SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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 Principal Executive Offices)
(905) 455-1990
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes |X| No |_|
At April 30, 2004 registrant had 53,429,803 common shares outstanding, the only
class of registrant's common stock outstanding. There were no other classes of
stock outstanding and the aggregate market value of voting stock held by
non-affiliates at such date was $423,999,168. The Company's common shares are
traded on the Nasdaq Smallcap Market tier of the Nasdaq Stock Market under the
symbol STKL and The Toronto Stock Exchange under the symbol SOY.
There are 34 pages in the March 31, 2004 10-Q and the index follows the cover
page.
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SUNOPTA INC. 1 March 31, 2004 10-Q
SUNOPTA INC.
FORM 10-Q
March 31, 2004
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as at March 31, 2004 and December 31,
2003.
Consolidated Statements of Shareholders' Equity for the three months
ended March 31, 2004 and December 31, 2003.
Consolidated Statements of Earnings for the three months ended March
31, 2004 and 2003.
Consolidated Statements of Cash Flow for the three months ended
March 31, 2004 and 2003.
Condensed Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Item 4. Disclosure Controls and Procedures
PART II - OTHER INFORMATION
All financial information is expressed in United States Dollars
The closing rate of exchange on April 30, 2004 was
CDN $1 = U.S. $0.7288
- --------------------------------------------------------------------------------
SUNOPTA INC. 2 March 31, 2004 10-Q
PART I - FINANCIAL INFORMATION
Item 1 -
Consolidated Financial Statements
SunOpta Inc.
For the Three Months Ended March 31, 2004
- --------------------------------------------------------------------------------
SUNOPTA INC. 3 March 31, 2004 10-Q
SunOpta Inc.
Consolidated Balance Sheets
As at March 31, 2004 and December 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
March 31, December 31,
2004 2003
$ $
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 19,503 21,990
Accounts receivable - trade (note 6) 28,391 26,241
Inventories (note 7) 38,059 34,778
Prepaid expenses and other current assets 3,328 2,524
Income taxes recoverable 1,686 1,686
Future income taxes 667 1,172
------------------------
91,634 88,391
Assets held for sale 4,993 6,007
Property, plant and equipment 47,283 44,761
Goodwill and intangibles, net 25,838 25,084
Future income taxes 8,891 9,023
Other assets 420 490
------------------------
179,059 173,756
========================
Liabilities
Current liabilities
Bank Indebtedness (note 8) 3,227 --
Accounts payable and accrued liabilities 22,806 24,670
Customer and other deposits 2,966 1,778
Current portion of long-term debt (note 8) 3,992 3,840
Current portion of long-term payables (note 9) 1,024 740
------------------------
34,015 31,028
Long-term debt (note 8) 20,398 21,196
Long-term payables (note 9) 1,382 1,591
------------------------
55,795 53,815
------------------------
Shareholders' Equity
Capital stock (note 10) 98,286 96,636
Contributed surplus 3,384 3,384
Retained earnings 17,649 15,779
Accumulated other comprehensive income 3,945 4,142
------------------------
123,264 119,941
------------------------
179,059 173,756
========================
Commitments and contingencies (note 14)
(See accompanying notes to consolidated financial statements)
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SUNOPTA INC. 4 March 31, 2004 10-Q
SunOpta Inc.
Consolidated Statements of Shareholders' Equity
As at March 31, 2004 and December 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Accumulated
Other
Capital Contributed Retained Comprehensive
Stock Surplus Earnings Income Total
$ $ $ $ $
Balance at December 31, 2003 96,636 3,384 15,779 4,142 119,941
Options exercised 225 -- -- -- 225
Warrants exercised 1,425 -- -- -- 1,425
Net earnings for the period -- -- 1,870 -- 1,870
Currency translation adjustment -- -- -- (197) (197)
-------------------------------------------------------------------------
Balance at March 31, 2004 98,286 3,384 17,649 3,945 123,264
=========================================================================
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SUNOPTA INC. 5 March 31, 2004 10-Q
SunOpta Inc.
Consolidated Statements of Earnings
For the three months ended March 31, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
March 31, March 31,
2004 2003
$ $
- -------------------------------------------------------------------------------
Revenues 62,502 41,411
Cost of goods sold 50,231 34,293
--------------------------
Gross profit 12,271 7,118
Warehousing and distribution expenses 1,156 178
Selling, general and administrative expenses 7,979 5,217
--------------------------
9,135 5,395
--------------------------
Earnings before the following 3,136 1,723
Interest expense (208) (491)
Interest and other income (expense) (115) 37
Foreign exchange gain (loss) (141) 341
--------------------------
(464) (113)
--------------------------
Earnings before income taxes 2,672 1,610
Provision for income taxes 802 483
--------------------------
Net earnings for the period 1,870 1,127
==========================
Net earnings per share for the period (note 11)
- Basic 0.04 0.03
==========================
- Diluted 0.03 0.03
==========================
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
SUNOPTA INC. 6 March 31, 2004 10-Q
SunOpta Inc.
Consolidated Statements of Cash Flow
For the three months ended March 31, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
March 31, March 31,
2004 2003
$ $
- -------------------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 1,870 1,127
Items not affecting cash
Amortization 1,618 1,088
Future income taxes 447 51
Other 111 45
--------------------------
4,046 2,311
Changes in non-cash working capital (note 12) (7,073) (2,702)
--------------------------
(3,027) (391)
--------------------------
Investing activities
Decrease in short term investments -- 2,038
Acquisition of companies, net of cash acquired (911) (1,871)
Acquisition of property, plant and equipment (3,849) (1,229)
Proceeds from sale of property 1,014 --
Proceeds from note receivable -- 358
Other (17) (147)
--------------------------
(3,763) (851)
--------------------------
Financing activities
Increase in bank indebtedness 3,227 5,228
Borrowings under term debt facilities -- 7,800
Repayment of term debt and tender facilities (663) (17,819)
Repayment of deferred purchase consideration (21) (227)
Proceeds from the issuance of common shares, net of issuance costs 1,650 1,130
Financing costs -- (70)
Purchase and redemption of Preference Shares of subsidiary companies (16) (130)
--------------------------
4,177 (4,088)
Foreign exchange gain on cash held in a foreign currency 126 100
--------------------------
(Decrease) in cash and cash equivalents during the period (2,487) (5,230)
Cash and cash equivalents - Beginning of the period 21,990 7,012
--------------------------
Cash and cash equivalents - End of the period 19,503 1,782
==========================
See note 12 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
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SUNOPTA INC. 7 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
1. Interim financial statements
The interim consolidated financial statements of SunOpta Inc. (the
Company) have been prepared in accordance with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X and in accordance with accounting
principles generally accepted in the United States. Accordingly, these
financial statements do not include all of the disclosures required by
generally accepted accounting principles for annual financial statements.
