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, 2003March 31, 2004
Commission File No. 0-9989
|_|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SunOpta Inc.SUNOPTA INC.
(Exact name of registrant as specified in its charter)
CANADA
(Jurisdiction of Incorporation)
Not Applicable
(I.R.S. Employer Identification No.)
2838 Highway 7Bovaird Drive West
Norval, Ontario L0P 1K0, Canada
(Address of PrinciplePrincipal Executive Offices)
(905) 455-1990
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to 12(g) of the Act:
Common Shares, no Par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes |X| No |_|
At November 6, 2003April 30, 2004 registrant had 52,578,46053,429,803 common shares outstanding, the only
class of registrant's common stock outstanding. There were no other classes of
stock outstanding and the aggregate market value of voting stock held by
non-affiliates at such date was $317,233,375.$423,999,168. The Company's common shares are
traded on the Nasdaq Smallcap Market tier of the Nasdaq Stock Market under the
symbol STKL and The Toronto Stock Exchange under the symbol SOY.
There are 4234 pages in the September 30, 2003March 31, 2004 10-Q and the index follows the cover
page.
- --------------------------------------------------------------------------------
SUNOPTA INC. 1 March 31, 2004 10-Q
SUNOPTA INC.
FORM 10-Q
September 30, 2003March 31, 2004
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as at September 30, 2003March 31, 2004 and December 31,
2002.2003.
Consolidated Statements of Retained EarningsShareholders' Equity for the ninethree months
ended September 30, 2003March 31, 2004 and 2002, and the year ended December 31, 2002.2003.
Consolidated Statements of Earnings for the three and nine months ended September 30, 2003March
31, 2004 and 2002.2003.
Consolidated Statements of Cash Flow for the three and nine months ended
September 30, 2003March 31, 2004 and 2002.2003.
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 SeptemberApril 30, 20032004 was
CDN $1 = U.S. $0.7408$0.7288
- --------------------------------------------------------------------------------
SUNOPTA INC. 2 March 31, 2004 10-Q
PART I - FINANCIAL INFORMATION
Item 1 -
Consolidated Financial Statements
(Expressed in thousands of U.S. dollars)
SunOpta Inc.
For the NineThree Months Ended September 30, 2003March 31, 2004
- --------------------------------------------------------------------------------
SUNOPTA INC. 3 March 31, 2004 10-Q
SunOpta Inc.
Consolidated Balance Sheets
As at September 30, 2003March 31, 2004 and December 31, 20022003
Unaudited
(Expressed(expressed in thousands of U.S. dollars)
- -----------------------------------------------------------------------------------------
September 30, December 31,
2003 2002
$ $
- -----------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 38,892 7,012
Short-term investments -- 2,038
Accounts receivable - trade 23,520 18,144
Note receivable -- 1,034
Inventories (note 4) 24,005 22,989
Prepaid expenses and other current assets 1,965 958
Future income taxes -- 115
--------------------------
88,382 52,290
Property, plant and equipment, net 40,055 37,033
Goodwill and intangibles, net 17,220 14,992
Future income taxes 11,440 9,892
Other assets (note 5) 813 1,080
--------------------------
157,910 115,287
==========================
Liabilities
Current liabilities
Bank indebtedness -- 3,963
Accounts payable and accrued liabilities 18,103 19,664
Customer and other deposits 608 421
Current portion of long-term debt (note 6) 2,769 11,650
Current portion of long-term payables (note 7) 872 3,458
--------------------------
22,352 39,156
Long-term debt (note 6) 19,095 25,099
Long-term payables (note 7) 1,454 1,505
--------------------------
42,901 65,760
--------------------------
Shareholders' Equity (note 10)
Capital stock (note 8) 95,786 38,020
Authorized
Unlimited common shares without par value
Issued
52,325,281 (December 31, 2002 - 41,984,118) common shares
Contributed surplus 2,968 2,914
Retained earnings 13,030 7,470
Currency translation adjustment 3,225 1,123
--------------------------
115,009 49,527
--------------------------
157,910 115,287
==========================
- --------------------------------------------------------------------------------
March 31, December 31,
2004 2003
$ $
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 19,503 21,990
Accounts receivable - trade (note 6) 28,391 26,241
Inventories (note 7) 38,059 34,778
Prepaid expenses and other current assets 3,328 2,524
Income taxes recoverable 1,686 1,686
Future income taxes 667 1,172
------------------------
91,634 88,391
Assets held for sale 4,993 6,007
Property, plant and equipment 47,283 44,761
Goodwill and intangibles, net 25,838 25,084
Future income taxes 8,891 9,023
Other assets 420 490
------------------------
179,059 173,756
========================
Liabilities
Current liabilities
Bank Indebtedness (note 8) 3,227 --
Accounts payable and accrued liabilities 22,806 24,670
Customer and other deposits 2,966 1,778
Current portion of long-term debt (note 8) 3,992 3,840
Current portion of long-term payables (note 9) 1,024 740
------------------------
34,015 31,028
Long-term debt (note 8) 20,398 21,196
Long-term payables (note 9) 1,382 1,591
------------------------
55,795 53,815
------------------------
Shareholders' Equity
Capital stock (note 10) 98,286 96,636
Contributed surplus 3,384 3,384
Retained earnings 17,649 15,779
Accumulated other comprehensive income 3,945 4,142
------------------------
123,264 119,941
------------------------
179,059 173,756
========================
Commitments and contingencies (note 12)14)
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
SUNOPTA INC. 4 March 31, 2004 10-Q
SunOpta Inc.
Consolidated Statements of Retained Earnings
For the nine months ended September 30, 2003Shareholders' Equity
As at March 31, 2004 and 2002 and the year ended December 31, 20022003
Unaudited
(Expressed(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Nine months ended Year ended
----------------- ----------
September 30, September 30, December 31,
2003 2002 2002Accumulated
Other
Capital Contributed Retained Comprehensive
Stock Surplus Earnings Income Total
$ $ $ - -----------------------------------------------------------------------------------------------------$ $
Retained Earnings - Beginning of the Year 7,470 3,704 3,704
Balance at December 31, 2003 96,636 3,384 15,779 4,142 119,941
Options exercised 225 -- -- -- 225
Warrants exercised 1,425 -- -- -- 1,425
Net earnings for the period 5,560 3,254 3,766
--------------------------------------------
Retained Earnings - End of Period 13,030 6,958 7,470
============================================-- -- 1,870 -- 1,870
Currency translation adjustment -- -- -- (197) (197)
-------------------------------------------------------------------------
Balance at March 31, 2004 98,286 3,384 17,649 3,945 123,264
=========================================================================
(See accompanying notes to consolidated financial statements)- --------------------------------------------------------------------------------
SUNOPTA INC. 5 March 31, 2004 10-Q
SunOpta Inc.
Consolidated Statements of Earnings
For the three months ended September 30,March 31, 2004 and 2003
and 2002
Unaudited
(Expressed(expressed in thousands of U.S. dollars, except per share amounts)
- -------------------------------------------------------------------------------------
September 30, September 30,
2003 2002
$ $
- -------------------------------------------------------------------------------------
Revenues 50,384 32,800
Cost of goods sold 41,404 27,510
--------------------------------
Gross profit 8,980 5,290
Selling, general and administrative expenses 5,887 3,240
--------------------------------
Earnings before the following 3,093 2,050
Interest expense (680) (302)
Interest and other income 201 30
Foreign exchange loss (171) (322)
--------------------------------
(650) (594)
--------------------------------
Earnings before income taxes 2,443 1,456
Provision for (recovery of) income taxes 343 (71)
--------------------------------
Net earnings for the period 2,100 1,527
================================
Net earnings per share for the period (note 9)
- Basic 0.05 0.04
================================
- Diluted 0.04 0.04
================================
- --------------------------------------------------------------------------------
March 31, March 31,
2004 2003
$ $
- -------------------------------------------------------------------------------
Revenues 62,502 41,411
Cost of goods sold 50,231 34,293
--------------------------
Gross profit 12,271 7,118
Warehousing and distribution expenses 1,156 178
Selling, general and administrative expenses 7,979 5,217
--------------------------
9,135 5,395
--------------------------
Earnings before the following 3,136 1,723
Interest expense (208) (491)
Interest and other income (expense) (115) 37
Foreign exchange gain (loss) (141) 341
--------------------------
(464) (113)
--------------------------
Earnings before income taxes 2,672 1,610
Provision for income taxes 802 483
--------------------------
Net earnings for the period 1,870 1,127
==========================
Net earnings per share for the period (note 11)
- Basic 0.04 0.03
==========================
- Diluted 0.03 0.03
==========================
(See accompanying notes to consolidated financial statements)
- --------------------------------------------------------------------------------
SUNOPTA INC. 6
SunOpta Inc.
