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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 27, 2004 registrant had 55,914,525 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 $307,546,995. 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 46 pages in the September 30, 2004 10-Q and the index follows the
cover page.
- --------------------------------------------------------------------------------
SUNOPTA INC. 1 September 30, 2004 10-Q
SUNOPTA INC.
FORM 10-Q
September 30, 2004
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as at September 30, 2004 and
December 31, 2003.
Condensed Consolidated Statements of Shareholders' Equity for the nine
months ended September 30, 2004 and the year ended December 31, 2003.
Condensed Consolidated Statements of Earnings for the three and nine
months ended September 30, 2004 and 2003.
Condensed Consolidated Statements of Cash Flow for the three and nine
months ended September 30, 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 October 27, 2004 was CDN $1 = U.S. $0.8155
- --------------------------------------------------------------------------------
SUNOPTA INC. 2 September 30, 2004 10-Q
PART I - FINANCIAL INFORMATION
Item 1 -
Condensed Consolidated Financial Statements
SunOpta Inc.
For the Three and Nine Months Ended September 30, 2004
(Unaudited)
- --------------------------------------------------------------------------------
SUNOPTA INC. 3 September 30, 2004 10-Q
SunOpta Inc.
Condensed Consolidated Balance Sheets
As at September 30, 2004 and December 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
September 30, December 31,
2004 2003
$ $
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 13,423 21,990
Accounts receivable - trade (note 6) 37,421 26,241
Inventories (note 7) 40,676 34,778
Prepaid expenses and other current assets (note 8) 6,588 2,524
Income taxes recoverable -- 1,686
Deferred income taxes 667 1,172
----------------------------
98,775 88,391
Assets held for sale 584 6,007
Property, plant and equipment 58,683 44,761
Goodwill and intangibles, net 43,890 25,084
Deferred income taxes 5,940 9,023
Other assets 528 490
----------------------------
208,400 173,756
============================
Liabilities
Current liabilities
Accounts payable and accrued liabilities 28,198 24,670
Customer and other deposits -- 1,778
Current portion of long-term debt (note 9) 4,776 3,840
Current portion of long-term payables (note 10) 755 740
----------------------------
33,729 31,028
Long-term debt (note 9) 31,962 21,196
Long-term payables (note 10) 1,282 1,591
----------------------------
66,973 53,815
----------------------------
Minority Interest (note 4(b)) 1,311 --
----------------------------
Shareholders' Equity
Capital stock (note 11) 104,484 96,636
Contributed surplus 3,384 3,384
Retained earnings 26,442 15,779
Accumulated other comprehensive income 5,806 4,142
----------------------------
140,116 119,941
----------------------------
208,400 173,756
============================
Commitments and contingencies (note 14)
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
SUNOPTA INC. 4 September 30, 2004 10-Q
SunOpta Inc.
Condensed Consolidated Statements of Shareholders' Equity
As at September 30, 2004 and December 31, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Accumulated
Capital Contributed Retained Other
Stock Surplus Earnings Comprehensive Total
Income
$ $ $ $ $
Balance at December 31, 2003 96,636 3,384 15,779 4,142 119,941
Options exercised 472 -- -- -- 472
Employee Stock Purchase Plan 281 -- -- -- 281
Warrants exercised 7,095 -- -- -- 7,095
Net earnings for the period -- -- 10,663 -- 10,663
Currency translation adjustment -- -- -- 1,664 1,664
------------------------------------------------------------------
Balance at September 30, 2004 104,484 3,384 26,442 5,806 140,116
==================================================================
- --------------------------------------------------------------------------------
SUNOPTA INC. 5 September 30, 2004 10-Q
SunOpta Inc.
Condensed Consolidated Statements of Earnings
For the three months ended September 30, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
September 30, September 30,
2004 2003
$ $
- -------------------------------------------------------------------------------
Revenues 80,142 50,384
Cost of goods sold 64,673 41,404
-----------------------------
Gross profit 15,469 8,980
Warehousing and distribution expenses 1,547 221
Selling, general and administrative expenses 9,350 5,567
-----------------------------
10,897 5,788
-----------------------------
Earnings before the following 4,572 3,192
Interest expense (675) (680)
Interest and other income (expense) (169) 255
Foreign exchange 227 (171)
-----------------------------
(617) (596)
-----------------------------
Earnings before income taxes 3,955 2,596
Provision for income taxes 1,188 401
-----------------------------
Net earnings for the period 2,767 2,195
=============================
Net earnings per share for the period (note 12)
- Basic 0.05 0.05
=============================
- Diluted 0.05 0.04
=============================
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
SUNOPTA INC. 6 September 30, 2004 10-Q
SunOpta Inc.
Condensed Consolidated Statements of Earnings
For the nine months ended September 30, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
September 30, September 30,
2004 2003
$ $
- -------------------------------------------------------------------------------
Revenues 223,588 144,436
Cost of goods sold 179,621 119,233
-----------------------------
Gross profit 43,967 25,203
Warehousing and distribution expenses 4,144 628
Selling, general and administrative expenses 26,254 16,360
-----------------------------
30,398 16,988
-----------------------------
Earnings before the following 13,569 8,215
Interest expense (1,035) (1,664)
Interest and other income (note 8) 2,238 465
Foreign exchange 442 425
-----------------------------
1,645 (774)
-----------------------------
Earnings before income taxes 15,214 7,441
Provision for income taxes 4,551 1,671
-----------------------------
Net earnings for the period 10,663 5,770
=============================
Net earnings per share for the period (note 12)
- Basic 0.20 0.13
=============================
- Diluted 0.20 0.12
=============================
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
SUNOPTA INC. 7 September 30, 2004 10-Q
SunOpta Inc.
Condensed Consolidated Statements of Cash Flow
For the three months ended September 30, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
September 30, September 30,
2004 2003
$ $
- ----------------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 2,767 2,195
Items not affecting cash
Amortization 1,658 1,233
Future income taxes 421 (867)
Other (223) 299
Changes in non-cash working capital (note 13) 2,453 (3,935)
-----------------------------
7,076 (1,075)
-----------------------------
Investing activities
Acquisition of companies, net of cash acquired (5,345) (150)
Acquisition of property, plant and equipment (5,585) (1,298)
Proceeds from note receivable 1,250 358
Other (94) 220
-----------------------------
(9,774) (870)
-----------------------------
Financing activities
Increase (decrease) in bank indebtedness (3,515) (10,004)
Borrowings under term debt facilities 16,400 --
Repayment of term debt (3,564) (5,674)
Repayment of deferred purchase consideration -- (243)
Proceeds from the issuance of common shares, net of issuance costs 5,895 54,098
Financing costs (198) (93)
Purchase and redemption of Preference Shares of subsidiary companies -- (8)
-----------------------------
15,018 38,076
Foreign exchange gain (loss) on cash held in a foreign currency (505) 112
-----------------------------
Increase in cash and cash equivalents during the period 11,815 36,243
Cash and cash equivalents - Beginning of the period 1,608 2,649
-----------------------------
Cash and cash equivalents - End of the period 13,423 38,892
=============================
See note 13 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
SUNOPTA INC. 8 September 30, 2004 10-Q
SunOpta Inc.
Condensed Consolidated Statements of Cash Flow
For the nine months ended September 30, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
September 30, September 30,
2004 2003
$ $
- -----------------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 10,663 5,770
Items not affecting cash
Amortization 5,100 3,499
Future income taxes 1,886 (543)
Other (183) 193
Changes in non-cash working capital (note 13) (9,501) (8,462)
-----------------------------
7,965 457
-----------------------------
Investing activities
Decrease in short term investments -- 2,038
Acquisition of companies, net of cash acquired (27,448) (2,894)
Acquisition of property, plant and equipment (14,833) (3,778)
Proceeds from sale of property 5,864 --
Proceeds from note receivable 1,250 1,074
Other (107) 199
-----------------------------
(35,274) (3,361)
-----------------------------
Financing activities
Increase in bank indebtedness -- (4,285)
Borrowings under term debt facilities 17,007 7,800
Repayment of term debt and tender facilities (5,310) (24,009)
Repayment of deferred purchase consideration (65) (490)
Proceeds from the issuance of common shares, net of issuance costs 7,848 56,028
Financing costs (198) (343)
Purchase and redemption of Preference Shares of subsidiary companies (216) (139)
-----------------------------
19,066 34,562
Foreign exchange gain (loss) on cash held in a foreign currency (324) 222
-----------------------------
Increased (decease) in cash and cash equivalents during the period (8,567) 31,880
Cash and cash equivalents - Beginning of the period 21,990 7,012
-----------------------------
Cash and cash equivalents - End of the period 13,423 38,892
=============================
See note 13 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
SUNOPTA INC. 9 September 30, 2004 10-Q
SunOpta Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
1. Basis of presentation
The interim condensed consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated on consolidation.
The interim condensed 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
nine months ended September 30, 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 16.
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 September
30, 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 16.
Cash and cash equivalents
Cash and cash equivalents consist of unrestricted cash and short-term
deposits with an original maturity of less than 90 days.
- --------------------------------------------------------------------------------
SUNOPTA INC. 10 September 30, 2004 10-Q
SunOpta Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
2. Description of business and significant accounting policies continued
Inventories
Raw materials and finished goods (excluding commodity grains) 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 commodity 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 on a straight line basis 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 financing agreement.
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 September 30, 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 subsidiaries, except Organic Ingredients, Inc. which is owned
50.1%, are 100% owned at September 30, 2004. Investments in these
subsidiaries represent control and are recorded using the
consolidation method, whereby revenues and expenses are consolidated
with the results of the Company. The minority interest balance on
the Balance Sheet represents the non-controlling shareholder's
interest in Organic Ingredients, Inc. This balance includes the
non-controlling equity component as at the date of acquisition and
income attributable since that date.