In the opinion of management, all adjustments considered necessary for
fair presentation have been included and all such adjustments are of a
normal, recurring nature. Operating results for the three months ended
March 31, 2004 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2004. For further
information, see the Company's consolidated financial statements, and
notes thereto, included in the Annual Report on Form 10K for the year
ended December 31, 2003.
As of January 1, 2004, SunOpta Inc. changed the basis of financial
statement preparation from generally accepted accounting principles in
Canada (Canadian GAAP) to those generally accepted in the United States
(U.S. GAAP). This change was made as a majority of the Company's
operations and shareholders are located in the U.S. As a result of this
change all comparative financial statement balances and related notes have
been amended to reflect the change to U.S. GAAP. Accounting principles in
the U.S. conform in all material respects to those in Canada, except as
indicated in Note 15.
2. Description of business and significant accounting policies
The Company was incorporated under the laws of Canada on November 13,
1973. 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 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 March 31,
2004 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 the United States. Differences
arising from the application of accounting principles generally accepted
in Canada are described in note 15.
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.
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SUNOPTA INC. 8 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
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.
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 assesses the carrying value of goodwill and indefinite life
intangibles for possible impairment on an annual basis. The Company's
finite 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.
Other assets
i) Deferred financing costs
Costs incurred in connection with obtaining long-term financing are
deferred and amortized over the term of the instrument.
ii) Investments
The Company has a 32% (2003 - 32%) investment in Easton Minerals
Limited ("Easton"). This investment is considered impaired and the
carrying value at March 31, 2004 is $nil (2003 - $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 March 31, 2004. Investments
in these subsidiaries are recorded using the consolidation method,
whereby revenues and expenses are consolidated with the results of
the Company.
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SUNOPTA INC. 9 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
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.
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 and are disclosed
as part of comprehensive income.
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.
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 $1,320 at March 31, 2004 (December
31, 2003 - $1,260) related to a deposit received on an option agreement
related to a property held for sale.
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. The income tax expense or benefit is the
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SUNOPTA INC. 10 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
income tax payable or refundable for the period plus or minus the change
in future income tax assets and liabilities during the period.
Derivative instruments
The Food Group enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on grain
transactions to the extent considered practicable for minimizing risk from
market price fluctuations. Futures contracts used for hedging purposes are
purchased and sold through regulated commodity exchanges. Inventories,
however, may not be completely hedged, due in part to the Company's
assessment of its exposure from expected price fluctuations. Exchange
purchase and sales contracts may expose the Company to risk in the event
that a counter party to a transaction is unable to fulfill its contractual
obligation. The Company manages its risk by entering into purchase
contracts with pre-approved 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 and options 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, 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, and accounts receivable. The Company
places its cash and cash equivalents 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
its accounts receivable credit risk exposure is limited. The Company
maintains an allowance for losses based on the expected collectibility of
the accounts.
Earnings per share
Basic earnings per share is 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 is computed
using the treasury stock method whereby the weighted average number of
common shares used in the basic earnings per share calculation is
increased to include the number of additional common shares that would
have been outstanding if the dilutive potential common shares had been
issued 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.
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SUNOPTA INC. 11 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
3. Stock Option Plan
The Company maintains several stock option plans under which incentive
stock options may be granted to employees and non-employee directors.
SunOpta accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, because the grant price equals the market price on the date
of grant, no compensation expense is recognized by the Company for stock
option issued to employees.
Had compensation cost for the Company's stock options been recognized
based upon the estimated fair value on the grant date under the fair value
methodology allowed by Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock Based Compensation," as amended by
SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure," the Company's net earnings and earnings per share would have
been as follows:
Three months ended
----------------------------
March 31, March 31,
2004 2003
Number of options granted -- 398,750
============================
$ $
Total fair value -- 791
============================
Net earnings for the period as reported 1,870 1,127
Stock compensation expense:
Options vested in current period from current period grants -- 40
Options vested in current period from prior period grants 154 60
----------------------------
154 100
----------------------------
Pro-forma net earnings for the period 1,716 1,027
============================
Pro-forma net earnings per common share
- Basic 0.03 0.02
============================
- Diluted 0.03 0.02
============================
The fair value of the options granted during the prior year where
estimated using the Black-Scholes option-pricing model with the
assumptions of a dividend yield of 0% (2003 - 0%), an expected volatility
of 55% (March 31, 2003 - 60%), a risk-free interest rate of 2.5% (March
31, 2003 - 3%), and an expected life of four to six years. These options
vest at various dates ranging from the date of the grants to December 10,
2008 and expire four to six years subsequent to the grant date.
4. Business acquisitions
On March 1, 2004 SunOpta acquired the outstanding shares of Distribue-Vie
Fruits & Legumes Biologiques Inc. (Distribue-Vie) for $911 including
acquisition costs. This acquisition has been accounted for using the
purchase method and accordingly the consolidated financial statements
include the results of operations of the acquired business from the date
of acquisition.
Distribue-Vie specializes in the distribution of organic fresh foods with
an emphasis on produce. Distribue-Vie is the dominant player in the
distribution of organic produce in Quebec and operates from a warehousing
facility located in Montreal, servicing the key Quebec market along with
geographic reach to Eastern Ontario and the Maritime provinces. An
additional $229 of contingent consideration may be payable if certain
predetermined profit targets are achieved by the acquired business during
the period April 1, 2004 to March
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SUNOPTA INC. 12 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
4. Business acquisitions continued
31, 2006 and will be recorded as goodwill when the amount and outcome of
this contingency becomes determinable.