Consolidated Statements of Earnings
For the nine months ended September 30, 2003 and 2002
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------------
September 30, September 30,
2003 2002
$ $
- --------------------------------------------------------------------------------------
Revenues 144,436 87,461
Cost of goods sold 119,232 73,431
---------------------------------
Gross profit 25,204 14,030
Selling, general and administrative expenses 17,247 9,446
---------------------------------
Earnings before the following 7,957 4,584
Interest expense (1,664) (1,030)
Interest and other income 411 238
Foreign exchange gain 425 140
---------------------------------
(828) (652)
---------------------------------
Earnings before income taxes 7,129 3,932
Provision for income taxes 1,569 678
---------------------------------
Net earnings for the period 5,560 3,254
=================================
Net earnings per share for the period (note 9)
- Basic 0.13 0.08
=================================
- Diluted 0.12 0.08
=================================
(See accompanying notes to consolidated financial statements)
7March 31, 2004 10-Q
SunOpta Inc.
Consolidated Statements of Cash Flow
For the three months ended September 30,March 31, 2004 and 2003
and 2002
Unaudited
(Expressed(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
September 30, September 30,March 31, March 31,
2004 2003 2002
$ $
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 2,100 1,5271,870 1,127
Items not affecting cash
Amortization 1,331 1,0541,618 1,088
Future income taxes (867) (498)447 51
Other 354 85
-------------------------------
2,918 2,168111 45
--------------------------
4,046 2,311
Changes in non-cash working capital (note 11) (3,992) (1,574)
-------------------------------
(1,074) 594
-------------------------------12) (7,073) (2,702)
--------------------------
(3,027) (391)
--------------------------
Investing activities
Decrease in short term investments -- 2,038
Acquisition of businesses,companies, net of cash acquired (150) (573)(911) (1,871)
Acquisition of property, plant and equipment (1,298) (903)(3,849) (1,229)
Proceeds from sale of property 1,014 --
Proceeds from note receivable -- 358
331
Other 220 364
-------------------------------
(870) (781)
-------------------------------(17) (147)
--------------------------
(3,763) (851)
--------------------------
Financing activities
DecreaseIncrease in bank indebtedness (10,004) (1,407)3,227 5,228
Borrowings under term debt facilities -- 7,800
Repayment of term debt and tender facilities (5,674) (297)(663) (17,819)
Repayment of deferred purchase consideration (243) (322)(21) (227)
Proceeds from the issuance of common shares, net of issuance costs 54,098 1,4441,650 1,130
Financing costs (93) -- (70)
Purchase and redemption of Preference Shares of subsidiary companies (8) (5)
-------------------------------
38,076 (587)(16) (130)
--------------------------
4,177 (4,088)
Foreign exchange gain (loss) on cash held in a foreign currency 111 (65)
-------------------------------
Increase (decrease)126 100
--------------------------
(Decrease) in cash and cash equivalents during the period 36,243 (839)(2,487) (5,230)
Cash and cash equivalents - Beginning of the period 2,649 7,647
-------------------------------21,990 7,012
--------------------------
Cash and cash equivalents - End of the period 38,892 6,808
===============================19,503 1,782
==========================
See note 1112 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
8
SunOpta Inc.
Consolidated Statements of Cash Flow
For the nine months ended September 30, 2003 and 2002
Unaudited
(Expressed in thousands of U.S. dollars)
- -----------------------------------------------------------------------------------------------------------
September 30, September 30,
2003 2002
$ $
- -----------------------------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities
Net earnings for the period 5,560 3,254
Items not affecting cash
Amortization 3,757 2,917
Future income taxes (543) (715)
Other 247 42
--------------------------------
9,021 5,498
Changes in non-cash working capital (note 11) (8,564) (5,956)
--------------------------------
457 (458)
--------------------------------
Investing activities
Decrease in short term investments 2, 038 6,307
Acquisition of businesses, net of cash acquired (2,894) (1,080)
Acquisition of property, plant and equipment (3,778) (3,055)
Proceeds from note receivable 1,074 1,045
Other 199 101
--------------------------------
(3,361) 3,318
--------------------------------
Financing activities
(Decrease) increase in bank indebtedness (4,285) 258
Repayment of term debt and tender facilities (24,009) (16,209)
Borrowings under term debt facilities 7,800 15,000
Payment of deferred purchase consideration (490) (754)
Proceeds from the issuance of common shares, net of issuance costs 56,028 1,805
Financing costs (343) (499)
Decrease in restricted cash -- 1,147
Purchase and redemption of Preference Shares of subsidiary companies (139) (122)
--------------------------------
34,562 626
Foreign exchange gain (loss) on cash held in a foreign currency 222 (42)
--------------------------------
Increase in cash and cash equivalents during the period 31,880 3,444
Cash and cash equivalents - Beginning of the period 7,012 3,364
--------------------------------
Cash and cash equivalents - End of the period 38,892 6,808
================================
See note 11 for supplemental cash flow information
(See accompanying notes to consolidated financial statements)
9- --------------------------------------------------------------------------------
SUNOPTA INC. 7 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the ninethree months ended September 30, 2003March 31, 2004
Unaudited
(Expressed(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
1. Interim financial statements
The interim consolidated financial statements of SunOpta Inc. (the
Company) have been prepared in accordance with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X and in accordance with accounting
principles generally accepted in Canada which conform, in all material
respects (except as indicated in note 13, with accounting principles
generally accepted in the U.S.).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 ninethree months ended
September 30, 2003March 31, 2004 are not necessarily indicative of the results that may be
expected for the full year endedending December 31, 2003.2004. For further
information, see the Company's consolidated financial statements, and
notes thereto, included in the Annual Report on Form 10-KA410K for the year
ended December 31, 2002.2003.
As of October 31, 2003, Stake Technology Ltd. has changed its name toJanuary 1, 2004, SunOpta Inc. (SunOpta)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). The name SunOpta better describesThis change was made as a majority of the Company's
commitment to environmental responsibilityoperations and natural and organic food
products nourishedshareholders are located in the `sun' with `optimal' nutritional value.U.S. As a result of this
change all comparative financial statement balances and related notes have
been amended to reflect the change to U.S. GAAP. Accounting principles in
the U.S. conform in all material respects to those in Canada, except as
indicated in Note 15.
2. Description of business and significant accounting policies
The Company was incorporated under the laws of Canada on November 13,
1973
and operates1973. The Company conducts business in three principal businesses. Themain areas, the SunOpta Food
Group (Food Group) processes, packages markets and distributes a wide range of
natural and organic food products and ingredients via its vertically integrated operations
with a focus on soy, oat fiber and corn basedother natural and organic food
products. The Environmental Industrial
GroupOpta Minerals processes, distributes and recycles industrial
minerals. The StakeTech Steam Explosion Technology Group engineers and 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, 2003March 31,
2004 are located in the United States and Canada.
The Company's significant accounting policies are outlined below. These
consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada.the United States. Differences
arising from the application of accounting principles generally accepted
in the
United StatesCanada are described in note 14.15.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
inter-companyintercompany accounts and transactions have been eliminated on
consolidation.
Cash and cash equivalents
Cash and cash equivalents consist of unrestricted cash and short-term
deposits with a maturity at acquisition of less than 90 days.
Short-term investments
Short-term investments consist- --------------------------------------------------------------------------------
SUNOPTA INC. 8 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of portfolio investments in other companies
and deposits with a maturity at acquisition of greater than 90 days, and
are valued at market.U.S. dollars)
- --------------------------------------------------------------------------------
Inventories
Raw materials and finished goods inventories are valued at the lower of
cost and estimated net realizable value. Cost is determined on a first-in,
first-out basis.