- --------------------------------------------------------------------------------
SUNOPTA INC. 11 September 30, 2004 10-Q
SunOpta Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
2. Description of business and significant accounting policies continued
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 as well as monetary assets of the corporate head office are
translated at exchange rates in effect at the balance sheet date.
Non-monetary assets of the corporate head office are translated at their
historical rates. Revenues and expenses are translated at average exchange
rates prevailing during the period. Unrealized gains or losses resulting
from translating self-sustaining operations are accumulated and reported
as a currency translation adjustment in shareholders' equity and are
disclosed as part of comprehensive income. Gains and losses resulting from
translating the corporate head office are included in the consolidated
statements of earnings.
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 $nil at September 30, 2004
(December 31, 2003 - $1,260) related to a deposit received on an option
agreement related to a property held for sale.
- --------------------------------------------------------------------------------
SUNOPTA INC. 12 September 30, 2004 10-Q
SunOpta Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
2. Description of business and significant accounting policies continued
Income taxes
The Company follows the asset and liability method of accounting for
income taxes whereby deferred income tax assets are recognized for
deductible temporary differences and operating loss carry-forwards, and
deferred 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.
Deferred income tax assets are recognized only to the extent that
management determines that it is more likely than not that the deferred
income tax assets will be realized. Deferred 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 income
tax payable or refundable for the period plus or minus the change in
deferred 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.
- --------------------------------------------------------------------------------
SUNOPTA INC. 13 September 30, 2004 10-Q
SunOpta Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Use of estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the dates of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
3. 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
options 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 Nine months
ended ended
----------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
Number of options granted 215,000 152,400 427,500 731,850
====================================================
$ $ $ $
Total fair value 654 715 1,494 2,049
====================================================
Net earnings for the period as reported 2,767 2,195 10,663 5,770
Stock compensation expense:
Options vested in current period from current
period grants 75 179 117 306
Options vested in current period from prior
period grants 148 60 443 181
----------------------------------------------------
223 239 560 487
----------------------------------------------------
Pro-forma net earnings for the period 2,544 1,956 10,103 5,283
====================================================
Pro-forma net earnings per common share
- Basic 0.05 0.04 0.19 0.12
====================================================
- Diluted 0.05 0.04 0.19 0.11
====================================================
The fair value of the options granted during the prior year were estimated
using the Black-Scholes option-pricing model with the assumptions of a
dividend yield of 0% (2003 - 0%), an expected volatility of 47% (September
30, 2003 - 60%), a risk-free interest rate of 2.5% (September 30, 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 August 6, 2008 and
expire four to six years subsequent to the grant date.
- --------------------------------------------------------------------------------
SUNOPTA INC. 14 September 30, 2004 10-Q
SunOpta Inc.
Notes to Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2004 and 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
4. Business acquisitions
In the first nine months of 2004, the Company acquired seven businesses.
All of these acquisitions have been accounted for using the purchase
method and the consolidated financial statements include the results of
operations for these businesses from the date of acquisition, less
minority interest on acquisition when the Company owns less than 100% of
the acquired company. The purchase price has been allocated to the assets
acquired and the liabilities assumed based on managements best estimate of
fair values.
The preliminary purchase price allocation of the net assets acquired and
consideration given is as follows:
Kofman- Organic Other
Barenholtz Ingredients Acquisitions
(a) (b) (c) Total
$ $ $ $
------------------------------------------------------------
Net assets acquired:
Non-cash working capital 1,866 886 4,406 7,158
Property, plant and equipment 53 71 3,559 3,683
Goodwill 914 692 12,143 13,749
Intangible assets - finite life 595 400 3,858 4,853
Other assets -- 1,577 -- 1,577
Deferred income tax liability (214) (64) (1,353) (1,631)
Debt and other liabilities -- -- (510) (510)
Minority Interest -- (1,304) -- (1,304)
------------------------------------------------------------
3,214 2,258 22,103 27,575
============================================================
Consideration given:
Cash paid on closing - net of cash acquired 3,214 2,228 21,163 26,605
Note payable -- -- 590 590
Acquisition costs -- 30 350 380
------------------------------------------------------------
3,214 2,258 22,103 27,575
============================================================
(a) Kofman-Barenholtz
On September 2, 2004, SunOpta acquired 100% of the outstanding shares of
Kofman-Barenholtz Foods Limited (Kofman-Barenholtz) for cash consideration
of $3,214 (Cdn $4,200). An additional Cdn $900 of consideration is payable
upon Kofman-Barenholtz's ability to maintain certain product line
distribution requirements under the agreement. Upon satisfaction of those
terms, any amount paid will become additional goodwill.
Kofman-Barenholtz is an established market leader in the distribution of
kosher and specialty grocery products across Canada, with over 50 years of
experience. Kofman-Barenholtz, headquartered in Toronto, maintains a
number of exclusive sourcing arrangements with kosher foods suppliers from
around the world, including Israel and the United States.
Kofman-Barenholtz's focus and strength in the kosher and specialty grocery
products market further strengthens SunOpta's Canadian natural, organic,
kosher and specialty foods distribution network. This transaction
positions SunOpta as the dominant kosher foods distributor.
Kofman-Barenholtz has been grouped under the Distribution Group within the
SunOpta Food Group segment.
- --------------------------------------------------------------------------------
SUNOPTA INC. 15 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
4. Business acquisitions continued
(b) Organic Ingredients
On September 10, 2004, SunOpta acquired 50.1% of the outstanding shares of
Organic Ingredients, Inc. (Organic Ingredients), headquartered in Aptos,
California for consideration of $2,258 including acquisition costs. As
part of the transaction, SunOpta has also obtained an option to acquire
the remaining 49.9% minority position exercisable between March 31, 2005
and July 1, 2005.
Organic Ingredients is a leading trader and provider of a wide range of
certified organic industrial ingredients including processed fruit and
vegetable based ingredients, sweeteners, vinegars and others. The company
sources and contract manufactures through exclusive arrangements with
suppliers located around the world, including North America, South
America, Europe and Asia. These exclusive supply arrangements enable the
company to maintain a strategic advantage in the organic food ingredient
market, in terms of cost and availability of supply. Organic Ingredients
has been grouped under the Ingredients Group within the SunOpta Food Group
segment.
The company's strategic cost and supply advantage is expected to generate
significant synergies with SunOpta's existing vertically integrated
organic food operations as SunOpta continues to expand its organic
ingredients and finished product offerings.
(c) Acquisitions completed during the six months ended June 30, 2004
Snapdragon
On June 1, 2004, SunOpta acquired the inventory and business of Snapdragon
Natural Foods Inc. (Snapdragon) for $878. Additional consideration may be
payable equal to 5% of net sales greater than a predetermined target
during the period September 1, 2004 to August 31, 2005.
Snapdragon distributes organic groceries and frozen products to both mass
market and natural food retailers throughout Canada from warehousing
facilities located in Montreal, Quebec, Toronto, Ontario and Calgary,
Alberta. The Snapdragon operation will further contribute to the Company's
stated objective of building Canada's first national natural and organics
food distribution network.
Supreme Foods
On May 1, 2004, SunOpta acquired the outstanding shares of Supreme Foods
Limited (Supreme) for $8,282 including acquisition costs and assumption of
a note payable to shareholders of $590.
Supreme is a leading distributor of certified organic, natural, kosher and
specialty grocery products across Canada, with headquarters in Toronto,
Ontario. Supreme has a number of exclusive sourcing agreements as well as
products marketed under its own trade names.
Supreme's focus and strength in grocery products will become the base of
SunOpta's growing natural, organic and specialty foods distribution
business. The combination of Supreme's business in eastern Canada with
Wild West Organic Harvest in western Canada creates a national grocery
platform for SunOpta and allows for considerable expansion of product
lines.
- --------------------------------------------------------------------------------
SUNOPTA INC. 16 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
4. Business acquisitions continued
General Mills Oat Fiber Facility
On April 16, 2004, SunOpta acquired the assets of General Mills Bakeries
and Food Service oat fiber processing facility for $11,651 including
acquisition costs. The assets included land, building, equipment and
inventory.
With the addition of this facility, the Company continued to increase its
total annual oat fiber processing capacity. The Company's growth in oat
fiber has been driven by the significant increase in consumer demand for
healthier food offerings, and the general trend to improve the nutritional
content of foods via the addition of fiber.
SunOpta's purchase of this facility is expected to generate efficiencies
in the Company's oat fiber processing operations enabling the Company to
streamline oat fiber production across three facilities, lengthening run
times, improving operating efficiencies and meeting our current backlog of
orders.
Distribution A & L
On April 1, 2004, SunOpta acquired the outstanding shares of Distribution
A&L for $381 including acquisition costs. An additional $381 of contingent
consideration may be payable if certain predetermined profit targets are
achieved by the acquired business during the period April 1, 2004 to June
30, 2009 and will be recorded as goodwill when the amount and outcome of
the consideration becomes determinable.
Distribution A&L specializes in the distribution of specialty abrasive and
related products. Distribution A&L focuses on smaller markets currently
not serviced by Opta Minerals via its network of selling professionals
specializing in the industrial, automotive and pool filtration industries.
The skills contained within this operation are key as the Opta Minerals
group continues to strategically expand products and sales capabilities.
Distribue-Vie
On March 1, 2004, SunOpta acquired the outstanding 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. 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 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 organic foods through marketing and retail
merchandising initiatives.
