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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Bovaird Drive West
Norval, Ontario L0P 1K0, Canada
(Address of Principle Executive Offices)
(905) 455-1990
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to 12(g) of the Act:
Common Shares, no Par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |X| No |_|
At March 11, 2004 the registrant had outstanding 52,892,753 common shares, the
only class of registrant's common stock outstanding. There were no other classes
of stock outstanding and the aggregate market value of voting stock held by
non-affiliates at such date was US $445,726,637. The Company's common shares
traded on Nasdaq Small Cap Market tier of The Nasdaq Stock Market under the
symbol STKL and on the Toronto Stock Exchange under the symbol SOY.
There are 51 pages in the December 31, 2003 10-K including this page and the
index after the cover page.
SUNOPTA INC.
TABLE OF CONTENTS
FORM 10-K Page
----
PART I
Item 1. Business.................................................................................................4
Item 2. Properties..............................................................................................22
Item 3. Legal Proceedings.......................................................................................23
Item 4. Submission of Matters to a Vote of Security Holders.....................................................23
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchase of Equity Securities....................................................................24
Item 6. Selected Financial Data.................................................................................26
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations..................27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..............................................44
Item 8. Financial Statements and Supplementary Data.............................................................45
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure....................45
Item 9A. Controls and Procedures.................................................................................45
PART III
Item 10. Directors and Executive Officers of the Registrant......................................................46
Item 11. Executive Compensation..................................................................................47
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..........47
Item 13. Certain Relationships and Related Transactions..........................................................47
Item 14. Principal Accountant Fees and Services..................................................................47
PART IV
Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K........................................48
Index to Consolidated Financial Statements..............................................................48
ii
Currency Presentation
All dollar amounts herein are expressed in United States dollars. Amounts
expressed in Canadian dollars are preceded by the symbol "CDN$". On March 11,
2004, the noon buying rate, in New York City for cable transfers in Canadian
dollars for customs purposes by the Federal Reserve Bank of New York was
US$0.7560 for $1.00 Canadian.
The following table sets forth information with respect to the exchange rate of
the Canadian dollar into United States currency during 2003. (1) The rate of
exchange for the Canadian dollar, expressed in US dollars, in effect at the end
of the year (2) the average of exchange rates in effect on the last day of each
month during the year and (3) the high and low exchange rates during the year.
===========================================================
RATES 2003
- -----------------------------------------------------------
Last Day (1) $0.7713
- -----------------------------------------------------------
Average (2) $0.7135
- -----------------------------------------------------------
High (3) $0.7788
- -----------------------------------------------------------
Low (3) $0.6338
===========================================================
Note Regarding Forward-Looking Financial Information
Certain statements included herein may constitute "forward-looking statements"
within the meaning of the United States Private Securities Litigation Reform Act
of 1995. These forward-looking statements include, but are not limited to
references to business strategies, competitive strengths, goals, capital
expenditure plans, business and operational growth plans and references to the
future growth of the business. These forward looking statements are based on
certain assumptions and analyses made by the Company in light of its experience
and its interpretation of current conditions, historical trends and expected
future developments as well as other factors that the Company believes are
appropriate in the circumstance.
However, whether actual results and developments will agree with expectations
and predications of the Company is subject to many risks and uncertainties
including, but not limited to; general economic, business or market risk
conditions; competitive actions by other companies; changes in laws or
regulations or policies of local governments, provinces and states as well as
the governments of United States and Canada; many of which are beyond the
control of the Company. Consequently all forward-looking statements made herein
are qualified by these cautionary statements and there can be no assurance that
the actual results or developments anticipated by the Company will be realized.
3
PART I
Item 1. Business
Overview
SunOpta Inc. ("the Company or SunOpta") owns and operates high-growth ethical
businesses, focused on environmental responsibility and the health and
well-being of its communities. The Company has three business units, the largest
being the SunOpta Food Group (Food Group), accounting for approximately 87% of
revenues. This group is well positioned in the rapidly growing natural and
organic foods sectors through its vertically integrated operations throughout
North America. In addition to the Food Group, Opta Minerals (formally the
Environmental Industrial Group) produces distributes, and recycles industrial
materials, and the StakeTech Steam Explosion Group (formally the Steam Explosion
Technology Group) markets proprietary non-wood processing technology with
significant licensing and application potential in the pulp, food processing and
bio-fuel industries.
The Company was incorporated under the laws of Canada on November 13, 1973. The
principal executive offices are located at 2838 Bovaird Drive West, Norval,
Ontario, Canada, L0P 1K0, telephone: (905) 455-1990, fax: (905) 455-2529,
e-mail: info@sunopta.com and web site: www.sunopta.com.
The Company makes available, free of charge through its website, its Annual
Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, registration statements on Form S-3 and any amendments to those reports as
soon as practicable after filing or furnishing the material with the Securities
and Exchange Commission.
The SunOpta Food Group, operates in the natural and organic sectors of the food
industry, sectors which are realizing annual growth rates of 10% to 20%. The
Company has implemented a vertically integrated model, giving basis for its
"seed to table" strategy. Seed to table makes reference to the Company's ability
to source grains and other agricultural products through its Grains and Soy
Products Group, transforming these inputs into value added food ingredients
through the SunOpta Ingredients Group, and ultimately producing and selling
consumer packaged products, which are sold and distributed through the Company's
Packaged & Distributed Products Group. The Grains and Soy Products Group is
headquartered at 3824 93rd Street SW Hope, Minnesota 56048-0128, telephone:
(507) 451-3316, fax: (507) 451-2910, email: info@sunrich.com and website:
www.sunrich.com. The SunOpta Ingredients Group is headquartered at 25 Wiggins
Avenue, Bedford, Massachusetts, 01730, telephone: (781) 276-5100, fax: (718)
276-5101, email: customer_service@opta-food.com and website: www.opta-food.com.
The Packaged & Distributed Products Group can be contacted through the Norval,
Ontario address.
Opta Minerals, which represents approximately 12% of consolidated sales,
includes BEI/PECAL, a division of the Company, Temisca Inc., Virginia Materials
Inc. (Virginia Materials) and International Materials & Supplies, Inc.
(International Materials). The Group processes, sells and distributes abrasives
and other industrial minerals to the foundry, steel and marine/bridge cleaning
industries; sources specialty sands and garnets for the water filtration
industry; and recycles inorganic materials under special permits from government
authorities at both its Waterdown, Ontario and Norfolk, Virginia sites. Opta
Minerals can be contacted at 407 Parkside Drive, Waterdown, Ontario, L0R 2H0,
telephone: (905) 689-6661, fax: (905) 689-0485, e-mail:
info@barnesenvironmental.com and web site: www.bei.ca.
The StakeTech Steam Explosion Group, a division of SunOpta, is located on the
corporate property of the Company in Norval, Ontario. This division holds
numerous patents on its steam explosion process and is marketing this clean
pulping system with a special focus on China, the world's largest user of
non-woody pulp. The steam explosion technology uses high temperature and
pressure rather than chemicals to process non-woody fibers into pulp which can
be used to produce various paper products. The Group is also pursuing
opportunities to leverage this technology for numerous food grade applications,
primarily to convert complex sugars into food grade sweeteners and for bio-fuel
production. The StakeTech Steam Explosion Group can be contacted at 2838 Bovaird
Drive West, Norval, Ontario, L0P 1K0, telephone: (905) 455-1990, fax: (905)
455-2529, e-mail: info@staketech.com and web site: www.steamexplosion.com.
Change of Corporate Name
At the annual and special meeting of the shareholders of the Company held in
Toronto, Canada on June 18, 2003, the shareholders of the Company approved a
special resolution to change the name of the Company to SunOpta Inc.,
4
which occurred on October 31, 2003. The name change more accurately reflects the
Company's stated mission and focus on the development of vertically integrated
natural and organic food businesses.
The Company also changed some of its affiliated and division names, most notably
the Environmental Industrial Group to Opta Minerals, the Steam Explosion
Technology Group to StakeTech Steam Explosion Group and Opta Food Ingredients
Inc. to SunOpta Ingredients, Inc..
Segmented Information
The Company operates in three industries:
(1) SunOpta Food Group produces, packages, markets and distributes a wide
range of natural and organic food products and ingredients with a focus on
soy, oat, sunflower and corn. There are three segments in the SunOpta Food
Group comprising:
a) Grains and Soy Products Group
b) SunOpta Ingredients Group
c) Packaged & Distributed Products Group
(2) Opta Minerals processes, sells and distributes industrial minerals,
and recycles inorganic materials for the foundry, steel, bridge and ship
cleaning industries; and
(3) StakeTech Steam Explosion Group owns numerous patents on its
proprietary steam explosion technology and designs and subcontracts the
manufacture of these systems for processing non-woody fibers for use in
the paper, food and biofuel industries.
The Company's operations and assets are located in both Canada and the United
States.
Acquisitions during 2003 and 2002
Food Group
One of SunOpta's strategies is to continue to pursue acquisitions that align
with its vertically integrated model in the natural and organic food industry.
SunOpta believes that this sector of the food industry is growing at 10-20% per
year and that it is fragmented with numerous players in both Canada and the
United States.
Specific growth strategies of SunOpta include the following:
o Diversify the range of organic and non-GMO grains that SunOpta
markets specifically including businesses that are vertically
integrated through ingredients and packaged products.
o Develop value added natural and organic food ingredient solutions to
meet demands of food manufacturers wanting to improve the
healthfulness of their products or expand into the natural and
organic markets.
o Expand Canadian natural and organic produce and grocery distribution
businesses to become the leading coast to coast distributor in
Canada.
o Invest in healthy convenience food businesses as we believe this
will be a strong area of growth in the natural and organic food
sectors.
o Selectively target natural and organic branded businesses that fit
with our vertically integrated model and compliment our current
product portfolio.
During the last two years SunOpta has acquired eight food businesses which are
described below:
2003
Sigco Sun Products
On November 12, 2003, the Company completed the acquisition of property, plant
and equipment, working capital and the business of Sigco Sunplant Inc., doing
business as Sigco Sun Products (Sigco) of Breckenridge, Minnesota for total
consideration of $8,479,000 including transaction costs. An additional
$1,347,000 of contingent consideration may be payable if certain predetermined
profit targets are achieved by the acquired business during
5
the period January 1, 2004 to December 31, 2008 and will be recorded as goodwill
when the amount and outcome of this contingency becomes determinable.
Sigco is a worldwide supplier of sunflower products and is fully integrated from
the sale of sunflower seed to farmers through processing the contracted crop
into finished in-shell and kernel sunflower products. The Company operates four
facilities located in Minnesota, North Dakota and Kansas. Sigco markets its
non-genetically modified sunflower products throughout the United States and to
international markets in Europe, Asia and the Americas. The acquisition builds
on the Company's vertically integrated model from seed to table and diversifies
the grain products that the Company markets.
Pro Organics Marketing Inc.
On October 10, 2003, the Company acquired all of the outstanding shares of Pro
Organics Marketing Inc. (Pro Organics) and related companies for cash
consideration of $4,957,000 including transaction costs. An additional $964,000
of contingent consideration may be payable to the former shareholders if certain
predetermined targets are achieved during the period of January 1, 2004 to
December 31, 2006 and will be recorded as additional goodwill when the amount
and outcome of this contingency becomes determinable.
Pro Organics is a leading distributor of certified organic fresh foods in Canada
with distribution facilities located in Vancouver, Toronto and Montreal. Along
with Wild West and Simply Organic, both acquired in 2002, Pro Organics gives the
Company a dominant market share of the certified organic fresh foods market in
Canada.
Kettle Valley Dried Fruit Ltd.
On May 1, 2003, the Company acquired all of the outstanding shares of Kettle
Valley Dried Fruit Ltd. (Kettle Valley) and its related companies for cash
consideration of $873,000, a note payable of $975,000 and issuance of the
Company's shares valued at $821,000 for total consideration of $2,669,000.
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, (B.C.) 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 region of the Western U.S. The acquisition of this
business is in line with the Company's strategy to expand the natural and
organic food business in Canada and enter the healthy convenience roods market,
a fast growing sector for natural or organic products.
Sonne Labs Inc.
On December 1, 2003, the Company acquired all of the outstanding shares of Sonne
Labs Inc. (operating as Dakota Gourmet) for cash consideration of $1,850,000
including acquisition costs. In addition, contingent consideration of $750,000
may be payable if certain predetermined profit targets are achieved by the
business from January 1, 2004 to December 31, 2007 and will be recorded as
additional goodwill.
Dakota Gourmet is focused on the manufacturing of innovative natural and organic
snack foods using vertically integrated soy, corn and sunflower ingredients.
These products are sold under the Dakota Gourmet (TM) brand and are also
produced for private label customers. This acquisition will expand the Company's
presence in the healthy convenience foods market and further supports the
Company's strategy to grow its natural and organic product offering in this food
sector.
2002
Opta Food Ingredients, Inc.
On December 4, 2002, the Company completed a cash tender offer for the
outstanding common shares of Opta Food Ingredients, Inc. (Opta). Approximately
92.6% of the outstanding common shares were tendered for $2.50 per share in cash
in accordance with the tender offer. On December 18, 2002 the Company merged
Opta with Stake Acquisition Corp, a wholly owned subsidiary. As a result of this
merger, the remaining 7.4% of the outstanding common shares of Opta were
converted to a right to receive $2.50 per share in cash from the Company,
amounting to $1,871,000. This amount was disbursed in 2003.
6
Now part of the SunOpta Ingredients Group, Opta is a leading innovator,
manufacturer and marketer of proprietary food ingredients that improve the
nutritional content, healthfulness, texture and taste of its customers' food
products. Opta is also the world's largest supplier of oat fiber to the food
industry.
Simply Organic Co. Ltd.
On December 1, 2002, the Company acquired 100% of the outstanding common shares
of Simply Organic Co. Ltd. for cash consideration of $187,000. In addition,
contingent consideration of $160,000 is payable and will be paid over the next
two fiscal years. The full amount of contingent consideration has been accrued
at December 31, 2002.
Simply Organic Co. Ltd. is an Ontario, Canada-based distributor of certified
organic food products, distributed throughout much of Ontario to mass market and
natural food retail outlets. As of December 31, 2003, Simply's operations have
been merged with the recently acquired Pro Organic's Toronto operations.
Wild West
On November 1, 2002, the Company acquired 100% of the outstanding common shares
of 632100 B.C. Ltd., successor to Wild West Organic Harvest Co-Operative
Association (Wild West) for cash consideration of $889,000. In addition,
contingent consideration of $144,000 may be payable if certain predetermined
profit targets are achieved by the acquired business. The full amount of
contingent consideration was accrued at December 31, 2002.
Wild West is a British Columbia, Canada-based distributor of certified organic
and natural food products throughout Western Canada to mass market and natural
food retail outlets.
Organic Kitchen
On July 2, 2002, the Company acquired certain assets including organic feed,
related inventories and trademarks and the businesses of Organic Kitchen Inc.
and Cloud Mountain Inc. (together forming Organic Kitchen). Consideration
consisted of $297,000 paid in cash on closing. In addition, the Company will pay
10% of the pre-tax profits earned to December 31, 2005, up to a maximum of
$1,268,000. This contingent consideration will be recorded as an increase to
goodwill when the amount of the contingency is determinable. No contingent
consideration was paid in 2003 (2002 - $nil).
The two businesses form an integrated unit which sources, blends and supplies
proprietary organic feeds to organic poultry and other meat producers. The
companies then partner with organic processors who package poultry and other
meat products and distribute to mass marketers under private label or the
Organic Kitchen (TM) brand.
Opta Minerals
International Materials
On November 1, 2002 Virginia Materials purchased the remaining 49% of the
outstanding common shares of International Materials, for cash consideration of
$125,000.
International Materials produces industrial garnets as a by-product from a
mining operation and processes these garnets for sale to the water filtration,
water jet cutting and abrasives markets.
Results from operations of the Food Group and for Opta Minerals acquisitions are
included in the Company's results of operations from the date of acquisition and
their respective assets and liabilities are included in the December 31, 2003
and December 31, 2002 consolidated balance sheet.
New and Amended Banking Agreement and Other Lending Facilities
During 2003, the Company amended and restated its credit agreement and also
completed two subsequent amendments to its financing arrangement. The amended
and restated agreement syndicated the financing arrangement to a group of banks
which includes existing lenders and increased the term loan by $7,800,000 to
$21,700,000. 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, drew on the credit facility to the extent of $3,500,000 and utilized
$3,886,000 of cash on hand to repay the tender facility obtained to finance the
acquisition of Opta .
7
In May 2003, and as part of the acquisition of Kettle Valley the Company amended
its facility and increased the Canadian line of credit facility to CDN
$7,500,000 from CDN $5,000,000.
In December 2003, the Company amended its credit agreement and extended the term
loan to June 2005. The Company fully intends to renew this term loan prior to
its maturity, however, for financial statement purposes, the principal payments
have been categorized as due in 2005.
Other debt facilities were entered into with the acquisitions of Kettle Valley,
Sigco, Dakota Gourmet and the purchase of Oracle enterprise software for a total
of $4,854,000. These have been disclosed in Note 8(d) of the financial
statements.
SUNOPTA FOOD GROUP
The SunOpta Food Group (Food Group) has been built over the past five years with
the acquisition of twelve companies and the start-up of one. The acquisitions
include Sunrich Inc. in August, 1999, Nordic Aseptic, Inc. in August, 2000,
Northern Food & Dairy, Inc. in September, 2000 and First Light Foods (Jenkins &
Gournoe) in February, 2001. In April, 2002, Sunrich Valley, a newly formed
division of SunOpta, launched a full line of organic dairy products under the
brand name mu (TM). In addition, during 2002, SunOpta completed the acquisitions
of Organic Kitchen, Wild West, Opta, and Simply Organic. In 2003, SunOpta
completed the acquisitions of Sigco, Dakota Gourmet, Pro Organics and Kettle
Valley. The acquisitions, coupled with significant internal growth, have
established a unique, vertically integrated natural and organic foods company
with significant presence in both the United States and Canada.
The Food Group is comprised of three segments, the Grains and Soy Products
Group, the SunOpta Ingredients Group, and the Packaged & Distributed Products
Group. These segments form the basis of the Company's vertically integrated food
operations. The Company has integrated these operations in order to leverage
efficiencies and cost savings, maximize product and processing capabilities and
develop a platform to support continued growth in the natural and organic foods
sectors.
[FLOW CHART OMITTED]
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MAJOR DEVELOPMENTS DURING 2003 - SUNOPTA FOOD GROUP
The Company has continued to realize on its strategy of becoming a major
participant in the natural and organic sector of the food industry in North
America. The four acquisitions in 2003 support SunOpta's strategy and have
helped the Company realize on specific objectives as follows:
o Entered the healthy convenience foods category with the acquisitions
of Kettle Valley and Dakota Gourmet.
o Positioned the Company as the leading organic fresh food distributor
in Canada with the acquisition of Pro Organics. Pro Organics has
operations in Vancouver, Toronto and Montreal. Subsequent to year
end, on March 1, 2004 SunOpta acquired Distribue-Vie Fruits &
Legumes Biologigues Inc. (Distribue-Vie) of Montreal, Quebec.
Distribue-Vie specializes in the distribution of organic fresh foods
with a emphasis on produce. It services the key Quebec market along
with geographic reach into Eastern Ontario and the Maritime
provinces. Sales of Distribue-Vie are approximately $5,000,000. This
acquisition further strengthens SunOpta's market share in natural
and organic produce in Canada and also expands the Canadian
Distribution Groups geographic coverage.
o Diversified our Grains and Soy Products business with the
acquisition of Sigco, a world wide supplier of vertically integrated
sunflower products.
SunOpta Ingredients has also seen significant growth during the year in its oat
fiber business due to the popularity of high fiber products and of the Atkins
and other low carbohydrate diets. We expect these trends to continue in 2004 and
have added capacity to our Cambridge, Minnesota facility and plan to add
additional capacity in 2004 to meet these demands.
GRAINS AND SOY PRODUCTS GROUP
The Grains and Soy Products Group forms the foundation of the Company's
vertically integrated natural and organic foods business model. This group
specializes in bringing a number of identity preserved, non-genetically modified
(non-GMO) and organic crops and related agronomic services to market with a core
focus in food use soybean, sunflower, corn, rice and oat products. This group
maintains ongoing relationships with approximately 1,850 Identity Preserved (IP)
growers throughout the midwest United States, whereby seeds and related services
are provided and much of the crop is subsequently purchased, genetically tested,
processed and then sold to the Group's domestic and international customers. In
addition, many of the grains are transferred to the Company's Ingredients Group
where they are transformed into value-added specialty food ingredients and
ultimately, consumer branded products. With the acquisition of Sigco, the Grains
and Soy Products Group has duplicated the model that it has for soybean products
with sunflowers. Sigco maintains relationships with approximately 500 farmers in
the midwest. All product is non-GMO and sold to domestic and international
customers as well as transferred to the Company's Packaged & Distributed
Products Group which produces healthy convenience foods with a sunflower base.
The Grains and Soy Products Group also markets a number of value-added soymilk
and soy ingredients including soy concentrates and dried soy powders and organic
and natural food ingredients including organic snack coatings, grain sweeteners,
maltodextrins, dry milled corn, milled soy, various vegetable oils, traditional
and high oleic sunflower kernel.
The Grains and Soy Products Group is headquartered in Hope, Minnesota with main
grain handling operations in Hope, Minnesota; Cresco, Iowa; Breckenridge,
Minnesota; Goodland, Kansas; and Edson, Kansas and a sales and marketing office
located in Minneapolis, Minnesota. A number of products marketed by the Group
are manufactured within the SunOpta Ingredients Group.
The Grains and Soy Products Group's major products are as follows:
Grains and Inputs: Included in grain and inputs are IP, specialty soybeans,
corn, various other grains such as sunflower, rice and oat, organic corn,
soybeans, organic feed ingredients, milled corn, soy and oat flours. IP
specialty grains and ingredients are sold to both domestic and foreign food
processors.
The demand for non-GMO soybeans from foreign customers and the increased demand
from domestic soy foods manufacturers have continued to fuel an increase in
business volume. These trends are expected to continue in the future because of
the continued growth of soy, organic and natural foods markets. The growth of
sunflowers can be
9
attributed to international demand as well as increasing domestic consumption
due to growing incidence of nut allergies and increasing consumer awareness of
the healthy benefits of sunflowers.
Soy and Grain Based Organic Ingredients: Soy and grain based ingredients are
marketed in Asia, Europe and throughout the United States where the Group has a
strong presence. The Food Group is continuing to develop new ingredient products
and customers as the demand for soy-based and organic products continue to grow.
The Company manufactures a range of grain sweeteners and maltodextrins under the
names Maisweet, Arrosweet and Oatsweet with sweeteners carrying a high dextrose
equivalent (DE) and maltodextrins carrying a lower equivalent. Organic and
natural vegetable oils are sold to customers throughout the United States, Hong
Kong and Japan. Organic snack coatings have been introduced in response to heavy
customer demand.
Competition
The Grain and Soy products group competes with large companies in the U.S. and
international commercial grain procurement market. The Group's organic specialty
grains compete in the smaller niche U.S. commercial organic grains market. Key
to competing in these markets is access to transportation, supply and
relationships with organic producers.
The soy products business is centered in Hope, Minnesota alongside the Union
Pacific Railroad. The railroad is used for the grain elevator business and
distribution of products nationally. The Hope facility is 70 miles south of
Minneapolis/St. Paul, which gives it access to the Mississippi River for grain
transporting and "containerized" shipments to the west coast for export. The
facility is centrally located within the heart of soy and corn producers. The
Group has an established IP grain producer network with approximately 1,500
producers with many relationships existing for over 20 years. The Group has also
been an organic certified handler and processor for a number of years and has
ample grain processing and storage facilities to meet the needs of its producers
and customers. The sunflower business is centered in Breckenridge, Minnesota,
located within the heart of North American sunflower production and close to
required transportation sources.
Distribution, Marketing and Sales
The Grains and Soy Products unit ensures that it provides its customers with the
highest quality organic, non-GMO and IP specialty grains and seeds, by serving
as a grower's supplier of seed, purchaser of the grower's specialty crops and
distributor of IP specialty products. The Group's "full circle" approach allows
it to satisfy the specific needs of foreign and domestic food manufacturers and
processors by providing products in the varieties and quantity needed in a
timely fashion; transporting products to meet customers' needs by being able to
package in containers, truck, rail or barge; providing product information and
technical support during the growing, processing, and marketing phases, and
offering complete service of product including grading, formulation, processing,
quality control and packaging.
Bulk commodity products revenues are sensitive to distribution costs. This can
limit their competitiveness in particular markets. Competitive bulk and
container freight costs give the Group access to Japanese and Mexican export
markets. Uncompetitive freight costs compared to South American and Eastern
Canada limit soybean opportunities in European markets, however Europe is a
major market for the Company's containers shipments of inshell and kernel
sunflowers.
Suppliers
IP and organic grains and seeds sourced from over 2,000 North American growers
and suppliers via annual contracts or spot market purchases. There is ample
supply of grains to satisfy the Group's needs with expanding production in other
parts of the world to provide additional supply if crop or market conditions
limit the North American supply. The Group has the ability to divert available
product based on market demand and customer requirements in order to maximize
return.
THE SUNOPTA INGREDIENTS GROUP
The SunOpta Ingredients Group (Ingredients Group) is focused on transforming
both internally and externally sourced raw material inputs into value-added food
ingredient solutions. The Group specializes in the technical processing of
specialty food ingredients with a focus on non-genetically modified, natural,
functional and organic offerings. The Group works closely with customers to
identify product formulation, cost and productivity issues
10
and develops solutions to these problems based on proprietary, value-added,
highly functional food ingredients and ingredient systems utilizing the Group's
extensive technical and manufacturing base.
The Ingredients Group is an innovator in the value-added food ingredients market
with a technical selling and product applications focus. Based on management's
estimates, the Group is one of the largest producers of soymilk concentrate in
the United States and is the world's largest supplier of oat fiber to the food
industry. Through its extensive manufacturing platform, the Group markets the
Canadian Harvest(TM) Oat Fiber family of insoluble fiber products, a number of
value-added starch-based texturizers, resistant starches and proprietary
stabilizer blends under the Opta Ingredient Systems(TM) umbrella, and a number
of custom processed ingredients including soluble fiber, natural preservatives
and fractionalized oat.
The Ingredients Group is headquartered in Bedford, Massachusetts. Processing
facilities are located in Alexandria, Minnesota (2); Fosston, Minnesota;
Cambridge, Minnesota; Galesburg, Illinois; Bertha, Minnesota; Afton, Wyoming,
Louisville, Kentucky and St. Thomas, Ontario. (The St. Thomas facility is
scheduled for closure in the second quarter of 2004).
The Ingredients Group is well positioned to capitalize on the rapid growth of
the natural and organic food markets. The Company produces a broad offering of
soy-based food products for the U.S. and international markets. The
proliferation of great tasting, healthy soy foods has increased the availability
of soy products to consumers. The increase in consumer demand has resulted in
soy food products experiencing some of the largest growth rates of any category
in the food industry. The FDA allows soy products containing more than 6.25
grams of soy protein per serving to make the claim of improving cardiovascular
health of consumers.
