a result of reduced ship repair activity of $1,001,000. Specialty
sands revenues, including coated sands, water filtration sands and garnets
improved by $249,000 over the same period in 2002.
Gross profit in the Environmental Industrial Group was $3,930,000 in the nine
months ended September 30, 2003 versus $4,964,000 in the nine months ended
September 30, 2002. As a percentage of revenues, gross margin decreased to 21.2%
in the first nine months of 2003 from 26.8% in the first nine months of 2002.
The decrease in margin is partially due to the shift in revenues to the Canadian
operations, which have inherently lower margins versus abrasive sales in the
U.S., and a reallocation of certain plant operating costs from selling, general
and administrative expenses to cost of goods sold in 2003 of approximately
$404,000 (after adjustment for the reallocation, 2002 gross margin was 24.6%).
Selling, general and administrative expenses decreased to $1,671,000 in the nine
months ended September 30, 2003 from $2,211,000 in the nine months ended
September 30, 2002, primarily due to the allocation noted above of $404,000, and
net cost reduction programs implemented throughout the Group of $136,000.
Interest expense increased to $277,000 in the first nine months of 2003 from
$222,000 in the first nine 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 $1,608,000 in the nine months ended September 30, 2003 versus
$1,589,000 in the nine months ended September 30, 2002.
Steam Explosion Technology Group
Revenues of $386,000 for the nine months ended September 30, 2003 (2002 -
$226,000) 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 $264,000 for the first nine
months of 2003 compared to $227,000 for the same period in 2002. These costs
reflect payroll and related expenses required to manage and maintain the
business.
Net earnings were $95,000 compared to a net loss of ($13,000) in the same period
in 2002.
Corporate Activities
Selling, general and administration expenses were $2,583,000 in the nine months
ended September 30, 2003 compared to $1,580,000 in the nine months ended
September 30, 2002. The increase of $1,003,000 reflects the additional
amortization of bank financing fees of $278,000, 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.
32
Liquidity and Capital Resources at September 30, 2003
Current assets
Cash and cash equivalents increased to $38,892,000 at September 30, 2003
(December 31, 2002 - $7,012,000), primarily due to the funds raised through the
share issuance in August 2003, offset by the repayment of certain term debt and
operating lines of credit throughout the period.
Trade accounts receivable increased to $23,520,000 at September 30, 2003 from
$18,144,000 at December 31, 2002. Trade receivables at September 30, 2003
attributable to the Food Group were $19,051,000 (December 31, 2002 -
$14,889,000). Trade receivables in the Environmental Industrial Group were
$4,072,000 (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 $397,000 related to license fee revenues (December 31, 2002 -
$nil).
The note receivable of $nil (December 31, 2002 - $1,034,000) and the product
rebate payable in long-term payables of $1,427,000 (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 paid 36 monthly
instalments of $119,000. The last payment of the note receivable was received in
the period ended September 30, 2003. Commencing October 2003 the agreement
requires the Company to provide the customer with a product rebate on all
purchases until a total of $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 $1,016,000 to $24,005,000 at September 30, 2003 from
$22,989,000 at December 31, 2002. The Food Group accounts for $18,647,000 of the
consolidated balance (December 31, 2002 - $18,492,000) and the Environmental
Industrial Group accounts for $5,358,000 (December 31, 2002 - $4,497,000). The
Steam Explosion Technology Group is not required to carry significant
inventories. The higher inventory balance in the Food Group is primarily due to
the acquisition of Kettle Valley, accounting for $466,000 of the increase. 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 $1,965,000 at September
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 nine
months, receivables from the sale of non-core properties and prepaid expenses
associated with Kettle Valley.
Property, plant and equipment
In the first nine months of 2003, the Company expended $3,778,000 (September 30,
2002 - $3,055,000) on property, plant and equipment, of which, the Food Group
comprised of $3,208,000. Key projects in the period included the micro filter
sweetener project at the Group's operation in Alexandria, MN, the expansion of
the grain cleaning and transfer system in Hope, MN and the completion of the
Kettle Valley plant in the state of Washington. During the first nine months of
2003, $513,000 was expended by the Environmental Industrial Group on general
additions, betterments and replacements and $57,000 was spent by the Steam
Explosion Technology Group and the Corporate Office on office equipment and
furniture.
Goodwill and intangibles
Goodwill and intangibles increased to $17,220,000 at September 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 $46,000.
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.
33
Other assets
Other assets decreased to $813,000 at September 30, 2003 from $1,080,000 at
December 31, 2002, due in most part to amortization of pre-operating costs and
financing fees of $629,000, offset by the capitalization of $343,000 in bank
financing fees.
Current liabilities
Bank indebtedness at September 30, 2003 was $nil (December 31, 2002 -
$3,963,000). The decrease relates primarily to the repayment of the operating
lines of credit with proceeds from the share issuance in the third quarter (note
8).
Accounts payable and accrued liabilities decreased to $18,103,000 at September
30, 2003 from $19,664,000 at December 31, 2002. The decrease is primarily due to
timing of vendor payments.