- --------------------------------------------------------------------------------
SUNOPTA INC. 17 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
5. Comprehensive Income
The following are components of comprehensive income, net of tax, for the
following periods:
Three months ended Nine months ended
--------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
$ $ $ $
Net earnings 2,767 2,195 10,663 5,770
Change in foreign currency translation adjustment 2,068 40 1,664 2,102
--------------------------------------------------
Comprehensive income 4,835 2,235 12,327 7,872
==================================================
6. Accounts Receivable
September 30, December 31,
2004 2003
$ $
Trade receivables 38,701 27,417
Allowance for doubtful accounts (1,280) (1,176)
------------------------------
37,421 26,241
==============================
7. Inventories
September 30, December 31,
2004 2003
$ $
Raw materials 15,751 11,599
Finished goods 23,172 21,363
Grain 1,753 1,816
------------------------------
40,676 34,778
==============================
Grain inventories consist of the following:
September 30, December 31,
2004 2003
$ $
Company owned grain 1,823 1,491
Unrealized gain (loss) on
Sales and purchase contracts (677) 153
Futures contracts 607 172
------------------------------
1,753 1,816
==============================
- --------------------------------------------------------------------------------
SUNOPTA INC. 18 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
8. Prepaid Expenses and Other Current Assets
Included within prepaid expenses and other current assets is a receivable
of $3,343 representing a judgment awarded and recovery of legal fees and
interest relating to a suit the Company filed against a supplier for
failure to adhere to the terms of a contract. The judgment was awarded on
June 29, 2004 by a federal court jury in the United States District Court
for the District of Oregon in favour of Sunrich Inc. (Sunrich) a
subsidiary of the Company. The supplier counter-sued the Company for
breach of contract however, as part of this judgment these counter-claims
were dismissed. The supplier has since filed post trial motions. The
Company and its legal counsel believe these motions and counter-claims are
without merit and the Company believes the collectibility of this
receivable is reasonably assured. Included within other income and expense
for the nine months ended September 30, 2004 is a recorded pre-tax gain of
$2,646. The gain has been recorded within the Packaged Products Group.
9. Long-term debt and banking facilities
September 30, December 31,
2004 2003
$ $
Long-Term Debt
Term loan (a)(i) 34,200 19,800
Other long-term debt (b) 2,538 5,236
-------------------------------
36,738 25,036
Less: current portion (4,776) (3,840)
-------------------------------
31,962 21,196
===============================
(a) On July 7, 2004, the Company amended and restated its credit
agreement with its banking syndicate as follows:
i) Term loan facility
The term loan facility was increased to $35,000 ($34,200 as at
September 30, 2004) from a June 30, 2004 balance of $18,700
(2003 - $19,800). Principal is payable quarterly based on a
seven year amortization. The term loan matures June 30, 2008
and is renewable at the option of the lender and the Company.
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 (2.7% as at September
30, 2004 and 2.2% as at December 31, 2003).
ii) $11,890 (CDN $15,000), (CDN $7,500 at September 30, 2004) 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
September 30, 2004, $nil (2003 - $nil) of this facility has
been utilized and $829 has been committed through letters of
credit as itemized in note 13(d).
iii) $17,500 ($9,000 at September 30, 2004) 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 September 30, 2004, $nil (2003 - $nil)
of this facility has been utilized.
- --------------------------------------------------------------------------------
SUNOPTA INC. 19 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
9. Long-term debt and banking facilities continued
iv) $10,000 revolving acquisition facility
As part of the amendment, the Company obtained an acquisition
facility to finance future acquisitions and capital
expenditures. This facility is subject to certain draw
restrictions. Principal is payable quarterly equal to the
greater of (a) 1/20 of the initial drawdown amount of the
facility, or (b) 1/20 of the outstanding principal amount as
of the date of the last draw. All remaining outstanding
principal under this facility is due on June 30, 2008.
Interest on borrowing under this facility is consistent with
the term loan described in i) above. This facility was not
utilized as at September 30, 2004.
The Canadian and U.S. line of credit facilities along with the
unused portion of the acquisition facility are subject to annual
extensions.
All of the 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 of Cdn $1,088 (September 30, 2004 - Cdn
$956) issued to the former shareholders of Kettle Valley
Dried Fruit Ltd. as part of the acquisition in 2003,
interest at 5%, interest and principle payable in ten
semi-annual instalments, uncollateralized. 758 816
Note payable of Cdn $809 (September 30, 2004 - Cdn $824)
issued to the former shareholders of Supreme Foods Inc.,
discounted at 5%, principal payable in three equal
annual instalments, uncollateralized. 653 --
Term loan assumed on the acquisition of Sigco Sun
Products in 2003. Interest payable monthly at LIBOR +
1.95% (September 30, 2004 - 3.04%). This balance was
paid in full during the quarter. -- 2,440
Term loan issued to Oracle Credit Corp. on the purchase
of a software license agreement. Interest at 2.0%
payable in eight quarterly instalments. 695 1,107
Other term debt with a weighted average interest rate of
4.0%, due in varying instalments through July 2009. 316 802
Capital lease obligations due in monthly payments
through 2006, with a weighted average interest rate of
6.8%. 116 71
-------------------
2,538 5,236
-------------------
- --------------------------------------------------------------------------------
SUNOPTA INC. 20 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
10. Long-term payables
September 30, December 31,
2004 2003
$ $
Product rebate payable 1,375 1,402
Deferred purchase consideration -- 65
Preference shares of subsidiary companies 108 144
Payable to former shareholders of acquired companies 443 623
Other 111 97
-----------------------------
2,037 2,331
Less: Current Portion (755) (740)
-----------------------------
1,282 1,591
=============================
11. Capital stock
September 30, December 31,
2004 2003
$ $
Issued and fully paid -
55,913,025 common shares (December 31, 2003 - 52,705,096) 104,213 94,338
285,000 warrants (December 31, 2003 - 3,241,350) 271 2,298
-----------------------------
104,484 96,636
=============================
(a) In the first nine months of 2004, employees and directors exercised
205,637 (September 30, 2003 - 1,008,215) common share options and an
equal number of common shares were issued for net proceeds of $472
(September 30, 2003 - $1,882).
(b) In the first nine months of 2004, 2,956,350 (September 30, 2003 -
1,134,425) warrants were exercised and an equal number of common
shares were issued for net proceeds of $7,095 (September 30, 2003 -
$1,963).
(c) In the first nine months of 2004, 45,942 (September 30, 2003 - $nil)
common shares were issued for net proceeds of $281 as part of the
Company's employee stock purchase plan.
(d) In the first nine months of 2004, 427,500 options were granted to
employees at a price of $6.93 and $7.69.
(e) As at September 30, 2004, there were options vested to employees and
directors to acquire 904,560 common shares at exercise prices of
$1.06 to $9.90. In addition, at September 30, 2004, options to
acquire an additional 1,300,880 common shares at $1.06 to $9.90 have
been granted to employees and directors but have not yet vested.
- --------------------------------------------------------------------------------
SUNOPTA INC. 21 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. Earnings per share
The calculation of basic earnings per share is based on the weighted
average number of shares outstanding. Diluted earnings per share reflect
the dilutive effect of the exercise of warrants and options. The number of
shares for the diluted earnings per share was calculated as follows:
Three months ended Nine Months ended
---------------------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
$ $ $ $
Net earnings for the period 2,767 2,195 10,663 5,770
===============================================================
Weighted average number of shares outstanding 53,544,930 46,394,941 53,285,668 43,903,794
Dilutive Warrants 163,382 2,342,159 182,291 1,904,963
Dilutive Options 750,437 1,184,910 906,674 947,313
---------------------------------------------------------------
Diluted weighted average number of shares outstanding 54,458,749 49,922,010 54,374,633 46,756,070
===============================================================
Earnings per share:
- Basic 0.05 0.05 0.20 0.13
===============================================================
- Diluted 0.05 0.04 0.20 0.12
===============================================================
13. Supplemental cash flow information
Three months ended Nine months ended
---------------------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
$ $ $ $
Changes in non-cash working capital:
Accounts receivable - trade 3,676 (2,621) (6,788) (5,526)
Inventories 3,178 71 1,660 (408)
Income tax recoverable -- -- 1,686 --
Prepaid expenses and other current assets (484) 105 (3,693) (893)
Accounts payable and accrued liabilities (3,917) (1,980) (589) (1,822)
Customer and other deposits -- 490 (1,777) 187
---------------------------------------------------------------
2,453 (3,935) (9,501) (8,462)
===============================================================
Cash paid for:
Interest 572 611 915 1,329
===============================================================
Income taxes 860 1,041 1,918 2,099
===============================================================
- --------------------------------------------------------------------------------
SUNOPTA INC. 22 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
14. Commitments and contingencies
(a) The Company is subject to a variety of claims and suits that arise
from time to time in the ordinary course of business. While
management currently believes that resolving all of these matters,
individually or in aggregate, will not have a material adverse
impact on the Company's financial position or the results of
operations, litigation and claims are subject to inherent
uncertainties and management's view of these matters may change in
the future. Were an unfavorable final outcome to occur, there exists
the possibility of a material adverse impact on the Company's
financial position and the results of operations for the period in
which the effect becomes reasonably estimable.
(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 SunOpta 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 $593 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 $31 have been placed
with third parties as security on transactions occurring in
the ordinary course of operations.