The 2002 acquisition of Opta has added a unique portfolio of products and this
has expanded the Group's specialty food ingredient business on the basis of two
main technology platforms: fiber-based texturizers which include Canadian
Harvest (TM) Oat Fibers and Stabilized Bran products, and Opta Ingredient
Systems(TM) which include OptaGrade(R), OptaMist(R), OptaFil(R), CrystaLean(R),
OptaMax(R), Shimizu Konjac Flour, Blanver's Best microcrystalline cellulose
(MCC) and other proprietary stabilizer blends.
The Group's food ingredients are used by more than 350 customers in the U.S.,
Canada, Latin America, Western Europe, the Middle East, Asia and the Pacific
Rim, including some of the largest U.S. consumer packaged food companies and
quick service restaurant chains.
In publications from both the American Dietetic Association and a Mayo Clinic
Health letter it was noted that fiber consumption is below recommended levels in
the US. The Ingredients Group's Canadian Harvest line of oat fibers and
stabilized brans are used in numerous products such as fiber-enriched breads and
other baked goods, breakfast cereals and snack bars as well as a bran-containing
yogurt specifically to boost fiber content. These products can be used to
increase fiber content of foods while minimizing negative effects on taste and
texture. The Group's oat fibers which are insoluble fibers enhance overall
gastrointestinal health. Oat fiber is a primary ingredient in breads, pastries,
muffins, tacos and tortillas as food companies reformulate their products to
meet the explosive growth of consumers adhering to the Atkins and other low
carbohydrate diets. Stabilized oat brans can be used as a source of soluble
fiber (beta-glucan) which is beneficial to cardiovascular health.
The Ingredients Group is also a leader in the area of resistant starches under
the tradename CrystaLean(R). Resistant starch is more slowly digested than
conventional food starch and therefore, is partially fermented in the lower
gastrointestinal tract. The resistant starch can then be used as an energy
source for gut bacteria which promote good intestinal health and can also be
metabolized to short chain fatty acids which are purported to be
anti-carcinogenic. Most importantly, resistant starch is broken down to glucose
at a slower rate than conventional starch which is advantageous for foods
formulated specifically for diabetics.
Many of the starch-based texturizers and ingredient blends were originally
developed for and are used in reduced fat versions of a variety of dairy
products such as low fat or fat-free cottage cheese, sour cream, cream cheese,
or process cheeses. As discussed in a document entitled " Taking the Fat Out of
Food" from the U.S. Food and Drug Administration, reducing fat intake by
consuming reduced fat versions of these products is an element of a healthier
diet.
In addition to helping food manufacturers improve the healthfulness of their
food products, the Ingredients Group's family of texturizing ingredients can
improve the overall quality of food products, reduce formulation costs and meet
specific processing requirements. The Company believes that all of its products
are GRAS (Generally Regarded As Safe, see Regulation section for a further
description) under current FDA regulations.
11
The Ingredients Group's major products are as follows:
Fiber-Based Products
Canadian Harvest: Canadian Harvest Oat Fibers are a family of insoluble fiber
products derived from oat hulls. Oat Fibers are used commercially to increase
yield and enhance texture in ground meat products, to add strength and reduce
breakage of taco shells and ice cream cones, and to enhance texture and increase
the fiber content of cereals, breads, cookies and crackers. The company also
offers Canadian Harvest Stabilized Brans derived from oat, wheat and corn, as
well as wheat germ. The Stabilized Brans are heat-treated to extend shelf life
and ground to meet customer needs for appropriate particle size.
Opta Ingredient Systems
Opta Ingredient Systems are proprietary blends of texturizing agents and other
ingredients that are primarily developed and sold for use in the dairy, salad
dressing and soy-based product categories. Many of the Ingredient Systems
contain one of the Group's unique and proprietary starch-based texturizers which
are described below.
OptaGrade: OptaGrade is a natural, starch-based texturizing agent that is used
commercially in a variety of dairy products including natural, imitation and
processed cheeses, sour cream, cream cheese and cottage cheese.
OptaMist: OptaMist is also a starch-based texturizing agent that improves the
taste, texture and appearance of dairy products, yogurt, natural and processed
cheese products, salad dressings and mayonnaise. While the functionality of
OptaMist is similar to that of OptaGrade, its unique processing flexibility
allows it to be used in food products made within a wide variety of processing
systems.
OptaFil: OptaFil is a starch-based opacifying agent and whitener used in reduced
fat or fat free dairy and non-dairy creamers, whipped toppings, puddings,
beverages, cheeses and salad dressings.
OptaMax: OptaMax is a starch-based texturizing agent developed to increase
yields and improve the texture of reduced fat natural cheese including
Mozzarella, Cheddar, Colby, Monterey Jack and Feta.
Konjac Flour: Under a distribution agreement with Shimizu International, Inc. of
Japan, SunOpta Ingredients is the exclusive North American distributor for
konjac flour for food ingredient applications. A unique and very versatile
texturizing agent obtained from the konjac plant commonly cultivated in East
Asia, konjac flour provides excellent heat and freeze thaw stability when used
to thicken or gel processed foods. Based upon current sales levels, the Company
does not believe the distribution agreement with Shimizu is material.
Microcrystalline Cellulose (MCC): Under a distribution agreement with Blanver
Farmoquimica, Ltda. of Brazil, SunOpta Ingredients is the exclusive distributor
of MCC for food-related applications in the United States. MCC, commonly known
and labeled as cellulose gel, is a naturally derived stabilizer, texturizing
agent and fat replacer. It is used extensively in reduced fat salad dressings,
numerous dairy products including cheese, frozen desserts and whipped toppings
and bakery products. Based upon current sales levels, the Company does not
believe the distribution agreement with Blanver is material.
Custom Ingredients and Services
The Company produces a number of unique functional food ingredients on a
contract basis utilizing customer's proprietary technology. Products include:
Benefiber: A soluble guar based fiber food ingredient, produced under a
manufacturing agreement for a Japanese customer, whereby the Japanese based
customer has the sole and exclusive rights to the product specifications. The
product is also sold to a U.S. based customer for U.S. distribution. Based upon
current sales levels, the Company does not believe the manufacturing agreement
is material.
Beta-Trim: Fractionalized oat based food ingredients produced under agreement
for domestic customers.
Microgard: A family of natural food preservatives.
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Dairy Blends: The Group produces custom blended powdered dairy ingredients for
several customers in the United States.
Powdered Honey and Molasses: The Group produces and markets dried sweeteners
such as powdered honey and molasses, which are sold to food manufacturers.
Technical Processing and Spray Drying: Technical processing and spray drying is
contracted with various customers to produce a variety of food ingredients.
Competition
Food ingredients are considered unique niche items usually developed or
processed for specific customers. This Group competes with other product
developers and specialty processors for the specialty ingredient business.
The food ingredients industry is intensely competitive. Competitors include
major chemical companies with food ingredient divisions, other food ingredient
companies, stabilizer companies and those consumer food companies that also
engage in the development and sale of food ingredients. Many of these
competitors have financial and technical resources as well as production and
marketing capabilities that are greater than those of the Company.
Distribution, Marketing and Sales
Utilizing a technically oriented customer account team, the Ingredients Group
believes that the most effective way to solve each customer's problem is to gain
a thorough understanding of the customer at all levels, build solid working
relationships throughout the customer's organization, be knowledgeable of the
market segment in which the customer competes, and have a detailed technical
understanding of the customer's problem as well as its preferred solution. The
Company takes a multidisciplinary approach in order to achieve this level of
customer understanding and service. Members of the Ingredient Group's direct
sales force are teamed up with the appropriate technical personnel to work as
"consultants" in defining and developing a range of potential solutions to their
formulation and product development problems. In all cases, the Ingredient
Group's strategy is to provide outstanding service and responsiveness, which the
Company believes, will lead to additional opportunities with existing and
prospective customers.
Suppliers
The Ingredients Group's raw materials and packaging needs are sourced from
various suppliers who provide products that contractually are required to comply
with certain specifications. Products are sourced from over 1,000 suppliers with
availability subject to world market conditions. There are a number of
alternative sources of supply for all raw materials with critical customer
supply relationships highlighted below.
Dairy ingredients are purchased from a number of suppliers, primarily dairy
producer cooperatives. Product is purchased in the spot market with certain
ingredients purchased via short-term supply contracts.
Oat hulls are primarily sourced from a major food company and there is ample
supply to meet production requirements.
Maltodextrin is purchased on contract from several suppliers. There is
substantial production capacity among these suppliers for maltodextrin. Organic
maltodextrins are produced by the Group from organic grains sourced from
contract growers.
Honey, molasses, high fructose corn syrup and flour are purchased based on
required specifications in the spot market. The supply for these ingredients is
sufficient to meet current demand. Supply shortfalls would have an effect on
availability and price and would be reflected in finished product pricing for
the Group.
Other ingredients such as guar, oat flour and carbon are supplied by process
customers and are not sourced directly from Food Group suppliers.
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THE PACKAGED & DISTRIBUTED PRODUCTS GROUP
The Packaged & Distributed Products Group represents the final layer of the
Company's vertically integrated natural and organic foods business model. This
Group includes a small but growing branded foods business in both Canada and the
U.S., aseptic packaging services for soymilk and other customers, a rapidly
growing Canadian distribution business and a healthy convenience food business
which includes the recent acquisitions of Kettle Valley and Dakota Gourmet. The
focus of this group is on the development, marketing and distribution of
consumer branded natural and organic food products, utilizing integrated inputs
and processing expertise to drive low cost, high quality products.
In Canada, the Company markets a line of branded organic dairy products
including milk, butter and creams under the mu trademark and a number of organic
food ingredients including organic skim and whole milk powders. The Group also
markets a line of organic poultry and pork products under the Organic Kitchen
label and other private labels.
The Packaged & Distributed Products Group started to build a Canadian national
natural and organic food distribution system in 2002 when the Company acquired
Wild West Organic Harvest based in Richmond, British Columbia and Simply
Organics based in Toronto, Ontario. In late 2003 SunOpta acquired Pro Organics
based in Burnaby, British Columbia with other facilities in Toronto and
Montreal. Most recently the Company acquired Distribue-Vie, an organic fresh
foods distributor serving Montreal, Eastern Ontario and the Maritime provinces.
Together these companies form the basis of the national distribution system,
handling approximately 3,000 natural and organic food products, including the
Company's branded line of dairy, poultry and fruit bar products.
In the U.S. the Group focuses on the aseptic packaging of shelf stable beverages
and liquid products from the SunOpta Aseptic (formerly Nordic Aseptic Inc.)
facility. The SunOpta Aseptic facility has been significantly upgraded over the
past three years as a result of the acquisition of a new half gallon filler, a
new boiler, new mix room facilities, a new CIP (clean in place) system, a number
of storage tanks, waste treatment processing and numerous upgrades and
improvements to existing equipment. The Company has an agreement with a major
food company to provide aseptic finished product. The Group also owns beverage
trademarks including Rice-um and Soy-um which are currently co-branded under an
arrangement with a U.S. Specialty Food retailer. The U.S. Packaged division also
markets a number of organic consumer products in the United States under the
brand names SunRich Naturals including soy-based veggie burgers, edamame and
other frozen soy vegetables.
The Packaged & Distributed Products Group's major products are as follows:
Aseptic Packaged Products: Processing and packaging of shelf stable liquid
products is performed at SunOpta Aseptic. The Group packages aseptic products
for some of the leading consumer branded food companies in the United States and
also has its own proprietary branded products being marketed under the trade
names Rice Um and Soy Um.
Fruit Bars and Leathers - The Group produces apple based natural and organic
fruit bars and leathers, which are marketed under the names Kettle Valley Real
Fruit Snack, Frunola and various private label brands.
Sunflower Snacks - The Group produces natural and organic packaged ready to eat
sunflower products sold under the Dakota Gourmet brand and various private label
brands.
Sunrich Naturals - The Group produces and markets North American grown
Individually Quick Frozen (IQF) frozen soy vegetables as podded edamame and
shelled edamame. A line of gluten free soy-based veggie burgers was introduced
under the Sunrich Naturals label to the Natural Foods Market in 2003.
Organic Dairy - Full line of packaged organic milk and organic butter products
under the trade name mu as well as organic dairy ingredients including organic
skim milk powder.
Organic Meat Products - Current products include organic chicken, organic pork
and organic turkey sold under the Organic Kitchen trademark and various private
label names.
Fresh Organic Produce - The Group distributes a full line of certified organic
fruits and vegetables.
Natural and Organic Grocery - The Group distributes approximately 2,400 natural
and organic grocery items from a broad range of North American suppliers.
14
Competition
The Company's aseptic packaged products compete with numerous other
manufacturers of similar size with similar aseptic packaged products.
Kettle Valley and Dakota Gourmet competes against much larger competitors in the
snack food category.
The Canadian Distribution division compete against much larger conventional
produce and natural food grocery distributors.
Organic Kitchen and SunOpta Dairy competes against other providers of organic
poultry and organic dairy products as well as significantly larger food
companies that provide specialty or high end products that compete with organic
products. The Group is the largest distributor of organic fresh foods in Canada.
Distribution, Marketing and Sales
Kettle Valley and Dakota Gourmet market their products through natural and mass
market grocery retailers, mass merchandising, U.S. School programs and other
distribution channels. The products are sold under the Kettle Valley Real Fruit
Snacks, Frunola and Dakota Gourmet Labels as well as by contract under various
private label brands.
The Canadian Distribution Group's primary distribution coverage includes central
and western Canada. It competes through the breadth of its product line,
providing excellent product quality and consistency and by maintaining strong
relationships with customers, growers, and suppliers.
The Group's Packaged Products are marketed to other food manufacturers under
private label brands and direct to grocery, and food specialty stores for our
own branded products.
Suppliers
The Canadian Distribution Group sources products from over 500 suppliers.
Overall supply is sufficient. Supply related to fresh produce items is
controlled through spot pricing and changes are reflected in prices to end
customers.
There are no supply contraints for the other organic and natural products
including culled apples, organic milk, organic soy concentrate (supplied
internally) and sunflowers (supplied internally).
REGULATION - SUNOPTA FOOD GROUP
The Food Group is affected by governmental agricultural regulations and
policies. State and federal fertilizer, pesticide, food processing, grain buying
and warehousing, and wholesale food regulations are examples of regulations that
affect this Group. Government-sponsored price supports and acreage set aside
programs are two examples of policies that may affect this Group.
In addition, several of the Food Group's business activities are subject to U.S.
environmental regulations. The Food Group is involved in the manufacture,
supply, processing and marketing of organic seed and food products and, as such,
is voluntarily subject to certain organic quality assurance standards. The Food
Group is currently in compliance with all state and federal fertilizer,
pesticide, food processing, grain buying and warehousing, and wholesale
food-handling regulations. Regulatory agencies include the United States
Department of Agriculture (USDA), which monitors both the food processing and
agricultural grain business as well as the Food and Drug Administration (FDA)
which oversees food safety and efficacy.
Certain food ingredient products are regulated under the 1958 Food Additive
Amendments to the Federal Food, Drug and Cosmetic Act of 1938 (the "Act"), as
administered by the FDA. Under the Act, pre-marketing approval by the FDA is
required for the sale of a food ingredient which is a food additive unless the
substance is Generally Recognized As Safe (GRAS) under the conditions of its
intended use by experts qualified by scientific training and experience to
evaluate the safety of food ingredients. A food additive is any substance, "the
intended use of which results or may reasonably be expected to result, directly
or indirectly, in its becoming a component or otherwise affecting the
characteristics of any food." Such pre-marketing approval for ingredients that
are not GRAS, which is
15
issued in the form of formal regulation, requires a showing both that the food
ingredient is safe under its intended conditions of use and that it achieves the
function for which it is intended.
GRAS status can be established through "self-affirmation" in which the producer
determines on its own that the ingredient is GRAS, typically with the assistance
of a panel of experts. At its option, the producer may also submit a "GRAS
Notification" to the FDA. Although FDA no longer officially recognizes the GRAS
status of ingredients through a petition and regulation process, a lack of FDA
objection to such a GRAS Notification is widely recognized as important evidence
of GRAS status.
A food ingredient may be deemed GRAS under the conditions of its intended use
based upon its history of common use in food prior to 1958, or based upon
scientific procedures which produce the same quantity and quality of scientific
evidence as would be required for the FDA to issue a pre-market approval of the
sale of a food additive. In either case, in order to establish that a product is
GRAS, it must not only actually be safe in its intended use, but it must be
generally recognized as such. If a food ingredient is not entitled to GRAS
status, pre-market approval must be sought through the filing of a Food Additive
Petition.
Countries other than the U.S. also regulate the sale of food ingredients.
Regulations vary substantially from country to country, and the Company takes
appropriate steps to comply with such regulations as necessary.
Many of the Food Group products are being marketed pursuant to GRAS
self-affirmation. The Food Group believes that most products for which it has
retained commercial rights are GRAS. However, such status cannot be determined
until actual formulations and uses are finalized. Thereafter, the group decides
whether self-affirmation procedures, and a GRAS notification will be
appropriate. Certain of the Company's products may require a Food Additive
Petition and in the event that one is required, the Company may elect to sell or
license its rights to another party.
The Food Group endeavours to comply in all material respects with applicable
environmental regulations. Some of the key regulations include:
Air Quality - regulated by EPA and certain city/state air pollution control
groups. Emission reports are filed annually.
Waste Treatment/Disposal - solid waste is either disposed of by a third-party or
in some cases the Company has a permit to haul and land apply. Agreements exists
with local city sewer districts to treat waste at specified levels of Biological
Oxygen Demand (BOD) and Total Suspended Solids (TSS).
Sewer - agreements with the local city sewer districts to treat waste as
specified limits of BOD and TSS. This requires weekly/monthly reporting as well
as annual inspection.
Hazardous Chemicals - various reports are filed with local city/state emergency
response agencies to identify potential hazardous chemicals being used in our
facilities.
RESEARCH AND DEVELOPMENT - SUNOPTA FOOD GROUP
The Food Group has developed a number of new soy ingredients and alternatives to
accommodate new product adaptation of these ingredients into various food items.
The expanding interest to incorporate soy-based foods in consumers' diets
creates numerous opportunities to develop soy ingredients that can be
incorporated into food developer's menu items. The Food Group continues to
research products and processing systems that are required to serve the growing
natural and organic foods markets and continues to expand in areas such as
organic oils and organic snack coatings.
In addition to the development of basic ingredients the Food Group has a staff
of highly trained and experimental food scientists and engineers dedicated to
resolve its customer formulation challenges. Applications and technical service
support provided by the Group includes all aspects of food product development
from concept to commercial launch as well as ongoing manufacturing support.
INTELLECTUAL PROPERTY - SUNOPTA FOOD GROUP
The nature of a number of the Food Group's products and processes requires the
Company to create and maintain a number of patents and trade secrets. The
Group's policy is to protect its technology by, among other things,
16
filing patent applications for technology relating to the development of its
business in the U.S. and in selected foreign jurisdictions.
The Group's success will depend, in part, on its ability to protect its products
and technology under U.S. and international patent laws and other intellectual
property laws. The Company believes that it owns or has the right to use all
proprietary technology necessary to manufacture and market its products under
development. There can be no assurance, however, that patent applications
relating to the Company's products or technology will result in patents being
issued or that current or additional patents will afford protection against
competitors with similar technology.
The Company also relies on trade secrets and proprietary know-how and
confidentiality agreements to protect certain of its technologies and processes.
There can be no assurance that the Company's outside partners and contract
manufacturers will be prevented from gaining access to the Company's proprietary
technology and confidential information.
EMPLOYEES - SUNOPTA FOOD GROUP
The Food Group has 696 full-time employees. There is one union at the Company's
St. Thomas, Ontario facility that covers approximately 11 employees. Subsequent
to year end, the Company announced closure of this facility, which will result
in the termination of the employees and the transfer of the business to one of
the Food Groups other facilities. Management considers relations with its
employees to be good.
PROPERTIES - SUNOPTA FOOD GROUP
The Food Group operates from seventeen processing facilities (13 owned, 4
leased) in seven U.S. states and one Canadian province. The Group also owns and
leases a number of office and distribution locations and also leases and
utilizes public warehouses to satisfy its storage needs. For more details please
see Item 2. - Properties.
OPTA MINERALS
Opta Minerals has two principal business lines:
(1) The manufacture and distribution of industrial mineral based
products such as specialty sands, bentonite clays, silica free
abrasives, garnets and other products for the foundry, shipbuilding,
bridge repair and steel industries. Many of these products can
subsequently be recycled; and
(2) The recycling of waste industrial mineral by-products and materials
from site reclamation projects; these materials are cleaned, crushed
and blended to specific chemistry for resale to cement, steel and
related industries.
This Group, like the Food Group, has also been built through several
acquisitions starting with the initial acquisition of Barnes Environmental and
Industrial in 1995. In 2000, George F. Pettinos (Canada) Limited (PECAL) and
Temisca, Inc. were acquired followed by the acquisitions of Virginia Materials
and 51% of International Materials in 2001. In late 2002, the 49% minority
interest in International Materials was also acquired.
Opta Minerals' processing of cement additives and certain abrasives slows down
during the January to March period, corresponding to reduced cement production
and difficult winter operating conditions. The foundry and steel businesses are
not considered seasonal. The establishment of the Louisiana manufacturing
facility in 1998 and the subsequent acquisition of Virginia Materials helps to
mitigate the seasonality of this Group.
The distribution of products is freight sensitive for lesser value added
products and is focused on the Ontario and Quebec markets while the higher value
products such as abrasives and garnets are shipped throughout the U.S. The
annual volume of materials processed and distributed is approximately 180,000
tonnes.
Major Developments during 2003
During the year the Company finalized its plan to sell its Hamilton based
manufacturing and processing facility for $1,041,000. The sale was completed in
early 2004. Production from this facility has been transferred to the
17
Group's Waterdown, Ontario facility. Cost savings are expected to be
approximately $290,000 per annum, excluding onetime costs.
In 2003 Opta Minerals signed a 5 year lease in Baltimore, Maryland. The Group
plans to complete installation of an abrasives facility on this site and be
operational by the third quarter of 2004.
Major Products
Barshot/Crystalgrit: Opta Minerals has a licence agreement with Crystalgrit,
Inc. from Quebec, Canada, the patent holder of "Specular Hematite as an Impact
Material" which gives the Group the exclusive right to market this material in
the two central Canadian provinces, Great Lakes and Northeast Atlantic region
states and the state of Alabama and the non-exclusive right for the balance of
North America. The Company pays 5.5% of the net sales price on products sold
under the license agreement with a minimum of CDN $175,000 per year. The Group
also has the first right of refusal for a licence in 5 other US states. Based on
current sales levels, the Company does not believe the license agreement to be
material.
Specular Hematite: Marketed under the name "Barshot" or "Crystalgrit" as a
recyclable abrasive providing higher profit margins for the user and competing
with existing materials such as garnet, staurolite, aluminum oxide, various
slags and steel grit.
The Group is continuing to develop agents/distributors primarily for the U.S.
exclusive territory, focusing on companies and contractors capable of recycling
Barshot or Crystalgrit.
Slag Abrasives: Opta Minerals markets copper slag abrasives under the name
"Ebony Grit" into the Ontario and Quebec markets. With the acquisition of
Virginia Materials the Group expanded its product offering with a coal slag
abrasive under the name of "Blackblast".
Garnets: Opta Minerals is a producer of garnets for the water jet cutting, water
filtration and abrasive industries. The Group also has an agreement with a
garnet supplier in China, complimenting this with a Distributor Agreement with a
garnet sand supplier in India. These high value products are sold to the water
jet cutting and wet and dry abrasive blasting markets.
Silica Sands: Opta Minerals supplies major foundry customers in Quebec and
Ontario with silica products. The acquisition of Temisca Inc. in 2000 provided
the Group with a lower cost and secured supply of silica raw materials which has
allowed the Group to remain a key supplier in this market. The properties of the
Temisca silica sands are suited to the filtration, frac sand, golf course sand
and construction applications.
Resin Coated Sand: Based upon management's understanding of the market, the
Group is a dominant supplier of resin coated sand in Ontario and Quebec via
products sourced from the U.S.. Resin coated sand is used exclusively by the
foundry industry.
Competition
Opta Minerals conducts business throughout North America with a focus on key
regions. Key regions comprise the Quebec-Detroit corridor, New York, Norfolk,
Virginia and the Louisiana Gulf region, all of which are areas of high volume
ship repairs and bridge cleaning activities. The Group is competitive in
abrasive and value added products in surrounding areas such as Michigan, New
Jersey and Ohio.
The Group competes against a variety of competitors servicing the foundry,
steel, abrasive, water jet and filtration industries. Each of these product
categories are normally served by as many as three competitors. The Group
competes through a combination of exceptional product quality and customer
service combined with competitive pricing in these markets.
In 1994, the Waterdown site was awarded a Certificate of Approval from the
Ontario Ministry of Environment and Energy to recycle non-hazardous and
hazardous solid waste. To obtain the certificate management was required to file
an operations and management plan with its initial application. Along with
maintaining a bond of CDN $750,000 with the Ontario Ministry of Environment, the
Company is limited in the amount of hazardous waste that it can store and
receive on any one day as well as the overall length of time hazardous wastes
can be stored. The Company is subject to periodic audits by the Ministry to
ensure proper storage, proper classification of hazardous wastes and security of
materials as well as controls and monitoring of ground and storm water
management,
18
contingency plans and site inspections. The significance of this Certificate of
Approval is that the Opta Minerals Group can recycle certain types of solid
waste, which could not be recycled without a Certificate of Approval, as many
materials have been declared hazardous by the Ontario Ministry of Environment
and Energy. The Certificate of Approval has no fixed expiry date, however the
Company must comply with requirements listed in the terms of the Certificate of
Approval, as summarized above to maintain its good standing.
Materials that can be recycled under the Certificate of Approval represent less
than 25% of the materials processed by Opta Minerals. The Certificate of
Approval serves as a barrier to entry for other operators.
Suppliers
Most of the Opta Minerals' critical raw materials are purchased through approved
suppliers to ensure the highest quality and the supplier's ability to adhere to
the Group's requirements.
Opta Minerals receives materials from in excess of 2,000 suppliers. While the
Group has several alternative sources of supply for many of the inputs it
requires, it also has several key supplier relationships, which are summarized
below.
The Group obtains its key abrasive raw materials from certain Canadian mines and
a U.S. power plant. Ebony Grit, a product produced from copper slag is supplied
by a Canadian mining and refining company. Specular Hematite reserves at the
current mine supplier are estimated to be sufficient to supply the Group's needs
for many years. Blackblast, a product produced from coal slag is supplied on an
exclusive basis by a U.S. power plant.
The Group has a non-exclusive right to distribute certain high purity silica
sand to the foundry industry in Quebec and Ontario for US Silica.
The Group represents Bentonite Performance Minerals, focusing on sales to the
foundry market, as well as other bentonite sales to the industrial market in
Quebec and Ontario.
The Group produces industrial garnet derived from a waste mining stream at its
Keesville, New York facility. In addition the group has an exclusive North
American Agreement to market garnet from a supplier in India and a second
agreement with a supplier in China.
Regulation
Opta Minerals' business primarily involves the handling of materials, which are
inorganic and mineral based. These types of materials are generally benign and
do not give rise to environmental problems.