The addition of Distribue-Vie to SunOpta's Canadian natural and organic
distribution system is expected to bring significant benefits to the
customer base in the form of broader product lines and greater support for
consumer education of organics through marketing and retail merchandising
initiatives.
The preliminary purchase price allocation of the net assets acquired and
consideration given is as follows:
$
Net assets acquired:
Non-cash working capital deficiency (41)
Property, plant and equipment 102
Goodwill 610
Intangible assets-finite life 375
Future income tax liability (135)
---------
911
========
Consideration given:
Cash paid on closing 911
========
5. Comprehensive Income (loss)
The following are components of comprehensive income (loss), net of tax,
for the following periods:
Three months ended
---------------------------
March 31, March 31,
2004 2003
$ $
Net earnings 1,870 1,127
Change in foreign currency translation adjustment (197) 778
---------------------------
Comprehensive income 1,673 1,905
===========================
6. Accounts Receivable
March 31, December 31,
2004 2003
$ $
Trade receivable 29,665 27,417
Allowance for doubtful accounts (1,274) (1,176)
----------------------------
28,391 26,241
============================
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SUNOPTA INC. 13 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
7. Inventories
March 31, December 31,
2004 2003
$ $
Raw materials 10,005 8,437
Finished goods 22,904 24,525
Grain 5,150 1,816
----------------------------------
38,059 34,778
==================================
Grain inventories consist of the following:
March 31, December 31,
2004 2003
$ $
Company owned grain 3,665 1,491
Unrealized gain on
Sales and purchase contracts 1,313 153
Futures contracts 172 172
----------------------------------
5,150 1,816
==================================
8. Long-term debt and banking facilities
March 31, December 31,
2004 2003
$ $
Long-Term Debt
Term loan (a) 19,275 19,800
Other long-term debt (b) 5,115 5,236
----------------------------------
24,390 25,036
Less: current portion (3,992) (3,840)
----------------------------------
20,398 21,196
==================================
(a) The Company has an amended and restated agreement with a group of
banks with 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 March 31,
2004, $19,275 (2003 - $19,800) 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 March 31,
2004 and 2.2% as at December 31, 2003).
- --------------------------------------------------------------------------------
SUNOPTA INC. 14 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
8. Long-term debt and banking facilities continued
ii) $5,720 (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 March
31, 2004 $nil (2003 - $nil) of this facility has been utilized
and $805 has been committed through letters of credit as
itemized in note 13(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 March 31, 2004 $3,227 (2003 - $nil) of
this facility has been utilized. This amount has been
classified as bank indebtedness on the consolidated balance
sheet.
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) Other long-term debt consists of the following:
2004 2003
$ $
Note payable (Cdn $1,088) issued to the former shareholders of 807 816
Kettle Valley Dried Fruit Ltd. as part of the acquisition in 2003,
interest at 5% payable in ten semi-annual instalments,
uncollateralized.
Term loan assumed on the acquisition of Sigco Sun Products in 2003 2,440 2,440
payable in ten semi annual instalments of $244. Interest payable
monthly at LIBOR + 1.95% (March 31, 2004 - 3.04%),
collateralized by the property and equipment of Sigco.
Term loan issued to Oracle Credit Corp. on the purchase of a 969 1,107
software license agreement. Interest at 2.0% payable in eight
quarterly instalments.
Other term debt with a weighted average interest rate of 4.5%, 795 802
due in varying instalments through July 2009.
Capital lease obligations due in monthly payments through 2006, 104 71
with a weighted average interest rate of 8.0%.
-------------------------
5,115 5,236
=========================
- --------------------------------------------------------------------------------
SUNOPTA INC. 15 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
9. Long-term payables
March 31, December 31,
2004 2003
$ $
-----------------------------
Deferred supplier rebate 250 --
Product rebate payable 1,393 1,402
Deferred purchase consideration 44 65
Preference shares of subsidiary companies 128 144
Payable to former shareholders of acquired companies 436 623
Other 155 97
-----------------------------
2,406 2,331
-----------------------------
Less: Current Portion (1,024) (740)
-----------------------------
1,382 1,591
=============================
10. Capital stock
March 31, December 31,
2004 2003
$ $
Issued and fully paid -
53,406,603 common shares (December 31, 2003 - 52,705,096) 96,365 94,338
2,647,500 warrants (December 31, 2003 - 3,241,350) 1,921 2,298
----------------------------
98,286 96,636
============================
(a) During the quarter ended March 31, 2004, employees and directors
exercised 107,657 (March 31, 2003 - 223,725) common share options
and an equal number of common shares were issued for net proceeds of
$225 (March 31, 2003 - $405).
(b) During the quarter ended March 31, 2004, 593,850 (March 31, 2003 -
123,356) warrants were exercised and an equal number of common
shares were issued for net proceeds of $1,425 (March 31, 2003 -
$207).
(c) There were no options granted to employees in the quarter.
(d) As at March 31, 2004 there were options vested to employees and
directors to acquire 774,200 common shares at exercise prices of
$1.06 to $9.90. In addition, at March 31, 2004, options to acquire
an additional 1,144,320 common shares at $1.06 to $9.90 have been
granted to employees and directors but have not yet vested.