- --------------------------------------------------------------------------------
SUNOPTA INC. 23 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
(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 576
2005 2,850
2006 2,583
2007 2,052
2008 2,031
Thereafter 1,756
-----------
$11,848
===========
15. 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, Ingredients Group,
Distribution Group and Packaged Products Group (which combined form the
SunOpta 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
September 30, 2004
-------------------------------------------------------------
StakeTech
Steam Explosion
Technology
SunOpta Opta Minerals Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 45,357 3,213 495 49,065
Canada 21,078 5,111 -- 26,189
Other 4,882 6 -- 4,888
-------------------------------------------------------------
Total revenues to external customers 71,317 8,330 495 80,142
=============================================================
Segment earnings (loss) before interest expense
and income taxes 3,865 909 (144) 4,630
-------------------------------------------------------------
Interest expense -- -- 675 675
-------------------------------------------------------------
Provision for income taxes -- -- 1,188 1,188
-------------------------------------------------------------
Segment net earnings (loss) 3,865 909 (2,007) 2,767
-------------------------------------------------------------
- --------------------------------------------------------------------------------
SUNOPTA INC. 24 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
15. Segmented information continued
The SunOpta Food Group has the following segmented reporting:
Three months ended
September 30, 2004
-----------------------------------------------------------------------------
Grains and Packaged
Soy Products Ingredients Distribution Products SunOpta
Group Group Group Group Food Group
$ $ $ $ $
External revenues by market
U.S 19,937 16,188 -- 9,232 45,357
Canada 287 481 19,374 936 21,078
Other 2,983 1,679 -- 220 4,882
-----------------------------------------------------------------------------
Total revenues from external customers 23,207 18,348 19,374 10,388 71,317
-----------------------------------------------------------------------------
Segment earnings before interest expense and
income taxes 369 2,482 590 424 3,865
-----------------------------------------------------------------------------
Nine months ended
September 30, 2004
-------------------------------------------------------------
StakeTech
Steam Explosion
Technology
SunOpta Opta Minerals Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 125,417 10,918 933 137,268
Canada 57,766 13,085 -- 70,851
Other 15,311 158 -- 15,469
-------------------------------------------------------------
Total revenues to external customers 198,494 24,161 933 223,588
-------------------------------------------------------------
Segment earnings (loss) before interest expense
and income taxes 15,056 3,162 (1,969) 16,249
-------------------------------------------------------------
Interest expense -- -- 1,035 1,035
-------------------------------------------------------------
Provision for income taxes -- -- 4,551 4,551
-------------------------------------------------------------
Segment net earnings (loss) 15,056 3,162 (7,555) 10,663
-------------------------------------------------------------
The SunOpta Food Group has the following segmented reporting:
Nine months ended
September 30, 2004
-----------------------------------------------------------------------------
Grains and Packaged SunOpta
Soy Products Ingredients Distribution Products Food
Group Group Group Group Group
$ $ $ $ $
External revenues by market
U.S 54,420 44,231 -- 26,766 125,417
Canada 787 1,417 52,776 2,786 57,766
Other 10,313 4,673 -- 325 15,311
-----------------------------------------------------------------------------
Total revenues from external customers 65,520 50,321 52,776 29,877 198,494
-----------------------------------------------------------------------------
Segment earnings before interest expense and
income taxes 2,033 6,311 3,138 3,574 15,056
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUNOPTA INC. 25 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
15. Segmented information continued
Three months ended
September 30, 2003
-------------------------------------------------------------
StakeTech
Steam Explosion
Technology
SunOpta Opta Minerals Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 36,885 3,798 82 40,765
Canada 5,507 2,609 -- 8,116
Other 1,434 69 -- 1,503
-------------------------------------------------------------
Total revenues to external customers 43,826 6,476 82 50,384
-------------------------------------------------------------
Segment earnings (loss) before interest expense
and income taxes 3,257 834 (815) 3,276
-------------------------------------------------------------
Interest expense -- -- 680 680
-------------------------------------------------------------
Provision for income taxes -- -- 401 401
-------------------------------------------------------------
Segment net earnings (loss) 3,257 834 (1,896) 2,195
-------------------------------------------------------------
The SunOpta Food Group has the following segmented reporting:
Three months ended
September 30, 2003
-----------------------------------------------------------------------------
Grains and Packaged
Soy Products Ingredients Distribution Products SunOpta
Group Group Group Group Food Group
$ $ $ $ $
External revenues by market
U.S 15,576 11,410 -- 9,899 36,885
Canada 126 289 4,599 493 5,507
Other 203 1,231 -- -- 1,434
-----------------------------------------------------------------------------
Total revenues from external customers 15,905 12,930 4,599 10,392 43,826
-----------------------------------------------------------------------------
Segment earnings before interest expense and
income taxes 794 1,646 52 765 3,257
-----------------------------------------------------------------------------
Nine months ended
September 30, 2003
----------------------------------------------------------------
StakeTech
Steam Explosion
Technology
SunOpta Opta Minerals Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 104,567 8,335 383 113,285
Canada 16,538 10,060 -- 26,598
Other 4,406 144 3 4,553
----------------------------------------------------------------
Total revenues to external customers 125,511 18,539 386 144,436
----------------------------------------------------------------
Segment earnings (loss) before interest expense
and income taxes 8,237 2,269 (1,401) 9,105
----------------------------------------------------------------
Interest expense -- -- 1,664 1,664
----------------------------------------------------------------
Provision for income taxes -- -- 1,671 1,671
----------------------------------------------------------------
Segment net earnings (loss) 8,237 2,269 (4,736) 5,770
----------------------------------------------------------------
- --------------------------------------------------------------------------------
SUNOPTA INC. 26 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
15. Segmented information continued
The SunOpta Food Group has the following segmented reporting:
Nine months ended
September 30, 2003
-----------------------------------------------------------------------------
Grains and Packaged
Soy Products Ingredients Distribution Products SunOpta
Group Group Group Group Food Group
$ $ $ $ $
External revenues by market
U.S 46,737 32,258 -- 25,572 104,567
Canada 254 867 13,868 1,549 16,538
Other 797 3,609 -- -- 4,406
-----------------------------------------------------------------------------
Total revenues from external customers 47,788 36,734 13,868 27,121 125,511
-----------------------------------------------------------------------------
Segment earnings before interest expense and
income taxes 2,440 3,101 308 2,388 8,237
-----------------------------------------------------------------------------
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 September
30, 2003. No customer was greater than 10% for the period ending September
30, 2004.
16. 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 Nine months ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
$ $ $ $
Net earnings for the period - as reported 2,767 2,195 10,663 5,770
Pre-operating costs expenses (i) -- (98) -- (258)
Stock option compensation expense (ii) (194) -- (500) --
Convertible debenture -- (54) -- (54)
Tax effect of above items -- 58 -- 103
----------------------------------------------------
Net earnings for the period - Canadian GAAP 2,573 2,101 10,163 5,561
====================================================
Net earnings per share - Canadian GAAP - Basic 0.05 0.05 0.19 0.13
====================================================
Net earnings per share - Canadian GAAP - Diluted 0.05 0.04 0.18 0.12
====================================================
Shareholders' equity - as reported 140,116 57,701
Cumulative pre-operating costs, net of amortization, net of tax -- 98
------------------------
Shareholders' equity - Canadian GAAP 140,116 57,799
========================
Retained earnings as reported 26,442 10,415
Cumulative pre-operating costs, net of amortization, net of tax (i) -- 98
Stock option compensation expense, net of tax (ii) (744) 417
------------------------
Retained earnings - Canadian GAAP 25,698 10,930
========================
- --------------------------------------------------------------------------------
SUNOPTA INC. 27 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
16. 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 can be deferred until the
business reaches commercial operation or the passage of a certain period
of time as predetermined by management. The Company has not deferred any
costs under Canadian GAAP in 2004.
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 nine months ended September 30, 2004
(September 30, 2003 - $258) 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 $500 in stock compensation expense for the nine months ended
September 30, 2004 (2003 - $nil) and a charge to retained earnings of $661
for prior year expenses.
Partially offsetting the balance above, are stock option expenses
recognized under US GAAP, not recognized under Canadian GAAP, related to a
delay between when options were granted to employees and when they were
approved by shareholders. An amount of $417 was recorded as an expense
prior to 2003, is a permanent difference between Canadian and US GAAP.
17. Proforma data (unaudited)
Condensed proforma income statement, as if the acquisitions of
Kofman-Barenholtz, Organic Ingredients, Supreme, Distribution A & L, Snap
Dragon, 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 Nine Months ended
-----------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
$ $ $ $
Revenues 83,733 75,323 250,285 219,161
Net earnings 2,827 2,521 11,450 6,778
Earnings per share
- Basic 0.05 0.06 0.22 0.15
-----------------------------------------------------
-Diluted 0.05 0.05 0.21 0.15
-----------------------------------------------------
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SUNOPTA INC. 28 September 30, 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 16 to the condensed
consolidated financial statements reconciles differences between U.S. and
Canadian GAAP.
Initial Public Offering of Common Shares in Canada by a wholly-owned subsidiary
of SunOpta, Opta Minerals Inc.
On October 21, 2004, the Company announced that Opta Minerals Inc., a
wholly-owned subsidiary of SunOpta, filed a preliminary prospectus with the
securities regulatory authorities in each of the provinces of Canada, in
connection with an initial public offering of its common shares. Prior to
completion of the proposed initial public offering, SunOpta intends to complete
an internal reorganization of its corporate and capital structure pursuant to
which all of its interest in the assets and subsidiaries comprising the Opta
Minerals Group, a reporting segment of the Company, will be transferred to Opta
Minerals Inc.