Accordingly, to date there has been low potential for environmental liabilities
to arise. The Ontario Ministry of Environment and Energy has the right to
inspect the Waterdown site and review the results of third party monitoring and
perform its own testing. Similar rights of inspection exist at the facility in
Norfolk, Virginia. Almost all of the Company's environmental regulation is
standard to the respective industries with the exception of the permits in
Ontario and Virginia to recycle certain types of solid waste including items
listed as hazardous materials. In both locations the Company is subject to
monthly reporting and periodic audits as well as having a financial bond in
place with the respective government should there be a contamination.
Based on known existing conditions and the Group's experience in complying with
emerging environmental issues, the Company is of the view that future costs
relating to environmental compliance will not have a material adverse effect on
its financial position.
Employees
Opta Minerals has 83 employees. With the closure of the Hamilton location, Opta
Minerals has one union site in Waterdown, Ontario. The contract extends to 2005.
Management considers relations with employees to be good.
19
Properties
Opta Minerals operates from six locations excluding Hamilton. The primary
operating facility with administrative, laboratory and principal production is
located in Waterdown, Ontario. In addition, the Group owns a
distribution/warehouse facility in Lachine (Montreal), Quebec and the Temisca
sand property in located in northern Quebec. The Group also leases
production/distribution facilities in New Orleans, Louisiana, Norfolk, Virginia
and Keesville, New York. For more details please see Item 2 Properties. In
January 2004 the Company sold its Hamilton, Ontario production facility and
moved the operations to its Waterdown location.
STAKETECH STEAM EXPLOSION GROUP
The Company has developed a steam explosion technology known as the "StakeTech
System", including process engineering and the hardware required.
The patented StakeTech System provides a method for the rapid and continuous
steam treatment of biomass under high pressure. The suitable raw materials
include wood chips, sugarcane bagasse, cereal straws and waste paper. In their
natural state, these materials are not easily separated into their component
parts. By processing with the addition of high-pressure steam, the StakeTech
System breaks the chemical and physical bonds that exist between the components
of these materials allowing their subsequent separation and processing into
products and components that potentially have wide and diverse applications. The
Company has demonstrated its equipment and technology on a commercial scale in
several applications.
For the past several years the group has focussed its marketing efforts on the
production of pulp for paper from non-woody fibers and the production of
celluose derivatives. The Group is also pursuing a number of food based
applications with both external parties and internally through the Company's
SunOpta Food Group and bio-fuel opportunities specifically related to the
production of ethanol.
StakeTech's steam explosion business is not affected by seasonality.
Major Developments in StakeTech Steam Explosion Group in 2003
In 2003, the StakeTech Steam Explosion Group continued to focus on marketing
pulping systems to China through its agent, Pacitec Inc. (Pacitec). In 2003,
Pacitec maintained its exclusive rights for the Chinese market and continues to
actively pursue the sale of StakeTech Systems.
In conjunction with Pacitec, the Company is currently pursuing equipment sales
to several separate projects in China. The Company is pursuing the setup of a
pilot/demonstration plant in China as a means to realize on its technology in
China. The Group has also begun to focus on the use of its technology for food
applications specifically related to the grains, (oats, soy and sunflowers) that
the Company currently sells. Testing of the materials began in 2003 in the
Group's newly renovated labs and will continue in 2004.
Along with food applications the Group has been working with a major ethanol
producer for the use of the StakeTech system to convert biomass to ethanol.
Competition
The Company is focussing its marketing efforts on applying the steam explosion
technology to the production of pulp for paper from non-woody fibres. The
Company believes the ability of StakeTech Systems to operate at high pressure
presents advantages in terms of reducing chemical requirements and improving
product yields.
The Company's success in marketing to the pulp and paper industry will depend on
the extent to which the StakeTech System can be shown to have advantages over
the technology of existing suppliers. These existing suppliers include Ahlstrom,
Kvaerner, Metso and Andritz. The Company is aware of other groups that are
attempting to develop and market new pulping processes. These include the NACO
process from Italy, the Saicca process from Spain and the Anbokem process from
Canada.
It is anticipated that competition from suppliers of alternative systems and
equipment in these markets will be strong and that the potential advantages for
the StakeTech System will have to be demonstrated.
20
The application of this technology to food and biofuel applications is
"application specific" and it is not believed that direct competition is a
factor in this regard.
Suppliers
Waste biomass such as straw is currently available in abundant supply in many
parts of the world. If other economic uses for waste biomass increase, the
Company may find that the supply of such raw materials is reduced and this could
have a materially adverse effect on the Company's steam explosion technology
business.
In respect of the manufacturing of the customized steam explosion technology
systems, the Company provides equipment fabricators with detailed drawings and
equipment specifications. All major equipment components have at least two
alternate suppliers.
Regulation
StakeTech steam explosion technology may use chemicals in addition to steam to
treat fibrous material. This technology does not generally produce appreciable
pollutants and the Company believes that its existing facilities are in full
compliance with applicable laws concerning the environment. To date the Company
has not found it necessary to spend significant amounts in order to comply with
applicable environmental laws. It is anticipated that future sales or licenses
of the Company's technology will be made where the StakeTech System is but one
part of a larger process, as for example in the manufacture of pulp or biofuels.
In these instances, the overall project may be subject to federal, state or
local provisions regulating the discharge of materials into the environment.
Compliance with such provisions may result in significant increases in the costs
associated with the overall project.
Proprietary Technology
The Company recognizes that there exists a threat of others attempting to copy
the Company's proprietary StakeTech System and/or appropriate the technology. To
mitigate this risk, the normal business practice of the Group includes the
signing of confidentiality agreements with all parties to which confidential
information is supplied including all customers and licensees. The Company also
holds several patents on its equipment and process technology.
In 2000, the Company received approval of a patent application made under the
Patent Cooperation Treaty (PCT) agreement. This patent application covers
certain proprietary equipment designs relating to the StakeTech System and this
approval served as the basis for a patent application made in China in January
2001. China is a signatory to the PCT.
Financial Exposure Related to Bonding and Guarantees
To enter markets such as China, the Company expects to have to provide
substantial performance guarantees in the form of process guarantees and
equipment guarantees. These guarantees will need to be backed by bank guarantees
and/or surety bonds. The Company endeavours to reduce the associated risks;
however there will always remain a possibility that the Company's guarantees or
bonds could be called, rightfully or wrongfully and/or the equipment supplied
fails to meet the guarantees and warranties provided resulting in potential
financial losses to the Company.
Research and Development
During 2003, research and development activities related to client specific
investigations and focused on the production of pulp from straw from China and
other food based and biofuel applications.
Employees
The StakeTech Steam Explosion Group has 3 employees; 2 engaged in technical
support, systems design and R&D, and 1 engaged in marketing, sales and
engineering. Since the division subcontracts out the production of its
equipment, it does not anticipate significantly increasing the size of its work
force until it receives a contract for its equipment. The Group has hired
additional people in 2004 related to research and customer contracts in the
development of the technology for bio-fuel and food based applications.
21
CORPORATE OFFICE
The corporate office of SunOpta is located in owned premises in Norval, Ontario.
Ten staff are employed in a variety of management, financial and administration
roles.
Environmental Hazards
The Company believes, with respect to both its operations and real property,
that it is in material compliance with environmental laws at all of its
locations and specifically with the requirements of its Certificate of Approval
issued by the Ontario Ministry of the Environment and Energy on the Opta
Minerals property in Waterdown, Ontario.
Employees
As of December 31, 2003 the Company had 792 employees broken out by division
below:
----------------------------------------------------------------------------------------------------
Divisions Number of Employees
----------------------------------------------------------------------------------------------------
Food Group 696
----------------------------------------------------------------------------------------------------
Opta Minerals 83
----------------------------------------------------------------------------------------------------
StakeTech Steam Explosion, Cdn Packaged Products and Corporate Office 13
----------------------------------------------------------------------------------------------------
Total 792
----------------------------------------------------------------------------------------------------
Item 2. Properties
SunOpta Food Group
The Company operates from the following major locations which are owned unless
otherwise noted:
- ------------------------------------------------------------------------------------------------------------------------------------
Location State/Province Group/Sub Group Description
- ------------------------------------------------------------------------------------------------------------------------------------
Norval Ontario Corporate Head Office/Steam Explosion Corporate office and laboratory
& Packaged & Distributed Products facilities
- ------------------------------------------------------------------------------------------------------------------------------------
Louisville (Leased) (1) Kentucky SunOpta Ingredients Oat fiber production
- ------------------------------------------------------------------------------------------------------------------------------------
Hope Minnesota SunOpta Ingredients Head office and grain processing
- ------------------------------------------------------------------------------------------------------------------------------------
Alexandria Minnesota SunOpta Ingredients Soymilk processing
- ------------------------------------------------------------------------------------------------------------------------------------
Bertha Minnesota SunOpta Ingredients Drying and blending
- ------------------------------------------------------------------------------------------------------------------------------------
Fosston Minnesota SunOpta Ingredients Processing and drying
- ------------------------------------------------------------------------------------------------------------------------------------
Cambridge Minnesota SunOpta Ingredients Oat fiber processing
- ------------------------------------------------------------------------------------------------------------------------------------
St. Thomas Ontario SunOpta Ingredients Brans and wheat germ production
- ------------------------------------------------------------------------------------------------------------------------------------
Afton Wyoming SunOpta Ingredients Soymilk processing
- ------------------------------------------------------------------------------------------------------------------------------------
Bedford Massachusetts SunOpta Ingredients Head office and development center
- ------------------------------------------------------------------------------------------------------------------------------------
Galesburg Illinois SunOpta Ingredients Starch based production
- ------------------------------------------------------------------------------------------------------------------------------------
Richmond (Leased) (2) British Columbia Packaged & Distribution Products Office, distribution and warehousing
- ------------------------------------------------------------------------------------------------------------------------------------
Mississauga (Leased) (3) Ontario Packaged & Distribution Products Distribution
- ------------------------------------------------------------------------------------------------------------------------------------
Burnaby (Leased) (4) British Columbia Packaged & Distribution Products Office, distribution and warehousing
- ------------------------------------------------------------------------------------------------------------------------------------
Toronto (Leased) (5) Ontario Packaged & Distribution Products Distribution
- ------------------------------------------------------------------------------------------------------------------------------------
Leonard (Leased) (6) Quebec Packaged & Distribution Products Distribution
- ------------------------------------------------------------------------------------------------------------------------------------
Alexandria Minnesota Packaged & Distribution Products Aseptic Packaging
- ------------------------------------------------------------------------------------------------------------------------------------
Summerland (2 Leased) (7) British Columbia Packaged & Distribution Products Head office and processing facility
- ------------------------------------------------------------------------------------------------------------------------------------
Omak (Leased) (8) Washington Packaged & Distribution Products Processing, warehouse and distribution
- ------------------------------------------------------------------------------------------------------------------------------------
Wahpeton North Dakota Packaged & Distribution Products Processing, warehouse and distribution
- ------------------------------------------------------------------------------------------------------------------------------------
Cresco Iowa Grains & Soy Products Milling
- ------------------------------------------------------------------------------------------------------------------------------------
Breckenridge Minnesota Grains & Soy Products Distribution
- ------------------------------------------------------------------------------------------------------------------------------------
Goodland Kansas Grains & Soy Products Grain processing and distribution
- ------------------------------------------------------------------------------------------------------------------------------------
Edson (Land Lease) (9) Kansas Grains & Soy Products Grain processing and distribution
- ------------------------------------------------------------------------------------------------------------------------------------
22
(1) Lease has an expiry date of July 2005.
(2) Lease has an expiry date of September 2007.
(3) Lease has an expiry date of December 2007.
(4) Lease has an expiry date of August 2009.
(5) Lease has an expiry date of December 2006.
(6) Lease has an expiry date of December 2005.
(7) Leases have an expiry date of Nov. 2007 & Sept. 2016 respectively.
(8) Lease has an expiry date of April, 2008.
(9) Lease has an expiry date of December 2006.
Opta Minerals
Opta Minerals operates from the following major locations which are owned unless
otherwise noted:
- -----------------------------------------------------------------------------------------------------------------------
Location State/Province Group Description
- -----------------------------------------------------------------------------------------------------------------------
Waterdown Ontario Opta Minerals Head office, processing and distribution
- -----------------------------------------------------------------------------------------------------------------------
Lachine Quebec Opta Minerals Distribution
- -----------------------------------------------------------------------------------------------------------------------
Bruno de Guiges Quebec Opta Minerals Specialty sands
- -----------------------------------------------------------------------------------------------------------------------
New Orleans (Leased) (1) Louisiana Opta Minerals Abrasives processing
- -----------------------------------------------------------------------------------------------------------------------
Norfolk (Leased) (2) Virginia Opta Minerals Processing and distribution
- -----------------------------------------------------------------------------------------------------------------------
Keeseville (Leased) (3) New York Opta Minerals Garnet processing and distribution
- -----------------------------------------------------------------------------------------------------------------------
Baltimore (Leased) (4) Maryland Opta Minerals Future site for abrasives facility
- -----------------------------------------------------------------------------------------------------------------------
(1) Lease has an expiry date of December 2005.
(2) Lease has an expiry date of October 2010 and an option to purchase for $2
million before October 2006.
(3) Lease has an expiry date of September 2010.
(4) Lease has an expiry date of December 2008.
StakeTech Steam Explosion Group and Executive Offices
The Company's Executive Group, StakeTech Steam Explosion Group, SunOpta Dairy
and Organic Kitchen operations are located at 2838 Bovaird Drive West, Norval,
Ontario, a property owned by the Company.
Item 3. Legal Proceedings
The SunRich Food Group a subsidiary to the Company has commenced a suit against
a supplier for failure to adhere to the terms of a contract. The Company and its
legal counsel believe that this claim has merit. The Company has ceased
co-packing arrangements under the existing contract and has commenced packing
under separate arrangements. It cannot however be determined if there will be
any recovery by the Company at this time and the Group is expensing the costs of
pursuing this suit on a monthly basis. The supplier has counter-sued the Company
for breach of contract. The Company believes this suit is unfounded. Other than
this action, the Company has not been and is not currently a party to any
material litigation other than stated above.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of the year ended December 31, 2003.
23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common shares trade in US$ on The Nasdaq Small Cap Market tier of
The Nasdaq Stock Market under the symbol STKL, and in CDN$ under the symbol SOY
on the Toronto Stock Exchange. The following table indicates the high and low
bid prices for SunOpta's common shares for each quarterly period during the past
two years as reported by Nasdaq. The prices shown are representative
inter-dealer prices, do not include retail mark ups, markdowns or commissions
and do not necessarily reflect actual transactions.
Trade Prices on Nasdaq (U.S. Dollars)
================================================================================
2003 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $4.04 $2.90
- --------------------------------------------------------------------------------
Second Quarter $7.06 $3.87
- --------------------------------------------------------------------------------
Third Quarter $11.15 $5.07
- --------------------------------------------------------------------------------
Fourth Quarter $10.25 $7.10
- --------------------------------------------------------------------------------
2002 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $2.68 $1.97
- --------------------------------------------------------------------------------
Second Quarter $3.48 $2.58
- --------------------------------------------------------------------------------
Third Quarter $3.07 $2.31
- --------------------------------------------------------------------------------
Fourth Quarter $3.41 $2.39
================================================================================
The following table indicates the high and low bid prices for SunOpta's common
shares for each quarterly period since the company's listing on the Toronto
Stock Exchange.
Trade Prices on TSX (Canadian Dollars)
================================================================================
2003 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $5.95 $4.50
- --------------------------------------------------------------------------------
Second Quarter $9.65 $5.75
- --------------------------------------------------------------------------------
Third Quarter $15.03 $8.82
- --------------------------------------------------------------------------------
Fourth Quarter $13.74 $8.32
- --------------------------------------------------------------------------------
2002 HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $4.17 $3.15
- --------------------------------------------------------------------------------
Second Quarter $5.39 $3.74
- --------------------------------------------------------------------------------
Third Quarter $4.75 $3.48
- --------------------------------------------------------------------------------
Fourth Quarter $5.27 $3.75
================================================================================
At December 31, 2003, the Company has approximately 600 shareholders of record.
Based on proxy requests from shareholders and nominee holders at the last annual
meeting date, the Company estimates that there are at least an additional 6,500
beneficial holders of the Company's common shares.
SunOpta has never paid dividends on its common stock and does not anticipate
paying dividends for the foreseeable future. The receipt of cash dividends by
United States shareholders from a Canadian corporation, such as SunOpta, may be
subject to Canadian withholding tax.
24
Issuance of securities and use of proceeds
Public and Private Offerings
On August 28, 2003, the Company issued 7,500,000 common shares at a price of
$7.00 per common share, as part of a public offering for gross proceeds of
$52,500,000. The Company incurred $1,496,000 in share issuance costs, (net of
tax) in relation to this offering.
On August 29, 2003, the Company issued 285,714 common shares at a price of $7.00
per common share, pursuant to a private placement with a significant
shareholder, for proceeds of $2,000,000.
Options and warrants exercised during the year
During the year ended December 31, 2003, employees and directors exercised
1,276,705 common share options and an equal number of common shares were issued
for net proceeds of $2,257,000.
During the year ended December 31, 2003, 1,461,750 warrants were exercised and
an equal number of common shares were issued for net proceeds of $2,622,000.
Claridge Convertible Debenture
In December 2002, SunOpta issued to Claridge a $5,000,000 convertible debenture
which was used to finance the acquisition of Opta. In September 2003 the
debenture was repaid using proceeds from the public offering.
Use of Proceeds
The funds raised through the offerings and on exercise of options and warrants
were used for general business purposes including working capital, debt
repayment and capital expenditures in existing businesses and for the Food Group
acquisitions completed in 2003. In 2003 SunOpta, subsequent to the public and
private offerings noted above, paid down its U.S. and CDN lines of credit which
can be drawn upon at any time. As at December 31, 2003 SunOpta has available
cash resources of $21,990,000 and approximately $14,000,000 in available lines
to draw upon for general business purposes and to advance the Company's business
acquisition strategy.
25
Item 6. Selected Financial Data
The following information has been summarized from the Company's consolidated
financial statements.
Summary (expressed in thousands of U.S. dollars, except per share amounts)
Canadian GAAP
- ---------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Revenues 199,099 120,898 89,822 63,821 29,699
- ---------------------------------------------------------------------------------------------------------
Net earnings 8,697 3,766 19 2,118 957
- ---------------------------------------------------------------------------------------------------------
Total assets 173,756 115,287 80,061 58,304 22,246
- ---------------------------------------------------------------------------------------------------------
Long-term debt (including current 25,036 36,656 16,648 19,811 2,582
portion)
- ---------------------------------------------------------------------------------------------------------
Other long-term obligations 2,331 5,056 4,487 2,516 895
(including current portion)
- ---------------------------------------------------------------------------------------------------------
Basic earnings per share $0.19 $0.09 $0.00 $0.09 $0.06
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per share $0.18 $0.09 $0.00 $0.09 $0.06
- ---------------------------------------------------------------------------------------------------------
Cash dividends -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Note: The above table for the years 1999 to 2001 have been converted from
Canadian dollars to U.S. dollars at a rate of convenience of $1.00 U.S. to
$1.5928 CDN.
United States GAAP
- ---------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Revenues 199,099 120,898 92,362 68,445 31,836
- ---------------------------------------------------------------------------------------------------------
Net earnings 8,940 3,701 (231) 1,869 975
- ---------------------------------------------------------------------------------------------------------
Total assets 173,756 114,929 79,708 61,450 24,550
- ---------------------------------------------------------------------------------------------------------
Long-term debt (including current 25,036 36,656 16,648 21,044 2,849
portion)
- ---------------------------------------------------------------------------------------------------------
Other long-term obligations 2,331 5,056 4,487 2,673 988
(including current portion)
- ---------------------------------------------------------------------------------------------------------
Basic earnings per share $0.19 $0.09 $(0.01) $0.08 $0.06
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per share $0.18 $0.09 $(0.01) $0.08 $0.06
- ---------------------------------------------------------------------------------------------------------
Cash dividends -- -- -- --
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Exchange rates (U.S. GAAP)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Period end 1.2965 1.5776 1.5490 1.5000 1.4859
- ---------------------------------------------------------------------------------------------------------
Average rate 1.4007 1.5703 1.5928 1.4852 1.4433
- ---------------------------------------------------------------------------------------------------------
26
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Overview
The Company's consolidated financial statements include the results of the
organization's three principal operating groups: the SunOpta Food Group,
accounting for approximately 87% of 2003 revenues, with a focus on vertically
integrated sourcing, processing and selling of soy, oat fiber and other natural
and organic food products; Opta Minerals accounting for approximately 12.5% of
2003 revenues, with a focus on processing, distributing and recycling industrial
minerals; and the StakeTech Steam Explosion Group accounting for less than 1% of
2003 revenues, with a focus on developing and commercializing proprietary steam
explosion technology for processing of biomass into higher value products. All
operating groups are growth oriented ethical businesses, focused on
environmental responsibility and the health and well being of its communities.
During the year the Company expanded its reporting structure and has further
refined its SunOpta Food Group segments as follows: Grains and Soy Products
Group, the foundation of the Food Group, specializing in bringing a number of
identity preserved, non-genetically modified and organic grains and related
agronomic services to market with a core focus in soy, sunflower, corn, rice and
oats ; SunOpta Ingredients Group, specializing in the technical processing of
specialty food ingredients, with a focus on non-genetically modified, natural,
functional and organic offerings ; and Packaged and Distributed Products Group
focusing on branded and packaged foods businesses in both Canada and the U.S.,
recently formed Canadian natural and organic distribution business and healthy
convenience foods business which includes the recent acquisitions of Kettle
Valley and Dakota Gourmet. The results of operations for the expanded reporting
segments have been disclosed for 2003, but prior year results have not been
expanded due to reporting constraints. Comparative analysis by expanded
reporting segment will commence in the first quarter of 2004.
The Management's Discussion and Analysis (MD&A), detailed below, is presented in
six parts; Critical Accounting Policies and Estimates, Results of Operations
2003 versus 2002 and 2002 versus 2001, Recent Accounting Developments Liquidity
and Capital Resources, Business Outlook and Risks and Uncertainties, and should
be read in conjunction with the audited consolidated financial statements and
accompanying notes contained on pages F-1 to F-37 of this Annual Report.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in Canada requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities,
related revenues and expenses, and disclosure of gain and loss contingencies at
the date of the financial statements. The estimates and assumptions made require
judgment on the part of management and are based on the Company's historical
experience and various other factors that are believed to be reasonable in the
circumstances. Management continually evaluates the information that forms the
basis of its estimates and assumptions as the business of the Company and the
business environment generally changes. The use of estimates is pervasive
throughout the Company's financial statements. The following are the accounting
policies and estimates which management believes to be most important to the
business of the Company.
Revenue Recognition
Revenue recognition
i) SunOpta 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 shipment of product or at the time
the service is provided to the customer.
ii) Opta Minerals
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 the non-hazardous material received.
27
iii) StakeTech Steam Explosion 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.
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.
Accounts Receivable
The Company's accounts receivable primarily includes amounts due from its
customers. The carrying value of each account is carefully monitored with a view
to assessing the likelihood of collection. An allowance for doubtful accounts is
provided for an estimate of losses that could result from customers defaulting
on their obligation to the Company. In assessing the amount of reserve required,
a number of factors are considered including the age of the account, the credit
worthiness of the customer, payment terms, the customer's historical payment
history and general economic conditions. Because the amount of the reserve is an
estimate, the actual amount collected could differ from the carrying value of
the debt. Note 17 of the Audited Consolidated Financial Statements provides an
analysis of the movements in the allowance for doubtful accounts.
Inventory
Inventory is the Company's largest current asset. The Company's inventory
consists primarily of finished goods held for sale. Inventories are valued at
the lower of cost, valued on a first-in, first-out basis, or estimate net
realizable value except certain grain inventories that are carried at market.
SunOpta assesses the net realizable value of its inventory on a regular basis by
reviewing, on a item-by-item basis, the realizable value of its inventory, net
of anticipated selling costs. If it is management's judgment that the selling
price of an item must be lowered below its cost in order for it to be sold, then
the carrying value of the related inventory is written down to realizable value.
A number of factors would be taken into consideration in assessing realizable
value including the quantity on hand, age and expiration, historical sales,
consumer demand and preferences. Depending on market conditions, the actual
amount received on sale could differ from management's estimate.
Impairment of Goodwill
In accordance with CICA section 3062, the Company evaluate its goodwill for
impairment on an annual basis or whenever indicators of impairment exist.
Section 3062 requires that if the carrying value of a reporting unit for which
goodwill exists exceeds its fair value, an impairment loss is recognized to the
extent that the carrying value of the reporting unit goodwill exceeds the
"implied fair value" of reporting unit goodwill.
As discussed in the notes to the financial statements, the Company has evaluated
its goodwill for impairment and has determined that the fair value of the
reporting units exceeds their carrying value, and as a result no impairment of
goodwill has been recorded. Goodwill of approximately $18,182,000 is recorded in
the financial statements as of December 31, 2003.
Accrued Expenses
The Company is constantly required to make estimates of future payments that
will be made which relate to the current accounting period. These estimates
range from things such as accrued but unpaid wages and bonuses to estimates of
capital taxes. In establishing appropriate accruals, management must make
judgements regarding the amount of the disbursement that will ultimately be
incurred. In making such assessments, management uses historical experience as
well as any other special circumstances surrounding a particular item. The
actual amount paid could differ from management's estimate.
Income Taxes
The Company is liable for income taxes in the United States and Canada. In
making an estimate of its income tax liability the Company must first make an
assessment of which items of income and expense are taxable in a particular
jurisdiction. This process involves a determination of the amount of taxes
currently payable as well as the assessment of the effect of temporary timing
differences resulting from different treatment of items for
28
accounting and tax purposes. These differences in the timing of the recognition
of income or the deductibility of expenses result in deferred income tax
balances that are recorded as assets or liabilities as the case may be on the
Company's balance sheet. The Company also makes an estimate on the amount of
valuation allowance to maintain relating to loss carry forwards and other
balances that can be used to reduce future taxes payable. Management assesses
the likelihood of the ultimate realization of these tax assets by looking at the
relative size of the tax assets in relation to the profitability of the
businesses which they can be applied to, the number of years based on
management's estimate it will take to use the tax assets and any other special
circumstances. If different judgements had been used, the Company's income tax
liability could have been different from the amount recorded. In addition, the
taxing authorities of those jurisdictions upon audit may not agree with the
Company's assessment. Note 17 of the Audited Consolidated Financial Statements
provides an analysis of the movements in the valuation allowance.
Results of Operations
2003 Operations Compared With 2002 Operations
Consolidated
Revenues for the year ended December 31, 2003, increased by 64.7% to
$199,099,000 from $120,898,000 in 2002. The Company's net earnings for the year
ended December 31, 2003 were $8,697,000 or $0.19 per basic common share (diluted
- - $0.18) compared to $3,766,000 or $0.09 per basic common share (diluted -
$0.09) in 2002, an increase of 131%.
The revenue increase of $78,201,000 is attributable to a $77,488,000 increase in
revenue from the SunOpta Food Group, an increase of $409,000 in revenue from
Opta Minerals, and an increase in revenue attributable to StakeTech Steam
Explosion of $304,000.