10
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Inventories, continued
Inventories of grain, are valued at market. Changes in market value are
included in cost of goods sold. The Food Group generally follows a policy
of hedging its grain transactions to protect gains and minimize losses due
to market fluctuations. Futures and purchase and sale contracts are
adjusted to market price and gains and losses from such transactions are
included in cost of goods sold. The Company has a risk of loss from hedge
activity if the grower does not deliver the grain as scheduled. 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%4 to 8% for buildings.
Amortization is calculated from the time the asset is put into use.
Included in land and buildings at September 30, 2003, are certain
properties held for sale totaling $5,020 (December 31, 2002 - $5,020). The
Company has entered into an option agreement to sell one of the properties
with a net book value of $4,800 (note 12 c).
Goodwill and intangibles
The Company adoptedassesses the new CICA Handbook Section 3062 "Goodwill and
Intangible Assets" on January 1, 2002. This new standard eliminated the
need for amortizationcarrying value of goodwill and indefinite life
intangible assets.
Goodwill represents the excess of the purchase price over the assigned
value of net assets acquired. Under the transitional provisions of the
standard, a goodwill impairment test was carried out and no impairment was
identified on January 1, 2002.
In accordance with the new standard, the Company has assessed the carrying
value of goodwillintangibles for possible impairment and has determined that no such
impairment exists as at December 31, 2002. Certain of theon an annual basis. The Company's
trademarks arefinite life intangible assets with an indefinite life. The Company has
further determined that there is no impairment in the valueconsist of these
indefinite life trademarks. As required by the standard, the new rules
relatedcustomer lists, trademarks and
distribution agreements and are amortized straight line over their
estimated useful lives, ranging from 4 to goodwill and other intangible assets have been applied
prospectively.15 years.
Other assets
i) Pre-operating costs
Net costs incurred in the pre-operating stage of a start-up business
are deferred until the business reaches commercial operation or the
passage of a certain period of time as predetermined by management.
During 2001, the Company initiated the start-up of an organic dairy
business based in Canada. Certain pre-operating costs totaling $308
were deferred up to June 30, 2002. Amortization of these costs on a
straight-line basis commenced in July 2002 and will result in these
costs being fully amortized by December 31, 2003.
During 2000, the Company acquired Nordic Aseptic, Inc., which was
considered a start-up business from the date of acquisition to
December 31, 2000. Certain operating costs, net of income earned
during the pre-operating period totaling $482 were deferred.
Amortization of these costs on a straight-line basis commenced in
January 2001 and will result in these costs being fully amortized by
December 31, 2003.
11
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
ii) Deferred financing costs
Costs incurred in connection with obtaining long-term financing are
deferred and amortized over the term of the related financing
agreement.
iii)instrument.
ii) Investments
The Company has a 32% (2002(2003 - 32%) investment in Easton Minerals
Limited ("Easton)Easton"). This investment is considered impaired and the
carrying value at September 30, 2003March 31, 2004 is $nil (2002(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, thusand
therefore it is not anticipated that further losses will be recorded
on this investment.
All other subsidiaries are 100% owned at September 30, 2003. On
November 1, 2002, the Company acquired the remaining 49% minority
interest in International Materials & Supplies, Inc.March 31, 2004. Investments
in these subsidiaries are recorded using the consolidation method,
whereby revenues and expenses are consolidated with the results of
the Company.
- --------------------------------------------------------------------------------
SUNOPTA INC. 9 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Revenue recognition
i) SunOpta Food Group
Grain revenues are recorded at the time of shipment. Revenues from
custom processing services are recorded upon provision of services
and upon completion of quality testing. All other Food Group
revenues are recognized upon the sale and shipment of a product or
the providing of a service to a customer. Revenues are generally
recorded at the time
of shipment unless therethe service is a specific
agreement withprovided to the customer for FOB destination. Customer rebates
are recorded at the earlier of when the related revenue is
recognized and when the rebate is determinable or when a reasonable
estimate is available.customer.
ii) Environmental Industrial GroupOpta 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 Technology Group
The percentage of completion method is used to account for
significant contracts in progress when related costs can be
reasonably estimated. The Company uses costs incurred to date as a
percentage of total expected costs to measure the extent of progress
towards completion.
Revenues from consulting and contract research are recognized when
the service is completed.
License fees related to the right to sell the Company's technologies
are recorded as revenues over the term of the license, when
collectibility is reasonably assured.
12
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
Foreign currency translation
The Company's Canadian operations are self-sustaining operations, with the
exception of the Corporatecorporate head office, which is considered to be an
integrated operation. The assets and liabilities of the self-sustaining
operations are translated at exchange rates in effect at the balance sheet
date. Monetary assets and liabilities of the Corporate office are translated at
exchange rates in effect at the balance sheet date. All other assets and
liabilities of the Corporate office are translated at historical exchange
rates. Revenues and expenses are translated at average exchange rates
prevailing during the period. Unrealized gains or losses resulting from
translating self-sustaining operations are accumulated and reported as a
currency translation adjustment in shareholders' equity. Unrealized gains
or losses resulting from translating the Corporate office accountsequity and are included in the determinationdisclosed
as part of earnings.comprehensive income.
The functional currency of all operations located in the United States of Americaand
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 $500 asan amount of $1,320 at September 30, 2003,March 31, 2004 (December
31, 20022003 - nil)$1,260) related to a deposit received on an option agreement
related to a property held for sale (note 12 c).sale.
Income taxes
The Company follows the asset and liability method of accounting for
income taxes whereby future income tax assets are recognized for
deductible temporary differences and operating loss carry-forwards, and
future income tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the amounts
of assets and liabilities recorded for income tax and financial reporting
purposes. Future income tax assets are recognized only to the extent that
management determines that it is more likely than not that the future
income tax assets will be realized. Future income tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment or substantive enactment. The income tax expense or benefit is the
- --------------------------------------------------------------------------------
SUNOPTA INC. 10 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
income tax payable or refundable for the period plus or minus the change
in future income tax assets and liabilities during the
period.
Employee stock compensation
Employee/director stock options granted by the Company contain exercise
prices, which are equivalent to the closing market price of the shares on
the day prior to the grant date. Any consideration paid by employees on
exercise of stock options or purchase of stock is credited to capital
stock. No compensation expense is recorded upon issuance of stock options
to employees. Stock options granted have a maximum life of six years and
usually vest over a four-year period.
Derivative instruments
The Food Group enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on grain
transactions to the extent considered practicable for minimizing risk from
market price fluctuations. Futures contracts used for hedging purposes are
purchased and sold through regulated commodity exchanges. Inventories,
however, may not be completely hedged, due in part to the Company's
assessment of its exposure from expected price fluctuations. Exchange
purchase and sales contracts may expose the Company to risk in the event
that a counter party to a transaction is unable to fulfill its contractual
obligation. The Company manages its risk by entering into purchase
contracts with pre-approved producers.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 13
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------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 areis computed by dividing the incomeearnings 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.issued at the beginning of the period.
Use of estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the dates of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
- --------------------------------------------------------------------------------
SUNOPTA INC. 11 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
3. AcquisitionStock 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 businessesgrant, no compensation expense is recognized by the Company for stock
option issued to employees.
Had compensation cost for the Company's stock options been recognized
based upon the estimated fair value on the grant date under the fair value
methodology allowed by Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock Based Compensation," as amended by
SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure," the Company's net earnings and earnings per share would have
been as follows:
Three months ended
----------------------------
March 31, March 31,
2004 2003
Number of options granted -- 398,750
============================
$ $
Total fair value -- 791
============================
Net earnings for the period as reported 1,870 1,127
Stock compensation expense:
Options vested in current period from current period grants -- 40
Options vested in current period from prior period grants 154 60
----------------------------
154 100
----------------------------
Pro-forma net earnings for the period 1,716 1,027
============================
Pro-forma net earnings per common share
- Basic 0.03 0.02
============================
- Diluted 0.03 0.02
============================
The fair value of the options granted during the prior year where
estimated using the Black-Scholes option-pricing model with the
assumptions of a dividend yield of 0% (2003 - 0%), an expected volatility
of 55% (March 31, 2003 - 60%), a risk-free interest rate of 2.5% (March
31, 2003 - 3%), and an expected life of four to six years. These options
vest at various dates ranging from the date of the grants to December 10,
2008 and expire four to six years subsequent to the grant date.