Amended and Restated Financing Agreement
On July 7, 2004, the Company amended and restated its credit agreement. The
amended and restated agreement increased the term loan by $16,300,000 to
$35,000,000, increased the Canadian line of credit facility from CDN $7,500,000
to CDN $15,000,000 and increased the U.S. line of credit facility from
$9,000,000 to $17,500,000. In addition the agreement added a revolving
acquisition facility with maximum borrowings up to $10,000,000, which can be
used to finance future acquisitions and significant internal growth
opportunities. The term loan has quarterly payments with a seven year
amortization. Draws from the revolving acquisition line will pay down the
principal on a quarterly basis equal to the greater of (a) 1/20 of the initial
drawdown amount of the facility, or (b) 1/20 of the outstanding principal amount
as of the date of the last draw. Both the term loan and borrowings under the
revolving acquisition facility have a maturity of June 30, 2008. The Canadian
and U.S. line of credit facilities and unused portion of the revolving
acquisition facility are subject to annual extensions.
Acquisitions during 2004
In the first nine months of 2004, the Company acquired seven businesses. All of
these acquisitions have been accounted for using the purchase method and the
consolidated financial statements include the results of operations for these
businesses from the date of acquisition, less minority interest on acquisitions
when the Company owns less than 100%. The purchase price has been allocated to
the assets acquired and the liabilities assumed based on management's best
estimate of fair values.
(a) Organic Ingredients
On September 10, 2004, SunOpta acquired 50.1% of the outstanding shares of
Organic Ingredients, Inc. ("Organic Ingredients"), headquartered in Aptos,
California, for cash consideration of $2,258,000 inclusive of acquisition
costs. As part of this transaction, SunOpta has also obtained an option to
acquire the remaining 49.9% minority position in 2005.
Organic Ingredients is a leading trader and provider of a wide range of
certified organic industrial ingredients including processed fruit and
vegetable based ingredients, sweeteners, vinegars and others. The company
sources and contract manufactures through exclusive arrangements with
suppliers located around the world, including North America, South
America, Europe and Asia. These exclusive supply arrangements enable the
company to maintain a strategic advantage in the organic food ingredient
market, in terms of cost and availability of supply.
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SUNOPTA INC. 29 September 30, 2004 10-Q
(b) Kofman-Barenholtz
On September 2, 2004, SunOpta acquired 100% of the outstanding shares of
Kofman-Barenholtz Foods Limited (Kofman-Barenholtz) for cash consideration
of $3,214,000 (Cdn $4,200,000). An additional Cdn $900,000 of
consideration is contingent upon the Company's ability to satisfy certain
product line distribution maintenance requirements under the agreement.
Upon satisfaction of those terms, any amount paid will be allocated to
goodwill.
Kofman-Barenholtz is an established market leader in the distribution of
kosher and specialty grocery products across Canada, with over 50 years of
experience. Kofman-Barenholtz, headquartered in Toronto, maintains a
number of exclusive sourcing arrangements with kosher foods suppliers from
around the world, including Israel and the United States.
Kofman-Barenholtz's focus and strength in the kosher and specialty grocery
products market further strengthens SunOpta's Canadian natural, organic,
kosher and specialty foods distribution network. This transaction
positions SunOpta as the dominant kosher foods distributor in Canada.
(c) Snapdragon
On June 1, 2004 SunOpta acquired the inventory and business of Snapdragon
Natural Foods Inc. (Snapdragon) for $878,000. Additional consideration may
be payable equal to 5% of net sales greater than a predetermined target
during the period September 1, 2004 to August 31, 2005.
Snapdragon distributes organic groceries and frozen products to both mass
market and natural food retailers throughout Canada from warehousing
facilities located in Montreal, Quebec, Toronto, Ontario and Calgary,
Alberta. The Snapdragon operation will further contribute to the Company's
stated objective of building Canada's first national natural and organics
food distribution network.
(d) Supreme Foods
On May 1, 2004, SunOpta acquired the outstanding shares of Supreme Foods
Limited ("Supreme") for $8,282,000 including acquisition costs and the
assumption of a note payable to shareholders of $590,000.
Supreme is a leading distributor of certified organic, natural, kosher and
specialty grocery products across Canada, with headquarters in Toronto,
Ontario. Supreme has a number of exclusive sourcing agreements as well as
products marketed under its own trade names.
Supreme's focus and strength in grocery products will become the base of
SunOpta's growing natural organic and specialty foods distribution
business. The combination of Supreme's business in eastern Canada with
Wild West Organic Harvest in western Canada creates a national grocery
platform for SunOpta and allows for considerable expansion of product
lines.
(e) General Mills Bakeries and Food Service Oat Fiber Facility
On April 16, 2004 SunOpta acquired the assets of General Mills Bakeries
and Food Service oat fiber processing facility for $11,651,000 including
acquisition costs.
With the addition of this facility, the Company continued to increase its
total annual oat fiber processing capacity. The Company's growth in oat
fiber has been driven by the significant increase in consumer demand for
healthier food offerings, and the general trend to improve the nutritional
content of foods via the addition of fiber.
SunOpta's purchase of this facility is expected to generate efficiencies
in the Company's oat fiber processing operations enabling the Company to
streamline oat fiber production across the three facilities, lengthening
run times and improving operating efficiencies.
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SUNOPTA INC. 30 September 30, 2004 10-Q
(f) Distribution A & L
On April 1, 2004 SunOpta acquired the outstanding shares of Distribution
A&L for $381,000 including acquisition costs. An additional $381,000 of
contingent consideration may be payable if certain predetermined profit
targets are achieved by the acquired business during the period between
April 1, 2004 to June 30, 2009, and will be recorded as goodwill when the
amount and outcome of the consideration becomes determinable.
Distribution A&L specializes in the distribution of specialty abrasive and
related products. Distribution A&L focuses on smaller markets currently
not serviced by the Opta Minerals via its network of selling professionals
specializing in the industrial, automotive and pool filtration industries.
The skills contained within this operation are key as the Opta Minerals
group continues to strategically expand products and sales capabilities.
(g) Distribue-Vie
On March 1, 2004 SunOpta acquired the outstanding shares of Distribue-Vie
Fruits & Legumes Biologiques Inc. ("Distribue-Vie") for $911,000 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. An
additional $229,000 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 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 network 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.
Operations For the Three Months Ended September 30, 2004 Compared With the Three
Months Ended September 30, 2003
Consolidated
Revenues in the three months ended September 30, 2004 increased by 59.1% to
$80,142,000 versus $50,384,000 in the comparable three months of 2003. The
Company's net earnings for the three months of 2004 were $2,767,000 or $0.05 per
basic common share (diluted - $0.05) compared to $2,195,000 or $0.05 per basic
common share (diluted - $0.04) for the three months ended September 30, 2003,
representing a 26.1% increase.
The increase of $29,750,000 in the Company's revenues is due to a $27,491,000
increase in revenue from the SunOpta Food Group, an increase of $1,854,000 from
Opta Minerals, and an increase of $413,000 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
throughout 2003 and in 2004 to date. Details are provided in the segmented
analysis below.
Earnings before interest expense, interest and other income (expense), foreign
exchange gains (losses) and income taxes increased to $4,572,000 compared to
$3,192,000 for the same period in the prior year, a 43.2% increase. The increase
is due to the acquisitions completed in the prior year and the first nine months
of this year, pricing on certain product lines, internal sales growth, synergies
and cost reductions realized throughout the organization, offset by expenses
related to, addressing the requirements of the Sarbanes-Oxley Act, totalling
approximately $300,000. In addition, the Company incurred certain integration
costs related to its Toronto and Montreal-based distribution operations during
the third quarter which had a negative impact of approximately $600,000. Further
details are included in segmented analysis detailed below.
Interest expense decreased slightly to $675,000 in the three months ended
September 30, 2004 from $680,000 in the three months ended September 30, 2003.
Borrowing costs reflect the increase in debt outstanding compared to the three
months ended September 30, 2003 and banking fees incurred on the amended
facility. Three months ended September 30, 2003 included costs on extinguishing
the convertible debenture of $183,000.
Interest and other income (expense) was ($169,000) in the three months ended
September 30, 2004 versus income of $255,000 in the three months ended September
30, 2003. The 2004 expense is primarily due to costs incurred in the
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SUNOPTA INC. 31 September 30, 2004 10-Q
pending 'Initial Public Offering' of common shares of Opta Minerals announced
October 27, 2004. The 2003 other income is primarily due to a gain recognized on
a discharged liability and gains realized on the sale of excess assets.
Foreign exchange gain in the quarter increased to $227,000 compared to a foreign
exchange loss of $171,000 in the same period in 2003. The gain is due to the
favourable movement in the value of the Canadian dollar on the Company's
Canadian dollar denominated balances.
The provision for income taxes in the three months ended September 30, 2004
reflects the Company's estimated effective tax rate in 2004 of 30.0%. In 2003
the tax rate of 15.4% reflects the recognition of certain tax loss
carry-forwards in the quarter.
Readers should note that due to differences between Canadian and U.S. GAAP, the
earnings for the three months ended September 30, 2003 was revised from
$2,100,000 as previously reported under Canadian GAAP to $2,195,000 under U.S.
GAAP. Note 16 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 $71,317,000 or 89.0% of total Company
consolidated revenues in the three months ended September 30, 2004 versus
$43,826,000 or 87.0% in the same period in 2003. The increase of $27,491,000 or
62.7% in SunOpta Food Group revenues was primarily due the acquisitions
completed in 2003 and 2004 and internal growth, partially offset by a decline in
revenues due to a short supply of soybean and non-GMO corn as discussed below.
Gross margins as a percentage of sales increased in the quarter from 16.9% to
19.0% reflecting the impact of improved product mix, pricing, higher margins
within the Distribution Group which has become a more significant segment and
cost rationalization within the Food Group, offset by lower margins within the
Grain & Soy Products Group due to reduced yields and the short grains crop in
2003.