Customer and other deposits of $608,000 at September 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, and to a deposit received on an
option agreement related to certain properly held for sale (note 12 (c)).
No recognition of revenue or accrual of costs is booked until the goods are
shipped. Deposits decrease during the planting season as customers purchase
seeds and agronomy products.
Long term debt
At September 30, 2003, the Company's long-term debt, including current portion,
is $21,864,000, a net decrease of $14,885,000 from December 31, 2002. The
decrease relates to the repayment of the tender facility of $15,186,000,
repayment of the convertible debenture of $5,000,000 and net repayments of other
term debt of $3,319,000, 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.
Long-term payables
The Company had deferred purchase consideration of $177,000 at September 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 this
liability will be extinguish by December 31, 2003.
The Preference Shares of subsidiary companies were reduced to $152,000 from
$291,000 as a result of regularly scheduled repurchases during the period 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 $2,105,000 to
$570,000 at September 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 nine months ended September 30, 2003, cash flow provided by operations
before working capital changes was $9,021,000, an increase of 64.1% from
$5,498,000 in the same period in 2002. The increase is due primarily to
improvements in earnings and higher amortization charges in the first nine
months of 2003 versus 2002.
Cash flow provided by operations after working capital changes was $457,000 for
the nine months ended September 30, 2003 (2002 - ($458,000)), reflecting the
utilization of funds for non-cash working capital of ($8,564,000) (2002 -
($5,956,000)). This utilization consists principally of an increase in accounts
receivable of ($5,526,000), an increase in inventories of ($408,000), an
increase in prepaid expenses and other current assets of ($893,000) and a
decrease in accounts payable and accrued liabilities of ($1,924,000), offset by
an increase in customer and other deposits of $187,000. The working capital
deficiencies in the first nine months of 2003 reflects the impact of
34
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 ($3,361,000). The Company sold its short
term investments for proceeds of $2,038,000 (2002 - $6,307,000), received
payments on a note receivable of $1,074,000 (2002 - $1,045,000), and received
payments from other investing activities of $199,000 (2002 - $101,000), offset
by acquisitions of property, plant and equipment of ($3,778,000) (2002 -
($3,055,000)) and payment for the acquisition of companies of ($2,894,000) (2002
- - ($1,080,000)).
Cash generated from financing activities was $34,562,000 in the nine months
ended September 30, 2003 (2002 - $626,000), consisting primarily of proceeds
from the issuance of common shares of $56,028,000 (2002 - $1,805,000) and an
increase in borrowings under term debt facilities of $7,800,000 (2002 -
$15,000,000), offset by a net decrease in bank indebtedness of ($4,285,000)
(2002 - $258,000), net debt repayments of ($24,009,000) (2002 - ($16,209,000)),
deferred purchase consideration payments of ($490,000) (2002 - ($754,000)),
purchase and redemption of preferred shares of subsidiary companies of
($139,000) (2002 - ($922,000)) and financing costs of ($343,000) (2002 -
($499,000)). In the nine months ended September 30, 2003, there was no
comparable decrease in restricted cash (2002 - $1,147,000).
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 September 30, 2003 the
Company had $38,892 in cash and cash equivalents.
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 September 30, 2003, the weighted average interest rate of the fixed rate
term debt was 5.3% and $1,339,000 of the Company's outstanding term debt is at
fixed interest rates. Variable rate term debt of $20,525,000 at an interest rate
of 3.67% is outstanding at September 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 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 $171,000. 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
nine months in 2003, 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 $1.3499 at September 30, 2003 for each U.S. dollar. The net effect of
this appreciation has been a $425,000 exchange gain and a $2,103,000 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 $2,327,000. 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.
35
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 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. At September 30, 2003, the Company owned
150,780 bushels of corn with a weighted average price of $1.86 and 173,945
bushels of soybeans with a weighted average price of $7.46. The Company has at
September 30, 2003 net long positions on corn and soy beans of 75,415 bushels
and 197,060 bushels, respectively. An increase/(decrease) in the commodity
prices of 10% would result in a gain/(loss) of $14,000 in corn and $147,000 in
soy beans, respectively. 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.
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
Net proceeds from the public offering and concurrent private placement, as
described in significant developments was approximately $52,694,000. During the
quarter approximately $16,200,000 was used to pay down the revolving and term
credit facilities and to repay the convertible debenture. Subsequent to the
quarter, approximately $5,738,000 of the proceeds was used to purchase Pro
Organics and repay associated debts. We intend to use the remaining proceeds
resulting from the share issuance for general corporate purposes including
future acquisitions, internal expansion projects and working capital
requirements.
Item 3. Defaults on senior securities - Not applicable
Item 4. Submission of matters to a vote of security holders - Not applicable
Item 5. Other - Not applicable
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.
SUNOPTA INC.
(Registrant)
/s/ John Dietrich
Date November 7, 2003
SunOpta Inc.
by John Dietrich
Vice President & Chief Financial Officer
38
EXHIBIT INDEX
Exhibit No. Page No.
- ----------- --------
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
39