- --------------------------------------------------------------------------------
SUNOPTA INC. 16 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
11. Earnings per share
The calculation of basic earnings per share is based on the weighted
average number of shares outstanding. Diluted earnings per share reflect
the dilutive effect of the exercise of warrants and options. The number of
shares for the diluted earnings per share was calculated as follows:
Three months ended
-------------------------------
March 31, March 31,
2004 2003
$ $
Net earnings for the period 1,870 1,127
===============================
Weighted average number of shares outstanding 52,838,493 42,290,847
Dilutive options 1,035,219 915,514
Dilutive warrants 1,983,011 1,343,550
-------------------------------
Diluted weighted average number of shares outstanding 55,856,723 44,549,911
===============================
Earnings per share:
- Basic 0.04 0.03
- Diluted 0.03 0.03
12. Supplemental cash flow information
Three months ended
-------------------------------
March 31, March 31,
2004 2003
$ $
Changes in non-cash working capital:
Accounts receivable - trade (2,040) 346
Inventories (3,241) (725)
Prepaid expenses and other current assets (791) (785)
Accounts payable and accrued liabilities (2,194) (2,451)
Customer and other deposits 1,193 913
-------------------------------
(7,073) (2,702)
===============================
Cash paid for:
Interest 200 304
===============================
Income taxes -- 418
===============================
13. 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.
- --------------------------------------------------------------------------------
SUNOPTA INC. 17 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
13. Commitments and contingencies continued
(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 $571 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 $205 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 2,393
2005 2,762
2006 2,427
2007 1,914
2008 1,942
Thereafter 1,679
------
13,117
======
- --------------------------------------------------------------------------------
SUNOPTA INC. 18 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
14. 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, oat fiber, natural and organic food products. During 2003
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 reflects how management views and
manages the business and is aligned with the Company's vertically
integrated model; (b) Opta Minerals, processes, distributes, and recycles
industrial minerals; and (c) the StakeTech Steam Explosion Group, markets
proprietary steam explosion technology systems for the pulp, biofuel and
food processing industries. The Company's assets, operations and employees
are located in Canada and the United States.
The Company has revised its reporting of segmented net earnings (loss) to
net earnings (loss) before interest expense and provision for income taxes
but inclusive of allocated corporate management fees, as this is better
aligned with how management views its operations. The SunRich Food Group
Inc., the holding company of U.S. operations, has also been reclassified
from the Food Group segment to Corporate.
Three months ended
March 31, 2004
----------------------------------------------------------------
StakeTech
Steam
Explosion
Technology
SunOpta Opta Minerals Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 35,236 4,135 147 39,518
Canada 15,567 2,704 -- 18,271
Other 4,713 -- -- 4,713
----------------------------------------------------------------
Total revenues to external customers 55,516 6,839 147 62,502
----------------------------------------------------------------
Segment net earnings before interest expense and
income taxes 3,221 507 (848) 2,880
----------------------------------------------------------------
Interest expense -- -- 208 208
----------------------------------------------------------------
Provision for income taxes -- -- 802 802
----------------------------------------------------------------
Segment net earnings (loss) 3,221 507 (1,858) 1,870
----------------------------------------------------------------
The SunOpta Food Group has the following segmented reporting:
Three months ended
March 31, 2004
----------------------------------------------------------------
Grains and
Soy SunOpta Packaged and
Products Ingredients Distributed SunOpta
Group Group Products Group Food Group
$ $ $ $
External revenues by market
U.S 14,381 13,277 7,578 35,236
Canada 159 493 14,915 15,567
Other 3,143 1,515 55 4,713
----------------------------------------------------------------
Total revenues from external customers 17,683 15,285 22,548 55,516
----------------------------------------------------------------
Segment net earnings before interest expense and
income taxes 522 1,786 913 3,221
----------------------------------------------------------------
- --------------------------------------------------------------------------------
SUNOPTA INC. 19 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
14. Segmented information continued
Three months ended
March 31, 2003
--------------------------------------------------------------------------
StakeTech
Steam Explosion
Technology
SunOpta Opta Minerals Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 29,825 1,993 225 32,043
Canada 4,507 3,382 -- 7,889
Other 1,452 24 3 1,479
--------------------------------------------------------------------------
Total revenues to external customers 35,784 5,399 228 41,411
--------------------------------------------------------------------------
Segment net earnings (loss) before
interest expense and income taxes 1,688 472 (59) 2,101
--------------------------------------------------------------------------
Interest expense -- -- 491 491
--------------------------------------------------------------------------
Provision for income taxes -- -- 483 483
--------------------------------------------------------------------------
Segment net earnings (loss) 1,688 472 (1,033) 1,127
--------------------------------------------------------------------------
The SunOpta Food Group has the following segmented reporting:
Three months ended
March, 2003
---------------------------------------------------------------------
Grains and SunOpta Packaged and
Soy Products Ingredients Distributed SunOpta
Group Group Products Group Food Group
$ $ $ $
External revenues by market
U.S. 12,545 9,766 7,514 29,825
Canada 53 289 4,165 4,507
Other 256 1,196 -- 1,452
---------------------------------------------------------------------
Total revenues from external customers 12,854 11,251 11,679 35,784
---------------------------------------------------------------------
Segment net earnings before interest
expense and income taxes 337 388 963 1,688
---------------------------------------------------------------------
Customer concentration
The Company had one customer in the Food Group whose purchases were
greater than 10% of the Company's revenue for the period ending March 31,
2003. No customer was greater than 10% for the period ending March 31,
2004.
- --------------------------------------------------------------------------------
SUNOPTA INC. 20 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
15. Canadian generally accepted accounting principle differences
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (U.S.
GAAP) which conform in all material respects applicable to the Company
with those in Canada (Canadian GAAP) during the periods presented, except
with respect to the following items:
Three months ended
---------------------------------
March 31, March 31,
2004 2003
$ $
Net earnings for the period - as reported 1,870 1,127
Pre-operating costs expenses (i) -- (90)
Stock option compensation expense (ii) (134) --
Tax effect of above items -- 27
---------------------------------
Net earnings for the period - Canadian GAAP 1,736 1,064
=================================
Net earnings per share - Canadian GAAP - Basic 0.03 0.03
=================================
Net earnings per share - Canadian GAAP - Diluted 0.03 0.02
=================================
Shareholders' equity - as reported 123,264 49,311
Cumulative pre-operating costs, net of amortization, net of tax -- 216
---------------------------------
Shareholders' equity - Canadian GAAP 123,264 49,527
=================================
Retained earnings as reported 17,649 15,779
Cumulative pre-operating costs, net of amortization, net of tax (i) -- 216
Stock option compensation expense, net of tax (ii) (795) --
---------------------------------
Retained earnings - Canadian GAAP 16,854 15,995
=================================
- --------------------------------------------------------------------------------
SUNOPTA INC. 21 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
15. Canadian generally accepted accounting principles differences, continued
(i) Under Canadian GAAP, certain costs expensed in prior years under U.S. GAAP
would have been deferred and amortized. 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.