Earnings before interest expense and income taxes in the SunOpta Food Group
increased 18.7% to $3,865,000 in the three months ended September 30, 2004
compared to $3,257,000 in the three months ended September 30, 2003.
Grains & Soy Products Group
The Grains and Soy Products Group contributed $23,207,000 in revenues in the
third quarter of 2004 versus $15,905,000 in the same quarter of 2003, a 45.9%
increase. Revenues were favourably impacted in the quarter by the acquisition of
Sigco Sun Products (Sigco) in late 2003, totalling $7,817,000, and increased
waxy corn sales. These increases were offset by revenue decreases of $2,340,000
mainly attributable to reduced yields and the short soybean and non-GMO corn
crops in 2003 which resulted in lost revenue. Expectations are for an improved
soy and corn crop in 2004 which should see revenues, and margins returning to
2003 levels in 2005.
Gross margin in the Grains and Soy Products Group decreased by $28,000 in the
quarter to $1,988,000 or 8.6% of revenues compared to $2,016,000 or 12.7%, in
the same period in 2003. The decrease in gross profit margins is primarily
attributable to mix, lower volumes of high margin specialty grains and margin
pressures on soy beans due to requirements to source soy beans at higher prices
to meet sales commitments.
Selling, general and administrative expenses increased to $1,647,000 in the
three months ended September 30, 2004 versus $1,222,000 in the three months
ended September 30, 2003. The increase is due primarily to the Sigco acquisition
completed in 2003. Other income in the three months ended September 30, 2004 was
$28,000.
Earnings before interest expense and income taxes in the Grains and Soy Products
Group was $369,000 in the three months ended September 30, 2004 compared to
$794,000 in the three months ended September 30, 2003, due to the factors noted
above.
Ingredients Group
The Ingredients Group contributed revenues of $18,348,000 in the three months of
2004 versus $12,930,000 in 2003, a 41.9% increase. The Organic Ingredients
acquisition completed in the third quarter of 2004 increased revenue by
$995,000. Oat fiber increases of $2,921,000 resulted from the demand generated
by low carb diets (such as Atkins, South
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SUNOPTA INC. 32 September 30, 2004 10-Q
Beach and Hampton diets) and fiber enriched foods and were supported by
increased capacity with expansion projects at our Cambridge facility and the
procurement of an additional facility in the second quarter of 2004 (see
significant developments). Increased revenues in dairy blending of $591,000 were
due to increased pricing and volumes. The remainder of the revenue increase
relates to increases in specialty food ingredients attributable to increased
technical processing and custom blending.
Gross margin in the Ingredients Group increased by $1,425,000 in the three
months ended September 30, 2004 to $4,563,000 or 24.9% of revenue, compared to
$3,138,000 or 24.3% 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 $2,035,000 in the
three months ended September 30, 2004 versus $1,605,000 in the three months
ended September 30, 2003. The increase is primarily due to an increased reserve
for bad debts related to certain customers, recruiting costs, increased
marketing expenditures and the acquisition of Organic Ingredients.
Other income (expenses) net of foreign exchange in the three months ended
September 30, 2004 increased to ($46,000) compared to $113,000 in the same
period in 2003. Last year's other income is primarily due to the discharge of a
long-term liability.
Earnings before interest expense and income taxes in the Ingredients Group were
$2,482,000 in the three months ended September 30, 2004 compared to $1,646,000
in the three months ended September 30, 2003, due primarily to the factors noted
above.
Packaged Products Group
The Packaged Products Group contributed revenues of $10,388,000 in the three
months of 2004 versus $10,392,000 in 2003, a slight decrease of $4,000. Revenues
were unfavourably impacted by decreased aseptic & consumer product sales of
$1,447,000 but offset by an increase of $1,443,000 resulting from the
acquisitions and internal growth within Kettle Valley and Dakota Gourmet which
were acquired in 2003. The decline in the aseptic and consumer product sales is
due to timing of sales to a significant customer. The agreement with Vitasoy
USA, announced on July 6, 2004, had a minimal impact on third quarter revenues,
however is expected to contribute fully in the fourth quarter.
Gross margin in the Packaged Products Group increased by $138,000 in the three
months ended September 30, 2004 to $1,546,000 or 14.9% of revenues compared to
$1,408,000 or 13.5% of revenues in the same period in 2003. The increase in
gross margin was attributable to the acquired businesses which have inherently
higher margin rates, offset by a reduction in contribution due to the decline in
sales of aseptic and consumer products.
Selling, general and administrative expenses increased to $1,097,000 in the
three months ended September 30, 2004 versus $585,000 in the three months ended
September 30, 2003. The increases are due to the acquisitions noted above.
Other income (expenses) including foreign exchange for the three months ended
September 30, 2004 is ($25,000) compared to ($58,000) in same period in 2003.
Earnings before interest expense and income taxes in the Packaged Products Group
were $424,000 in the three months ended September 30, 2004 compared to $765,000
in the three months ended September 30, 2003, due to the factors noted above.
Distribution Group
The Distribution Group contributed revenues of $19,374,000 in the three months
ended September 30, 2004 versus $4,599,000 in 2003, an increase of $14,775,000
or 321.3%. Revenues were favourably impacted by increased grocery revenues of
$1,024,000 in our existing divisions and an increase in revenues of $13,751,000
resulting from the acquisitions completed in late 2003 and the first nine months
of 2004, offset by certain business attrition due to integration issues within
central Canada.
Gross margin in the Distribution Group increased by $4,645,000 in the three
months ended September 30, 2004 to $5,487,000 or 28.3% of revenue compared to
$842,000 or 18.3% of revenue, in the same period in 2003. The increase in gross
profit is attributable to the acquired businesses and synergies recognized in
both the acquisition and existing operations within the Distribution Group.
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SUNOPTA INC. 33 September 30, 2004 10-Q
Warehousing and distribution costs increased to $1,547,000 in the three months
ended September 30, 2004 versus $221,000 in the three months ended September 30,
2003. Selling, general and administrative expenses increased to $3,415,000 in
the three months ended September 30, 2004 versus $580,000 in the three months
ended September 30, 2003. The increases noted are due primarily to the
acquisitions noted above.
Other expenses net of foreign exchange gain in the three months ended September
30, 2004 resulted in a $65,000 gain compared to other income of $11,000 in same
period in 2003.
Earnings before interest expense and income taxes in the Distribution Group were
$590,000 in the three months ended September 30, 2004 compared to $52,000 in the
three months ended September 30, 2003, due to the factors noted above.
Opta Minerals Group
Opta Minerals contributed $8,330,000 or 10.4% of the total Company consolidated
revenues in the three months ended September 30, 2004, versus $6,476,000 or
12.9% in 2003 for the same period. Revenues were favourably impacted by the
acquisition of Distribution A&L in the amount of $480,000, an increase in demand
for silica free abrasives and general increases in sales activities within
Canadian based operations.
Gross margin was $1,707,000 in the three months ended September 30, 2004 versus
$1,495,000 in the three months ended September 30, 2003. As a percentage of
revenues, gross margin decreased to 20.5% in the three months of 2004 from 23.1%
in the three months of 2003. The decrease in margin is due primarily to product
mix and an increased percentage of sales from Canadian based businesses which
have inherently lower margins.
Selling, general and administrative expenses remained stable at $664,000 in the
three months ended September 30, 2004 compared to the three months ended
September 30, 2003. Additional costs incurred due to the acquisition of
Distribution A&L was offset by cost savings in other areas of the business.
Other income (expense) increased to ($183,000) in the three months ended
September 30, 2004 versus $14,000 in the comparable three months of 2003. Other
expense recognized in 2004 relates to incremental audit costs incurred with
respect to the Initial Public Offering of common shares for this group which was
announced October 21, 2004. Foreign exchange gain (loss) for the three months
ended September 30, 2004 was $49,000 compared to an exchange loss of ($11,000)
for the comparable period in 2003.
Earnings before interest expense and income taxes were $909,000 in the three
months ended September 30, 2004 versus $834,000 in the three months ended
September 30, 2003.
StakeTech Steam Explosion Group and Corporate
Revenues of $495,000 for the three months ended September 30, 2004, versus
$82,000 in same period in 2003, were derived from engineering and research and
development work undertaken during the quarter for the investigation of
converting certain bio-mass for the production of ethanol. The 2003 revenue was
primarily driven from licence fees. There have been no licence fee revenues
recognized in 2004.
Gross margin in the StakeTech Steam Explosion Group was $178,000 in the three
months ended September 30, 2004 versus $81,000 in the three months ended
September 30, 2003. As a percentage of revenues, gross margin was 36.0% in the
three months ended September 30, 2004 compared to 62.1% in the comparable three
months of 2003. Gross margin recognized in 2003 was attributed to license fees
which have no associated service costs offset by depreciation expenses.
Selling, general and administrative expenses were $492,000 for the three months
ended September 30, 2004 compared to $911,000 for the same period in 2003. The
decrease was a result of reclassification of certain costs to interest expense
and cost of goods sold and reduced professional fees.
Other income including a foreign exchange gain was $170,000 in the three months
ended September 30, 2004 versus $15,000 in the three months ended September 30,
2003. The gain in 2004 is mainly due to foreign exchange gains recognized in the
quarter.
Loss before interest expense and income taxes was $144,000 in the three months
ended September 30, 2004 versus $815,000 in the three months ended September 30,
2003 which was attributable to the factors listed above.