Net earnings before interest expense and income taxes in the year ended December
31, 2003 were $11,498,000 compared to $5,580,000 in 2002, an increase of
$5,918,000 or 106.1%. The increase is attributable to the SunOpta Food Group,
which increased by $5,980,000 or 131% and net decrease in Corporate and
StakeTech Steam Explosion costs of $222,000 (including the effect of foreign
exchange gains) or 12.1%, partially offset by a reduction in Opta Minerals of
$284,000 or 11%.
Interest expense increased to $1,942,000 in the year ended December 31, 2003
from $1,413,000 in 2002. The increase in interest expense reflects the loss on
extinguishment of debt of $183,000 relating to the early redemption on the
convertible debenture by the Company and the increase in borrowings prior to the
equity financing completed in the year, to support acquisitions and internal
growth.
The provision for income taxes in 2003 reflects the reversal of a valuation
allowance against loss carry forwards relating to certain U.S. operations since
their utilization is now considered more likely than not. Without this reversal
the tax rate would have been approximately 28%. The effective tax rate was 9.0%
in 2003 compared to 9.6% in 2002. U.S. readers should note that due to
differences between Canadian and U.S. GAAP, net earnings for the year ended
December 31, 2003 under U.S. GAAP were $8,940,000 or $0.19 per basic common
share (diluted - $0.18) versus a $3,701,000 or $0.09 per basic common share
(diluted - $0.09) in 2002. Note 17 to the consolidated financial statements
itemizes these differences.
Segmented Operations Information
SunOpta Food Group
The SunOpta Food Group contributed $173,807,000 or 87.3% of the Company's total
consolidated revenues in 2003 versus $96,319,000 or 79.7% in 2002. The increase
in revenues as a percentage of total revenues reflects the Company's commitment
to natural and organic foods and aggressive acquisition and internal growth
strategies. Of the revenues recognized in 2003, the Grains & Soy Products Group
accounted for $60,322,000 or 34.7% of Food Group revenue, the SunOpta
Ingredients Group accounted for $49,949,000 or 28.7% of Food Group revenue, and
the Packaged and Distributed Products Group accounted for $63,536,000 or 36.6%
of Food Group revenue.
The increase of $77,488,000 or 80.5% in SunOpta Food Group revenues was due to
an increase in grain sales of $13,377,000, an increase in sales of aseptic soy
and are packaged products of $9,709,000 due to increased demand, in addition to
the acquisitions (including internal growth on base revenues subsequent to their
29
acquisition) of Opta, Organic Kitchen, Wild West and Simply Organic in 2002 and
the acquisitions of Sigco Sun Products, Pro Organics, Kettle Valley and Sonne
Labs in 2003 totalling $58,707,000. These increases were partially offset by
decreases in certain soy ingredients sales of $1,790,000, decrease in dairy
blending revenue of $1,139,000 due to normal fluctuations in this business,
decrease in certain toll processing revenue of $819,000 and decreases in certain
other consumer products of $551,000.
Gross profit in the SunOpta Food Group increased by $16,889,000 in 2003 to
$30,086,000 or 17.9% of revenues compared to $13,197,000 or 13.7% of revenues in
2002. The increase in gross profit reflects the higher gross profit margins of
certain acquired businesses and improvements in efficiencies and volumes at the
Company's aseptic packaging operation, partially offset by the significant
increase in grain sales which is a lower margin business.
Selling, general and administrative expenses increased to $19,704,000 or 11.3%
of sales in 2003 from $9,088,000 or 9.4% of sales in 2002. The increase of
$10,616,000 is due primarily to acquisitions completed in 2002 and 2003 of
$10,945,000, partially offset by certain cost reduction programs implemented
throughout the Group.
Net earnings before interest expense and income taxes in the SunOpta Food Group
were $10,536,000 in 2003 compared to $4,556,000 in 2002. The Grains & Soy
Products Group accounted for $2,745,000 the SunOpta Ingredients Group accounted
for $4,797,000, and the Packaged and Distributed Products Group accounted for
$2,994,000 of the net earnings before interest expense and income taxes of this
group. Readers should be advised that internal product transfers of Grains and
Soy Products to the SunOpta Ingredients Group and Packaged and Distributed
Products Group are accounted for at cost.
Opta Minerals
Opta Minerals contributed $24,831,000 or 12.5% of the total Company's
consolidated revenues in the year ended December 31, 2003, compared to
$24,422,000 or 20.2% in 2002. Improved abrasive and mineral sales from the
Canadian operations of $993,000 were partially offset by weak abrasive sales in
the U.S. East coast as a result of reduced ship repair activity of $823,000.
Specialty sands revenues, including coated sands, water filtration sands and
garnets improved by $239,000 over the same period in 2002.
Gross profit in Opta Minerals was $5,132,000 in 2003 versus $6,112,000 in 2002.
As a percentage of revenues, gross margin decreased to 20.7% for the current
year from 25.0% in 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 23.3%).
Selling, general and administrative expenses decreased to $2,605,000 or 10.5% in
sales in 2003 from $3,258,000 or 13.3% in sales in 2002 a decrease of $653,000.
The decrease is primarily due to the reallocation noted above of $404,000, and
cost reduction programs implemented throughout the Group.
Net earnings before interest expense and income taxes were $2,580,000 in 2003
versus $2,864,000 in 2002.
StakeTech Steam Explosion Group and Corporate
Revenues and gross profit of $461,000 in the year ended December 31, 2003 and
$157,000 in 2002 were primarily derived from licence fees. The increase in 2003
is attributable to the recognition of $150,000 in license fees relating to 2002
and the recognition of a full year of license fees in 2003.
Selling, general and administration expenses were $3,479,000 in the year ended
December 31, 2003 compared to $1,935,000 in the year ended December 31, 2002.
The increase of $1,545,000 reflects the additional amortization and costs of
bank financing fees of $324,000, a $300,000 allowance for doubtful accounts, an
increase in professional fees of $250,000 for specific transactions and an
increase in costs related to the administration of a growing public company of
$671,000.
Interest and other income (expense) increased to $114,000 in the year ended
December 31, 2003 from ($212,000) recognized in 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 and interest earned on
higher cash balances held subsequent to the equity financing completed in August
2003.
30
Corporate foreign exchange gains in 2003 increased to $1,288,000 from $209,000
in 2002, resulting primarily from the translation of net assets held in Canada
due to the appreciation of the Canadian dollar during the year.
Net loss before interest expense and income taxes was $1,618,000 for 2003,
compared to a net loss before interest expense and income taxes of $1,840,000 in
2002.
2002 Operations Compared With 2001 Operations
Consolidated
Revenues in the year ended December 31, 2002, increased by 34.6% to $120,898,000
from $89,822,000 in 2001. Earnings increased to $3,766,000 or $0.09 per common
share from $19,000 or $0.00 per common share in 2001.
The increase in the Company's revenues of $31,076,000 in 2002 is due to a number
of factors including increased sales of aseptic packaged soymilk products of
$12,808,000, increased sales of bulk grains of $9,647,000, specialty beans and
dietary fiber of $3,089,000, the three acquisitions and one start-up within the
Canadian natural and organic foods business in 2002 totalling $2,585,000, the
acquisition of Opta Food Ingredients, Inc. in December 2002, added $1,942,000,
and the acquisitions of the business and certain assets of Virginia Materials &
Supplies, Inc. and the outstanding common shares of International Materials and
Supplies, Inc. (Virginia Materials) in October, 2001 resulted in increased
revenues of $5,351,000.
Net earnings for the year ended December 31, 2002 increased to $3,766,000 from
$19,000 in 2001, due to improved financial performance at Nordic Aseptic, the
Company's aseptic packaging operations of $1,990,000 after tax, as well as
improved volumes and margins in dietary fiber of $624,000 after tax and certain
grain and agronomy products of $276,000 after tax. In addition, cost reduction
programs implemented throughout the Company and certain price increases in Opta
Minerals combined with the incremental earnings through the October 2001
Virginia Materials acquisition resulted in $1,097,000 after tax contributed to
improved earnings. The Company realized reduced borrowing costs as a result of
new banking arrangements implemented in 2002 of $232,000 after tax, and had a
reduced effective tax rate due to the reversal of a valuation allowance recorded
against tax loss carry forward of $550,000 partially offset by the write-down of
the Company's 32% investment in Easton Minerals Limited of $366,000, reduction
in StakeTech Steam Explosion earnings of $187,000 after tax and net higher
corporate costs of approximately $300,000 after tax. The Company wrote down the
value of the Easton Minerals Limited investment to $nil since the shares have
not traded since early 2002 and a potential financing to facilitate a business
merger in 2002 did not materialize.
U.S. readers should note that due to differences between Canadian and U.S. GAAP,
the net earnings for the year ended December 31, 2002 under U.S. GAAP were
$3,701,000 or $0.09 per common share versus a loss of ($231,000) or ($0.01) per
common share in 2001. Note 17 to the consolidated financial statements itemizes
the nature of these differences.
The Company's consolidated gross margin improved to 16.1% in the year ended
December 31, 2002 from 13.8% in 2001. The key drivers of this improvement are
provided in the segmented operations information detailed below.
Selling, general and administrative expenditures increased 28.2% in the year
ended December 31, 2002 to $14,281,000 from $11,142,000 in 2001. The increase in
administrative costs is consistent with the growth in food operations, the 2002
acquisitions, the Virginia Materials acquisition completed in October 2001 and
increased Corporate costs to support a rapidly growing public company. These
increases were partially offset by a reduction in amortization expense as a
result of the Company adopting the new CICA Handbook Section 3062 "Goodwill and
Intangible Assets" on January 1, 2002, whereby goodwill and indefinite life
intangibles are no longer amortized. Amortization of goodwill and intangibles
included in selling, general and administrative expenses in the year ended
December 31, 2001 was $492,000.
Interest expense decreased to $1,413,000 in the year ended December 31, 2002
from $1,745,000 in 2001. The decrease in borrowing costs relates mainly to a
decrease in the effective borrowing rate due to the consolidation of a number of
loans under the new financing arrangements which resulted in lower interest
rates and a decrease in floating interest rates on certain debt instruments
versus 2001.
31
Interest and other income was $218,000 in the year ended December 31, 2002,
compared to $326,000 in the year ended December 31, 2001. Included in the
results for the year ended December 31, 2002 is a write-down of the Company's
32% investment in Easton Minerals Limited of $366,000, offset by a gain in the
sale of non-core assets of $285,000, which included certain surplus real estate
properties obtained in the acquisitions of Barnes Environmental International
and Northern Food & Dairy, Inc.
Provision for income taxes increased to $401,000 in the year ended December 31,
2002, compared to $147,000 in 2001. The effective tax rate decreased from 88.6%
in 2001 (2001 included a tax refund of $85,000 related to the reassessment of an
acquired business) to 9.6% in 2002 mainly due to the realization of certain loss
carry-forwards including the realization of the previously unrecorded Nordic
loss carry-forwards of $550,000 and tax planning strategies implemented by the
Company.
Segmented Operations Information
Food Group
The Company treated the Food Group as one reporting segment in 2002. With the
continued expansion of the Food Group, the Company has transitioned its
management structure and related reporting systems in support of its vertically
integrated food model. The Company has expanded its segmented reporting for the
year ending December 31, 2003 however it was not practical to break out the
segments for the year ending 2002 and 2001.
The Food Group contributed $96,319,000 or 79.7% of total Company consolidated
revenues in the year ended December 31, 2002 versus $69,973,000 or 77.9% in the
same period in 2001. The increase of $26,346,000 or 37.7% (of which 31.4% was
generated through internal growth), was due primarily to increased sales of
aseptic packaged soymilk at Nordic Aseptic of $12,808,000, an increase in sales
of bulk grains and specialty beans of $9,528,000, a supply contract cancellation
fee of $1,557,000 and the acquisitions of the Canadian natural and organic food
companies and Opta in the second half of 2002.
Gross margin in the Food Group increased by $4,364,000 in the year ended
December 31, 2002 to $13,197,000, or 13.7%, from $8,833,000 or 12.6% in 2001.
The increase in gross margin reflects the positive impact of improved product
margins on organic feed, dietary fiber and various other specialty processed
products of $664,000, the impact of the turnaround at Nordic Aseptic of
$3,262,000, cost reduction initiatives undertaken throughout the Group, the
supply contract cancellation fee of $1,557,000 and acquisitions completed in
2002, offset by lower margins on bulk grains and certain retail consumer
products of $862,000.
Selling, general and administrative expenses increased to $8,301,000 in the year
ended December 31, 2002 versus $6,297,000 in the year ended December 31, 2001.
The increase is due primarily to an increase in payroll and related costs (as
the organization continues to support the growth in operations), selling,
general and administrative expenses incurred through acquisitions and legal
costs of approximately $200,000, due in most part to an action against a former
supplier for failure to adhere to the terms of a supply contact, as detailed in
Part II - Other Information.
The Food Group net earnings before interest expense and taxes increased to
$4,556,000 in the year ended December 31, 2002 from $1,655,000 in 2001 as a
result of the improved financial performance at Nordic Aseptic, improved volumes
and margins on grains, specialty beans and dietary fiber. Earnings also
benefited from internal cost control programs, the supply contract cancellation
fee, a one-time gain on sale of property and the reversal of a valuation
allowance on the Nordic loss carry-forwards that was previously provided.
Opta Minerals
Opta Minerals contributed $24,422,000 or 20.2% of the Company's consolidated
revenues in the year ended December 31, 2002, versus $19,490,000 or 21.7% in
2001, an increase of $4,932,000 or 25.3%. Revenues were favourably impacted by
the acquisition of Virginia Materials in October 2001 of $5,351,000, partially
offset by weak market and economic conditions in the Canadian steel and foundry
businesses, the economic impact of the September 11th tragedy on the demand for
abrasives and continued competition in the silica and coated sands markets.
Gross margin in Opta Minerals increased to $6,112,000 in the year ended December
31, 2002 versus $3,256,000 in the year ended December 31, 2001, an increase of
$2,856,000 or 87.7%. The increase in margin resulted primarily from the
acquisition of Virginia Materials and improvements in price and sales mix,
offset by a decrease in volume as
32
a result of the economic conditions noted above. As a percentage of revenues,
gross margin improved to 25.0% in 2002 from 16.7% in 2001.
Selling, general and administrative expenses increased to $2,933,000 in the year
ended December 31, 2002 from $2,326,000 in 2001. The increase is due in most
part to a full year of expenses in relation to Virginia Materials.
Net earnings before interest expense and income taxes improved significantly in
the year ended December 31, 2002 to $2,864,000 versus $836,000 in 2001, due in
most part to the addition of Virginia Materials and improved price and sales
margins on certain products, offset by unfavourable economic and market
conditions in the Canadian steel and foundry businesses and increased
competitive pressures in key product groups.
StakeTech Steam Explosion and Corporate
Revenues of $157,000 in the year ended December 31, 2002 and $359,000 in 2001
were derived primarily from licence fees. The decrease in revenues over the
prior year is due to the uncertainty of collection of the second half of the
annual licence fees. The remainder of the licence fee revenue will be recorded
once collection becomes certain.
Cost of goods sold for the year ended December 31, 2002 was nil versus $76,000
in 2001 (mainly amortization charges). The asset was fully amortized in 2001,
and therefore no amortization was recorded in 2002.
Selling, general and administrative expenses were $3,047,000 in the year ended
December 31, 2003 compared to $2,514,000 in 2001. The increase was due to an
increase in the costs of administering a growing public company including
incremental payroll and related costs, public relations, professional fees and
financing costs, in addition to accrued costs in the settlement of a legal
action as detailed in Part II - Other Information.
For the year ended December 31, 2002 the Group had a net loss before interest
expense and income taxes of $1,840,000 compared to $580,000 in 2001.
Recent Accounting Developments
Effective January 1, 2004 the Company will adopt CICA 3870 which will require
the Company to record stock compensation expense on options granted to
employees. Under the transitional provisions of this new standard, the Company
will record a charge through retained earnings representing the cumulative
impact of stock options granted since January 2002 and will record an expense
for existing and any new options over the remaining vesting period.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and
clarifies reporting for derivative instruments. It is effective for contracts
entered into or modified after June 30, 2003. The Company adopted this standard
in fiscal year 2003. The adoption of this standard did not have a significant
effect on the Company's consolidated financial statements.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (FASB 150). The
statement clarifies how issuers classify and measure certain instruments with
characteristics of both liabilities and equity. It is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company adopted this standard in fiscal year 2003. The adoption of
this standard did not have a significant effect on the Company's consolidated
financial statements.
In December 2003, the Financial Accounting Standards Board, ("FASB") issued
Interpretation No. 46R, "Consolidation of Variable Interest Entities." The
objective of FIN 46 is to improve financial reporting by companies involved with
variable interest entities. Prior to FIN 46R, companies have generally included
another entity in its consolidated financial statements only if it controlled
the entity through voting interest. FIN 46R changes that by requiring a variable
entity to be consolidated by a company if that company is subject to a majority
of the risk or loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. Consolidation by
a primary beneficiary of the assets, liabilities and results of activities of
variable interest entities will provide more complete information about the
resources, obligations, risks and opportunities of the consolidated company. The
adoption of this standard did not have a significant effect on the Company's
Consolidated Financial Statements.
33
Liquidity and Capital Resources (at December 31, 2003)
Current assets
Cash and cash equivalents increased to $21,990,000 at December 31, 2003 (2002 -
$7,012,000), primarily due to issuance of common shares for net proceeds of
$56,601,000 in August of 2003. (The bulk of the common shares were issued in a
public and private offering finalized in August, for net proceeds of
$53,004,000).
As of December 31, 2003 the Company had short term investments of $Nil (2002 -
$2,038,000). The short term investments held at December 31, 2002 consisted of
short-term money market investments with maturity dates greater than 90 days
from acquisition, obtained in the acquisition of Opta. These securities were
disposed in 2003 and the proceeds invested in cash equivalents, as noted above.
The Company's cash is invested in the money market.
Trade accounts receivable increased to $26,241,000 at December 31, 2003 from
$18,144,000 at December 31, 2002. Trade receivables attributable to the Food
Group as at December 31, 2003 were $21,893,000 (2002 - $14,889,000). The
increase was primarily due to acquisitions completed in 2003 and an increase in
business especially oat fiber sales within the Ingredients Group. Trade
receivables in Opta Minerals were $4,229,000 compared to $3,225,000 in 2002.
The note receivable of $Nil at December 31, 2003 (2002 - $1,034,000) and the
product rebate payable included in long-term payables of $1,402,000 (2002 -
$1,330,000) are related to an agreement with a major customer to supply product.
This agreement required the Food Group to expand a food processing plant to the
customer's specifications, which was completed in 2000. In accordance with the
terms of the agreement the customer committed to pay 36 monthly instalments of
$119,000, of which the remaining payments were received in 2003. The agreement
also requires the Company to provide the customer with a rebate based on product
purchases beginning in October 2003 until such time as $1,720,000 is repaid.
During 2003, $75,000 of the product rebate has been 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 $11,789,000 to $34,778,000 at December 31, 2003.
Inventories in the Food Group increased $9,893,000 to $28,385,000, primarily due
to the acquisitions as noted in the Business Overview section. Inventories in
Opta Minerals increased $1,896,000 to $6,332,000, due in most part to the
committed purchase of raw material inventories from the previous owner of
Virginia Materials, as agreed in the October 2001 acquisition and the required
purchases under contract from the Baltimore utility. As of January 2004 Opta
Minerals has consumed all the inventory from the former owner and will begin
using Company owned inventory for future sales. The StakeTech Steam Explosion
Group is not required to carry significant inventories.
Assets held for sale
Assets held for sale of $6,007,000 at December 31, 2003 (2002 - $5,020,000)
include the former Opta head office in Bedford, Massachusetts, which has a
book value of $4,800,000, SunOpta Ingredients' St. Thomas Ontario Canada
facility with a book value of $193,000 and Opta Minerals' Hamilton, Ontario
facility, with a book value of $1,014,000. Subsequent to year end, the Hamilton
facility was sold for proceeds of $1041,000. The Company has received deposits
of $1,260,000 relating to the Bedford property which have been included in
customer and other deposits. Upon exercise of the option these amounts will be
applied to the purchase price.
Property, plant and equipment
In the year ended December 31, 2003, the Company spent $7,139,000 (2002 -
$4,464,000) on capital expenditures. Of this, the Food Group expended
$5,361,000, with the larger projects being $500,000 to expand oat fiber
capacity, $700,000 in the Grain and Soy Products Group to support a specific
customers requirements, $950,000 on the new Kettle Valley plant in Omak,
Washington and $400,000 on equipment to improve soy concentrate yields. Opta
Minerals expended $796,000, of which, $151,000 was spent on processing equipment
for new products and $104,000 for environmental improvements The Corporate
Office and Staketech Steam Explosion Group expended $982,000, including $807,000
on an enterprise system computer software to be implemented throughout the
Company in 2004 and improvements and expansion of the StakeTech Steam Explosion
labs and facility for $101,000.
34
Goodwill and intangibles
Goodwill increased by $5,970,000 to $18,182,000 at December 31, 2003 from
$12,212,000 at December 31, 2002. The increase relates to the four acquisitions
completed during 2003 combined with the payment of the deferred purchase
consideration relating to the acquisition of Virginia Materials.
Definite life assets, of $4,035,000 were obtained in the acquisitions noted in
the Business Overview and Note 2 of the Audited Consolidated Financial
Statements. These definite life assets were valued by management as part of the
purchase accounting related to these acquisitions using a discounted cash flow
methodology and managements' best estimate of the cash flows related to each
asset. The December 31, 2003 balance of $6,798,000 (2002 - $2,705,000) includes
the reclassification of trademarks "Rice-um and Soy-um" acquired through the
acquisition of First Light Foods from Indefinite life trademarks and
amortization of $116,000 during the year. SunOpta's definite life intangible
assets consist of customer lists, trademarks and production agreements and are
amortized over their estimated useful lives, ranging from 4 to 15 years.
Future income taxes
Net future income tax assets of $10,195,000, (including current portion of
$1,172,000) as at December 31, 2003 (2002 - 10,007,000) relate principally to
loss carry-forwards recorded on the acquisition of Opta, loss carry-forwards
available in Canada, scientific research expenditures credits available in
Canada and differences between the accounting and tax basis of assets and
liabilities primarily related to property, plant and equipment and intangibles.
During the year ended December 31, 2003 the Company reversed the valuation
allowance of $3,239,000 related to certain U.S. losses as management determined
it is more likely than not that these U.S. loss carry forwards will be utilized.
Included in future income taxes is a valuation allowance of $1,738,000 (2002 -
$4,107,000). The valuation allowance has decreased as a result of greater
certainty associated with the ultimate realization of these future tax assets.
See Note 11 of the Audited Consolidated Financial Statements for a more thorough
breakdown and discussion of the Company's future income tax assets
Other assets
Other assets decreased to $490,000 at December 31, 2003 versus $1,080,000 as at
December 31, 2002. In 2002 and 2001 the Company deferred $308,000 in costs
related to the start-up of an organic dairy business based in Canada.
Amortization of these costs commenced July 2002 and were amortized on a
straight-line basis to December 31, 2003. In 2000, the Company deferred $482,000
of pre-operating costs related to SunOpta Aseptic, which comprised the operating
losses from April to December 31, 2000 that were related to the start-up phase
of the plant. This amount was amortized equally over a 36-month period and as at
December 31, 2003, the unamortized balance of these items is $Nil (2002 -
$358,000). Readers should note that these pre-operating costs would have been
expensed under U.S. GAAP at the time incurred.
In 2002, the Company deferred financing related costs of $796,000 and as at
December 31, 2003 has a net balance remaining of $436,000 (2002 - $619,000).
These costs are related to the conversion and consolidation of substantially all
of the Company's and its subsidiaries' outstanding debt to one major Canadian
bank and its U.S. subsidiary. While the amortization period for the term loan is
seven years, these costs are being amortized over two years, which represents
the first renewal date of the agreement.
Current liabilities
Accounts payable and accrued liabilities increased to $24,664,000 at December
31, 2003 from $19,664,000 at December 31, 2002. The increase is primarily due to
an increase in base business and the acquisitions completed in 2003.
Customer and other deposits of $1,778,000 at December 31, 2003 (2002 - $421,000)
relate to cash deposits made by Food Group customers in 2003 for purchases to be
completed throughout the 2004 season of $518,000 and $1,260,000 (2002 - $Nil)
related to deposits received for the former Opta Bedford facility as described
above in Assets Held for Sale and in Note 5 of the financial statements. No
recognition of revenue or accrual of costs is booked on the cash deposits made
by Food Group customers until the goods are shipped.
35
New Financing Arrangement Replacing Existing Lines of Credit and Long Term Debt
During 2003, the Company amended and restated its credit agreement which
syndicated the financing arrangement to a group of banks including existing
lenders and increased the term loan by $7,800,000 to $21,700,000. 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, drew on the credit
facility to the extent of $3,500,000 and utilized $3,886,000 of cash on hand to
repay at tender facility obtained to finance the acquisition of Opta. The term
loan is repayable quarterly and amortizes over seven years. All credit
facilities bear interest at various reference rates including U.S. bank prime,
U.S. LIBOR and/or Canadian bank prime plus a premium based on certain financial
ratios of the Company. The term loan has a two year maturity at which point the
facility is renewable at the option of the lender and the Company. The Company
fully expects to renew this facility. These are collateralised by a first
priority security against substantially all of the Company's assets in both
Canada and the United States.
In May 2003 and as part of the acquisition of Kettle Valley, the Company amended
its facility and increased the Canadian line of credit facility to CDN
$7,500,000 from CDN $5,000,000.
The Company also assumed or issued debt of $4,854,000 related to the
acquisitions of Kettle Valley, Sigco, and Dakota Gourmet and the purchase of a
software license agreement.
Total debt of $24,149,000 outstanding at December 31, 2002 was repaid during
2003 with the proceeds of the new financing arrangements and proceeds from the
public offering in August 2003.
Bank indebtedness
Net bank indebtedness at December 31, 2003 is $Nil (2002 - $3,963,000). The
decrease is due to the paydown of the Company's credit facilities with proceeds
from the public and private offering completed during the year.
Long term debt
At December 31, 2003, the Company's long-term debt, including current portion,
is $25,036,000, a decrease of $11,620,000 from December 31, 2002. Included in
long term debt is a $19,800,000 remaining on the term loan, noted above and
$5,236,000 of other debt including assumed and new debt of $4,854,000 noted
above.
Long-term payables
Total long-term payables (including current portion) at December 31, 2003 were
$2,331,000, compared to $5,056,000 at December 31, 2002. Long-term payables
consist of (1) the product rebate payable to a major customer as previously
discussed, (2) deferred purchase consideration related to the acquisition of
Virginia Materials, (3) preference shares of subsidiary companies (4) amounts
payable to former shareholders of acquired companies, and (5) grain brokerage
account.
The decrease of $2,725,000 in 2003 is due in most part to the payment of
$1,871,000 to former shareholders of Opta and the payment of $602,000 in
deferred purchase consideration related to the acquisition of Virginia
Materials.
Cash flows
Net cash and cash equivalents increased $14,978,000 during fiscal 2003 (2002 -
$3,648,000) to $21,990,000 as at December 31, 2003 (2002 - $7,012,000).