4. Business acquisitions
On MayMarch 1, 2003,2004 SunOpta reached an agreement to acquire 100% ofacquired the outstanding shares of Kettle Valley Dried Fruit Ltd. (Kettle Valley)Distribue-Vie
Fruits & Legumes Biologiques Inc. (Distribue-Vie) for $911 including
acquisition costs. This acquisition has been accounted for using the
purchase method and its related companies.
Kettle Valley producesaccordingly the consolidated financial statements
include the results of operations of the acquired business from the date
of acquisition.
Distribue-Vie specializes in the distribution of organic fresh foods with
an emphasis on produce. Distribue-Vie is the dominant player in the
distribution of organic produce in Quebec and operates from a warehousing
facility located in Montreal, servicing the key Quebec market along with
geographic reach to Eastern Ontario and the Maritime provinces. An
additional $229 of contingent consideration may be payable if certain
predetermined profit targets are achieved by the acquired business during
the period April 1, 2004 to March
- --------------------------------------------------------------------------------
SUNOPTA INC. 12 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
4. Business acquisitions continued
31, 2006 and will be recorded as goodwill when the amount and outcome of
this contingency becomes determinable.
The addition of Distribue-Vie to SunOpta's Canadian natural and organic
fruit bars and fruit leathers
with an appledistribution system is expected to bring significant benefits to the
customer base and markets these products under the Kettle Valley Real
Fruit Snack and Frunola brands. The Company operates two production
facilities in Summerland, British Columbia, the heart of the B.C. apple
growing district, and has constructed a third plant in the Stateform of Washington, the centerbroader product lines and greater support for
consumer education of the apple growing district of the Western U.S.organics through marketing and retail merchandising
initiatives.
The preliminary purchase price allocation of the net assets acquired and
consideration given is summarized below:as follows:
$
Net assets acquired:
$
Non-cash working capital 471deficiency (41)
Property, plant and equipment 1,217102
Goodwill 1,063
Customer relationships and contracts 370
Trademark 401
Bank indebtedness and term debt (583)610
Intangible assets-finite life 375
Future income tax liability (270)
----------
2,669
==========(135)
---------
911
========
Consideration given:
Cash 874
Notes payable 975
Common shares 820
----------
2,669
==========
14paid on closing 911
========
5. Comprehensive Income (loss)
The following are components of comprehensive income (loss), net of tax,
for the following periods:
Three months ended
---------------------------
March 31, March 31,
2004 2003
$ $
Net earnings 1,870 1,127
Change in foreign currency translation adjustment (197) 778
---------------------------
Comprehensive income 1,673 1,905
===========================
6. Accounts Receivable
March 31, December 31,
2004 2003
$ $
Trade receivable 29,665 27,417
Allowance for doubtful accounts (1,274) (1,176)
----------------------------
28,391 26,241
============================
- --------------------------------------------------------------------------------
SUNOPTA INC. 13 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the ninethree months ended September 30, 2003March 31, 2004
Unaudited
(Expressed(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
4.7. Inventories
September 30,March 31, December 31,
2004 2003 2002
$ $
Raw materials 9,093 7,85910,005 8,437
Finished goods 12,867 11,75022,904 24,525
Grain 2,045 3,380
--------------------------------
24,005 22,989
================================5,150 1,816
----------------------------------
38,059 34,778
==================================
Grain inventories consist of the following:
September 30,March 31, December 31,
2004 2003 2002
$ $
Company owned grain 2,074 3,3383,665 1,491
Unrealized gain (loss) on
Sales and purchase contracts (39) (79)1,313 153
Futures contracts 10 121
--------------------------------
2,045 3,380
================================172 172
----------------------------------
5,150 1,816
==================================
5. Other assets
September 30, December 31,
2003 2002
$ $
Pre-operating costs, net of accumulated
amortization of $690 (2002 - $432) 98 358
Deferred financing costs, net of accumulated
amortization of $572 (2002 - $201) 644 619
Other 71 103
--------------------------------
813 1,080
================================
6.8. Long-term debt and banking facilities
September 30,March 31, December 31,
2004 2003 2002
$ $
Long-Term Debt
Term loan (a) 20,325 13,900
Tender facility (b) -- 15,186
Convertible debenture (e) -- 4,69719,275 19,800
Other long-term debt (c)(d) 1,539 2,966
--------------------------------
21,864 36,749(b) 5,115 5,236
----------------------------------
24,390 25,036
Less: current portion (2,769) (11,650)
--------------------------------
19,095 25,099
================================(3,992) (3,840)
----------------------------------
20,398 21,196
==================================
15(a) The Company has an amended and restated agreement with a group of
banks with the following components;
i) Term loan
Principal payable quarterly based on a seven year
amortization. The term loan matures June 2005 and is renewable
at the option of the lender and the Company. As at March 31,
2004, $19,275 (2003 - $19,800) remained outstanding.
Interest on the term loan is payable at the borrower's option
at U.S. dollar base rate or U.S. LIBOR plus a margin based on
certain financial ratios of the Company (2.2% as at March 31,
2004 and 2.2% as at December 31, 2003).
- --------------------------------------------------------------------------------
SUNOPTA INC. 14 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the ninethree months ended September 30, 2003March 31, 2004
Unaudited
(Expressed(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
6.8. Long-term debt and banking facilities continued
(a) In March 2003, the Company amended its financing arrangement with
its current lenders and entered into a syndication agreement. As
part of the amendment, the term loan increased by $7,800 and the
credit facility increased by $4,000.
(b) During the first quarter of 2003, the Company repaid the tender
facility with proceeds from the amended term loan of $7,800, $3,500
from an increase in aii) $5,720 (CDN $7,500) line of credit facility
(notedInterest on borrowings under this facility accrues at the
borrower's option based on various reference rates including
Canadian or U.S. bank prime, or Canadian bankers' acceptances,
plus a margin based on certain financial ratios. As at March
31, 2004 $nil (2003 - $nil) of this facility has been utilized
and $805 has been committed through letters of credit as
itemized in (a) above)
and the utilization of $3,886 in cash.
(c) During the first nine months of 2003, the Company repaid certain
other long-term debt of $2,097, in addition to making regularly
scheduled repayments of $202.
(d) As part of the acquisition of Kettle Valley, the Company has
recorded an $872 (CDN $1,174) note payable in other long-term debt.
In addition, the Company increased its Canadian13(d).
iii) $9,000 line of credit to
CDN $7,500 from CDN $5,000facility
Interest on borrowings under this facility accrues at the
borrower's option based on various reference rates including
U.S. bank prime, or LIBOR, plus a margin based on certain
financial ratios. As at March 31, 2004 $3,227 (2003 - $nil) of
this facility has been utilized. This amount has been
classified as bank indebtedness on the consolidated balance
sheet.
The term loan and the Canadian and U.S. line of credit facilities
described above are collateralized by a resultfirst priority security
against substantially all of the acquisition.
(e) DuringCompany's assets in both Canada and
the third quarter of 2003, the Company redeemed the
convertible debenture at the face value of $5,000. As a resultUnited States.
(b) Other long-term debt consists of the early redemption a loss on extinguishment of debt of $183,
representing the accelerated interest accretion was recorded.
7. Long-term payablesfollowing:
September 30, December 31,2004 2003 2002
$ $
Product rebateNote payable 1,427 1,330
Deferred purchase consideration 177 667
Preference shares of subsidiary companies 152 291
Payable(Cdn $1,088) issued to the former shareholders of acquired companies (a) 570 2,675
---------------------------------
2,326 4,963
Less: current portion (872) (3,458)
---------------------------------
1,454 1,505
=================================807 816
Kettle Valley Dried Fruit Ltd. as part of the acquisition in 2003,
interest at 5% payable in ten semi-annual instalments,
uncollateralized.
Term loan assumed on the acquisition of Sigco Sun Products in 2003 2,440 2,440
payable in ten semi annual instalments of $244. Interest payable
monthly at LIBOR + 1.95% (March 31, 2004 - 3.04%),
collateralized by the property and equipment of Sigco.