Under Canadian GAAP, the Company would have 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
would have commenced in July 2002 and as at December 31, 2003 these costs
would have been fully amortized.
In 2000, the Company acquired Nordic Aseptic, Inc., (renamed to SunOpta
Aseptic Inc.) which under Canadian GAAP would have been 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 would have been deferred. Amortization of these costs
would have commenced January 1, 2001 and as of December 31, 2003 these
deferred costs would have been fully amortized.
Amortization of $nil in the three months ended March 31, 2004 (March 31,
2003 - $90) relating to these pre-operating costs would have been expensed
under Canadian GAAP.
(ii) Effective January 1, 2004, Canadian GAAP requires the Company to record
stock compensation expense on options granted to employees. Under the
transitional provisions of this new standard, the Company would record a
charge through retained earnings representing the cumulative impact of
stock options granted since January 2002 and would record an expense for
existing and any new options over the remaining vesting period.
In conjunction with the standard, under Canadian GAAP, the Company would
have recorded $134 in stock compensation expense for the three months
ended March 31, 2004 (2003 - $nil) and a charge to retained earnings of
$661 for prior year expenses.
16. Proforma data (unaudited)
Condensed proforma income statement, as if the acquisitions of
Distribue-Vie, Kettle Valley, Pro Organics, Sigco Sun Products and Sonne
Labs Inc. had occurred at the beginning of 2003, is as follows:
Three months ended
------------------
March 31, March 31,
2004 2003
$ $
Revenues 63,446 54,689
Net earnings 1,920 1,626
Earnings per share
- Basic 0.04 0.04
- Diluted 0.03 0.04
- --------------------------------------------------------------------------------
SUNOPTA INC. 22 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
17. Subsequent Events
Subsequent to March 31, 2004 the Company completed three acquisitions:
(a) Distribution A & L
On April 1, 2004 the Company acquired the outstanding shares of
Distribution A & L of Drummondville, Quebec for approximately $390
including acquisition costs.
(b) General Mills Oat Fiber Facility
On April 19, 2004 the Company completed the purchase of the General
Mills Bakeries & Foodservice oat fiber processing facility and
related inventory located in Cedar Rapids, Iowa for approximately
$11,600 including associated costs.
(c) Supreme Foods Limited
On May 1, 2004 the Company completed the acquisition of Supreme
Foods Limited (Supreme) headquartered in Toronto, Canada for
approximately $7,700. The acquisition price will be adjusted based
on the actual net assets owned by Supreme at closing.
- --------------------------------------------------------------------------------
SUNOPTA INC. 23 March 31, 2004 10-Q
PART I - FINANCIAL INFORMATION
Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Significant Developments
Change to U.S. GAAP
As of January 1, 2004, SunOpta changed the basis of financial statement
preparation from generally accepted accounting principles in Canada to those
generally accepted in the United States. This change was made as a majority of
the Company's operations and shareholders are located in the U.S. As a result of
this change comparative financial statement balances and related notes have been
amended to reflect the change to U.S. GAAP. Note 15 to the consolidated
financial statements reconciles differences between U.S. and Canadian GAAP.
Acquisitions during 2004
Distribue-Vie
On March 1, 2004 SunOpta acquired the outstanding common shares of Distribue-Vie
Fruits & Legumes Biologiques Inc. (Distribue-Vie) for $911 including acquisition
costs.
Distribue-Vie specializes in the distribution of organic fresh foods with an
emphasis on produce. Distribue-Vie is the dominant player in the distribution of
organic produce in Quebec and operates from a warehousing facility located in
Montreal, servicing the key Quebec market along with geographic reach to Eastern
Ontario and the Maritime provinces.
The addition of Distribue-Vie to SunOpta's Canadian natural and organic
distribution system is expected to bring significant benefits to the customer
base in the form of broader product lines and greater support for consumer
education of organics through marketing and retail merchandising initiatives.
Distribution A & L
On April 1, 2004 the Company acquired the outstanding common shares of
Distribution A & L of Drummondville, Quebec for approximately $390 including
acquisition costs.
Distribution A& L is a distributor of abrasives to small and specialty customers
including retail markets. The acquisition gives Opta Minerals better access to
retails markets for their abrasives.
General Mills Oat Fiber Facility
On April 19, 2004 the Company completed the purchase of the General Mills
Bakeries & Foodservice oat fiber processing facility and related inventory
located in Cedar Rapids, Iowa, for approximately $11,600 including associated
costs.
The Company's growth in oat fiber has been driven by the significant increase in
consumer demand for healthier food offerings, resulting from the popularity of
low-carb diets such as Atkins and South Beach, and the general trend to improve
the nutritional content of foods. The facility complements the two other oat
fiber facilities that the Company operates and will enable the Company to
streamline oat fiber production across the three facilities, lengthening run
times and improving operating efficiencies.
Supreme Foods
On May 1, 2004 the Company completed the acquisition of Supreme Foods Limited
(Supreme) headquartered in Toronto, Ontario for approximately $7,700. The
acquisition price will be adjusted based on the actual net assets owned by
Supreme at closing.
- --------------------------------------------------------------------------------
SUNOPTA INC. 24 March 31, 2004 10-Q
Supreme Foods
Supreme's focus and strength in grocery products will become the base of
SunOpta's growing natural, organic, kosher and specialty foods distribution
business in Eastern Canada. The combination of Supreme's business in the East,
with the grocery business of Wild West in the West, creates a national platform
for SunOpta and will allow for considerable expansion of product lines.