For the year ended December 31, 2003, cash provided by operations before working
capital changes was $14,041,000 (2002 - $6,989,000), an increase of $7,052,000
or 101%. The increase was due primarily to increased net earnings throughout the
Company and increased amortization.
36
Cash provided by operations after working capital changes was $1,926,000 for the
year ended December 31, 2003 (2002 - $72,000), reflecting the use of funds for
non-cash working capital of ($12,115,000) (2002 - $6,917,000). This utilization
consists principally of an increase in accounts receivable ($3,484,000), an
increase in inventories ($4,976,000), an increase in prepaid expenses and other
assets and income taxes recoverable of ($1,686,000) and a decrease in accounts
payable and accrued liabilities ($2,139,000), offset by a an increase in
customer deposits of $1,357,000. The usage of cash flows to fund working capital
in 2003 reflects the increase in working capital requirements required to fund
the rapid growth in operations.
Cash used in investment activities of $21,624,000 in 2003 (2002 - $18,546,000),
reflects cash used to complete acquisitions, net of cash acquired, of
$17,594,000 (2002 - $21,919,000) and acquisitions of property, plant and
equipment of $7,139,000 (2002 - $4,464,000), offset by a decrease of short term
investments for proceeds of $2,038,000 (2002 - increase of 6,307,000) and
payments received on a note receivable of $1,071,000 (2002 - $1,425,000).
Cash provided by financing activities was $34,187,000 in the year ended December
31, 2003 (2002 - $22,031,000), consisting primarily of net proceeds from the
issuance of common shares of $56,601,000, primarily from the public and private
offerings in August 2003, offset by net repayment of long-term debt facilities
of $15,791,000 (2002 - net borrowings of 17,943,000), net decrease in operating
lines of credit of $5,531,000 (2002 - net increase of $2,757,000)), payment of
deferred purchase consideration to the former owner of Virginia Materials of
($602,000) (2002 - ($982,000)), deferred financing costs of ($343,000) (2002 -
($796,000)) and the purchase and redemption of preference shares of subsidiary
companies of ($147,000) (2002 - ($129,000)).
Business Outlook
The natural and organic foods industries in the North American market are
currently estimated to be in excess of $10 billion based on managements
estimates, with a large number of companies competing in specific segments of
the market. However, there are relatively few companies well positioned to take
advantage of this rapidly growing market, currently estimated to be growing at
10 to 20% annually. The Food Group's vertically integrated business model
coupled with its growth strategy based on a combination of internal growth and
acquisitions, has positioned the Company as a leader in the North American
natural and organic foods market.
Based on current market projections and annualized results of the acquisitions
completed in 2003, the Company expects revenues in 2004, excluding additional
potential acquisitions, to be approximately $275,000,000, a 38% increase over
2003. In addition, the Company's business plan includes strategies and
initiatives designed to improve the underlying performance of the operations and
to improve the quality of earnings. Specifically, the Company is looking to
improve the strategic synergies across its Food operations, vertically
integrating wherever possible. Initiatives to improve the productivity of the
operations include, plant rationalization programs, continued training and
development of employees, consolidated procurement and internal services
programs, consolidated information and accounting systems to provide better
analysis and timely decision-making.
The Company expects to continue its rapid growth through an effective balance of
internal growth and acquisitions, all in support of its vertically integrated
field to table strategy. Maintaining liquidity and having available sources of
cash will be imperative if the Company is to continue to grow. At December 31,
2003 the Company had $21,990,000 in cash and approximately $14,000,000 in unused
bank lines for a total of $35,990,000 in cash availability. The proceeds from
the issuance of common shares and new bank financing, previously described in
the Business Overview and in Note 8 and Note 10 of the Consolidated Financial
Statements, provided approximately $56,000,000 in cash resources. The Company's
remaining cash and unused lines plus cash generated from operations are
sufficient to finance capital maintenance estimated at $3,000,000, annual debt
service of $3,840,000 and payment of the remaining current portion of long-term
payables of $740,000, plus finance targeted internal growth and acquisitions. In
order to finance significant acquisitions beyond those already completed or
closed in 2004, the Company would need additional sources of cash which could be
obtained through a combination of additional bank or subordinated financing, a
private or public offering, or the issuance of shares in relation to an
acquisition or a divestiture. The Company intends to maintain a target debt to
equity ratio of 0.6 to 1 versus the current position of 0.21 to 1. If the
Company's current operating lines were maximized to full borrowing base metrics
and long term debt was increased to 0.6 to 1 debt to equity ratio, incremental
funds for growth in excess of $60,000,000 should be available.
37
The table below sets out the Company's obligation under its long-term debt, long
term payables, operating and capital leases at December 31, 2003:
2008 &
2004 2005 2006 2007 thereafter Total
------------------------------------------------------------------------------------------------
Long term debt &
capital leases 3,840,000 18,934,000 793,000 764,000 705,000 25,036,000
Operating leases 2,930,000 2,625,000 2,289,000 1,813,000 2,001,000 11,658,000
Long-term payables 740,000 718,000 503,000 370,000 -- 2,331,000
------------------------------------------------------------------------------------------------
7,510,000 22,277,000 3,585,000 2,947,000 2,706,000 39,025,000
================================================================================================
This table does not include certain contingent consideration related to
acquisitions in 2002 and 2003 that may become payable if predetermined profit
target are achieved.
Risks associated with rapid growth are detailed below:
The Company will continue to devote significant effort to increase returns on
capital by improving its investment in working capital and capital projects with
increased accountability and measurement.
As previously stated, the Company will continue to pursue strategic alternatives
for its non-core operations; the Opta Minerals and StakeTech Steam Explosion
Group. However, the Company will only divest itself of these operations if and
when a strategy that is beneficial to the shareholders of SunOpta Inc. is
identified. In 2003, the Opta Minerals provided approximately 12% of the
Company's consolidated revenues and net earnings before interest and taxes of
$2,580,000. The StakeTech Steam Explosion Group continues to focus on selling
the steam explosion technology to the China market and is also pursuing a number
of potential food and bio-fuel applications. The outlook for the Group for 2004
is uncertain due to the time and effort required to complete the signing of each
contract.
Risks and Uncertainties
The Common Shares of the Company are speculative in nature and involve a high
degree of risk. Accordingly, in analyzing an investment in these securities,
prospective investors should carefully consider the following risk factors,
together with all of the other information appearing, or incorporated by
reference, in this document, in light of his or her particular financial
circumstances and/or investment objectives. These risk factors could materially
and adversely affect our future operating results and could cause actual events
to differ materially from those described in forward-looking statements relating
to us.
We Need Additional Capital to Maintain Current Growth Rates
Our facilities in Alexandria, Minnesota and Cambridge, Minnesota operate at, or
near, capacity on many of their processing lines. Continued growth in these
operations is reliant upon our ability to increase capacity through internal
capital projects, new facilities or acquisition. Our ability to raise capital,
through equity and/or debt financing, is directly related to our ability to
continue to grow and improve returns from operations. Additional capital through
equity financing may also result in additional dilution to our current
shareholders and a decrease in our share price if we are unable to realize
returns equal to or above our current rate of return. We will not be able to
maintain our growth rate and our strategy as a consolidator within the natural
and organic food industries without continued access to capital.
Exercise of Warrants and Stock Options and Issuance of Additional Securities
Could Dilute the Value of Our Common Shares
As of December 31, 2003, there are approximately 5,268,527 warrants and stock
options outstanding to purchase Common Shares, with exercise prices ranging from
$1.06 to $9.90 per Common Share. The exercise of these warrants and stock
options could result in dilution in the value of our Common Shares and the
voting power represented thereby. Furthermore, to the extent the holders of our
warrants and stock options exercise such securities and then sell the Common
Shares they receive upon exercise, our share price may decrease due to the
additional amount of Common Shares available in the market. The subsequent sales
of these shares could encourage short sales by our shareholders and others which
could place further downward pressure on our share
38
price. Moreover, the holders of our warrants and stock options may hedge their
positions in our Common Shares by short selling our Common Shares, which could
further adversely affect our stock price.
The Company has also implemented an employee stock purchase plan (ESPP)
beginning March 1, 2004. the program will allow all qualifying employees to buy
the Company's stock at a discount to market prices.
In addition, to attract and retain key personnel or to raise capital, we may
issue additional securities, including stock options. No prediction can be made
as to the effect, if any, that future issuance of stock options, the ESPP or
sales of our Common Shares, or the availability of Common Shares for future
sale, will have on the market price of our Common Shares prevailing from time to
time. Sales of substantial amounts of our Common Shares in the public market, or
the perception that such sales could occur, may adversely affect the market
price of our Common Shares and may make it more difficult for us to sell our
equity securities in the future at a time and price which we deem appropriate.
Consumer Preferences for Natural and Organic Food Products are Difficult to
Predict and May Change
87% of our fiscal 2003 consolidated revenue was derived from the Food Group. Our
success depends, in part, on our ability to offer products that anticipate the
tastes and dietary habits of consumers and appeal to their preferences on a
timely and affordable basis. A significant shift in consumer demand away from
our products or products that utilize our integrated ingredients, or our failure
to maintain our current market position could reduce our sales, which could harm
our business. Consumer trends change based on a number of possible factors,
including nutritional values, such as a change in preference from fat free to
reduced fat to no reduction in fat; and a shift in preference from organic to
non-organic and from natural products to non-natural products. These changes
could lead to, among other things, reduced demand and price decreases, which
could have a material adverse effect on our business.
We Operate in a Highly Competitive Industry
We carry on businesses in highly competitive product and geographic markets in
the U.S., Canada and various international markets. The Grains and Soy Products
Group and the Ingredients Group compete with large companies in the U.S. and
various international commercial grain procurement marketers, major chemical
companies with food ingredient divisions, other food ingredient companies,
stabilizer companies and consumer food companies that also engage in the
development and sale of food ingredients. The Food Group's Packaged &
Distributed Products Group competes against conventional food distributors,
providers of organic meat and organic dairy products and significantly larger
food companies that provide specialty or high end products. Many of these
competitors have financial resources and staff larger than ours and may be able
to benefit from economics of scale, pricing advantages and greater resources to
launch new products that compete with our offerings. We have little control over
and cannot otherwise affect these competitive factors. If we are unable to
effectively respond to these competitive factors or if the competition in any of
our product markets results in price reductions or decreased demand for our
products, our business, results of operations and financial condition will be
materially impacted.
We Rely on Our Manufacturing Facilities
We own, manage and operate a number of manufacturing, processing and packaging
facilities located throughout the United States and Canada. The Food Group
operates from seventeen processing facilities (thirteen owned, four leased) in
seven U.S. states and two Canadian provinces. Opta Minerals operates from six
locations (three owned, three leased) located throughout the United States and
Canada. The StakeTech Steam Explosion Group operates its facilities at our
corporate location in Norval, Ontario.
An interruption in or the loss of operations at one or more of these facilities,
or the failure to maintain our labour force at one or more of these facilities,
could delay or postpone production of our products, which could have a material
adverse effect on our business, results of operations and financial condition
until we could secure an alternate source of supply.
The Loss of Key Management or Our Inability to Attract and Retain Management
Talent Could Adversely Affect our Business
Our future prospects depend to a significant extent upon the continued service
of our key executives. In particular, we are highly dependent upon the services
of Jeremy N. Kendall, our chairman of the board and chief executive
39
officer. We believe Mr. Kendall's management expertise, knowledge and vision are
critical factors in our continuing growth.
Furthermore, our continued growth depends on our ability to identify, recruit
and retain key management personnel. The competition for such employees is
intense. We are also dependent on our ability to continue to attract, retain and
motivate our sourcing, production, distribution, sales, marketing and other
personnel.
We Rely on Our Ability to Manage Our Supply Chain Efficiently
Our supply chain is complex. We rely on third parties for our raw materials and
for the manufacturing, processing and distribution of many of our products. The
inability of any of these third parties to deliver or perform for us in a timely
or cost-effective manner could cause our operating costs to rise and our margins
to fall. Many of our products are perishable and require timely processing and
transportation to our customers. Many of our products can only be stored for a
limited amount of time before they spoil and cannot be sold. We must
continuously monitor our inventory and product mix against forecasted demand, or
risk having inadequate supplies to meet consumer demand as well as having too
much inventory that may reach its expiration date. If we are unable to manage
our supply chain efficiently and ensure that our products are available to meet
consumer demand, our operating costs could increase and our margins could fall.
Volatility in the Prices of Raw Materials Could Increase Our Cost of Sales and
Reduce Our Gross Margin
Raw materials used in the Food Group and Opta Minerals represent a significant
portion of our cost of sales. Our cost to purchase these materials, such as
organic grains and abrasive industrial minerals, from our suppliers can
fluctuate depending on many factors, including weather patterns, economic and
political conditions and pricing volatility. In addition, we must compete with
competitors having substantially greater resources than us for limited supplies
of these raw materials. If the cost of these materials increases due to any of
the above factors, we may not be able to pass along the increased costs to our
customers.
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 our assessment of our exposure from expected
price fluctuations. Exchange purchase and sales contracts may expose us to risk
in the event that a counter-party to a transaction is unable to fulfill its
contractual obligation. We are unable to hedge 100% of the price risk of each
transaction due to timing, availability of hedge contracts and third party
credit risk. In addition, we have a risk of loss from hedge activity if a grower
does not deliver the grain as scheduled.
Technological Innovation by Competitors Could Make Our Products Less Competitive
Competitors include major chemical companies, other food ingredient companies
and consumer food companies that also engage in the development and sale of food
ingredients. Many of these companies are engaged in the development of
texturizers and other food ingredients and have introduced a number of
texturizers into the market. Existing products or products under development by
our competitors could prove to be more effective or less costly than any
products which have been or are being developed by us.
We Rely on Protection of Our Intellectual Property and Proprietary Rights
We and particularly our Food Group and StakeTech Steam Explosion Group depend,
in part, on our ability to protect intellectual property rights. We rely
primarily on patent, copyright, trademark and trade secret laws to protect our
proprietary technologies. The failure of any patents or other intellectual
property rights to provide protection to our technologies would make it easier
for our competitors to offer similar products, which could result in lower sales
or gross margins.
The Food Group has developed a number of new ingredients and alternatives to
accommodate new product adaptation of these and other ingredients into various
food items. The nature of a number of the Food Group's products and processes
requires us to create and maintain a number of patents and trade secrets. The
Food Group's policy is to protect its technology by, among other things, filing
patent applications for technology relating to the development of its business
in the U.S. and in selected foreign jurisdictions.
40
Our trademarks and brand names are registered in the United States, Canada and
other jurisdictions and we intend to keep these filings current and seek
protection for new trademarks to the extent consistent with business needs. We
rely on trade secrets and proprietary know-how and confidentiality agreements to
protect certain of the technologies and processes used by the Food Group.
In addition, the StakeTech Steam Explosion Group holds a number of patents on
its steam explosion process and is marketing a clean pulping system with a
special focus on China. We recognize that there exists a threat of others
attempting to copy our proprietary steam explosion technology. To mitigate this
risk, the normal business practice of this group includes the signing of
confidentiality agreements with all parties to which confidential information is
supplied including all customers and licensees. We also hold several patents on
our equipment and process technology.
We are Subject to Substantial Environmental Regulation and Policies
We are, and expect to continue to be, subject to substantial federal, state,
provincial and local environmental regulation. There are specific regulations
governing the recycling of solid waste material regulated by the Ontario
Ministry of Environment and Energy and the Commonwealth of Virginia, Department
of Environment Quality. Some of the key regulations include:
o Air Quality - regulated by Environmental Protection Agency (EPA) and
certain city/state air pollution control groups. Emission reports
are filed annually;
o Waste Treatment/Disposal - solid waste is either disposed of by a
third-party or in some cases the Company has a permit to haul and
apply the sludge to land. Agreements exist with local city sewer
districts to treat waste at specified levels of biochemical oxygen
demand (BOD) and total suspended solids (TSS);
o Sewer - agreements with the local city sewer districts to treat
waste as specified limits of BOD and TSS, which requires
weekly/monthly reporting as well as annual inspection; and
o Hazardous Chemicals - various reports are filed with local
city/state emergency response agencies to identify potential
hazardous toxic chemicals being used, including reports filed with
the Department of Public Safety Emergency Response Commission in
Minnesota and the Kentucky Emergency Response Commission.
Permits are required from various state, provincial and local authorities,
including the Minnesota Pollution Control Agency, the Commonwealth of Virginia,
Department of Environmental Quality and the Ontario Ministry of Environment
related to air quality, storm water discharge, solid waste, land spreading and
hazardous waste.
In the event that our safety procedures for handling and disposing of
potentially hazardous materials in certain of our businesses were all to fail,
we could be held liable for any damages that result and any such liability could
exceed our resources. We may be required to incur significant costs to comply
with environmental laws and regulations in the future. In addition, changes to
environmental regulations may require us to modify our existing plant and
processing facilities and could significantly increase the cost of those
operations.
Our soymilk processing facility and aseptic packaging facility, both located in
Alexandria, Minnesota, are currently not in complete compliance with the
industrial permit limits for the discharge of industrial wastewater. To regain
compliance, we will apply for increased discharge limits. We have installed a
pretreatment system which came online in early 2004. We have an agreement with
the sanitary district to operate the pretreatment system for 60 days. After the
60 days we will review the effectiveness of the pretreatment system and begin
negotiations for a combined permit for the two facilities. If we fail to regain
compliance through the foregoing actions, we could be required to reduce our
discharge of such industrial wastewater to approved levels, which may force us
to reduce production and/or transfer part of our production capabilities to
other facilities.
The foregoing environmental regulations, as well as others common to the
industries in which we participate, can present delays and costs that can
adversely affect business development and growth. If we fail to comply with
applicable laws and regulations, we may be subject to civil remedies, including
fines, injunctions, recalls or seizures, as well as potential criminal
sanctions, which could have a material adverse effect on our business, results
of operations and financial condition. In addition, any changes to current
regulations may impact the development, manufacturing and marketing of our
products, and may have a negative impact on our future results.
41
The Food Group Is Subject to Significant Food Regulations
The Food Group is affected by state and federal fertilizer, pesticide, food
processing, grain buying and warehousing, and wholesale food regulations.
Government-sponsored price supports and acreage set aside programs are two
examples of policies that may affect the Food Group. The Food Group is currently
in compliance with all state and federal regulations. Because the Food Group is
involved in the manufacture, supply, processing and marketing of organic seed
and food products, it is voluntarily subject to certain organic quality
assurance standards.
Certain food ingredient products are regulated under the 1958 Food Additive
Amendments to the Federal Food, Drug and Cosmetic Act of 1938 (FDCA), as
administered by the United States Food and Drug Administration (FDA). Under the
FDCA, pre-marketing approval by the FDA is required for the sale of a food
ingredient which is a food additive unless the substance is Generally Recognized
As Safe (GRAS) under the conditions of its intended use by qualified experts in
food safety. We believe that most products for which the Food Group has retained
commercial rights are GRAS. However, such status cannot be determined until
actual formulations and uses are finalized. As a result, the Food Group may be
adversely impacted if the FDA determines that our food ingredient products do
not meet the criteria for GRAS.
In December 2000, the USDA adopted regulations with respect to a national
organic labeling and certification program which became fully effective in
October 2002. These regulations, among other things, set forth the minimum
standards producers must meet in order to have their products labeled as
"certified organic." We currently manufacture and distribute a number of organic
products that are covered by these new regulations. While we believe our
products and our supply chain are in compliance with these regulations, changes
to food regulations may increase our costs to remain in compliance. In addition,
in January 2001, the FDA proposed new policy guidelines regarding the labeling
of genetically engineered foods. These guidelines, if adopted, could require us
to modify the labeling of our products, which could affect the sales of our
products and thus harm our business. We could lose our "organic" certification
if a facility becomes contaminated with non-organic materials or if we do not
use raw materials that are certified organic. The loss of our "organic"
certifications could materially harm our business, results of operations and
financial condition.
Product Liability Suits, if Brought, Could Have a Material Adverse Effect on Our
Business
As a manufacturer and marketer of natural and organic food products and
environmental mineral products, we are subject to the risk of claims for product
liability. If a product liability claim exceeding our insurance coverage were to
be successfully asserted against us, it could harm our business.
Acceptance of StakeTech Steam Explosion technology
The StakeTech Steam Explosion Group's technology has yet to gain wide acceptance
within the industry and, consequently, earnings can fluctuate from quarter to
quarter. Its patented steam technology, while proven, has yet to develop a firm
customer base. The success of this division will depend upon its ability to
promote commercial acceptance of our steam explosion technology.
We Are Subject to Financial Exposure Related to Bonding and Guarantees
For the StakeTech Steam Explosion Group to enter markets such as China, we
expect to have to provide substantial performance guarantees in the form of
process guarantees and equipment guarantees. These guarantees will need to be
backed by bank guarantees and/or surety bonds. We endeavor to reduce the
associated risks, however there will always remain a possibility that our
guarantees or bonds could be called, rightfully or wrongfully and/or that the
equipment supplied fails to meet the guarantees and warranties provided
resulting in potential financial losses.
We Are Subject to Dividend Restrictions and Potential Withholding Taxes on
Dividends
We have not paid dividends on our Common Shares since our inception and have
used available cash resources to fund growth. Moreover, we are precluded under
the terms of various agreements with our creditors from paying dividends without
approval from certain creditors. It is our intention to retain future earnings
to fund growth. We will consider paying dividends on our Common Shares in the
future when circumstances permit, having regard to, among other things, our
earnings, cash flow and financial requirements, as well as relevant legal and
business
42
considerations. Accordingly, investors should not expect to receive a return on
investment in our Common Shares through the payment of dividends in the
foreseeable future and may not realize a return on investment even if they sell
their shares. Any future payment of dividends to holders of our Common Shares
will depend on decisions that will be made by the Board of Directors and will
depend on then existing conditions, including our financial condition,
contractual restrictions, capital requirements and business prospects. Also, if
we pay dividends, the receipt of cash dividends by United States shareholders
from a Canadian corporation may be subject to a 5% to 15% Canadian withholding
tax.
Loss of Our Key Customer Could Materially Reduce Sales and Earnings
We have one customer, The Hain Celestial Group, whose purchases from SunOpta in
fiscal 2003 amounted to more than 10% of our revenue. As a result of this
concentration of our customer base, the loss or cancellation of business from
The Hain Celestial Group could materially and adversely affect our business,
financial condition or results of operations.
Our Operating Results and Share Price are Subject to Significant Volatility
Our net sales and operating results may vary significantly from period to period
due to:
o changes in our operating expenses;
o management's ability to execute our business and growth strategies;
o personnel changes;
o demand for natural products;
o supply shortages;
o general economic conditions;
o changes in customer preferences and demands for natural and organic
food products;
o volatility in commodity prices resulting from poor growing
conditions, natural disasters or otherwise; and
o future acquisitions, particularly in periods immediately following
the consummation of such acquisition transactions while the
operations of the acquired businesses are being integrated into our
operations.
In addition, our share price is more volatile than other larger public
companies. Announcements regarding:
o fluctuations in financial performance from period to period;
o mergers and acquisitions;
o strategic partnerships or arrangements;
o litigation and governmental inquiries;
o changes in governmental regulation and policy;
o patents or proprietary rights;
o changes in consumer preferences and demand;
o new financings; and
o general market conditions
may have a significant impact on our share price. Higher volatility increases
the chance of larger than normal price swings which reduces predictability in
the share value of our stock and could impair investment decisions. In addition,
price and volume trading volatility in the U.S. stock markets can have a
substantial effect on our share price, frequently for reasons other than our
operating performance. These broad market fluctuations could adversely affect
the market price of our Common Shares.
Fluctuations in Exchange Rates, Interest Rates and Certain Commodities Could
Adversely Affect Our Results of Operations Financial Condition and Liquidity
We are exposed to foreign exchange rate fluctuations as the financial results of
our Canadian Corporate office and our Canadian subsidiaries are translated into
U.S. dollars on consolidation and to interest rate risk as a large percentage of
our term debt is at variable rates. See Item 7A for a quantitative and
qualitative disclose about these risks.
43
We May Not Be Able to Effectively Manage Our Growth and Integrate Acquired
Companies
Our growth strategy inherently assumes that we will be able to identify suitable
acquisition candidates on terms acceptable to us and that these acquisitions, if
pursued and completed, will be integrated successfully. Our ability to
effectively integrate current and future acquisitions, including our ability to
realize potentially available marketing opportunities and cost savings in a
timely and efficient manner will have a direct impact on our future results. We
may encounter problems in connection with the integration of any new businesses,
such as:
o integration of an acquired brand or business' distribution channels
with those of SunOpta;
o integration of an acquired company's products into our product mix;
o amount of cost savings that may be realized as the result of our
integration of an acquired brand or business;
o unanticipated quality and production issues with acquired products;
o adverse effects on business relationships with our suppliers and
customers;
o diversion of management attention;
o difficulty with personnel and loss of key employees;
o compatibility of financial control and information systems; and
exchange rate risk with respect to our acquisitions in Canada.
Item 7A - Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk
The primary objective of our investment activities is to preserve principal and
limit risk. To achieve this objective, the company maintains its portfolio in a
variety of securities, including both government and corporate obligations and
money market funds. These securities are generally classified as cash and cash
equivalents or short-term investments and are recorded on the balance sheet at
fair value with unrealized gains or losses reported through profit and loss. As
at December 31, 2003 all of SunOpta's excess funds were held in cash and cash
equivalents with a maturity less than 90 days.
Debt in both fixed rate and floating rate interest carry different types of
interest rate risk. Fixed rate debt may have their fair market value adversely
affected by a decline in interest rates. In general, longer date debts are
subject to greater interest rate risk than shorter dated securities. Floating
rate term debt gives less predictability to cash flows as interest rates change.
As at December 31, 2003, the weighted average interest rate of the fixed rate
term debt was 3.9% (2002 - 9.0%) and $2,796,000 (2002 - $7,663,000) of the
Company's outstanding term debt is at fixed interest rates. Variable rate term
debt of $22,240,000 (2002 - $29,086,000) at an interest rate of 2.3% (2002 -
3.2%) is partially hedged by variable rate cash equivalent investments. 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 companies
ability to manage 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 $150,000. 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 as of
January 1, 2002 the United States dollar has become the Company's reporting
currency. 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. 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 1.2965 at December 31, 2003 for each U.S. dollar.
The net effect of this appreciation has been a $1,077,000 exchange gain and a
$4,096,000 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 $2,230,000 (2002 - $2,263,000).
44
The functional currency of all operations located in Canada is the Canadian
dollar. For these operations all transaction gains or losses in relation to the
U.S. dollar are recorded as Foreign Exchange gain (loss) in the Consolidated
Statement of Earnings while gains (losses) on translation of net assets to U.S.
dollars on consolidation are recorded in the Currency Translation Adjustment
account within Shareholders' Equity. The functional currency of the corporate
head office is the U.S. dollar. Transaction gains or losses as well as
translation gains and losses on monetary assets and liabilities are recorded
within Foreign Exchange gains (losses) on the Consolidated Statement of
Earnings. U.S. based Food Group operations have no exposure to other currencies
since almost all sales and purchases are made in U.S. dollars. It is the
Company's intention to hold excess funds in the currency in which the funds are
likely to be used, which will from time to time; potentially expose the Company
to exchange rate fluctuations when converted into U.S. dollars.