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SUNOPTA INC. 34 September 30, 2004 10-Q
Operations For the Nine Months Ended September 30, 2004 Compared With the Nine
Months Ended September 30, 2003
Consolidated
Revenues in the first nine months of 2004 increased by 54.8% to $223,588,000
versus $144,436,000 in the first nine months of 2003. The Company's net earnings
for the first nine months of 2004 were $10,663,000 or $0.20 per basic common
share (diluted - $0.20) compared to $5,770,000 or $0.13 per basic common share
(diluted - $0.12) for the first nine months of 2003, representing an 84.8%
increase.
The increase in the Company's revenues is due to a $72,983,000 increase in
revenue from the SunOpta Food Group, an increase of $5,622,000 from Opta
Minerals and an increase of $547,000 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.
Earnings before interest expense, interest and other income (expense), foreign
exchange gains (losses) and income taxes increased to $13,569,000 compared to
$8,215,000 for the same period in the prior year, a 65.2% increase. The
increases are due to the acquisitions completed in the prior year, internal
sales growth, synergies and cost reductions realized throughout the
organization. In addition, net earnings for the nine months ended September 30,
2004 included a gain recognized on the judgment received in a lawsuit against a
supplier for breach of contract as described in Note 8 (Other Income) of the
condensed consolidated financial statements. Further details are included in
segmented analysis detailed below.
Interest expense decreased to $1,035,000 in the nine months ended September 30,
2004 from $1,664,000 in the nine months ended September 30, 2003. The decrease
in borrowing costs reflects a lower average debt balance outstanding during the
year compared to the prior period ended September 30, 2003 and lower borrowing
costs as a result of improved premiums and lower LIBOR rates in general.
Interest and other income increased to $2,238,000 in the nine months ended
September 30, 2004 versus $465,000 in the nine months ended September 30, 2003.
This increase is due to a favourable judgment received in a lawsuit against a
supplier for breach of contract for $2,646,000 (see Note 8 - Prepaid Expenses
and Other Current Assets). Foreign exchange gains of $442,000 compared to
$425,000 in the same period in 2003 are due to the realization of gains due to
movements in the Canadian dollar during the first nine months of 2004.
The provision for income taxes in the first nine months of 2004 reflects the
Company's estimated effective tax rate in 2004 of 30%. The provision for income
tax in 2003 of 22.5% included the realization of loss carryforwards available to
the Company.
Readers should note that due to differences between Canadian and U.S. GAAP, the
earnings for the nine months ended September 30, 2003 was revised from
$5,560,000 as previously reported under Canadian GAAP to $5,770,000 under U.S.
GAAP. Note 16 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 $198,494,000 or 88.8% of total Company
consolidated revenues in the first nine months of 2004 versus $125,511,000 or
86.9% in the same period in 2003. The increase of $72,983,000 or 58.1% is
attributable to the acquisitions completed over the past year and internal
growth from the Company's existing business, which was partially offset by a
decline in revenues in 2004 due to the short soybean and corn crop in 2003. For
detailed explanations see segments analysis below.
Gross margins as a percentage of sales increased for the first nine months from
16.6% to 19.2% reflecting the impact of improved product mix and pricing, cost
rationalization and higher margins within the Distribution Group which has
become a more significant segment within the Food Group.
Earnings before interest expense and income taxes in the SunOpta Food Group
increased 82.8% to $15,056,000 in the nine months ended September 30, 2004 as
compared to $8,237,000 in the nine months ended September 30, 2003.
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SUNOPTA INC. 35 September 30, 2004 10-Q
Grains & Soy Products Group
The Grains and Soy Products Group contributed $65,520,000 in revenues in the
first nine months of 2004 versus $47,788,000 in 2003, a 37.1% increase. Revenues
were favourably impacted by the acquisition of Sigco Sun Products in late 2003,
totalling $21,255,000 and increases in certain grain revenues. These increases
were offset by revenue decreases in 2004 attributable to the short soybean and
corn crop in 2003.
Gross margin in the Grains and Soy Products Group increased by $292,000 in the
nine months ended September 30, 2004 to $6,691,000 or 10.2% of revenues as
compared to $6,399,000 or 13.4%, in the same period in 2003. The decrease in
gross profit margins is related to reduced margins on soybean crop sales,
especially in the third quarter, fixed sales contracts of organic feed which had
a significant impact in the second quarter and the lower volumes noted above.
The decrease was offset by the sunflower product lines acquired which have
historically higher gross margins than other grain products.
Selling, general and administrative expenses increased to $4,877,000 in the nine
months ended September 30, 2004 versus $3,962,000 in the nine months ended
September 30, 2003. The increase is due primarily to the Sigco acquisition
completed in 2003.
Other income in the nine months ended September 30, 2004 of $219,000, compared
to $3,000 in the prior year is primarily related to the sale of non-core assets
during the year.
Earnings before interest expense and income taxes in the Grains and Soy Products
Group was $2,033,000 in the nine months ended September 30, 2004 compared to
$2,440,000 in the nine months ended September 30, 2003, due to the factors noted
above.
Ingredients Group
The Ingredients Group contributed revenues of $50,321,000 in the first nine
months of 2004 as compared to $36,734,000 in 2003, a 37.0% increase. The
increase in revenues is attributable to increased sales of oat fiber, dairy
blends, soluble fiber and technical processing. Oat fiber increases of
$7,899,000 resulted from the demand generated by low carb diets and fiber
enriched foods and were supported by increased capacity at our Cambridge
facility and our newly acquired facility in Cedar Rapids, Iowa. An increase of
$2,303,000 in dairy blends was realized due to increased volumes and pricing
compared to the prior year.
Gross margin in the Ingredients Group increased by $4,117,000 in the nine months
ended September 30, 2004 to $12,044,000 or 23.9% of revenue compared to
$7,927,000 or 21.6% 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 pricing, plant utilization and cost rationalization
initiatives.
Selling, general and administrative expenses increased to $5,534,000 in the nine
months ended September 30, 2004 versus $4,883,000 in the nine months ended
September 30, 2003. The increase is due to the acquisition of Organic
Ingredients in the third quarter of 2004 and increased compensation costs as a
result of previously vacant positions with the group.
Other income (expenses) in the first nine months ended September 30, 2004 was
($283,000) compared to $198,000 in the first nine months of 2003. The expenses
in 2004 are related to the closure of the St. Thomas Facility and costs incurred
to prepare the Bedford facility for sale, partially offset by a small gain
recognized on the sale of the Bedford Facility. The 2003 gain is a result of a
gain recognized on a discharged liability. In 2004, the Ingredients group had an
exchange gain of $84,000 compared to a loss of ($141,000) in 2003. As the
Canadian based St. Thomas facility is now closed, future exchange gains and
losses within this group will be minimal.
Earnings before interest expense and income taxes in the Ingredients Group were
$6,311,000 in the nine months ended September 30, 2004 as compared to $3,101,000
in the nine months ended September 30, 2003, due primarily to the factors noted
above.
Packaged Products Group
The Packaged Products Group contributed $29,877,000 revenues in the first nine
months of 2004 versus $27,121,000 in 2003, an increase of $2,756,000 or 10.2%.
Revenues were favourably impacted by internal growth within the acquisitions
completed in 2003 of Kettle Valley and Dakota Gourmet of $4,353,000, increased
Canadian packaged revenues of $769,000 offset by a year to date decline of
$2,171,000 in aseptic packaged and consumer products. The aseptic packaged and
consumer products revenues have been affected by our largest customer who has
changed its ordering patterns.
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SUNOPTA INC. 36 September 30, 2004 10-Q
Gross margin in the Group increased by $407,000 in the first nine months ended
September 30, 2004 to $4,310,000 or 14.4% compared to $3,903,000 or 14.4%, in
the same period in 2003. The gross margin percentage in the year included a
reduction in contribution due to a decline in sales of aseptic products
including the effects of fixed overhead absorption, offset by higher margins in
the acquired businesses.
Selling, general and administrative expenses increased to $3,285,000 in the nine
months ended September 30, 2004 versus $1,466,000 in the nine months ended
September 30, 2003. The increases noted are due primarily to the acquisitions
made in the healthy convenience food sector.
Other income (expenses) including foreign exchange effects in the first nine
months ended September 30, 2004 were $2,549,000 as compared to ($49,000) in same
period in 2003. A gain of $2,646,000 was recognized on the judgment received in
a lawsuit against a supplier for breach of contract as described in Note 8
(Prepaid Expenses and Other Current Assets) in the second quarter.
Earnings before interest expense and income taxes in the Packaged Products Group
were $3,574,000 in the nine months ended September 30, 2004 compared to
$2,388,000 in the nine months ended September 30, 2003 due to the factors noted
above.
Distribution Group
The Distribution Group contributed revenues of $52,776,000 in the nine months of
2004 versus $13,868,000 in 2003, an increase of $38,908,000 or 280.6%. Revenues
were favourably impacted by increased produce and grocery revenues of
$37,765,000 resulting from the acquisitions completed in 2003 (Pro Organics) and
2004 (Supreme Foods, Snapdragon, Kofman-Barenholtz), however hampered by certain
integration issues related to the Toronto and Montreal-based operations.
Gross margin increased by $12,312,000 in the nine months ended September 30,
2004 to $14,972,000 as compared to $2,660,000 in the same period in 2003. The
increase in gross profit was attributable to acquisitions and the synergies
recognized in our previously existing and acquired businesses.