Operations For the Three Months ended March 31, 2004 Compared With the Three
Months Ended March 31, 2003
Consolidated
Revenues in the first three months of 2004 increased by 50.9% to $62,502,000
versus $41,411,000 in the first three months of 2003. The Company's net earnings
for the first three months of 2004 were $1,870,000 or $0.04 per basic common
share (diluted - $0.03) compared to $1,127,000 or $0.03 per basic common share
(diluted - $003) for the first three months of 2003, representing a 65.9%
increase.
The increase in the Company's revenues is due to a $19,732,000 increase in
revenue from the SunOpta Food Group and an increase of $1,440,000 from Opta
Minerals, partially offset by an $81,000 decrease in revenue attributable to the
StakeTech Steam Explosion Group. These increases are due to continued internal
growth in certain product lines and the impact of acquisitions completed to
date. Details are provided in the segmented analysis below.
Net earnings before interest expense, other income (expense), foreign exchange
gains (losses) and income taxes increased to $3,136,000 compared to $1,723,000
for the same period in the prior year, an 82% increase. The increases are due to
the acquisitions completed in the prior year, internal sales growth and
synergies and cost reductions realized throughout the organization. Further
details are included in segmented analysis detailed below.
Interest expense decreased to $208,000 in the three months ended March 31, 2004
from $491,000 in the three months ended March 31, 2003. The decrease in
borrowing costs reflects the decrease in debt outstanding during the quarter
compared to the three months ended March 31, 2003 and lower borrowing costs as a
result of improved financial ratios impacting the premium over LIBOR that the
Company pays and lower LIBOR rates in general.
Interest and other income (expense) decreased to ($115,000) in the three months
ended March 31, 2004 from $37,000 in the three months ended March 31, 2003,
primarily due to plant closing costs of $186,000 for the St. Thomas and Hamilton
facilities.
Foreign exchange gain (loss) of ($141,000) compared to $341,000 in the same
period in 2003 is due to the depreciation of the Canadian dollar in the three
months ended March 31, 2004 compared to significant appreciation in the Canadian
dollar in the same period last year.
The provision for income taxes in the first three months of 2004 reflects the
Company's estimated effective tax rate in 2004 of 30%.
Readers should note that due to differences between Canadian and U.S. GAAP, the
earnings for the three months ended March 31, 2003 was revised from $1,064,000
as previously reported under Canadian GAAP to $1,127,000 under U.S. GAAP. Note
15 to the consolidated financial statements itemizes differences between U.S.
and Canadian GAAP.
Segmented Operations Information
(Note: Certain prior year figures have been adjusted to conform with the current
year presentation and segmented reporting.)
SunOpta Food Group
The SunOpta Food Group contributed $55,516,000 or 88.8% of total Company
consolidated revenues in the first three months of 2004 versus $35,784,000 or
86.4% in the same period in 2003. The increase of $19,732,000 or 55.1% in
SunOpta Food Group revenues was primarily due to increased sales of oat fiber,
specialty food ingredients
- --------------------------------------------------------------------------------
SUNOPTA INC. 25 March 31, 2004 10-Q
and the acquisitions completed in 2003, partially offset by a decline in sales
of certain consumer products as discussed below.
Gross margins as a percentage of sales increased in the quarter from 16.3% to
19.7% reflecting the impact of improved product mix and cost rationalization
across the organization.
Net earnings before interest expense and income taxes in the SunOpta Food Group
increased 90.8% to $3,221,000 in the three months ended March 31, 2004 compared
to $1,688,000 in the three months ended March 31, 2003.
Grains & Soy Products Group
The Grains and Soy Products Group contributed $17,683,000 in revenues in the
first three months of 2004 versus $12,854,000 in 2003, a 37.6% increase.
Revenues were favourably impacted in the quarter by the acquisition of Sigco Sun
Products (Sigco) in late 2003, totalling $5,307,000, partially offset by revenue
decreases of $478,000 mainly attributable to a decrease in shipments of grain
products as a result of supply issues related to the 2003 crop year, net of
higher commodity prices.
Gross margin in the Grains and Soy Products Group increased by $512,000 in the
three months ended March 31, 2004 to $2,306,000 or 13.0% of revenues compared to
$1,794,000 or 14.0%, in the same period in 2003. The decrease in gross profit
margins is related primarily to product mix as sunflower products lines acquired
have historically higher gross margins than other grain products, offset by
price pressure in soy commodity and ingredient margins due in most part to
commodity pricing issues.
Selling, general and administrative expenses increased to $1,839,000 in the
three months ended March 31, 2004 versus $1,457,000 in the three months ended
March 31, 2003. The increase is due primarily to the Sigco acquisition completed
in 2003. Other income in the three months ended March 31, 2004 of $55,000 is
primarily related to a gain recognized on the disposition of assets.
Net earnings before interest expense and income taxes in the Grains and Soy
Products Group was $522,000 in the three months ended March 31, 2004 compared to
$337,000 in the three months ended March 31, 2003, due in most part to the
factors noted above.
SunOpta Ingredients Group
The SunOpta Ingredients Group (Ingredients Group) contributed $15,285,000
revenues in the first three months of 2004 versus $11,251,000 in 2003 a 35.9%
increase. The increase in revenues is attributable to increased sales of oat
fiber and specialty food ingredients. Oat fibre increases of $2,117,000 resulted
from the demand generated by low carb diets (such as Atkins, South Beach and
Hampton diets) and fiber enriched foods and were supported by increased capacity
due to expansion projects completed in late 2003 and early 2004 at our Cambridge
facility. Increases in specialty food ingredients were primarily attributable to
increases in ingredient blends and strong soluble fiber sales.
Gross margin in the Ingredients Group increased by $1,704,000 in the three
months ended March 31, 2004 to $3,687,000 or 24.1% of revenue compared to
$1,980,000 or 17.6% of revenue, in the same period in 2003. The increase in
gross margin reflects increased percentage of oat fiber revenues on a
comparative basis, improved plant utilization and cost rationalization
initiatives.
Selling, general and administrative expenses increased to $1,824,000 in the
three months ended March 31, 2004 versus $1,564,000 in the three months ended
March 31, 2003. The increase is primarily due to recruiting and new hires
related to filling previously vacant positions.