Commodity risk
The Food Group enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on grain transactions to
the extent considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging purposes are purchased and sold
through regulated commodity exchanges. Inventories, however, may not be
completely hedged, due in part to the Company's assessment of its exposure from
expected price fluctuations. Exchange purchase and sales contracts may expose
the Company to risk in the event that a counter-party to a transaction is unable
to fulfill its contractual obligation. The Company manages its risk by entering
into purchase contracts with pre-approved producers. The Company has a risk of
loss from hedge activity if a grower does not deliver the grain as scheduled.
Sales contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated. All futures transactions are marked
to market. Gains and losses on futures transactions related to grain inventories
are included in cost of goods sold. At December 31, 2003 the Company owned
482,600 (2002 - 503,000) bushels of corn with a weighted average price of $2.15
(2002 - $2.08) and 389,868 (2002 - 278,000) bushels of soy beans with a weighted
average price of $7.07 (2002 - $7.37). The Company has at December 31, 2003 net
long positions on corn and soy beans of 4,576 (2002 - 20,000) and 167,294 (2002
- - 13,000) bushels respectively. An increase/decrease in commodity prices of 10%
would result in a gain (loss) of $984 (2002 - $4,150) in corn and $118,277 (2002
- - $9,581) in soy beans, respectively. There are no futures contracts in the
other Food Group segments, Opta Minerals, the StakeTech Steam Explosion Group or
related to Corporate office activities.
Item 8. Financial Statements and Supplementary Data
Financial statements are set forth on pages F-1 through F-37 of this Report and
are incorporated herein by reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of management, the Chief
Executive Officer and Chief Financial Officer of the Company have evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of December 31, 2003, and, based on their evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that these
controls and procedures are effective. Disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures are also designed to ensure that information is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Internal Control over Financial Reporting
There has been no change in the Company's internal control over financial
reporting that occurred during the Company's fiscal quarter ended December 31,
2003 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
45
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors and Executive Officers
The information with respect to directors required by this item is incorporated
herein by reference from the section entitled "Election of Directors" in the
Company's definitive Proxy Statement for its Annual Meeting of Shareholders to
be held May 13, 2004 (the "2004 Proxy Statement"), to be filed with the
Securities and Exchange Commission not later than April 29, 2004.
(b) Executive Officers
The following table shows certain information with respect SunOpta's Executive
Officers as of December 31, 2003:
================================================================================
Name Executive Officers of SunOpta
- --------------------------------------------------------------------------------
Jeremy N. Kendall Chairman of the Board, CEO & Director
================================================================================
Steven R. Bromley Executive Vice President & Chief Operating Officer
================================================================================
John Dietrich Vice President & Chief Financial Officer
================================================================================
Allan Routh Director, President, Grains and Soy Products Group
================================================================================
Arthur J. McEvily President, SunOpta Ingredients Group
================================================================================
Jeremy Kendall has served as a Director of the Company since September 1978. In
June 1983, he was elected Chairman of the Board and Chief Executive Officer of
the Company. He is Chairman of the Board of all of the Company's subsidiaries
except 1108176 Ontario Limited. He is also Chairman of Jemtec Inc. (6/91 to
present), a distributor of electronic home incarceration equipment and Easton
Minerals Ltd. (1/95 to present) a mineral exploration company. In the past 5
years, Mr. Kendall has served on the following Boards of Directors: BI Inc.
(9/81 to 11/00), producer of electronic home incarceration equipment, Brigdon
Resources Inc. (6/93 to 2/99), oil and gas exploration company, Redaurum Ltd.
(6/94 to 12/98), mineral exploration and production company and Wisper Inc.
(6/95 to 3/02), a provider of wireless electronic equipment and services. Mr.
Kendall is also a Director of a number of private and charitable organizations.
Steven Bromley is a Certified General Accountant and joined SunOpta in June 2001
and was appointed Vice President, Finance and Chief Financial Officer in
September 2001. The Board of Directors appointed Mr. Bromley Executive Vice
President and Chief Financial Officer in November 2002 and in September 2003 Mr.
Bromley was appointed Executive Vice President and Chief Operating Officer.
Prior to joining the Company, Mr. Bromley spent over 13 years in the Canadian
dairy industry in a wide range of financial and operational roles with both
Natrel Inc. and Ault Foods Limited. From 1997 to 1999 he served on the Board of
Directors of Natrel, Inc.. In the past 5 years, Mr. Bromley has not served on
any other reporting issuers Board of Directors.
John Dietrich is a Chartered Accountant and Chartered Financial Analyst. He
joined the Company in January 2002 as Vice President & Treasurer. The Board of
Directors appointed Mr. Dietrich Vice President & Chief Financial Officer in
September, 2003. In the last 5 years he has held finance roles at Natrel Inc.,
as Director of Business Development and Paragon Trade Brands (Canada) Inc., as
Director of Finance. Mr. Dietrich has not served on any reporting issuers Board
of Directors.
Allan Routh was elected to the Board of Directors in September 1999. Mr. Routh
is President of the Company's Grains and Soy Products Group and prior to March
2003 was President and Chief Executive Officer of the SunRich Food Group, Inc.,
a wholly-owned subsidiary of the Company. Mr. Routh has been involved in the soy
industry since 1984. Mr. Routh is presently serving a term on the Board of
Directors of the Soyfoods Association of North America and served as its
President between 1999 and 2000. In the past 5 years, Mr. Routh has not served
on any other reporting issuers Board of Directors.
Arthur McEvily was appointed President of SunOpta Ingredients Group in April
2003. Mr. McEvily previously held the position of President and Chief Executive
Officer of Opta Food Ingredients which he obtained in
46
February 2000. Prior to that, he was named Executive Vice President in January
1999, Senior Vice President, Commerical Development in December 1997 and served
as Vice President Applications, Technical Service and New Product
Commercialization from August 1996 to December 1997. He served as Vice President
Sales and Business Development of Opta from December 1993 to July 1996. Mr.
McEvily received a B.Sc. in Biochemistry from Marlboro College, Marlboro,
Vermont and a Ph.D. in chemistry at the University of North Carolina at Chapel
Hill. He was a postdoctoral fellow at Harvard Medical School.
Item 11. Executive Compensation
The information required under this item is incorporated herein by reference
from the section entitled "Executive Compensation" in the 2004 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by item 403 of Regulation S-K is incorporated herein by
reference from the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the 2004 Proxy Statement.
The information required by item 201(d) of Regulation S-K regarding the
Company's equity compensation plans is set out in the table below. All such
plans have received shareholder approval.
Number of Securities Weighted Average Exercise Number of Securities
to be Issued on Price of Outstanding Available for Future
Exercise Options Issuance
-------- ------- --------
Equity compensation plans
approved by shareholders 2,027,177 $4.56 nil
Item 13. Certain Relationships and Related Transactions
Rental property
The Company leases certain real estate to Dennis Anderson under operating leases
that expire in August 2010. Annual rental under each of the leases is
negligible.
Pursuant to the Pro Organics acquisition the Company has leased Pro Organics
Vancouver warehouse and administration facility from the former owners who still
remain as executive officers of Pro Organics. The lease is at market rates and
is for a five year term with two five year renewal periods.
Item 14 - Principal Accountant Fees and Services
Information with respect to principal accountant fees and services may be found
under the caption "Independent Auditor Fees" in the Company's Proxy Statement
for the Annual Meeting of Stockholders to be held on May 13, 2004. Such
information is incorporated herein by reference.
47
Item 15. Exhibits, Financial Statements and Reports on Form 8-K
SUNOPTA INC.
(a) Documents filed as part of this Report Page
----
1. Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as at
December 31, 2003 and 2002 F-3
Consolidated Statements of Shareholders Equity
For the Years ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Earnings -
For the Years ended December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows -
For the Years ended December 31, 2003, 2002 and 2001 F-6
Notes to Consolidated Financial Statements -
For the Years ended December 31, 2003 and 2002 F-7-F-37
3. Exhibits
2A. Agreement and Plan of Merger dated as of October 25, 2002
among Opta Food Ingredients, Inc., SunOpta Inc. and Stake
Acquisition Corp. (incorporated herein by reference to the
Company's Form 8-K, SEC file No. 0-9989, filed November 6,
2002, Exhibit 2.1).
3i(a) Amalgamation of Stake Technology Ltd and 3754481 Canada Ltd.
(formerly George F. Pettinos (Canada) Limited) (incorporated
herein by reference to the Company's Form 10-KSB, SEC file No.
0-9989, for the year ended December 31, 2000, Exhibit 3.1).
3i(b) Certificate of Amendment dated October 31, 2003 to change the
Company's name from Stake Technology Ltd. to SunOpta Inc. **
3i(c) Articles of Amalgamation of SunOpta Inc. and Sunrich Valley
Inc., Integrated Drying Systems Inc., Kettle Valley Dried
Fruits Ltd., Pro Organics Marketing Inc., Pro Organics
Marketing (East) Inc., 4157648 Canada Inc. and 4198000 Canada
Ltd. dated January 1, 2004. **
3ii Bylaw No. 14 approved by shareholders - June 17, 1997
(incorporated herein by reference to the Company's Form 10-KSB
for the year ended December 31 1997, SEC file No. 0-9989,
Exhibit 3.3).
10A. 1993 Employee/Director Stock Option Plan dated May 19, 1993
(incorporated herein by reference to the Company's Form 10-KSB
for the year ended December 31, 1995, SEC file No. 0-9989,
Exhibit 10.18).
10B. 1996 Employee/Director Stock Option Plan dated September 27,
1996 (incorporated herein by reference to the Company's Form
10-KSB for the year ended December 31, 1996, SEC file No.
0-9989, Exhibit 10.22).
10C. 1998 Stock Option Plan dated December 12, 1997 (incorporated
herein by reference to the Company's Form 10-KSB for the year
ended December 31, 1998, SEC file No. 0-9989, Exhibit 10.16).
48
Exhibits (continued)
10D. 1999 Stock Option Plan dated February 18, 1999 (incorporated
herein by reference to the Company's Form 10-KSB for the year
ended December 31, 1999, SEC file No. 0-9989, Exhibit 10.19).
10E. 2001 Stock Option Plan dated March 13, 2001 (incorporated
herein by reference to the Company's Form 10-KSB for the year
ended December 31, 2001, SEC file No. 0-9989, Exhibit 10.14).
10F. 2002 Stock Option Plan dated March 26, 2002 (previously filed
with Form 10-K for the year ended December 31, 2002, SEC file
No. 0-9989 filed on March 31, 2003, Exhibit 10.1(f)).
10G. Debenture Purchase Agreement dated as of December 4, 2002
between StakeTechnology Ltd. and Claridge Israel LLC
(previously filed with Form 10-K for the year ended December
31, 2002, SEC file No. 0-9989, filed on March 31, 2003,
Exhibit 10.3(d)).
10H. Amended and Restated Credit Agreement dated as of February 21,
2003 among SunOpta Inc. (the "Company"), certain affiliates of
the Company, Bank of Montreal, as Agent and Harris Trust and
Savings Bank, as U.S. Security Agent and other Lenders within
the lending group. (previously filed with Form 10-K for the
year ended December 31, 2002, SEC file No. 0-9989, filed on
March 31, 2003, Exhibit 10.3(e)).
10I. Employment Agreement dated October 1, 2001 between the Company
and Mr. Jeremy Kendall (previously filed with Form 10-K/ A-3
for the year ended December 31, 2002, SEC file No. 0-9989,
filed on July 2, 2003).
10J. Employment Agreement dated August 2, 1999.between the Sunrich,
Inc (a wholly-owned subsidiary of the Company) and Mr. Allan
Routh (previously filed with Form 10-K for the year ended
December 31, 2002, SEC file No. 0-9989, filed on July 2,
2003).
10K. Employment Agreement dated January 26, 2001 between the Opta
Food Ingredients, Inc. (now SunOpta Ingredients Inc., a
wholly-owned subsidiary of the Company) and Mr. Arthur McEvily
(previously filed with Form 10-K for the year ended December
31, 2002, SEC file No. 0-9989, filed on July 2, 2003).
10L. Production Agreement and Addendum dated August 6, 2001 between
The Hain Celestial Group and Nordic Aseptic, Inc. (a wholly
owned subsidiary of the Company) (previously filed with Form
10-K for the year ended December 31, 2002, SEC file No.
0-9889, filed on July 14, 2003).
10M. First Amending Agreement to Amended and Restated Credit
Agreement dated as of May 16, 2003 among SunOpta Inc. (the
"Company"), certain affiliates of the Company, Bank of
Montreal, as Agent and Harris Trust and Savings Bank as U.S.
Security Agent and other Lenders within the lending group. **
10N. Second Amending Agreement to Amended and Restated Credit
Agreement dated as of December 31, 2003 among SunOpta Inc.
(the "Company"), certain affiliates of the Company, Bank of
Montreal, as Agent and Harris Trust and Savings Bank as U.S.
Security Agent and other Lenders within the lending group. **
10O. Employee Stock Purchase Plan dated May 7, 2003 for 1,000,000
common shares. **
21 List of subsidiaries- Exhibit 21 **
24 Powers of Attorney - Exhibit 24 **
49
Exhibits (continued)
31.1 Certification by Jeremy Kendall, Chief Executive Officer
pursuant to SEC Release No. 33-8238 as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by John Dietrich, Chief Financial Officer
pursuant SEC Release No. 33-8238 as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Jeremy Kendall, Chief Executive Officer
pursuant to Section 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by John Dietrich, Chief Financial Officer
pursuant to Section 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* This exhibit does not include the Exhibits and Schedules
thereto as listed in its table of contents. The Company
undertakes to furnish any such Exhibits and Schedules to the
Securities and Exchange Commission upon its request.
** Filed herewith
(b) Reports on Form 8K
No Reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2003.
50
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1984, the registrant has duly caused this report to be signed on its
behalf by the undersigned. Thereunto duly authorized.
SUNOPTA INC.
John Dietrich /s/ John Dietrich
-----------------
Vice President and Chief Financial Officer
Date: March 12, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------------------------------------------------------------------------------------------
* March 12, 2004
- ----------------------------------
Jeremy N. Kendall Chairman, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ John Dietrich March 12, 2004
- ----------------------------------
John Dietrich Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
* March 12, 2004
- ----------------------------------
Cyril A. Ing Director and Corporate Secretary
* March 12, 2004
- ----------------------------------
Joseph Riz Director
*
- ----------------------------------
Jim Rifenbergh Director March 12, 2004
*
- ----------------------------------
Allan Routh Director March 12, 2004
*
- ----------------------------------
Dennis Anderson Director March 12, 2004
*
- ----------------------------------
Katrina Houde Director March 12, 2004
*
- ----------------------------------
Camillo Lisio Director March 12, 2004
*
- ----------------------------------
Stephen Bronfman Director March 12, 2004
*
- ----------------------------------
Robert Fetherstonhaugh Director March 12, 2004
* By his signature set forth below, John Dietrich, pursuant to a duly executed
power of attorney filed with the Securities and Exchange Commission as an
exhibit to this report, has signed this report on behalf of and as
Attorney-In-Fact for this person.
/s/ John Dietrich - John Dietrich -Attorney-in-Fact
- -----------------
51
SunOpta Inc.
Consolidated Financial Statements
(expressed in U.S. dollars)
- F1 -
PRICEWATERHOUSECOOPERS [LOGO]
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
Chartered Accountants
February 20, 2004 (except as to Mississauga Executive Centre
note 18, which is as of March 1, 2004) One Robert Speck Parkway, Suite 1100
Mississauga, Ontario Canada L4Z 3M3
Telephone +1 905 949 7400
Facsimile +1 905 949 7415
Auditors' Report
To the Shareholders of
SunOpta Inc.
We have audited the consolidated balance sheets of SunOpta Inc. as at December
31, 2003 and 2002 and the consolidated statements of earnings, retained earnings
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada and the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and 2002 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003 in accordance with Canadian
generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and the other member firms of PricewaterhouseCoopers International Limited, each
of which is a separate and independent legal entity.
- F2 -
SunOpta Inc.
Consolidated Balance Sheets
As at December 31, 2003 and 2002
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
2003 2002
$ $
Assets (note 8)
Current assets
Cash and cash equivalents 21,990 7,012
Short-term investments -- 2,038
Accounts receivable - trade 26,241 18,144
Current portion of note receivable (note 3) -- 1,034
Inventories (note 4) 34,778 22,989
Prepaid expenses and other current assets 2,524 958
Income taxes recoverable 1,686 --
Future income taxes (note 11) 1,172 115
-----------------
88,391 52,290
Assets held for sale (note 5) 6,007 5,020
Property, plant and equipment, net (note 5) 44,761 32,013
Goodwill and intangibles, net (note 6) 25,084 14,992
Future income taxes (note 11) 9,023 9,892
Other assets (note 7) 490 1,080
-----------------
173,756 115,287
=================
Liabilities
Current liabilities
Bank indebtedness (note 8) -- 3,963
Accounts payable and accrued liabilities 24,664 19,664
Customer and other deposits 1,778 421
Current portion of long-term debt (note 8) 3,840 11,557
Current portion of long-term payables (note 9) 740 3,551
-----------------
31,022 39,156
Long-term debt (note 8) 21,196 25,099
Long-term payables (note 9) 1,591 1,505
-----------------
53,809 65,760
-----------------
Shareholders' Equity
Capital stock (note 10) 96,670 38,020
Authorized
Unlimited common shares without par value
Issued
52,705,096 (December 31, 2002 - 41,984,118) common shares
Contributed surplus 2,968 2,914
Retained earnings 16,167 7,470
Currency translation adjustment 4,142 1,123
-----------------
119,947 49,527
-----------------
173,756 115,287
=================
Commitments and contingencies (note 14)
(See accompanying notes to consolidated financial statements)
- F3 -
SunOpta Inc.
Consolidated Statements of Shareholders Equity
For the years ended December 31, 2003, 2002 and 2001
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
Shareholders' Equity
Currency
Capital Contributed Retained Translation
Stock Surplus Earnings Adjustment Total
$ $ $ $ $
Balance at December 31, 2000 14,258 2,910 3,685 40 20,893
Shares and warrants issued to acquire First Light Foods 804 -- -- -- 804
Shares and warrants issued under private placements 19,776 -- -- -- 19,776
Options exercised 1,037 -- -- -- 1,037
Net earnings for the year -- -- 19 -- 19
Currency translation adjustment -- -- -- 971 971
Balance at December 31, 2001 35,875 2,910 3,704 1,011 43,500
Warrants exercised and issued, net of repurchased 1,694 4 -- -- 1,698
Options exercised 397 -- -- -- 397
Convertible right associated with convertible debenture 54 -- -- -- 54
Net earnings for the year -- -- 3,766 -- 3,766
Currency translation adjustment -- -- -- 112 112
Balance at December 31, 2002 38,020 2,914 7,470 1,123 49,527
Warrants exercised 1,861 -- -- -- 1,861
Compensation warrants exercised 761 -- -- -- 761
Options exercised 2,257 -- -- -- 2,257
Shares issued under equity offerings 53,004 -- -- -- 53,004
Shares issued to acquired Kettle Valley 821 -- -- -- 821
Convertible right (54) 54 -- -- --
Net earnings for the year -- -- 8,697 -- 8,697
Currency translation adjustment -- -- -- 3,019 3,019
-----------------------------------------------------------------
Balance at December 31, 2003 96,670 2,968 16,167 4,142 119,947
=================================================================
(See accompanying notes to consolidated financial statements)
- F4 -
SunOpta Inc.
Consolidated Statements of Earnings
For the years ended December 31, 2003, 2002 and 2001
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
2003 2002 2001
$ $ $
Revenues 199,099 120,898 89,822
Cost of goods sold 163,421 101,431 77,450
------------------------------
Gross profit 35,678 19,467 12,372
Selling, general and administrative expenses 25,788 14,281 11,142
------------------------------
Earnings before the following 9,890 5,186 1,230
Interest expense (1,942) (1,413) (1,745)
Interest and other income 531 218 326
Foreign exchange gain 1,077 176 355
------------------------------
(334) (1,019) (1,064)
------------------------------
Earnings before income taxes 9,556 4,167 166
Provision for income taxes (note 11) 859 401 147
------------------------------
Net earnings for the year 8,697 3,766 19
==============================
Net earnings per share for the year (note 15)
Basic 0.19 0.09 0.00
==============================
Diluted 0.18 0.09 0.00
==============================
(See accompanying notes to consolidated financial statements)
- F5 -
SunOpta Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2003, 2002 and 2001
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
2003 2002 2001
$ $ $
Cash provided by (used in)
Operating activities
Net earnings for the year 8,697 3,766 19
Items not affecting cash
Amortization 5,484 4,130 3,706
Future income taxes (475) (1,000) (142)
Write-down of investment -- 366 --
Other 335 (273) (189)
---------------------------------
14,041 6,989 3,394
Changes in non-cash working capital, net of businesses
acquired (note 12) (12,115) (6,917) (3,074)
---------------------------------
1,926 72 320
---------------------------------
Investing activities
Decrease (increase) in short-term investments 2,038 6,307 (6,307)
Acquisition of companies, net of cash acquired (17,594) (21,919) (2,172)
Acquisition of property, plant and equipment, net of disposals (7,139) (4,464) (3,907)
Proceeds from notes receivable 1,071 1,425 1,393
Other -- 105 (49)
---------------------------------
(21,624) (18,546) (11,042)
---------------------------------
Financing activities
Increase (decrease) in line of credit facilities (5,531) 2,757 (1,020)
Borrowings under long-term debt and tender facility 8,907 34,883 1,042
Repayment of long-term debt (24,698) (16,940) (6,188)
Repayment of deferred purchase consideration (602) (982) --
Proceeds from the issuance of common shares, net of issuance costs 56,601 2,091 20,813
Financing costs (343) (796) --
Decrease (increase) in restricted cash -- 1,147 (1,147)
Purchase and redemption of Preference Shares of subsidiary companies (147) (129) (117)
---------------------------------
34,187 22,031 13,383
Foreign exchange gain on cash held in foreign currency 489 91 67
---------------------------------
Increase (decrease) in cash and cash equivalents during the year 14,978 3,648 2,728
Cash and cash equivalents - Beginning of year 7,012 3,364 636
---------------------------------
Cash and cash equivalents - End of year 21,990 7,012 3,364
=================================
See note 12 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
- F6 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
1. Description of business and significant accounting policies
SunOpta Inc. (the Company) was incorporated under the laws of Canada on
November 13, 1973. Formerly operating as Stake Technology Ltd., the
Company changed its name to SunOpta Inc. on October 31, 2003. The new
corporate 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 food markets. The Company
conducts business in three main areas, the SunOpta Food Group (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, oat fiber and other natural and organic food products. Opta Minerals
(formally the Environmental Industrial Group) processes, distributes and
recycles industrial minerals. The StakeTech Steam Explosion Group markets
proprietary steam explosion technology systems for the pulp, bio-fuel and
food processing industries. The Company's assets, operations and employees
at December 31, 2003 are located in the United States and Canada.
The Company's significant accounting policies are outlined below. These
consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada. Differences arising
from the application of accounting principles generally accepted in the
United States are described in note 17.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated on
consolidation.
Cash and cash equivalents
Cash and cash equivalents consist of unrestricted cash and short-term
deposits with a maturity of less than 90 days.
Short-term investments
Short-term investments consist of portfolio investments in other companies
and deposits with a maturity at acquisition of greater than 90 days, and
are valued at market.
Inventories
Raw materials and finished goods inventories are valued at the lower of
cost and estimated net realizable value. Cost is determined on a first-in,
first-out basis.
Inventories of grain, are valued at market. Changes in market value are
included in cost of goods sold. The Food Group generally follows a policy
of hedging its grain transactions to protect gains and minimize losses due
to market fluctuations. Futures and purchase and sale contracts are
adjusted to market price and gains and losses from such transactions are
included in cost of goods sold. The Company has a risk of loss from hedge
activity if the grower does not deliver the grain as scheduled. The
Company also has inventories consisting of sunflowers and specialty beans
which are valued at cost.
- F7 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated
amortization.
Amortization is provided on property, plant and equipment on the
diminishing balance basis or, in the case of certain U.S.-based
subsidiaries, straight-line basis at rates based on the estimated useful
lives of the assets as follows: 10% to 33% for office furniture and
equipment, machinery and equipment and vehicles and 4 to 8% for buildings.
Amortization is calculated from the time the asset is put into use.
Goodwill and intangibles
The Company adopted CICA Handbook Section 3062 "Goodwill and Intangible
Assets" on January 1, 2002. This standard eliminates the need for
amortization of goodwill and indefinite life intangible assets. Goodwill
represents the excess of the purchase price over the assigned value of net
assets acquired.
In accordance with the standard, the Company has assessed the carrying
value of goodwill and indefinite life intangibles for possible impairment,
and has determined that no such impairment exists as at December 31, 2003.
The Company's definite life intangible assets consist of customer lists,
trademarks and distribution agreements and are amortized straight line
over their estimated useful lives, ranging from 4 to 15 years. As required
by the standard, the new rules related to goodwill and other intangible
assets have been applied prospectively. On a pro-forma basis, the impact
of adopting the new standard on 2001 earnings were:
2001
$
Net earnings for the year 19
Add back: goodwill and trademark amortization,
net of tax 492
-----
Adjusted net earnings for the year 511
=====
Adjusted net earnings per basic and diluted common share 0.02
=====
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.
As at December 31, 2003 the unamortized balance of pre-operating
costs was $nil (2002 - $358, 2001 - $353).
The Company deferred pre-operating expenses of $308 in 2002 relating
to the start up of an organic dairy business in Canada. Amortization
of these costs on a straight line basis commenced in July 2002 and
as at December 31, 2003 these costs have been fully amortized.
In 2000, the Company acquired Nordic Aseptic, Inc., which was
considered a start-up business from the date of acquisition to
December 31, 2000. Certain operating costs, net of income earned
during the pre-operating period totaling $482 were deferred.
Amortization of these costs commenced January 1, 2001 and as of
December 31, 2003 these deferred costs have been fully amortized.
- F8 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
ii) Deferred financing costs
Costs incurred in connection with obtaining long-term financing are
deferred and amortized over the term of the instrument.
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 December 31, 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, and
therefore it is not anticipated that further losses will be recorded
on this investment.
All other subsidiaries are 100% owned at December 31, 2003.
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) SunOpta 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 shipment of product or at the time
the service is provided to the customer.
ii) Opta Minerals
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) StakeTech Steam Explosion 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.
License fees related to the right to sell the Company's technologies
are recorded as revenues over the term of the license, when
collectibility is reasonably assured.
Change in reporting currency
The Company historically prepared and filed its consolidated financial
statements in Canadian dollars. On January 1, 2002 the Company adopted the
United States (U.S.) dollar as its reporting currency for presentation of
its consolidated financial statements. With the recent acquisitions of a
number of companies in the United States, a significant portion of the
Company's net earnings are earned by its U.S. operations. Historical
consolidated results have been restated using a translation of
convenience, whereby all historical results have been reflected using the
exchange rate in effect on December 31, 2001 of $1 U.S. to $1.5928 CDN.
The functional currency of all operations located in the United States and
the corporate head office is the United States dollar. The functional
currency of all other operations located in Canada is the Canadian dollar.