Term loan issued to Oracle Credit Corp. on the purchase of a 969 1,107
software license agreement. Interest at 2.0% payable in eight
quarterly instalments.
Other term debt with a weighted average interest rate of 4.5%, 795 802
due in varying instalments through July 2009.
Capital lease obligations due in monthly payments through 2006, 104 71
with a weighted average interest rate of 8.0%.
-------------------------
5,115 5,236
=========================
(a) During the first quarter $1,871 was paid to the former shareholders
of Opta Food Ingredients, Inc.(Opta) in respect of untendered shares
converted to a right to receive $2.50 per share in cash as a result
of the amalgamation of Stake Acquisition Corp. with Opta.
16- --------------------------------------------------------------------------------
SUNOPTA INC. 15 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the ninethree months ended September 30, 2003March 31, 2004
Unaudited
(Expressed(expressed in thousands of U.S. dollars)dollars, except per share amounts)
- --------------------------------------------------------------------------------
8.9. Long-term payables
March 31, December 31,
2004 2003
$ $
-----------------------------
Deferred supplier rebate 250 --
Product rebate payable 1,393 1,402
Deferred purchase consideration 44 65
Preference shares of subsidiary companies 128 144
Payable to former shareholders of acquired companies 436 623
Other 155 97
-----------------------------
2,406 2,331
-----------------------------
Less: Current Portion (1,024) (740)
-----------------------------
1,382 1,591
=============================
10. Capital stock
September 30,March 31, December 31,
2004 2003 2002
$ $
(a) Issued and fully paid -
52,325,28153,406,603 common shares (December 31, 20022003 - 41,984,118) 93,813 35,230
3,090,17552,705,096) 96,365 94,338
2,647,500 warrants (December 31, 20022003 - 4,224,600) 1,973 2,790
------------------------------------
95,786 38,020
====================================3,241,350) 1,921 2,298
----------------------------
98,286 96,636
============================
(b) In(a) During the first nine months of 2003,quarter ended March 31, 2004, employees and directors
exercised 1,008,215 (September 30, 2002107,657 (March 31, 2003 - 238,540)223,725) common share options
and an equal number of common shares were issued for net proceeds of
$1,882
(September 30, 2002$225 (March 31, 2003 - $373)$405).
(c) In(b) During the first nine months ofquarter ended March 31, 2004, 593,850 (March 31, 2003 1,134,425-
123,356) warrants were exercised
(September 30, 2002 - 655,000) and an equal number of common
shares were issued for net proceeds of $1,963 (September 30, 2002$1,425 (March 31, 2003 -
$1,471)$207).
In addition, 216,000 (September 30, 2002 - $nil)
compensation warrants(c) There were exercisedno options granted to employees in the first nine months for
net proceeds of $461 (September 30, 2002 - $nil).quarter.
(d) On May 1, 2003, the Company issued 196,809 common shares at a price
of $4.17 per common share, in respect of the acquisition of Kettle
Valley.
(e) On August 28, 2003, the Company issued 7,500,000 common shares at a
price of $7.00 per common share, in respect to a public offering for
gross proceeds of $52,500. The Company incurred $1,806 in share
issuance costs (net of tax).
(f) On August 29, 2003, the Company issued 285,714 common shares
pursuant to a private placement with a significant shareholder, for
proceeds of $2,000.
(g) As at September 30, 2003March 31, 2004 there were options vested to employees and
directors to acquire 886,080774,200 common shares at exercise prices of
$1.06 to $9.11.$9.90. In addition, at September 30, 2003,March 31, 2004, options to acquire
an additional 985,3401,144,320 common shares at $1.06 to $9.11$9.90 have been
granted to employees and directors but have not yet vested.
(h) In the first nine months of 2003, 731,850 options were granted to
employees at a price range of $3.06 to $9.11.
Employee stock options granted by the Company in 2003 and 2002 were
granted at prices which approximated the value of stock on the grant
date. These options vest at various dates ranging from the date of
the grants to September 29, 2007 and expire two to six years
subsequent to the grant date.
The fair value of the options granted during the first nine months
of 2003 was estimated using the Black-Scholes option-pricing model
with the assumptions of a dividend yield of 0% (2002 - 0%), an
expected volatility of 60% (2002 - 60%), a risk-free interest rate
of 3% (2002 - 3%), and an expected life of one to six years.
17--------------------------------------------------------------------------------
SUNOPTA INC. 16 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the ninethree months ended September 30, 2003March 31, 2004
Unaudited
(Expressed(expressed in thousands of U.S. dollars, except per share amounts)dollars)
- --------------------------------------------------------------------------------
8. Capital stock, continued
Pro-forma net earnings reflecting stock compensation for the three and
nine months ended September 30, 2003 and 2002 are as follows:
Three months ended Nine months ended
--------------------------------------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
$ $ $ $
Number of options granted 152,400 -- 731,850 110,000
==============================================================
$ $ $ $
Total fair value 715 -- 2,049 118
==============================================================
Net earnings for the period as reported 2,100 1,527 5,560 3,254
Stock compensation expense:
Options vested in current period from current year grants 179 12 306 36
Options vested in current period from prior years grants 60 22 181 66
--------------------------------------------------------------
239 34 487 102
--------------------------------------------------------------
Pro-forma net earnings for the period 1,861 1,493 5,073 3,152
==============================================================
Pro-forma net earnings per common share
- Basic 0.04 0.04 0.12 0.08
==============================================================
- Diluted 0.04 0.03 0.11 0.07
==============================================================
9.11. Earnings per share
The calculation of basic earnings per share is based on the weighted
average number of shares outstanding. Diluted earnings per share reflect
the dilutive effect of the exercise of warrants and options. The number of
shares for the diluted earnings per share was calculated as follows:
Three months ended
Nine months ended
------------------------------------------------------------------
September 30, September 30, September 30, September 30,-------------------------------
March 31, March 31,
2004 2003 2002 2003 2002
$ $
$ $
Net earnings for the period 1,870 1,127
===============================
Weighted average number of shares used in
basic earnings per share 46,394,941 41,879,000 43,903,794 41,402,000outstanding 52,838,493 42,290,847
Dilutive potential of the following
Warrants 2,342,159 765,519 1,904,963 765,519
Employee/director stock options 1,184,910 648,597 947,313 648,597
------------------------------------------------------------------
Weighted1,035,219 915,514
Dilutive warrants 1,983,011 1,343,550
-------------------------------
Diluted weighted average number of shares used in
diluted earnings per share 49,922,010 43,293,116 46,756,700 42,816,116
==================================================================outstanding 55,856,723 44,549,911
===============================
Earnings per share:
- Basic 0.05 0.04 0.13 0.08
==================================================================0.03
- Diluted 0.04 0.04 0.12 0.08
==================================================================0.03 0.03
For the three months ended September 30, 2003, 90,000 options have been
excluded from the calculation due to their anti-dilutive nature. For the
nine months ended September 30, 2003, 152,400 options have been excluded
from the calculation due to their anti-dilutive nature.