Other expenses in the three months ended March 31, 2004 increased to $77,000
compared to $28,000 in the same period in 2003. The increase is primarily
related to costs incurred to close the St. Thomas Facility and costs incurred to
prepare the Bedford facility for sale, partially offset by proceeds recognized
on the option to sell the Bedford Facility. The loss recognized in 2003 was
attributable to foreign exchange.
Net earnings before interest expense and income taxes in the Ingredients Group
were $1,786,000 in the three months ended March 31, 2004 compared to $388,000 in
the three months ended March 31, 2003, due primarily to the factors noted above.
- --------------------------------------------------------------------------------
SUNOPTA INC. 26 March 31, 2004 10-Q
Packaged & Distributed Products Group
The Packaged & Distributed Products Group contributed $22,548,000 revenues in
the first three months of 2004 versus $11,679,000 in 2003, an increase of
$10,869,000 or 93.1%. Revenues were favourably impacted by increased produce and
grocery revenues of $1,415,000 and revenues of $10,394,000 resulting from the
acquisitions completed in 2003 in the Canadian Distribution Group and in the
healthy convenience foods sector (including 24.6% internal growth in the
acquired companies from the same quarter in the prior year), partially offset by
a decline of $940,000 in certain consumer product revenues due to certain
customers balancing inventories.
Gross margin in the Packaged & Distributed Products Group increased by
$2,870,000 in the three months ended March 31, 2004 to $4,920,000 or 21.8%
compared to $2,050,000 or 17.6%, in the same period in 2003. The increase in
gross margin was attributable to the acquired businesses which inherently have
higher margin rates and other increases due to synergies recognized in legacy
companies within the Canadian Distribution Group. The increases noted were
offset by a reduction in contribution due to the decline in sales of aseptic
consumer products related to specific customers including the effects of reduced
production and fixed overhead absorption at our SunOpta aseptic facility.
Warehousing and distribution costs increased to $1,156,000 in the three months
ended March 31, 2004 versus $178,000 in the three months ended March 31, 2003.
Selling, general and administrative expenses increased to $2,823,000 in the
three months ended March 31, 2004 versus $940,000 in the three months ended
March 31, 2003. The increases noted are due primarily to the acquisitions noted
above.
Other expenses in the three months ended March 31, 2004 of $28,000 compared to
other income of $31,000 in same period in 2003. The expense recognized is due to
foreign exchange.
Net earnings before interest expense and income taxes in the Packaged &
Distributed Products Group were $913,000 in the three months ended March 31,
2004 compared to $963,000 in the three months ended March 31, 2003 due to the
factors noted above.
Opta Minerals
Opta Minerals contributed $6,839,000 or 10.9% of the total Company consolidated
revenues in the first three months of 2004, versus $5,399,000 or 13.0% in 2003.
Revenues were favourably impacted by increased demand for silica free abrasives
due to an increased activity level in the U.S..
Gross margins in Opta Minerals were $1,305,000 in the three months ended March
31, 2004 versus $1,066,000 in the three months ended March 31, 2003. As a
percentage of revenues, gross margin decreased to 19.1% in the first three
months of 2004 from 19.7% in the first three months of 2003. The decrease in
margin is due primarily to increasing material costs within the foundry industry
and product mix.
Selling, general and administrative expenses increased to $694,000 in the three
months ended March 31, 2003 versus $559,000 in the three months ended March 31,
2002. The increase is due to the fulfillment of previously vacant positions and
other general cost increases.
Other expenses increased to $104,000 in the first three months of 2004 versus
$35,000 in the first three months of 2003. The increase was due to costs
incurred in the quarter on the rationalization of the Hamilton Facility.
Net earnings before interest expense and income taxes were $507,000 in the three
months ended March 31, 2004 versus $472,000 in the three months ended March 31,
2003.
StakeTech Steam Explosion Group and Corporate
Revenues of $147,000 for the three months ended March 31, 2004, versus $228,000
in same period in 2003, were derived from pre-engineering work undertaken during
the quarter. Licence fees recognized in the first quarter of 2003 were $225,000.
There were no licence fee revenues recognized in the first quarter of 2004.
Gross margin in the StakeTech Steam Explosion Group was $54,000 in the three
months ended March 31, 2004 versus $228,000 in the three months ended March 31,
2003. As a percentage of revenues, gross margin decreased to
- --------------------------------------------------------------------------------
SUNOPTA INC. 27 March 31, 2004 10-Q
36.5% in the first three months of 2004 from 100% in the first three months of
2003. Gross margin recognized in 2003 was attributed to license fees which have
no associated service costs.
Selling, general and administrative expenses were $798,000 for the first three
months of 2004 compared to $697,000 for the same period in 2003. The increase
was a result of payroll expenses and increased costs associated with a growing
public company including the addition of in-house legal counsel and internal
audit functions. In addition, the Company incurred increased personnel and
associated costs within the StakeTech Steam Explosion Group in anticipation of
additional bio-fuel contracts and work related to the use of steam technology in
food applications.
Other income expenses was $104,000 in the first three months of 2004 versus a
gain $410,000 in the first three months of 2003. The decrease was mainly due to
the depreciation of the Canadian dollar in the three months ended March 31, 2004
compared to significant appreciation in the Canadian dollar in the same period
last year.
Net loss before interest expense and income taxes was $848,000 in the three
months ended March 31, 2004 versus $59,000 in the three months ended March 31,
2003.
Liquidity and Capital Resources at March 31, 2004
Sources of Liquidity
The Company obtains its short term financing through a combination of cash
generated from operating activities, cash and cash equivalents, and available
operating lines of credit. At March 31, 2004, the Company's cash and cash
equivalents totalled $19,503,000. An additional $10,688,000 is immediately
available in operating lines of credit with a syndicate of lenders.
The Company obtains its long term financing through its credit agreement with a
syndicate of lenders. The Company fully intends to renew this agreement prior
to, or upon maturity in 2005, and may expand this credit agreement, and/or
obtain additional long term financing for internal expansion uses, acquisitions
or other strategic purposes.