- F9 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
Foreign currency translation
The Company's operations are self-sustaining operations, with the
exception of the corporate head 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. 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 a
currency translation adjustment in shareholders' equity.
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 an amount of $1,260 at December 31, 2003
(December 31, 2002 - $nil) related to a deposit received on an option
agreement related to a property held for sale (note 5).
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
The Company measures the expense associated with its stock based
compensation using the intrinsic value method. 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.
The fair value of the options granted during 2003, 2002 and 2001 was
estimated using the Black-Scholes option-pricing model with the
assumptions of a dividend yield of 0% for each year, an expected
volatility of 55% (2002- 60%; 2001 - 30%), a risk-free interest rate of
2.5% (2002 - 3%; 2001 - 3%), and an expected life of four years.
- F10 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
Pro-forma net earnings (loss), reflecting stock compensation expense for
2003, 2002 and 2001 are as follows:
2003 2002 2001
Number of options granted 1,152,450 415,100 1,238,125
====================================
$ $ $
Total fair value 3,328 630 508
====================================
Net earnings for the year as reported 8,697 3,766 19
Stock compensation expense:
Options vested in current year from current year grants 664 126 410
Options vested in current year from prior years grants 241 115 65
------------------------------------
905 241 475
------------------------------------
Pro-forma net earnings (loss) for the year 7,792 3,525 (456)
====================================
Pro-forma net earnings (loss) per common share
- Basic 0.17 0.08 (0.01)
====================================
- Diluted 0.16 0.08 (0.01)
====================================
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 growers.
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.
Financial Instruments
The Company's financial instruments recognized in the consolidated balance
sheets and included in working capital consist of cash and cash
equivalents, short term investments, accounts receivable, other current
assets, accounts payable and accrued liabilities and customer and other
deposits. The fair values of these instruments approximate their carrying
value due to their short-term maturities.
The Company's financial instruments that are exposed to credit risk
include cash and cash equivalents, short term investments and accounts
receivable. The Company places its cash, cash equivalents and short term
investments with institutions of high creditworthiness. The Company's
trade accounts receivable are not subject to a high concentration of
credit risk. The Company routinely assesses the financial strength of its
customers and, as a consequence, believes that it accounts receivable
credit risk exposure is limited. The Company maintains an allowance for
losses based on the expected collectibility of the accounts.
Information on the Company's other financial instruments is contained in
other notes to the consolidated financial statements.
- F11 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
Earnings per share
Basic earnings per share are computed by dividing the earnings available
for common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share are 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 at the beginning of the period.
Use of estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the dates of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
2. Business acquisitions
2003
In 2003, the Company acquired four businesses (2002 - four businesses).
All of these acquisitions have been accounted for using the purchase
method, and accordingly, the consolidated financial statements include the
results of operations of the acquired businesses from the dates of the
acquisition. The purchase price has been allocated to the assets acquired
and the liabilities assumed based on management's best estimate of fair
values.
The purchase price allocation of the net assets acquired and consideration
given is summarized below:
Pro Organics
Sigco Sun Marketing Other
Products Inc. Acquisitions Total
Net assets acquired: (a) (b) (c) $
Non-cash working capital 4,217 855 708 5,780
Property, plant and equipment 6,429 818 2,117 9,364
Goodwill -- 3,196 1,627 4,823
Intangible assets - definite life 505 1,723 1,807 4,035
Future tax liability -- (692) (761) (1,453)
Debt (including bank indebtedness) (2,672) (943) (979) (4,594)
-----------------------------------------------------------
8,479 4,957 4,519 17,955
-----------------------------------------------------------
Consideration given:
Cash paid on closing 7,543 4,957 2,723 15,223
Contingent consideration 253 -- -- 253
Due to former shareholders 683 -- -- 683
Common shares issued -- -- 821 821
Note payable -- -- 975 975
-----------------------------------------------------------
8,479 4,957 4,519 17,955
-----------------------------------------------------------
- F12 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
(a) Sigco Sun Products
On November 12, 2003, the Company completed the acquisition of the
business and certain net assets of Sigco Sun Products Inc. (Sigco) of
Breckenridge, Minnesota for total consideration of $8,479 including
transaction costs. An additional $1,347 of contingent consideration may be
payable if certain predetermined profit targets are achieved by the
acquired business during the period January 1, 2004 to December 31, 2008
and will be recorded as goodwill when the amount and outcome of this
contingency becomes determinable.
Sigco is a worldwide supplier of sunflower products and is fully
integrated from the sale of sunflower seed to farmers through processing
the contracted crop into finished in-shell and kernel sunflower products.
The Company operates four facilities located in Minnesota, North Dakota
and Kansas. Sigco markets its non-genetically modified sunflower products
throughout the United States and to international markets in Europe, Asia
and the Americas. The acquisition builds on the Company's vertically
integrated model from seed to table and diversifies the grain products
that the Company sells.
(b) Pro Organics Marketing Inc.
On October 10, 2003, the Company acquired all of the outstanding shares of
Pro Organics Marketing Inc. (Pro Organics) and related companies for cash
consideration of $4,957 including transaction costs. An additional $964 of
contingent consideration may be payable to the former shareholders if
certain predetermined targets are achieved during the period of January 1,
2004 to December 31, 2006 and will be recorded as additional goodwill when
the amount and outcome of this contingency becomes determinable.
Pro Organics is a leading distributor of certified organic fresh foods in
Canada with distribution facilities located in Vancouver, Toronto and
Montreal. Along with Wild West and Simply Organic, both acquired in 2002,
Pro Organics gives the Company a dominant market share of the certified
organic fresh foods market in Canada.
Other acquisitions:
(c) Kettle Valley Dried Fruit Ltd.
On May 1, 2003, the Company acquired all of the outstanding shares of
Kettle Valley Dried Fruit Ltd. (Kettle Valley) and its related companies
for cash consideration of $873, a note payable of $975 and issuance of the
Company's shares valued at $821 for total consideration of $2,669.
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, (B.C.) 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 region of the Western U.S. The
acquisition of this business is in line with the Company's strategy to
expand the natural and organic food business in Canada and enter the
healthy convenience foods market, a fast growing sector for natural or
organic products.
Sonne Labs Inc.
On December 1, 2003, the Company acquired all of the outstanding shares of
Sonne Labs Inc. (operating as Dakota Gourmet) for cash consideration of
$1,850 including acquisition costs. In addition, contingent consideration
of $750 may be payable if certain predetermined profit targets are
achieved by the business from January 1, 2004 to December 31, 2007 and
will be recorded as additional goodwill when the amount of this
contingency becomes determinable.
- F13 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
2. Business acquisitions
Dakota Gourmet is focused on the manufacture of innovative natural and
organic snack foods using soy, corn and sunflower ingredients. These
products are sold under the Dakota Gourmet (TM) brand and are also
produced for private label customers. This acquisition will expand the
Company's presence in the healthy convenience foods market and further
supports the Company's strategy to grow its natural and organic product
offering in this food sector.
2002
The net assets acquired relating to business acquisitions completed in
2002 and the consideration given are summarized below:
Opta Food Other
Ingredients, Inc. Acquisitions
(a) (b) Total
$ $ $
Net assets acquired
Cash 7,611 (188) 7,423
Short term investments 2,038 -- 2,038
Non-cash working capital 5,580 49 5,629
Property, plant and equipment 5,020 410 5,430
Goodwill -- 1,570 1,570
Definite life intangibles -- 220 220
Future income tax asset 10,056 -- 10,056
Long-term debt (1,705) (258) (1,963)
-------------------------------------------
28,600 1,803 30,403
===========================================
Consideration given
Cash paid on closing 26,729 1,498 28,227
Contingent consideration -- 305 305
Due to former shareholders 1,871 -- 1,871
-------------------------------------------
28,600 1,803 30,403
===========================================
(a) Opta Food Ingredients, Inc.
On December 4, 2002, the Company completed a cash tender offer for
the outstanding common shares of Opta Food Ingredients, Inc. (Opta).
Approximately 92.6% of the outstanding common shares were tendered
for $2.50 per share in cash in accordance with the tender offer. On
December 18, 2002 the Company merged Opta with Stake Acquisition
Corp, a wholly owned subsidiary. As a result of this merger, the
remaining 7.4% of the outstanding common shares of Opta were
converted to a right to receive $2.50 per share in cash from the
Company, amounting to $1,871. This amount was disbursed in 2003.
Now part of the SunOpta Ingredients Group, Opta was a leading
innovator, manufacturer and marketer of proprietary food ingredients
that improve the nutritional content, healthfulness, texture and
taste of its customers' food products. Opta was also the world's
largest supplier of oat fiber to the food industry.
- F14 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
Other acquisitions:
(b) Simply Organic Co. Ltd.
On December 1, 2002, the Company acquired 100% of the outstanding
common shares of Simply Organic Co. Ltd. for cash consideration of
$187. In addition, contingent consideration of $160 is payable and
will be paid over the next two fiscal years. The full amount of
contingent consideration has been accrued at December 31, 2002.
Simply Organic Co. Ltd. is an Ontario, Canada-based distributor of
certified organic food products, distributed throughout much of
Ontario to mass market and natural food retail outlets. As of
December 31, 2003, Simply's operations have been merged with the
recently acquired Pro Organic's Toronto operations.
Wild West Organic Harvest Co-operative Association
On November 1, 2002, the Company acquired 100% of the outstanding
common shares of 632100 B.C. Ltd., successor to Wild West Organic
Harvest Co-Operative Association (Wild West) for cash consideration
of $889. In addition, contingent consideration of $144 may be
payable if certain predetermined profit targets are achieved by the
acquired business. The full amount of contingent consideration was
accrued at December 31, 2002.
Wild West is a British Columbia, Canada-based distributor of
certified organic and natural food products throughout Western
Canada to mass market and natural food retail outlets.
International Materials
On November 1, 2002, Virginia Materials purchased the remaining 49%
of the outstanding common shares of International Materials, for
cash consideration of $125.
International Materials produces industrial garnets as a by-product
from a mining operation and processes these garnets for sale to the
water filtration, water jet cutting and abrasives markets.
Organic Kitchen
On July 2, 2002, the Company acquired certain assets and the
businesses of Organic Kitchen Inc. and Cloud Mountain Inc. (together
forming Organic Kitchen). Consideration consisted of $297 paid in
cash on closing. In addition, the Company will pay 10% of the
pre-tax profits earned to December 31, 2005, up to a maximum of
$1,268. This contingent consideration will be recorded as an
increase to goodwill when the amount of the contingency is
determinable. No contingent consideration was paid in 2003 (2002 -
$nil).
The two companies form an integrated unit which sources, blends and
supplies proprietary organic feeds to organic poultry and other meat
producers. The companies then partner with organic processors who
package poultry and other meat products and distribute to mass
marketers under private label or the Organic Kitchen (TM) brand.
- F15 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
(c) Virginia Materials
On October 31, 2001, the Company's wholly owned subsidiary, Virginia
Materials Inc. acquired certain assets of Virginia Materials and
Supplies, Inc. including inventory, equipment and other long-term
assets as well as 51% of the outstanding common shares of
International Materials & Supplies, Inc. (International Materials)
for cash consideration, including acquisition costs of $1,743,
contingent consideration and deferred purchase consideration,
consisting of the Company's purchase of the vendor's inventory at
prices above fair market value. At the time of acquisition, the
Company agreed to pay 50% of the profits for a two-year period from
the date of the acquisition. The vendor's share of profits was
considered contingent consideration. During 2002, the Company
amended the arrangement with the vendor of Virginia Materials and
paid $50 per month for the period January 1, 2003 to October 31,
2003 in lieu of 50% of profits. During 2002 and 2003, the deferred
purchase consideration was also adjusted to reflect revised
estimates of the amount of inventory remaining to be purchased. This
resulted in an increase to goodwill of $248 which was recorded
during 2003.
Virginia Materials is a supplier of abrasives to the shipbuilding
and repair industry. It has a production facility located in
Norfolk, Virginia. Virginia Materials also recycles spent abrasives
which are used in the production of cement and converts aluminium
smelting waste into a roofing and abrasive product.
3. Note receivable
Prior to the Company's acquisition of Northern Food & Dairy Inc.
(Northern) on September 15, 2000, Northern signed an agreement with a
major customer to supply a natural food product. This agreement required
Northern to expand its food processing plant to the customer's
specifications. In accordance with the terms of the agreement, the
customer paid Northern 36 monthly instalments of $119 commencing October
2000 and as at December 31, 2003 the outstanding receivable was fully
collected. The agreement also requires Northern to provide the customer
with a product rebate beginning three years after production at the new
plant commences until $1,720 is repaid. During 2003, $75 of the product
rebate has been repaid.
Upon acquisition of Northern on September 15, 2000, the Company assigned
fair values of $3,425 to the note receivable and $1,075 to the product
rebate payable based on the cash flows associated with these financial
instruments discounted at a rate of 9.5%.
During 2003, Northern received payments of $1,071 (2002 - $1,425) and
recorded imputed interest income of $37 (2002 - $156) on the note
receivable. Imputed interest expense of $147 (2002 - $121) was recorded on
the product rebate payable.
4. Inventories
2003 2002
$ $
Raw materials 8,437 7,859
Finished goods 24,525 13,628
Grain 1,816 1,502
------------------
34,778 22,989
==================
Grain inventories consist of the following:
Company owned grain 1,491 1,460
Unrealized gain (loss) on
Sale and purchase contracts 153 (79)
Future contracts 172 121
------------------
1,816 1,502
==================
- F16 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
5. Property, plant and equipment
2003
--------------------------------------
Accumulated
Cost Amortization Net
$ $ $
Land and buildings 22,513 2,321 20,192
Machinery and equipment 34,536 13,903 20,633
Office furniture and equipment 4,300 1,281 3,019
Vehicles 1,055 138 917
--------------------------------------
62,404 17,643 44,761
======================================
2002
--------------------------------------
Accumulated
Cost Amortization Net
$ $ $
Land and buildings 17,403 1,033 16,370
Machinery and equipment 24,904 10,714 14,190
Office furniture and equipment 1,546 640 906
Vehicles 575 28 547
--------------------------------------
44,428 12,415 32,013
======================================
Included in machinery and equipment is equipment under capital lease with
a cost of $457 (2002 - $490) and net book value of $330 (2002 - $277).
Included in office furniture and equipment is $807 of capitalized computer
software, which is currently not being amortized as it has not been placed
into use.
Assets held for sale
Assets held for sale include the former Opta's head office located in
Bedford, Massachusetts, SunOpta Ingredients' St. Thomas, Ontario
processing facility (both acquired in the acquisition of Opta - note 2)
and Opta Minerals' Hamilton, Ontario processing and distribution facility.
(a) Former Opta Facilities
Assets held for sale include the former Opta's head office located
in Bedford, Massachusetts, which has a book value at December 31,
2003 of $4,800 (December 31, 2002 - $4,800). During the year, the
Company entered into an option agreement to sell the building at a
price of $4,850. The option was granted for one year and expires on
September 22, 2004.
As per the terms of the option agreement, as of December 31, 2003,
Opta has received $1,260 in non-refundable option deposits which
will be applied to the sale price at closing should the option be
exercised. Opta will continue to receive non-refundable monthly
option payments of $30, which will not be applied to the purchase
price and monthly option deposits of $20, which will be applied to
the purchase price if exercised. The Company has recorded $1,260 in
customer and other deposits and option payments of $90 have been
included in other income in 2003.
Upon sale of the building it is the Company's intent to lease a
portion of the building from the new owners.
Subsequent to year end the Company announced the closure of the
SunOpta Ingredients' St. Thomas, Ontario Canada facility and has
classified this building as an asset held for sale. The book value
as at December 31, 2003 was $193 (December 31, 2002 - $220). The
estimated realizable value exceeds this amount at December 31, 2003.
- F17 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
(b) Opta Minerals
In January 2003, the Company relocated its production operation from
Hamilton, Ontario to its existing facility in Waterdown, Ontario and
as a result classified the land and building as an asset held for
sale. At December 31, 2003 the land and building has a book value of
$1,014. Subsequent to year end, the facility was sold for proceeds
of $1,041.
6. Goodwill and intangibles
2003 2002
$ $
Goodwill - at cost, less accumulated amortization of $985
(2002 - $985) 18,182 12,212
Trademarks and other intangibles with a definite life - at cost,
less accumulated amortization of $122 (2002 - $6) 6,798 2,705
Patents and licenses, net 104 75
-----------------
25,084 14,992
=================
Goodwill Intangibles Patents
and licenses Total
$ $ $ $
Balance as at December 31, 2002 12,212 2,705 75 14,992
Additions during the year 5,071 4,035 16 9,122
Amortization -- (116) (30) (146)
Impact of foreign exchange 899 174 43 1,116
-------------------------------------------------------
Balance at December 31, 2003 18,182 6,798 104 25,084
=======================================================
The Company estimates that aggregate amortization expense associated with
definite life trademarks and other intangibles will be $726 for 2004
through 2007, and $702 in 2008.
7. Other assets
2003 2002
$ $
Pre-operating costs, net of accumulated amortization of $790
(2002 - $432) -- 358
Deferred financing costs, net of accumulated amortization
of $727 (2002 - $201) 436 619
Other 54 103
---------------
490 1,080
===============
- F18 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
8. Long-term debt and banking facilities
2003 2002
$ $
Term loan (a) 19,800 13,900
Tender facility (b) -- 15,186
Convertible debenture (c) -- 4,697
Other long-term debt (d) 5,236 2,873
----------------------
25,036 36,656
Less: current portion (3,840) (11,557)
----------------------
21,196 25,099
======================
(a) In March 2003 the Company amended and restated its credit agreement
which syndicated the financing arrangement to a group of banks
including existing lenders and increased the term loan by $7,800 to
$21,700. In addition, the U.S. line of credit facility was increased
by $4,000 to $9,000. The Company used the incremental proceeds on
the term loan, drew on the credit facility to the extent of $3,500
and utilized $3,886 of cash on hand to repay the tender facility
obtained to finance the acquisition of Opta (note 2).
In May 2003 and as part of the acquisition of Kettle Valley, the
Company amended its facility and increased the Canadian line of
credit facility to CDN $7,500 from CDN $5,000.
In December 2003, the Company further amended its credit agreement
and extended the term loan to June 2005. The Company fully intends
to renew this term loan prior to its maturity however, for financial
statement purposes the principal payments have been categorized as
due in 2005. The amended and restated agreement has the following
components;
i) Term loan
Principal payable quarterly based on a seven year
amortization. The term loan matures June 2005 and is renewable
at the option of the lender and the Company. As at December
31, 2003, $19,800 (2002 - $13,900) remained outstanding.
Interest on the term loan is payable at the borrower's option
at U.S. dollar base rate or U.S. LIBOR plus a margin based on
certain financial ratios of the Company (2.2% as at December
31, 2003 and 3.0% as at December 31, 2002).
ii) $5,785 (CDN $7,500) line of credit facility
Interest on borrowings under this facility accrues at the
borrower's option based on various reference rates including
Canadian or U.S. bank prime, or Canadian bankers' acceptances,
plus a margin based on certain financial ratios. As at
December 31, 2003 $nil (2002 - $494) of this facility has been
utilized and $802 has been committed through letters of credit
as itemized in note 14 (d).
iii) $9,000 line of credit facility
Interest on borrowings under this facility accrues at the
borrower's option based on various reference rates including
U.S. bank prime, or LIBOR, plus a margin based on certain
financial ratios. As at December 31, 2003 $nil (2002 - $3,963)
of this facility has been utilized.
- F19 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
The term loan and the Canadian and U.S. line of credit facilities
described above are collateralized by a first priority security
against substantially all of the Company's assets in both Canada and
the United States.
(b) On December 4, 2002, the Company entered into a tender financing
arrangement with its principal lender to facilitate the Company's
tender offer to purchase all of the outstanding common shares of
Opta (note 2).
The tender facility had a maximum borrowing base of $17,000. As at
December 31, 2002, $15,186 of this facility had been utilized.
Interest on borrowings under this facility accrued at the borrower's
option based on various reference rates including the bank's prime
plus 100 basis points, or LIBOR plus 200 basis points (3.3% as at
December 31, 2002). In March 2003, the tender facility was repaid
with cash and the incremental proceeds from the amended term loan
and line of credit facilities, as described above.
(c) On December 4, 2002, to finance the acquisition of Opta, the Company
issued a $5,000 convertible debenture, with interest payable
quarterly at 5.5% per annum. In conjunction with the issuance of the
convertible debenture, the Company issued 250,000 share purchase
warrants with an exercise price of $3.25. The warrants and the
convertible right inherent in the debenture were fair valued at
$317, as at December 4, 2002, and have been classified as a
component of shareholders' equity. As a result, the fair value
attributed to the debt component of the convertible debenture was
$4,683. The debenture was convertible at the option of the holder at
any time after November 30, 2003, or earlier under certain
circumstances at the conversion price of $3.00 per share. The
effective interest rate on the debenture was 9.6%.
On August 29, 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 and has been recorded as interest
expense. The warrants remain outstanding and have an expiry date of
November 30, 2004.
- F20 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
(d) Other long-term debt consists of the following:
2003 2002
$ $
Note payable (Cdn $1,088) issued to the former shareholders of 816 --
Kettle Valley as part of the acquisition (note 2), interest at 5%
payable in ten semi-annual instalments, uncollateralized
Term loan assumed on the acquisition of Sigco (note 2) payable 2,440 --
in ten semi annual instalments of $244. Interest payable
monthly at LIBOR + 1.95% (December 31 - 3.15%),
collateralized by the property and equipment of Sigco
Term loan issued to Oracle Credit Corp. on the purchase of a 1,107 --
software license agreement. Interest at 2.0% payable in eight
quarterly instalments
Other term debt with a weighted average interest rate of 2.4%, 802 845
due in varying instalments through July 2007
Capital lease obligations due in monthly payments through 71 323
2006, with a weighted average interest rate of 8.5%
Term loan assumed on acquisition of Opta, payable in quarterly -- 1,705
instalments of $27 including interest at 7.4% due June 2003,
collateralized by certain assets in the United States
---------------
5,236 2,873
===============
(e) The loans and capital leases detailed above require payments as
follows:
$
2004 3,840
2005 18,934
2006 793
2007 764
2008 and thereafter 705
------
25,036
------
(f) Interest expense on long-term debt for the year ended December 31,
2003 was $1,664 (December 31, 2002 - $1,292).
(g) The fair value of long-term debt as at December 31, 2003 is
considered not to be materially different from the carrying amount.
- F21 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
9. Long-term payables
2003 2002
$ $
Product rebate payable (note 3) 1,402 1,330
Deferred purchase consideration 65 667
Preference shares of subsidiary companies 144 291
Payable to former shareholders of acquired companies 623 2,675
Other 97 93
-----------------
2,331 5,056
Less: Current portion (740) (3,551)
-----------------
1,591 1,505
=================
10. Capital stock
The Company is authorized to issue an unlimited number of common shares
without par value and an unlimited number of special shares without par
value.
The following is a summary of changes in capital stock:
Warrants and rights Common shares Total
--------------------------- --------------------- ------
Number $ Number $ $
Balance as at December 31, 2000 500,000 19 28,186,972 14,239 14,258
------------------------------------------------------------------
Shares and warrants issued to acquire First
Light Foods (a) 35,000 8 833,333 796 804
Options exercised (b) -- -- 999,425 1,037 1,037
April 2001 private placement (c) 705,750 507 1,411,498 1,157 1,664
May 2001 private placement (c) 1,200,000 762 2,400,000 3,462 4,224
September 2001 private placement (c) 2,250,000 1,650 3,000,000 3,901 5,551
December 2001 private placements (c) -- -- 4,250,000 8,337 8,337
Warrants issued (c) 478,500 -- -- -- --
------------------------------------------------------------------
Balance as at December 31, 2001 5,169,250 2,946 41,081,228 32,929 35,875
------------------------------------------------------------------
Warrants exercised (a) (656,150) (430) 656,150 1,904 1,474
Warrants issued (a) 250,000 263 -- -- 263
Warrants repurchased (a) (60,000) (43) -- -- (43)
Options exercised (b) -- -- 246,740 397 397
Convertible right associated with convertible
debenture (a) -- 54 -- -- 54
------------------------------------------------------------------
Balance as at December 31, 2002 4,703,100 2,790 41,984,118 35,230 38,020
------------------------------------------------------------------
Warrants exercised (a) (1,095,750) (438) 1,095,750 2,299 1,861
Compensation and related warrants exercised (a) (366,000) -- 366,000 761 761
Shares issued to acquire Kettle Valley (a) -- -- 196,809 821 821
August 2003 public offering (c) -- -- 7,500,000 51,004 51,004
August 2003 private placement (c) 285,714 2,000 2,000
Options exercised (b) -- -- 1,276,705 2,257 2,257
Convertible right (a) -- (54) -- -- (54)
------------------------------------------------------------------
Balance as at December 31, 2003 3,241,350 2,298 52,705,096 94,372 96,670
==================================================================
- F22 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
(a) Warrants
During 2003, 1,461,750 warrants including compensation warrants
granted as part of private placements completed in 2001 were
exercised at prices ranging from $1.50 to $2.40 for net proceeds of
$2,622; (2002 - 656,150 warrants, $1,474; 2001 - nil warrants, $nil
proceeds).
On May 1, 2003, the Company issued 196,809 common shares at a price
of $4.17 per common share, in the acquisition of Kettle Valley (note
2).
In conjunction with the convertible debenture issued in 2002 (note
8) the Company issued 250,000 warrants with a fair value of $263, an
exercise price of $3.25, and an expiry date of November 30, 2004.
The convertible right issued in conjunction with the convertible
debenture has a fair value of $54 and expired during the year, as
the debenture was repaid prior to redemption.
On April 2, 2002, 60,000 shareholder warrants with an exercise price
of $1.75 per unit, were repurchased by the Company for a net cost of
$39.
During February, 2001 in respect of the acquisition of Jenkins and
Gournoe Inc. the Company issued 833,333 common shares at a price of
$0.96 per common share and 35,000 warrants exercisable at $1.70 for
five years to February 2006, at a price of $0.23 per warrant.
(b) Employee/director option plans
Details of changes in employee/director stock options are as
follows:
2003 2002 2001
Outstanding at beginning of year 2,201,260 2,050,700 1,811,325
Granted 1,152,450 415,100 1,253,800
Exercised (1,276,705) (246,740) (999,425)
Retracted (49,828) (17,800) (15,000)
------------------------------------------
Outstanding options at year end 2,027,177 2,201,260 2,050,700
==========================================
Exercisable options at year end 787,907 1,613,480 1,598,305
==========================================
Weighted average fair value of options granted during the year $ 2.89 $ 1.51 $ 0.41
==========================================
The Company grants options to employees and directors from time to
time under employee/director stock option plans. The Board of
Directors of the Company has authorized and approved 5,150,000 (2002
- 5,150,000) shares to be made available for the stock option plans.
The following is a summary of options granted during the year.