18
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
10. Shareholders' equity
Cumulative
Capital Contributed Retained Translation
Stock Surplus Earnings Adjustment Total
$ $ $ $ $
Balance at December 31, 2002 38,020 2,914 7,470 1,123 49,527
Options exercised 1,882 -- -- -- 1,882
Warrants exercised 1,963 -- -- -- 1,963
Compensation warrants exercised 461 -- -- -- 461
Shares issued to acquire Kettle Valley 820 -- -- -- 820
Proceeds of equity issue, net of issuance costs 50,694 -- -- -- 50,694
Proceeds of private placement 2,000 -- -- -- 2,000
Elimination of convertible right (54) 54 -- -- -
Net earnings for the period -- -- 5,560 -- 5,560
Currency translation adjustment -- -- -- 2,102 2,102
-------------------------------------------------------------------------
Balance at September 30, 2003 95,786 2,968 13,030 3,225 115,009
=========================================================================
11.12. Supplemental cash flow information
Three months ended
-------------------------------------
September 30, September 30,-------------------------------
March 31, March 31,
2004 2003 2002
$ $
Changes in non-cash working capital:
Accounts receivable - trade (2,621) (1,192)(2,040) 346
Inventories 71 (536)(3,241) (725)
Prepaid expenses and other current assets 105 41(791) (785)
Accounts payable and accrued liabilities (2,037) 334(2,194) (2,451)
Customer and other deposits 490 (221)
-------------------------------------
(3,992) (1,574)
=====================================1,193 913
-------------------------------
(7,073) (2,702)
===============================
Cash paid for:
Interest 611 401
=====================================200 304
===============================
Income taxes 1,041 793
=====================================
Nine months ended
-------------------------------------
September 30, September 30,
2003 2002
$ $
Changes in non-cash working capital:
Accounts receivable - trade (5,526) (5,450)
Inventories (408) (145)
Prepaid expenses and other current assets (893) (39)
Accounts payable and accrued liabilities (1,924) 989
Customer and other deposits 187 (1,311)
-------------------------------------
(8,564) (5,956)
=====================================
Cash paid for:
Interest 1,329 1,253
=====================================
Income taxes 2,099 873-- 418
===============================
On May 1, 2003,13. Commitments and contingencies
(a) Sunrich Inc., a subsidiary of the Company issued 196,809 common shares in respecthas commenced a suit
against a supplier for failure to adhere to the terms of a contract.
The Company and its legal counsel believe that this claim has merit.
The Company has ceased co-packing arrangements under the acquisitionexisting
contract and has commenced packing under separate arrangements. It
cannot however be determined if there will be any recovery by the
Company at this time and the Company is expensing the costs of
Kettle Valley.
19pursuing this suit as incurred. The Supplier has counter-sued the
Company for breach of contract. The Company believes this suit is
unfounded. Other than this action, the Company has not been and is
not currently a party to any other material litigation.
- --------------------------------------------------------------------------------
SUNOPTA INC. 17 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the ninethree months ended September 30, 2003March 31, 2004
Unaudited
(Expressed(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12.13. Commitments and contingencies (a) Various claims or potential claims arising in the normal course of
business are pending against the Company. It is the opinion of
management that these claims or potential claims are without merit
and the amount of potential liability, if any, to the Company is not
determinable. Management believes the final determination of these
claims or potential claims will not materially affect the financial
position or results of the Company. Legal counsel has concluded the
outcome of these claims or potential claims is not determinable.continued
(b) The Company believes, with respect to both its operations and real
property that it is in material compliance with current
environmental laws, with the exception of its processing and
packaging facilities located in Alexandria, Minnesota. These
facilities are currently not in complete compliance with the
industrial permit limits for the discharge of industrial wastewater.
The Company has applied for increased discharge limits and is also
re-engineering certain processes and installing pre-treatment
equipment to remedy this issue. Other than this, basedlaws. Based on known existing conditions and the
Company's experience in complying with emerging environmental
issues, the Company is of the view that future costs relating to
environmental compliance will not have a material adverse effect on
its financial position, but there can be no assurance that
unforeseen changes in the laws or enforcement policies of relevant
governmental bodies, the discovery of changed conditions on the
Company's real property or in its operations, or changes in use of
such properties and any related site restoration requirements, will
not result in the incurrence of significant costs. No provision has
been made in these consolidated financial statements for these
future costs since such costs, if any, are not determinable at this
time.
(c) During the quarter the Company's subsidiary, Opta Food Ingredients,
Inc. (Opta) entered into an option agreement whereby a Purchaser was
granted a one year option to purchase the former Opta Corporate
Headquarters and Development Centre (45,000 square feet) at a price
of $4,850. The option was granted for a period of one year and
expires on September 22, 2004.
As per the terms of the option agreement, as of September 30, 2003
Opta has received a $500 non-refundable option deposit which will be
applied to the sale price at closing should the option be exercised.
Opta will also receive non-refundable monthly option payments of
$30, which will not be applied to the purchase price. An option
deposit in the amount of $700 is due on or before December 15, 2003
and Opta will also receive monthly option deposits of $20, all of
which will be applied to the purchase price if exercised. The $500
is recorded on the Company's balance sheet under customer and other
deposits.
(d) In the normal course of business, the Food Group holds grain for the
benefit of others. The Company is liable for any deficiencies of
grade or shortage of quantity that may arise in connection with such
grain.
(e)(d) Letters of credit:
i) An irrevocable letter of credit for $555$571 has been placed with
the Ontario Ministry of Environment and Energy as a security
deposit for the Certificate of Approval granted to the Company
for certain recycling activities. This letter of credit must
remain in place indefinitely as a condition of the Certificate
of Approval.
ii) An irrevocable letter of credit for $195$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.
20
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
12. Commitments and contingencies, continued
iii) Additional letters of credit totalling $28$29 have been placed
with third parties as security on transactions occurring in
the ordinary course of operations.
(f)(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:
$
2003 247
2004 1,6652,393
2005 1,5972,762
2006 1,5162,427
2007 1,3201,914
2008 and thereafter 1,433
---------------
7,778
===============
13.1,942
Thereafter 1,679
------
13,117
======
- --------------------------------------------------------------------------------
SUNOPTA INC. 18 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
14. Segmented information
Industry segments
The Company operates in three industry segments: a)(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;products. During 2003
the Company expanded its reporting structure and has further defined its
segments into Grains and Soy Products Group, SunOpta Ingredients Group and
Packaged and Distributed Products Group (which combined form the Food
Group). The addition of these segments reflects how management views and
manages the business and is aligned with the Company's vertically
integrated model; (b) the Environmental Industrial Group,Opta Minerals, processes, distributes, and recycles
industrial minerals; and (c) the StakeTech Steam Explosion Technology Group, engineers and markets
proprietary steam explosion technology systems for the pulp, biofuel and
food processing industries. Management
has identified its segments based on the nature of the products and
services being sold and its organizational structure in support of these
segments. Operating segments have been aggregated within the Food Group
segment. The Company's assets, operations and employees
are located in Canada and the United States.