The Company has the following sources from which it can fund its operating 2004
cash requirements:
o Cash and cash equivalents.
o Available operating lines of credit.
o Cash flows generated from operating activities.
o Cash flows generated from the sale of assets held for sale.
o Cash flows generated from receipts of warrants and options currently
in-the-money.
o Additional long term financing based on securitization of existing
assets.
In order to finance significant acquisitions beyond those already completed 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 term debt to equity ratio
of 0.60 to 1 versus the current position of 0.20 to 1.
The Company anticipates having no issues in obtaining additional long term
financing in view of its current financial position and past experience in the
capital markets.
Cash Flows from Operating Activities
Cash flows provided by operations for the first three months of 2004 before
working capital changes was $4,046,000 (2003 - $2,311,000), an increase of
$1,735,000 or 75%. The increase was due primarily to an increase in net earnings
and an increase in the add-back of amortization and future income taxes.
Cash provided (used) by operations after working capital changes was
($3,027,000) for the three months ended March 31, 2004 (2003 - ($391,000)),
reflecting the use of funds for non-cash working capital of ($7,073,000) (2003 -
($2,702,000)). This utilization consists principally of an increase in accounts
receivable ($2,040,000), an increase in inventories ($3,241,000), an increase in
prepaid expenses and other assets of ($791,000) and a decrease in accounts
payable and accrued liabilities ($2,194,000), partially offset by an increase in
customer deposits of
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SUNOPTA INC. 28 March 31, 2004 10-Q
$1,193,000. The usage of cash flows to fund working capital in 2004 reflects the
increase in working capital requirements required to fund the rapid growth in
operations and seasonal usage of cash to fund the purchase of grains within the
Grains and Soy Products Group.
Cash Flows from Investing Activities
Cash provided (used) in investment activities of ($3,763,000) in the first three
months of 2004 (2003 - ($851,000)), reflects cash used to complete acquisitions,
net of cash acquired, of ($911,000) (2003 - ($1,871,000)) and acquisitions of
property, plant and equipment of ($3,849,000) (2003 - ($1,229,000)), offset by a
decrease of short term investments for proceeds of $nil (2003 - $2,038,000),
payments received on a note receivable of $nil (2003 - $358,000), and proceeds
from the sale of property of $1,014,000 (2003 - $nil).
Cash Flows from Financing Activities
Cash provided (used) by financing activities was $4,177,000 in 2004 (2003 -
($4,088,000)), consisting primarily of net proceeds from the issuance of common
shares of $1,650,000 (2003 - $1,130,000), primarily from warrants expiring in
the quarter, and an increase in bank indebtedness of $3,227,000 (2003 -
$5,228,000), partially offset by net repayment on long-term debt facilities of
($633,000) (2003 - ($10,019,000)) payment of deferred purchase consideration of
($21,000) (2003 - ($227,000)), financing costs of $nil (2003 - ($70,000)) and
the purchase and redemption of preference shares of subsidiary companies of
($16,000) (2003 - ($130,000)).
Item 3 -Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk
The primary objective of our investment activities is to preserve principal and
limit risk. To achieve this objective, the company restricts its portfolio to a
variety of securities, including 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 March 31, 2004 all of SunOpta's excess funds were held in cash and cash
equivalents with a maturity of 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 March 31, 2004, the weighted average interest rate of the fixed rate term
debt was 4.0% (2003 - 3.9%) and $2,796,000 (2003 - $2,796,000) of the Company's
outstanding term debt is at fixed interest rates. Variable rate term debt of
$21,715,000 (2003 - $22,240,000) at an interest rate of 2.3% (2003 - 2.3%) 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 Company's ability to
manage 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. The
Company is exposed to foreign exchange rate fluctuations as the financial
results of the Company and its Canadian subsidiaries are translated into U.S.
dollars on consolidation. During the first quarter of 2004, the Canadian dollar
has depreciated slightly against the U.S. dollar with closing rates moving from
CDN $1.2965 at December 31, 2003 to CDN $1.3113 at March 31, 2004 for each U.S.
dollar. The net effect of this appreciation has been a $141,000 net exchange
loss and a $338,000 decrease 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 $3,308,000 (2003 - $2,230,000).
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 Accumulated other comprehensive income
account within Shareholders' Equity. The functional
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SUNOPTA INC. 29 March 31, 2004 10-Q
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 March 31, 2003 the Company owned 590,943
(2003 - 482,600) bushels of corn with a weighted average price of $2.89 (2003 -
$2.15) and 526,215 (2003 - 389,868) bushels of soy beans with a weighted average
price of $10.85 (2003 - $7.07). The Company has at March 31, 2004 net long
positions on corn and soy beans of 501,067 (2003 - 4,576) and 352,417 (2003
- -167,294) bushels respectively. An increase/decrease in commodity prices of 10%
would result in a gain (loss) of $144,808 (2003 - $984) in corn and $382,372
(2003 - $118,277) 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 4. 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 March 31, 2004, 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 quarter ended March 31, 2004 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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SUNOPTA INC. 30 March 31, 2004 10-Q
PART II - OTHER INFORMATION.
Item 1. Legal proceedings
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.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities - Not applicable
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not applicable
Item 5. Other Information
(a) Not applicable
(b) The Company has implemented procedures to enable security holders to
recommend nominees for election to the Company's Board of Directors. These
procedures are outlined in detail on page 9 of the Company's current
Information Circular, for its shareholder meeting to be held May 13, 2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
31.1 Certification by Jeremy Kendall, Chief Executive Officer pursuant to
Rule 13(a) - 14(a) under the Exchange Act.
31.2 Certification by John Dietrich, Chief Financial Officer pursuant to
Rule 13(a) - 14(a) under the Exchange Act.
32 Certifications by Jeremy Kendall, Chairman and Chief Executive
Officer and John Dietrich, Vice President and Chief Financial
Officer pursuant to Section 18 U.S.C Section 1350.
(b) Reports on Form 8-K - None
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 May 7, 2004
SunOpta Inc.
by John Dietrich
Vice President
and Chief Financial Officer
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SUNOPTA INC. 31 March 31, 2004 10-Q