Number of
Number of Options vested at
Grant date Expiry date Exercise price options Dec 31, 2003
January 02, 2003 January 02, 2008 $3.06 10,000 2,000
March 20, 2003 March 20, 2008 $3.72 398,750 79,750
May 01, 2003 May 01, 2008 $5.00 12,000 2,400
May 07, 2003 May 07, 2008 $5.24 158,700 31,740
August 13, 2003 August 13, 2008 $7.49 62,400 12,480
September 29, 2003 September 29, 2008 $9.11 90,000 18,000
November 04, 2003 November 04, 2008 $9.90 242,900 48,580
December 10, 2003 December 10, 2008 $7.42 177,700 37,990
-------------------------------
1,152,450 232,940
===============================
- F23 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
Employee/director stock options granted by the Company contain an
exercise price, which is equal 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.
During the year the Company granted 1,152,450 options which vest as
follows: 232,940 options vested in 2003, 232,503 vest per annum in
2004 to 2006 and 222,002 in 2007. During 2003, 1,276,705 (2002 -
246,740; 2001 - 999,425) options were exercised and the equivalent
number of common shares were issued for net proceeds of $2,257 (2002
- $397; 2001 - $1,037).
Details of employee/director stock options as at December 31, 2003
are as follows:
-------------------------------------------------------------------------------------------------
Expiry Exercise Vested Weighted Total Weighted
Date Price Outstanding Average Outstanding Average Price
Range Options Price Options
2004 $1.06 to $1.86 50,437 $1.34 50,437 $1.34
2005 $1.06 to $1.38 256,200 $1.17 317,100 $1.18
2006 $1.53 to $2.10 141,350 $1.84 227,150 $1.84
2007 $2.15 to $3.07 148,100 $2.84 363,560 $2.79
2008 $3.06 to $9.90 191,820 $6.97 1,068,930 $6.64
----------------------------------------------------------------
787,907 $3.03 2,027,177 $4.56
================================================================
The weighted average remaining contractual life for vested
outstanding options and total outstanding options is 3.2 and 4.0
years respectively.
On January 7, 2000, based on Board of Director approval all options
with an option price in excess of $1.06 were repriced to $1.06. In
addition, on March 5, 2000, the Board of Directors approved a
resolution extending the exercise period of 304,375 options from
March 10, 2001 to December 31, 2003.
(c) Equity Offerings and Private Placements
On August 28, 2003, the Company issued 7,500,000 common shares at a
price of $7.00 per common share, as part of a public offering for
gross proceeds of $52,500. The Company incurred $1,496 in share
issuance costs, (net of tax) in relation to this offering.
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.
In 2001, the Company completed four private placements. The Company
issued 11,061,498 common shares and 4,155,750 warrants to acquire
4,155,750 common shares for total proceeds of $19,776 net of
issuance costs. The following is a summary of the warrants issued:
Expiry date Exercise price Warrants $
March 31, 2004 $1.75 705,750 507
March 31, 2004 $2.40 1,200,000 762
September 30, 2004 $2.40 2,250,000 1,650
-----------------------
4,155,750 2,919
=======================
- F24 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
In addition, pursuant to the 2001 private placement agreements, the
Company granted to their agents:
i) Compensation warrants exercisable until June 8, 2003 to
purchase 144,000 option units at $2.00 per unit. If exercised
in full, the Company would issue 144,000 common shares and
72,000 warrants exercisable at $2.40 to acquire 72,000 common
shares, which expire on March 31, 2004.
During 2003, all of the above 144,000 compensation warrants
were exercised and 216,000 common shares were issued for net
proceeds of $461.
ii) Compensation warrants exercisable until September 28, 2003 to
purchase 150,000 option units at $2.00 per unit. If exercised
in full, the Company will issue 150,000 common shares and
112,500 warrants exercisable at $2.40 to acquire 112,500
common shares, which expire on September 30, 2004.
During 2003, the above 150,000 compensation warrants were
exercised and 150,000 common shares were issued for net
proceeds of $300. The above 112,500 compensation warrants
remain outstanding at year end.
(d) During 1997, the shareholders of the Company agreed to reduce the
stated capital account of the Company's common shares by $15,712
through the elimination of a deficit.
11. Income taxes
The Company's effective income tax rate on consolidated earnings has been
determined as follows:
2003 2002 2001
Canadian statutory income tax rate 36.1% 39.0% 42.0%
Increase (decrease) by the effects of:
Change in valuation allowance (24.8%) (13.2%) (25.8%)
Differences in foreign, capital gains, manufacturing (2.1%) (3.7%) (1.5%)
and processing and future income tax rates
Other (0.2%) (12.5%) 73.9%
-----------------------------------
Effective income tax rate 9.0% 9.6% 88.6%
===================================
$ $ $
Net earnings before income taxes 9,556 4,167 166
===================================
Provision for income taxes 859 401 147
===================================
- F25 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
The components of the provisions for Canada and U.S. income taxes are
shown below:
2003 2002 2001
$ $ $
Current (benefit) expense:
Canada 370 (1,094) (85)
United States 433 110 374
------------------------------
803 (984) 289
Future (benefit) expense:
Canada 50 (717) 2
United States 6 2,102 (144)
------------------------------
56 1,385 (142)
------------------------------
Provision for income taxes 859 401 147
==============================
Future income taxes of the Company are comprised of the following:
2003 2002
$ $
Differences in property, plant and equipment basis (106) 4,946
Non-capital losses 7,291 6,443
Tax benefit of scientific research expenditures 2,783 2,112
Tax benefit of costs incurred during share issuance (note 10) 1,281
Other 684 613
--------------------
11,933 14,114
Valuation allowance (1,738) (4,107)
--------------------
10,195 10,007
====================
The Company has approximately $5,245 and $1,000 (2002 - $4,373 and $1,000)
in Canadian and U.S. scientific research expenditures respectively, which
can be carried forward indefinitely to reduce future years' taxable
income. The Company also has approximately $nil (2002 - $120) in Canadian
scientific research investment tax credits and approximately $870 (2002 -
$870) in U.S. state scientific research investment tax credits which will
expire in approximately 12 years.
The Company has Canadian and U.S. non-capital loss carry-forwards of
approximately $7,404 and $32,500 respectively, as at December 31, 2003
(2002 - $2,116 and 34,900). The Company also has State loss carry forwards
of approximately $5,800 as of December 31, 2003 (2002 - $8,400). The
amounts are available to reduce future federal and provincial/state income
taxes. Non-capital loss carry-forwards attributable to Canada expire over
varying amounts over the next seven years while non-capital loss
carry-forwards attributable to the U.S. expire in varying amounts over the
next 17 years.
A valuation allowance of $1,738 (2002 - $4,107) has been recorded to
reduce the net benefit recorded in these consolidated financial statements
related to the capital and non-capital loss carry-forwards. The valuation
allowance has decreased as a result of greater certainty associated with
the ultimate realization of these future tax assets.
- F26 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
12. Supplemental cash flow information
2003 2002 2001
$ $ $
Changes in non-cash working capital, net of
businesses acquired:
Accounts receivable - trade (3,484) (4,712) 315
Inventories (4,976) (3,086) (3,383)
Prepaid expenses and other current assets (1,187) 579 (404)
Income taxes recoverable (1,686) -- --
Accounts payable and accrued liabilities (2,139) 1,271 (135)
Customer deposits 1,357 (969) 533
-------------------------------
(12,115) (6,917) (3,074)
===============================
Cash paid for:
Interest 1,698 1,632 1,789
===============================
Income taxes 2,099 1,373 405
===============================
13. Related party transactions and balances
In addition to transactions disclosed elsewhere in these consolidated
financial statements, the Company entered into the following related party
transactions:
(a) Included in other current assets as at December 31, 2003 is $25
(2002 - $75) due from officers/directors of the Company.
(b) Pursuant to the Pro Organics acquisition the Company has leased Pro
Organics Vancouver, British Columbia warehouse and administration
facility from the former owners who still remain as executive
officers of Pro Organics. The lease is at market rates and is for a
five year term with two five year renewal periods.
(c) Pursuant to the acquisition of Sigco the Company has a receivable of
$310 as at December 31, 2003 from the selling company which is
controlled by the President of Sigco, for certain accounts
receivable collected on behalf of the Company. This amount has been
included in Prepaid expenses and Other assets and was fully
discharged subsequent to year end.
- F27 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
14. Commitments and contingencies
(a) SunRich Inc. a subsidiary of the Company has commenced a suit
against a supplier for failure to adhere to the terms of a contract.
The Company and its legal counsel believe that this claim has merit.
The Company has ceased co-packing arrangements under the existing
contract and has commenced packing under separate arrangements. It
cannot however be determined if there will be any recovery by the
Company at this time and the Company is expensing the costs of
pursuing this suit as incurred. The supplier has counter-sued the
Company for breach of contract. The Company believes this suit is
unfounded. Other than this action, the Company has not been and is
not currently a party to any other material litigation.
(b) The Company believes, with respect to both its operations and real
property that it is in material compliance with current
environmental laws. Based on known existing conditions and the
Company's experience in complying with emerging environmental
issues, the Company is of the view that future costs relating to
environmental compliance will not have a material adverse effect on
its financial position, but there can be no assurance that
unforeseen changes in the laws or enforcement policies of relevant
governmental bodies, the discovery of changed conditions on the
Company's real property or in its operations, or changes in use of
such properties and any related site restoration requirements, will
not result in the incurrence of significant costs. No provision has
been made in these consolidated financial statements for these
future costs since such costs, if any, are not determinable at this
time.
(c) In the normal course of business, the Food Group holds grain for the
benefit of others. The Company is liable for any deficiencies of
grade or shortage of quantity that may arise in connection with such
grain.
(d) Letters of credit:
i) An irrevocable letter of credit for $578 has been placed with
the Ontario Ministry of Environment and Energy as a security
deposit for the Certificate of Approval granted to the Company
for certain recycling activities. This letter of credit must
remain in place indefinitely as a condition of the Certificate
of Approval.
ii) An irrevocable letter of credit for $195 has been placed with
the Commonwealth of Virginia Department of Environmental
Qualities as a security deposit for the Certificate of
Approval granted to the Company for certain recycling
activities. This letter of credit must remain in place
indefinitely as a condition of the Certificate of Approval.
iii) Additional letters of credit totalling $29 have been placed
with third parties as security on transactions occurring in
the ordinary course of operations.
(e) Real property lease commitments:
The Company has entered into various leasing arrangements which have
fixed monthly rents that are adjusted annually each year for
inflation.
Commitments under operating leases, principally for distribution
centres, warehouse and equipment, are as follows:
$
2004 2,930
2005 2,625
2006 2,289
2007 1,813
2008 and thereafter 2,001
------
11,658
======
In the years 2003, 2002 and 2001, minimum rents, including
immaterial contingent rents and sublease rental income, were $1,766,
$921 and $604, respectively.
- F28 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
15. Earnings per share
The calculation of basic earnings per share is based on the weighted
average number of shares outstanding. Diluted earnings per share reflect
the dilutive effect of the exercise of warrants and options as disclosed
in note 10. The number of shares for the diluted earnings per share was
calculated as follows:
2003 2002 2001
Weighted average number of shares used in
basic earnings per share 46,094,627 41,547,302 32,220,352
Dilutive potential of the following
Employee/director stock options 840,085 765,034 150,191
Warrants 2,004,201 747,459 85,392
----------------------------------------
Weighted average number of shares used in
diluted earnings per share 48,938,913 43,059,795 32,455,935
========================================
Net earnings for the period 8,697 3,766 19
========================================
Earnings per share:
- Basic 0.19 0.09 0.00
----------------------------------------
- Diluted 0.18 0.09 0.00
----------------------------------------
Options to purchase 573,000 common shares have been excluded from the
calculations of diluted earnings per share due to their anti-dilutive
effect.
16. Segmented information
Industry segments
The Company operates in three industry segments: (a) the SunOpta 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. During the year the
Company expanded its reporting structure and has further defined its
segments into Grains and Soy Products Group, SunOpta Ingredients Group and
Packaged and Distributed Products Group (which combined form the Food
Group). The addition of these segments better reflects how management
views and manages the business and is aligned with the Company's
vertically integrated model; (b) Opta Minerals (formally known as
Environmental Industrial Group), processes, distributes, and recycles
industrial minerals; and (c) the StakeTech Steam Explosion Group, markets
proprietary steam explosion technology systems for the pulp and food
processing industries. The Company's assets, operations and employees are
located in Canada and the United States.
The Company has presented segmented information under the new reporting
structure for the current year; however, due to reporting constraints it
is considered impractical to do so for 2002 and 2001 results. The Company
has also revised its reporting of segmented net earnings (loss) to net
earnings (loss) before interest and taxes but inclusive of allocated
corporate management fees, as this is more aligned with how management
views its operations. SunRich Food Group Inc., the holding company of U.S.
operations, has also been reclassified from the Food Group segment to
Corporate. For 2002 and 2001 the Company has restated its segments to
include the effect of the Sunrich Food Group and management fee
reclassifications.
- F29 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
2003
-------------------------------------------------------------------
StakeTech
Steam Explosion
SunOpta Opta Minerals Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 134,964 9,446 461 144,871
Canada 30,754 15,202 -- 45,956
Other 8,089 183 -- 8,272
-------------------------------------------------------------------
Total revenues from external customers 173,807 24,831 461 199,099
-------------------------------------------------------------------
Segment net earnings (loss) before interest
expense and income taxes 10,536 2,580 (1,618) 11,498
-------------------------------------------------------------------
Interest expense -- -- -- 1,942
-------------------------------------------------------------------
Provision for income taxes -- -- -- 859
-------------------------------------------------------------------
Net earnings -- -- -- 8,697
-------------------------------------------------------------------
Identifiable assets 117,346 26,363 30,047 173,756
-------------------------------------------------------------------
Amortization 3,889 952 643 5,484
-------------------------------------------------------------------
Goodwill 12,062 6,120 -- 18,182
-------------------------------------------------------------------
Expenditures on property, plant and
equipment 5,361 796 982 7,139
-------------------------------------------------------------------
The SunOpta Food Group has the following segmented reporting:
2003
---------------------------------------------------------------------
Grains and SunOpta Packaged and
Soy Products Ingredients Distributed SunOpta
Group Group Products Group Food Group
$ $ $ $
External revenues by market
U.S 57,499 42,756 36,043 136,298
Canada 439 1,488 27,333 29,260
Other 2,384 5,705 160 8,249
---------------------------------------------------------------------
Total revenues from external customers 60,322 49,949 63,536 173,807
---------------------------------------------------------------------
Segment net earnings before interest
expense and income taxes 2,745 4,797 2,994 10,536
---------------------------------------------------------------------
Identifiable assets 36,588 46,140 34,618 117,346
---------------------------------------------------------------------
Amortization 744 1,656 1,489 3,889
---------------------------------------------------------------------
Goodwill 1,293 3,893 6,877 12,062
---------------------------------------------------------------------
Expenditures on property, plant and
equipment 986 2,874 1,837 5,698
---------------------------------------------------------------------
- F30 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
2002
-------------------------------------------------------------------
StakeTech
Steam Explosion
Opta Minerals Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 89,088 8,305 157 97,550
Canada 2,936 15,902 -- 18,838
Other 4,295 215 -- 4,510
-------------------------------------------------------------------
Total revenues from external customers 96,319 24,422 157 120,898
-------------------------------------------------------------------
Segment net earnings (loss) before
interest expense and income taxes 4,556 2,864 (1,840) 5,580
-------------------------------------------------------------------
Interest expense 821 320 272 1,413
-------------------------------------------------------------------
Provision for (recovery of) income taxes 1,394 1,115 (2,108) 401
-------------------------------------------------------------------
Net earnings (loss) 3,203 1,741 (1,178) 3,766
-------------------------------------------------------------------
Identifiable assets 85,040 21,981 8,266 115,287
-------------------------------------------------------------------
Amortization 2,995 861 274 4,130
-------------------------------------------------------------------
Goodwill 6,692 5,520 -- 12,212
-------------------------------------------------------------------
Expenditures on property, plant
and equipment 3,306 1,058 100 4,464
-------------------------------------------------------------------
2001
-------------------------------------------------------------------
StakeTech
Steam Explosion
Opta Minerals Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 66,408 5,365 359 72,132
Canada 200 14,124 -- 14,324
Other 3,365 1 -- 3,366
-------------------------------------------------------------------
Total revenues from external customers 69,973 19,490 359 89,822
-------------------------------------------------------------------
Segment net earnings (loss) before
interest expense and income taxes 1,655 836 (580) 1,911
-------------------------------------------------------------------
Interest expense 1,423 291 31 1,745
-------------------------------------------------------------------
Provision for (recovery of) income taxes 186 170 (209) 147
-------------------------------------------------------------------
Net earnings (loss) 310 491 (782) 19
-------------------------------------------------------------------
Identifiable assets 51,073 16,948 12,040 80,061
-------------------------------------------------------------------
Amortization 2,889 705 112 3706
-------------------------------------------------------------------
Goodwill 7,874 3,163 60 11,097
-------------------------------------------------------------------
Expenditures on property, plant and
equipment 2,590 1,290 27 3,907
-------------------------------------------------------------------
Equity accounted investment -- -- 366 366
-------------------------------------------------------------------
- F31 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
Geographic segments
2003 2002
---------------------------------- ---------------------------------
U.S. Canada Total U.S. Canada Total
$ $ $ $ $ $
Property, plant and
equipment 34,540 10,221 44,761 29,568 7,465 37,033
================================== =================================
Goodwill 9,926 8,256 18,182 9,158 3,054 12,212
================================== =================================
Total assets 110,224 63,532 173,756 87,399 27,888 115,287
================================== =================================
Customer concentration
The Company has one customer in the Food Group whose purchases were 13% of
the Company's total revenue in 2003 (2002 - 16%).
17. 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 year
ended December 31, 2003, (2002 - $276, 2001 - $32)), deferred in these
financial statements would be expensed. Amortization of $358 in the year
ended December 31, 2003, (2002 - $271, 2001 - $161) related to
pre-operating costs would not have been expensed.
On March 11, 2002, the Company committed to grant certain employees
114,000 options to acquire 114,000 common shares at $2.15. These options
were provided to employees contingent upon approval by the shareholders of
the 2002 stock option plan. This approval was received on June 18, 2002.
Under U.S. GAAP, the difference in stock price between the exercise price
and the closing price the day immediately preceding the day of
shareholders' approval is considered to be compensation expense.
Accordingly, $62 would be recorded under U.S. GAAP in 2002 as stock option
compensation expense.
During 2001, the Company repriced certain options. As a result, for the
year ended December 31, 2003 - $nil (2002 - $nil; 2001 - $321) would be
recognized as stock option compensation expense under U.S. GAAP.
In conjunction with the issuance of the convertible debenture described in
notes 8 and 10 for Canadian GAAP purposes, the fair value of the
convertible right was determined to be $54. For U.S. GAAP purposes, the
value of the right was determined to be $383. For U.S. GAAP this amount
has been measured and disclosed but would not be recorded until the option
right became exercisable on November 30, 2003. As the convertible
debenture was repaid prior to November 30, 2003 the value of the right
under U.S. GAAP was not recorded. The Canadian GAAP accretion of $34 on
the convertible debenture has not been recorded for U.S. GAAP purposes.
Effective January 1, 2002, the Company adopted the U.S. dollar as its
reporting currency. Under Canadian GAAP historical results were restated
using a translation of convenience, whereas under U.S. GAAP, the
consolidated financial statements would be restated on a retroactive
basis. The effect of this adjustment would not be material.
- F32 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
17. United States generally accepted accounting principles differences
continued
Accordingly, the following would have been reported under U.S. GAAP:
2003 2002 2001
$ $ $
Net earnings for the year - as reported 8,697 3,766 19
Pre-operating costs amortized 358 271 161
Pre-operating costs capitalized -- (276) (32)
Accretion on convertible debenture 34 -- --
Stock option compensation expense -- (62) (321)
Tax effect of above items (149) 2 (52)
--------------------------------------------
Net earnings (loss) for the year - US. GAAP 8,940 3,701 (225)
============================================
Net earnings (loss) per share - U.S. GAAP - Basic 0.19 0.09 (0.01)
============================================
Net earnings (loss) per share - U.S. GAAP - Diluted 0.18 0.09 (0.01)
============================================
Weighted average number of common shares
outstanding 46,094,627 41,547,302 32,220,352
============================================
Diluted weighted average number of common shares 48,938,913 43,059,795 32,455,935
============================================
Shareholders' equity - as reported 119,947 49,527 43,500
Cumulative pre-operating costs, net of amortization,
net of tax -- 215 212
Cumulative stock compensation expense (416) (416) (354)
--------------------------------------------
Shareholders' equity - U.S. GAAP 119,531 49,326 43,358
============================================
Comprehensive income
U.S. GAAP requires that a comprehensive income statement be prepared.
Comprehensive income is defined as "The change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner events". It includes all changes in equity
during a period, except those resulting from investments by owners and
distribution to owners. The comprehensive income 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.
2003 2002 2001
$ $ $
Net earnings (loss) for the year - U.S. GAAP 8,940 3,701 (225)
Currency translation adjustment 3,019 112 971
-------------------------
Comprehensive income for the year 11,959 3,813 746
=========================
- F33 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
17. United States generally accepted accounting principles differences,
continued
Other U.S. GAAP disclosures
Changes in Reserves 2003 2002 2001
$ $ $
Allowance for Doubtful Accounts
Balance, beginning of year 709 367 590
Additions charged to profit and loss, including
effects of foreign exchange rate differences 892 450 162
Accounts receivable charged off, net of recoveries (383) (108) (385)
------------------------------
Balance, end of year 1,218 709 367
==============================
Deferred Tax Valuation Allowance
Balance, beginning of year 4,107 479 479
Additions (reductions) to valuation allowance (2,369) 4,107 --
Adjustments to valuation allowance, including
effects of foreign exchange rate differences -- (479) --
------------------------------
Balance, end of year 1,738 4,107 479
==============================
The following items are considered part of operating income:
2003 2002 2001
$ $ $
Write down of investment in Easton Minerals Limited -- (366) --
Gain on sale of assets (net of assets written off of $112) 21 285 51
------------------------------
21 (81) 51
==============================
2003 2002 2001
$ $ $
Accrued payroll 1,607 1,235 1,059
==============================
Proforma data (unaudited)
Condensed proforma income statement, as if the acquisitions of Sigco Sun
Products, Sonne Labs, Pro Organics, Kettle Valley occurred at the
beginning of 2003 and the acquisitions of Opta, Wild West, Organic Kitchen
and Simply Organic, had occurred at the beginning of 2002, is as follows:
2003 2002
$ $
Revenue 239,320 214,135
Net earnings 9,275 4,016
Earnings per share
- Basic 0.20 0.10
- Diluted 0.19 0.09
- F34 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
18. Subsequent Events
(i) Business acquisition
On March 1, 2004 the Company announced the acquisition of Distribue-vie
Fruits & Legumes Biologigues Inc. (Distribue-vie) of Montreal, Quebec for
approximately $853 including acquisition costs. Contingent consideration
may be payable to the former shareholders if certain predetermined targets
are achieved during the period of April 1, 2004 to April 1, 2006.
Distribue-vie specializes in the distribution of organic fresh foods with
an emphasis on produce and serves the Quebec market along with geographic
reach to Eastern Ontario and the Maritime provinces. Distribue-vie had
revenue in the past year of approximately $5,000. The Company is a further
addition to the Canadian organic and natural distribution group that the
company has formed over the last several years.
(ii) Assets held for sale
Subsequent to year-end the Company sold its Opta Minerals Hamilton
facility for proceeds of $1,041 and announced the closure of its St.
Thomas facility. These assets are classified as "Assets held for sale" at
December 31, 2003 within the Consolidated Balance Sheet and are detailed
further in Note 5.
Recent accounting developments
Effective January 1, 2004 the Company will adopt CICA 3870 which will require
the Company to record stock compensation expense on options granted to
employees. Under the transitional provisions of this new standard, the Company
will record a charge through retained earnings representing the cumulative
impact of stock options granted since January 2002 and will record an expense
for existing and any new options over the remaining vesting period.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and
clarifies reporting for derivative instruments. It is effective for contracts
entered into or modified after June 30, 2003. The Company adopted this standard
in fiscal year 2003. The adoption of this standard did not have a significant
effect on the Company's consolidated financial statements.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (FASB 150). The
statement clarifies how issuers classify and measure certain instruments with
characteristics of both liabilities and equity. It is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company adopted this standard in fiscal year 2003. The adoption of
this standard did not have a significant effect on the Company's consolidated
financial statements.
In December 2003, the Financial Accounting Standards Board, ("FASB") issued
Interpretation No. 46R, "Consolidation of Variable Interest Entities." The
objective of FIN 46 is to improve financial reporting by companies involved with
variable interest entities. Prior to FIN 46R, companies have generally included
another entity in its consolidated financial statements only if it controlled
the entity through voting interest. FIN 46R changes that by requiring a variable
entity to be consolidated by a company if that company is subject to a majority
of the risk or loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. Consolidation by
a primary beneficiary of the assets, liabilities and results of activities of
variable interest entities will provide more complete information about the
resources, obligations, risks and opportunities of the consolidated company. The
Company does not have any investments in variable interest entities.
- F35 -
SunOpta Inc.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
Supplemental Financial Information (Unaudited)
Quarter ended Quarter ended
December 31 September 30
------------------------------------------------
2003 2002 2003 2002
Revenues 54,663 33,437 50,384 32,800
Cost of goods sold 44,188 28,000 41,404 27,510
------------------------------------------------
Gross profit 10,475 5,437 8,980 5,290
Selling, general and administrative expenses 8,543 4,835 5,887 3,240
------------------------------------------------
Earnings (loss) before the following 1,932 602 3,093 2,050
Interest expense (278) (383) (680) (302)
Interest and other income (expense) 120 (20) 201 30
Foreign exchange gain (loss) 653 36 (171) (322)
------------------------------------------------
495 (367) (650) (594)
------------------------------------------------
Earnings before income taxes 2,427 235 2,443 1,456
Provision for (recovery of) income taxes (710) (277) 343 (71)
------------------------------------------------
Net earnings for the year 3,137 512 2,100 1,527
================================================
Net earnings per share for the year
Basic 0.06 0.01 0.05 0.04
================================================
Diluted 0.06 0.01 0.04 0.04
================================================
Quarter ended Quarter ended
June 30 March 31
------------------------------------------------
2003 2002 2003 2002
Revenues 52,641 31,378 41,411 23,283
Cost of goods sold 43,536 25,942 34,293 19,979
------------------------------------------------
Gross profit 9,105 5,436 7,118 3,304
Selling, general and administrative expenses 5,874 3,223 5,485 2,983
------------------------------------------------
Earnings before the following 3,231 2,213 1,633 321
Interest expense (493) (306) (491) (422)
Interest and other income 173 97 37 111
Foreign exchange gain (loss) 254 466 341 (4)
------------------------------------------------
(66) 257 (113) (315)
------------------------------------------------
Earnings before income taxes 3,165 2,470 1,520 6
Provision for (recovery of) income taxes 769 766 456 (17)
------------------------------------------------
Net earnings for the year 2,396 1,704 1,064 23
================================================
Net earnings per share for the year
Basic 0.06 0.04 0.03 0.00
================================================
Diluted 0.05 0.04 0.02 0.00
================================================
- F36 -
PART I - FINANCIAL INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SUNOPTA INC.
/s/ John Dietrich
Date March 12, 2004
SunOpta Inc.
By John Dietrich
Vice President & Chief Financial Officer
- F37 -