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, 2003
---------------------------------------------------------------------------------March 31, 2004
----------------------------------------------------------------
StakeTech
Steam
Explosion
Technology
EnvironmentalSunOpta Opta Minerals Group and
Food Group IndustrialGroup Corporate Consolidated
$ $ $ $
External revenues by market
U.S 35,236 4,135 147 39,518
Canada 15,567 2,704 -- 18,271
Other 4,713 -- -- 4,713
----------------------------------------------------------------
Total revenues to external customers 55,516 6,839 147 62,502
----------------------------------------------------------------
Segment net earnings before interest expense and
income taxes 3,221 507 (848) 2,880
----------------------------------------------------------------
Interest expense -- -- 208 208
----------------------------------------------------------------
Provision for income taxes -- -- 802 802
----------------------------------------------------------------
Segment net earnings (loss) 3,221 507 (1,858) 1,870
----------------------------------------------------------------
The SunOpta Food Group has the following segmented reporting:
Three months ended
March 31, 2004
----------------------------------------------------------------
Grains and
Soy SunOpta Packaged and
Products Ingredients Distributed SunOpta
Group Group Products Group Food Group
$ $ $ $
External revenues by market
U.S 14,381 13,277 7,578 35,236
Canada 159 493 14,915 15,567
Other 3,143 1,515 55 4,713
----------------------------------------------------------------
Total revenues from external customers 17,683 15,285 22,548 55,516
----------------------------------------------------------------
Segment net earnings before interest expense and
income taxes 522 1,786 913 3,221
----------------------------------------------------------------
- --------------------------------------------------------------------------------
SUNOPTA INC. 19 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
14. Segmented information continued
Three months ended
March 31, 2003
--------------------------------------------------------------------------
StakeTech
Steam Explosion
Technology
SunOpta Opta Minerals Group and
Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 36,118 3,798 82 39,99829,825 1,993 225 32,043
Canada 6,274 2,6094,507 3,382 -- 8,8837,889
Other 1,434 69 -- 1,503
------------------------------------------------------------------------------1,452 24 3 1,479
--------------------------------------------------------------------------
Total revenues to external customers 43,826 6,476 82 50,384
------------------------------------------------------------------------------
Interest expense 362 96 222 680
------------------------------------------------------------------------------
Provision for (recovery of) income taxes 457 124 (234) 343
------------------------------------------------------------------------------35,784 5,399 228 41,411
--------------------------------------------------------------------------
Segment net earnings (loss) 2,451 638 (989) 2,100
------------------------------------------------------------------------------
Identifiable assets 101,508 23,523 32,879 157,910
------------------------------------------------------------------------------
Amortization 864 277 190 1,331
------------------------------------------------------------------------------
Expenditures on property, plantbefore
interest expense and equipment 1,097 185 16 1,298
------------------------------------------------------------------------------income taxes 1,688 472 (59) 2,101
--------------------------------------------------------------------------
Interest expense -- -- 491 491
--------------------------------------------------------------------------
Provision for income taxes -- -- 483 483
--------------------------------------------------------------------------
Segment net earnings (loss) 1,688 472 (1,033) 1,127
--------------------------------------------------------------------------
21
The SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
ForFood Group has the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
13. Segmented information, continuedfollowing segmented reporting:
Three months ended
September 30, 2002
------------------------------------------------------------------------------
Steam Explosion
Technology
EnvironmentalMarch, 2003
---------------------------------------------------------------------
Grains and SunOpta Packaged and
Soy Products Ingredients Distributed SunOpta
Group andGroup Products Group Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 24,985 3,323 76 28,38412,545 9,766 7,514 29,825
Canada 386 3,25853 289 4,165 4,507
Other 256 1,196 -- 3,644
Other 686 86 -- 772
------------------------------------------------------------------------------1,452
---------------------------------------------------------------------
Total revenues tofrom external customers 26,057 6,667 76 32,800
------------------------------------------------------------------------------
Interest expense 216 86 -- 302
------------------------------------------------------------------------------
Provision for (recovery of) income taxes (130) 451 (392) (71)
------------------------------------------------------------------------------12,854 11,251 11,679 35,784
---------------------------------------------------------------------
Segment net earnings (loss) 1,530 726 (729) 1,527
------------------------------------------------------------------------------
Identifiable assets 53,366 20,859 8,769 82,994
------------------------------------------------------------------------------
Amortization 793 220 41 1,054
------------------------------------------------------------------------------
Expenditures on property, plantbefore interest
expense and
equipment 722 162 19 903
------------------------------------------------------------------------------
Nine months ended
September 30, 2003
------------------------------------------------------------------------------
Steam Explosion
Technology
Environmental Group and
Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 103,800 8,335 383 112,518
Canada 17,305 10,060 -- 27,365
Other 4,406 144 3 4,553
------------------------------------------------------------------------------
Total revenues to external customers 125,511 18,539 386 144,436
------------------------------------------------------------------------------
Interest expense 1,165 277 222 1,664
------------------------------------------------------------------------------
Provision for income taxes 1,561 454 (446) 1,569
------------------------------------------------------------------------------
Segment net earnings 5,532 1,608 (1,580) 5,560
------------------------------------------------------------------------------
Amortization 2,663 686 408 3,757
------------------------------------------------------------------------------
Expenditures on property, plant and
equipment 3,208 513 57 3,778
------------------------------------------------------------------------------337 388 963 1,688
---------------------------------------------------------------------
22Customer concentration
The Company had one customer in the Food Group whose purchases were
greater than 10% of the Company's revenue for the period ending March 31,
2003. No customer was greater than 10% for the period ending March 31,
2004.
- --------------------------------------------------------------------------------
SUNOPTA INC. 20 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the ninethree months ended September 30, 2003March 31, 2004
Unaudited
(Expressed(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
13. Segmented information, continued
Nine months ended
September 30, 2002
--------------------------------------------------------------------------
Steam Explosion
Technology
Environmental Group and
Food Group Industrial Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S. 65,687 8,744 226 74,657
Canada 652 9,608 -- 10,260
Other 2,370 174 -- 2,544
--------------------------------------------------------------------------
Total revenues to external customers 68,709 18,526 226 87,461
--------------------------------------------------------------------------
Interest expense 808 222 -- 1,030
--------------------------------------------------------------------------
Provision for (recovery of) income taxes 352 909 (583) 678
--------------------------------------------------------------------------
Segment net earnings (loss) 2,583 1,589 (918) 3,254
--------------------------------------------------------------------------
Amortization 2,174 640 103 2,917
--------------------------------------------------------------------------
Expenditures on property, plant and
equipment 2,169 794 92 3,055
--------------------------------------------------------------------------
Geographic segments
September 30, December 31,
2003 2002
-------------------------------------- ---------------------------------------
U.S. Canada Total U.S. Canada Total
$ $ $ $ $ $
Property, plant and
equipment 29,520 10,535 40,055 29,568 7,465 37,033
====================================== =======================================
Goodwill and intangibles 11,669 5,551 17,220 11,655 3,337 14,992
====================================== =======================================
Total assets 92,782 65,128 157,910 87,399 27,888 115,287
====================================== =======================================
Customer concentration
The Company has one customer in the Food Group whose purchases were 14.8%
(September 30, 2002 - 13.6%) of the Company's third quarter total revenue
and 12.7% of the Company's total revenue in the first nine months of 2003
(September 30, 2002 - 14.0%).
23
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the nine months ended September 30, 2003
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
14. United States15. Canadian generally accepted accounting principlesprinciple differences
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada (Canadianthe United States (U.S.
GAAP) which conform in all material respects applicable to the Company
with those in the United States (U.S.Canada (Canadian GAAP) during the periods presented, except
with respect to the following:
Under U.S. GAAP, certain pre-operating costs of $nil incurred in the nine
months ended September 30, 2003, (2002 - $276), deferred in these
financial statements would be expensed. Amortization of $258 in the nine
months ended September 30, 2003, (2002 - $170) related to pre-operating
costs would not have been expensed.
In conjunction with the issuance of the convertible debenture in 2002 for
Canadian GAAP purpose, the fair value of the convertible right was
determined to be $54. For U.S. GAAP purposes, the convertible right would
not be recorded until the option right is exercisable.
On March 11, 2002, the Company committed to grant certain employees
114,000 options to acquire 114,000 common shares at $2.15. These options
were provided to employees' contingent upon approval by the shareholders
of the 2002 stock option plan. This approval was received on June 18,
2002. Under U.S. GAAP, the difference in stock price between the exercise
price and the closing price the day immediately preceding the day of
shareholders' approval is considered to be compensation expense.
Accordingly, $62 would be recorded under U.S. GAAP in 2002 as stock option
compensation expense.
Accordingly, the following would have been reported under U.S. GAAP:items:
Three months ended
Nine months ended Year ended
---------------------------------------------------------------------------------
September 30, September 30, September 30, September 30, December---------------------------------
March 31, March 31,
2004 2003 2002 2003 2002 2002
$ $
$ $ $
Net earnings for the period - as reported 2,100 1,527 5,560 3,254 3,7661,870 1,127
Pre-operating costs expensed 98 90 258 170 271
Pre-operating costs capitalizedexpenses (i) -- -- -- (276) (276)
Accretion on convertible debenture 54 -- 54 -- --(90)
Stock option compensation expense (ii) (134) -- -- -- (62) (62)
Tax effect of above items (58) (36) (119) 42 42
------------------------------------------------------------------------------ 27
---------------------------------
Net earnings for the period - U.S.Canadian GAAP 2,194 1,581 5,753 3,128 3,701
============================================================================1,736 1,064
=================================
Net earnings per common share - U.S.Canadian GAAP - Basic 0.05 0.04 0.13 0.08 0.09
============================================================================0.03 0.03
=================================
Net earnings per share - Canadian GAAP - Diluted 0.04 0.04 0.12 0.07 0.09
============================================================================0.03 0.02
=================================
Shareholders' equity - as reported 115,009 43,701 49,527123,264 49,311
Cumulative pre-operating costs, net of amortization, net of tax (61) (268) (215)
Cumulative stock compensation expense (416) (416) (416)
------------------------------------------------ 216
---------------------------------
Shareholders' equity - U.S.Canadian GAAP 114,532 43,017 48,896
==============================================123,264 49,527
=================================
Retained earnings as reported 17,649 15,779
Cumulative pre-operating costs, net of amortization, net of tax (i) -- 216
Stock option compensation expense, net of tax (ii) (795) --
---------------------------------
Retained earnings - Canadian GAAP 16,854 15,995
=================================
24- --------------------------------------------------------------------------------
SUNOPTA INC. 21 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the ninethree months ended September 30, 2003March 31, 2004
Unaudited
(Expressed(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
14. United States15. Canadian generally accepted accounting principles differences, continued
Comprehensive income
U.S.(i) Under Canadian GAAP, requires that a comprehensive income statement be prepared.