Warehousing and distribution costs increased to $4,144,000 in the nine months
ended September 30, 2004 versus $628,000 in the nine months ended September 30,
2003, which reflects the impact of acquisitions and cost of certain integration
issues experienced in the third quarter of 2004. Selling, general and
administrative expenses increased to $7,694,000 in the nine months ended
September 30, 2004 versus $1,782,000 in the nine months ended September 30,
2003. The increases noted are due primarily to the acquisitions noted above.
Other income (expenses) in the nine months ended September 30, 2004 including
exchange gains (losses) were $4,000 compared to other income of $58,000 in same
period in 2003.
Earnings before interest expense and income taxes in the Distribution Group were
$3,138,000 in the nine months ended September 30, 2004 as compared to $308,000
in the nine months ended September 30, 2003, due to the factors noted above.
Opta Minerals
Opta Minerals contributed $24,161,000 or 10.8% of the total Company consolidated
revenues in the first nine months of 2004, versus $18,539,000 or 12.8% in 2003.
Revenues were favourably impacted by an increase in revenues due to the
acquisition of Distribution A&L and internal growth via an increase in demand
for abrasives products.
Gross margins in Opta Minerals were $5,572,000 in the nine months ended
September 30, 2004 versus $3,930,000 in the nine months ended September 30,
2003. As a percentage of revenues, gross margin increased to 23.1% in the first
nine months of 2004 from 21.2% in the first nine months of 2003. The increase in
margin is due primarily to increased demand for abrasive sales, primarily in
U.S. based operations.
Selling, general and administrative expenses increased to $2,144,000 in the nine
months ended September 30, 2004 versus $1,741,000 in the nine months ended
September 30, 2003. The increase in costs is attributable to the acquisition
noted above.
Other income (expense) increased to ($324,000) in the first nine months of 2004
versus a gain of $134,000 in the first nine months of 2003. The increase was due
to costs incurred in the first quarter due to the rationalization of the
Hamilton facility and costs incurred in the third quarter relating to the
pending 'Initial Public Offering' of common shares of Opta
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SUNOPTA INC. 37 September 30, 2004 10-Q
Minerals. The Group also has foreign exchange gains/(losses) of $58,000 for the
nine months ended September 30, 2004 and ($54,000) in the comparable period of
the previous year.
Earnings before interest expense and income taxes were $3,162,000 in the nine
months ended September 30, 2004 versus $2,269,000 in the nine months ended
September 30, 2003.
StakeTech Steam Explosion Group and Corporate
Revenues of $933,000 for the nine months ended September 30, 2004, versus
$386,000 in same period in 2003, were derived from pre-engineering work and
research and development undertaken during the period. Majority of the 2003
revenue relates to licence fees that were recognized. There have been no license
fees recognized in 2004.
Gross margin in the StakeTech Steam Explosion Group was $378,000 in the nine
months ended September 30, 2004 versus $384,000 in the nine months ended
September 30, 2003. As a percentage of revenues, gross margin decreased to 39.7%
in the first nine months of 2004 from 87.0% in the first nine months of 2003.
Gross margin recognized in 2003 was attributed to license fees which had no
associated service costs.
Selling, general and administrative expenses were $2,720,000 for the nine months
of 2004 compared to $2,526,000 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, internal audit
functions and compliance costs related to Sarbanes Oxley. 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. These increases
have been partially offset by reduced professional fees.
Other income was $373,000 in the first nine months of 2004 versus $741,000 in
the first nine months of 2003. The gains are primarily related to foreign
exchange due to significant fluctuations in the Canadian Dollar.
Loss before interest expense and income taxes was $1,969,000 in the nine months
ended September 30, 2004 versus $1,401,000 in the nine months ended September
30, 2003.
Liquidity and Capital Resources at September 30, 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 September 30, 2004, the Company has availability
under certain lines of credit of approximately $29,000,000. A revolving
acquisition line is also available with maximum draws up to $10,000,000.
The Company obtains its long term financing through its credit agreement with a
syndicate of lenders. The Company may expand this credit agreement, and/or
obtain additional long term financing for internal expansion uses, acquisitions
or other strategic purposes as required. On July 7, 2004, the Company increased
its term loan to $35,000,000 and its operating lines of credit.
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, the Company may 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 1.00 versus the current
position of 0.26 to 1.00.
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.
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SUNOPTA INC. 38 September 30, 2004 10-Q
Cash Flows from Operating Activities
Cash provided by operations for the first nine months of 2004 before changes in
working capital was $17,466,000 (2003 - $8,919,000), an increase of $8,547,000
or 95.8%. The increase was due primarily to an increase in net earnings.
Cash provided by operations after working capital changes was $7,965,000 for the
nine months ended September 30, 2004 (2003 -$457,000), reflecting the use of
funds for non-cash working capital of ($9,501,000) (2003 - ($8,462,000)). This
utilization consists principally of an increase in accounts receivable
($6,788,000), an increase in prepaid expenses and other assets of ($3,693,000),
a decrease in accounts payable and accrued liabilities of ($509,000) and a
decrease in customer deposits of ($1,777,000), partially offset by a decrease in
inventories $1,660,000 and the recovery of income taxes of $1,686,000. 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.
Cash Flows from Investing Activities
Cash used in investment activities of $35,274,000 in the first nine months of
2004 (2003 -$3,361,000), reflects cash used to complete acquisitions, net of
cash acquired, of ($27,448,000) (2003 - ($2,894,000)) and acquisitions of
property, plant and equipment of ($14,833,000) (2003 - ($3,778,000)), offset by
proceeds from the sale of property of $5,864,000 (2003 - $nil), a decrease in
short term investments for proceeds of $nil (2003 - $2,038,000) and payments
received on a note receivable of $1,250,000 (2003 - $1,074,000).
Cash Flows from Financing Activities
Cash provided by financing activities was $19,066,000 in 2004 (2003 -
$34,562,000), consisting primarily of increased borrowings under term debt
facilities $17,007,000 (2003 - $7,800,000), net proceeds from the issuance of
common shares of $7,848,000 (2003 - $56,028,000), partially offset by decrease
in bank indebtedness $nil (2003 - ($4,285,000)), repayment on long-term debt
facilities of ($5,310,000) (2003 - ($24,009,000)), payment of deferred purchase
consideration of ($65,000) (2003 - ($490,000)), financing costs of ($198,000)
(2003 - ($343,000)) and the purchase and redemption of preference shares of
subsidiary companies of ($216,000) (2003 - ($139,000)).
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 September 30, 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 its 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 September 30, 2004, the weighted average interest rate of the fixed rate
term debt was 3.5% (2003 - 5.3%) and $2,538,000 (2003 - $1,339,000) of the
Company's outstanding term debt is at fixed interest rates. Variable rate term
debt of $34,200,000 (2003 - $20,525,000) at an interest rate of 2.7% (2003 -
3.67%) 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 $240,000. Given the short duration of fixed
rate debt, changes in interest rates would have a negligible effect 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 nine months 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 $1.2616 at September 30,
2004 for each U.S. dollar. The net effect of this depreciation has been a
$442,000 net exchange gain and a $1,307,000 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
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SUNOPTA INC. 39 September 30, 2004 10-Q
held constant would result in an increase (decrease) in the fair value of the
Company's net assets by $4,855,000 (2003 - $2,327,000).
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
Statements 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 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 September 30, 2004 the Company owned
111,885 (2003 - 150,780) bushels of corn with a weighted average price of $2.48
(2003 - $1.86) and 38,361 (2003 - 173,945) bushels of soy beans with a weighted
average price of $11.69 (2003 - $7.46). The Company has at September 30, 2004
net long/(short) positions on corn and soy beans of (153,983) (2003 - 75,415)
and (52,954) (2003 -197,060) bushels respectively. An increase/decrease in
commodity prices of 10% would result in a gain (loss) of $130,794 (2003 -
$14,000) in corn and $9,514 (2003 - $147,000) 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. Controls and Procedures
Under Section 404 of the Sarbanes-Oxley Act of 2002 ("404"), we are required to
include, for the first time in our Annual Report on Form 10-K for 2004 (the
"10-K"), management's assessment of the effectiveness of our internal controls
over financial reporting (the "Assessment"), and our independent auditor's
attestation of that assessment (the "Attestation"). We are working diligently to
complete our work required for the Assessment and Attestation. To date, however,
we have experienced an increased workload versus initial expectations and have
realized some delays in executing against our internal 404 project plan. In the
third quarter of 2004 we re-evaluated that plan, adding both significant
internal staffing resources and external consultants to our 404 project team.
The revised 404 project plan contains many time-critical milestones. Our efforts
during November and December 2004 will be critical to our success.
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 September 30, 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 September 30, 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. 40 September 30, 2004 10-Q
PART II - OTHER INFORMATION.
Item 1. Legal proceedings
Included within prepaid expenses and other current assets is a receivable
of $3,343,000 representing a judgment awarded and recovery of legal fees
and interest relating to a suit the Company filed against a supplier for
failure to adhere to the terms of a contract. The judgment was awarded on
June 29, 2004 by a federal court jury in the United States District Court
for the District of Oregon in favour of Sunrich Inc. (Sunrich) a
subsidiary of the Company. The supplier counter-sued the Company for
breach of contract however, as part of this judgment these counter-claims
were dismissed. The supplier has since filed post trial motions. The
Company and it's legal counsel believe these motions and counter-claims
are without merit and the Company believes the collectibility of this
receivable is reasonably assured. Included within other income and expense
for the nine months ended September 30, 2004 is a recorded pre-tax gain of
$2,646,000.
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
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SUNOPTA INC. 41 September 30, 2004 10-Q
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.
** Filed herewith
(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 November 5 2004
SunOpta Inc.
by John Dietrich
Vice President
and Chief Financial Officer
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SUNOPTA INC. 42 September 30, 2004 10-Q