Comprehensive income is defined as "The changecertain costs expensed in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner events". It includes all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. The comprehensive statement reconciles the
reported net income to the comprehensive income.
The following is a comprehensive income statement (prepared in accordance
with U.S. GAAP), which,prior years under U.S. GAAP
would have been deferred and amortized. Net costs incurred in the
same prominencepre-operating stage of a start-up business are deferred until the business
reaches commercial operation or the passage of a certain period of time as
other financial statements.
Three months ended Nine months ended Year ended
----------------------------------------------------------------------------------
September 30, September 30, September 30, September 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Net earnings for the period-U.S. GAAP 2,194 1,581 5,753 3,128 3,701
Currency translation adjustment 40 (587) 2,102 4 112
----------------------------------------------------------------------------------
Comprehensive income for the period 2,234 994 7,855 3,132 3,813
==================================================================================
Other U.S.predetermined by management.
Under Canadian GAAP, disclosures
Changes in reserves Three months ended Nine months ended Year ended
----------------------------------------------------------------------------------
September 30, September 30, September 30, September 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Allowance for doubtful accounts
Balance - beginning of period 675 510 709 367 367
Additions chargedthe 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 expense including
effects of foreign exchange rate 322 674 427 817 450
differences
Accounts receivable charged off, net (230) -- (369) -- (108)
of recoveries
----------------------------------------------------------------------------------
Balance - end of period 767 1,184 767 1,184 709
==================================================================================
Future income tax valuation allowance
Balance - beginning of period 4,107 479 4,107 479 479
Additions to valuation allowance -- -- -- -- 4,107
Adjustments to valuation allowance -- -- -- -- (479)
----------------------------------------------------------------------------------
Balance - end of period 4,107 479 4,107 479 4,107
==================================================================================
25
SunOpta
Aseptic Inc.
Condensed Notes) which under Canadian GAAP would have been considered a
start-up business from the date of acquisition to Consolidated Financial Statements
ForDecember 31, 2000.
Certain operating costs, net of income earned during the ninepre-operating
period totaling $482 would have been deferred. Amortization of these costs
would have commenced January 1, 2001 and as of December 31, 2003 these
deferred costs would have been fully amortized.
Amortization of $nil in the three months ended September 30,March 31, 2004 (March 31,
2003 Unaudited
(Expressed- $90) relating to these pre-operating costs would have been expensed
under Canadian GAAP.
(ii) Effective January 1, 2004, Canadian GAAP requires the Company to record
stock compensation expense on options granted to employees. Under the
transitional provisions of this new standard, the Company would record a
charge through retained earnings representing the cumulative impact of
stock options granted since January 2002 and would record an expense for
existing and any new options over the remaining vesting period.
In conjunction with the standard, under Canadian GAAP, the Company would
have recorded $134 in thousandsstock compensation expense for the three months
ended March 31, 2004 (2003 - $nil) and a charge to retained earnings of
U.S. dollars)
- --------------------------------------------------------------------------------
14. United States generally accepted accounting principles differences,
continued
September December 31,
30, 2003 2002
$ $
Accrued payroll 2,167 1,235
================= ===============$661 for prior year expenses.
16. Proforma data (unaudited)
Condensed proforma income statement, as if the acquisitions of
Opta, Wild
West, Organic Kitchen, Simply OrganicDistribue-Vie, Kettle Valley, Pro Organics, Sigco Sun Products and Kettle ValleySonne
Labs Inc. had occurred at the beginning of 2002,2003, is as follows:
Three months ended Nine months ended Year ended
-------------------------------------------------------------------------------------
September 30, September 30, September 30, September 30, December 31,
2003 2002 2003 2002 2002
$ $ $ $ $
Revenues 50,384 44,185 145,760 120,278 153,686
Net earnings 2,100 1,837 5,622 4,060 4,875
Earnings per share
- Basic 0.05 0.04 0.13 0.10 0.12
- Diluted 0.04 0.04 0.12 0.09 0.11
15.Three months ended
------------------
March 31, March 31,
2004 2003
$ $
Revenues 63,446 54,689
Net earnings 1,920 1,626
Earnings per share
- Basic 0.04 0.04
- Diluted 0.03 0.04
- --------------------------------------------------------------------------------
SUNOPTA INC. 22 March 31, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three months ended March 31, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
17. Subsequent Events
On October 10, 2003,Subsequent to March 31, 2004 the Company completed three acquisitions:
(a) Distribution A & L
On April 1, 2004 the Company acquired 100% of the outstanding shares of
Pro Organics Marketing Inc,Distribution A & L of Drummondville, Quebec for approximately $390
including acquisition costs.
(b) General Mills Oat Fiber Facility
On April 19, 2004 the Company completed the purchase of the General
Mills Bakeries & Foodservice oat fiber processing facility and
related companies ("Pro Organics")inventory located in Cedar Rapids, Iowa for cash considerationapproximately
$11,600 including associated costs.
(c) Supreme Foods Limited
On May 1, 2004 the Company completed the acquisition of Supreme
Foods Limited (Supreme) headquartered in Toronto, Canada for
approximately $5,000 including transaction costs.$7,700. The terms of the agreement also provide for an earn out during the three
year period commencing January 1, 2004. Pro Organics resultsacquisition price will be included in the Company's consolidated financial statements from the date
of acquisition.
Pro Organics is a leading distributor of certified organic fresh foods in
Canada with distribution facilities located in Vancouver, Toronto and
Montreal.
16. Comparative balances
Certain line items in the prior year consolidated balance sheet and prior
years consolidated statements of earnings and consolidated statements of
cash flows have been combined to achieve comparability to current year's
presentation. The reclassifications of these prior year balances did not
have a significant impactadjusted based
on the presentation of the consolidated
financial statements.
26actual net assets owned by Supreme at closing.
- --------------------------------------------------------------------------------
SUNOPTA INC. 23 March 31, 2004 10-Q
PART I - FINANCIAL INFORMATION
Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Significant Developments
Effective October 31, 2003Change to U.S. GAAP
As of January 1, 2004, SunOpta changed the Company changed it's namebasis of financial statement
preparation from Stake Technology
Ltd.generally accepted accounting principles in Canada to SunOpta Inc. The new name combinesthose
generally accepted in the names of twoUnited States. This change was made as a majority of
the Company's historical operating food groups,operations and shareholders are located in the Sunrich Food GroupU.S. As a result of
this change comparative financial statement balances and Opta Food
Ingredients.related notes have been
amended to reflect the change to U.S. GAAP. Note 15 to the consolidated
financial statements reconciles differences between U.S. and Canadian GAAP.
Acquisitions during 2004
Distribue-Vie
On March 1, 2004 SunOpta acquired the outstanding common shares of Distribue-Vie
Fruits & Legumes Biologiques Inc. (Distribue-Vie) for $911 including acquisition
costs.
Distribue-Vie specializes in the distribution of organic fresh foods with an
emphasis on produce. Distribue-Vie is the dominant player in the distribution of
organic produce in Quebec and operates from a warehousing facility located in
Montreal, servicing the key Quebec market along with geographic reach to Eastern
Ontario and the Maritime provinces.
The change reflects the Company's commitmentaddition of Distribue-Vie to environmental
responsibility and to theSunOpta's Canadian natural and organic
foods markets.distribution system is expected to bring significant benefits to the customer
base in the form of broader product lines and greater support for consumer
education of organics through marketing and retail merchandising initiatives.
Distribution A & L
On October 10, 2003,April 1, 2004 the Company acquired 100% of the outstanding common shares of
Pro
Organics Marketing Inc, and related companies ("Pro Organics")Distribution A & L of Drummondville, Quebec for cash
consideration of approximately $5,000,000. The terms of the agreement also
provide for an earn out during the three year period commencing January 1, 2004.
Pro Organics results will be included in the Company's consolidated financial
statements from the date of acquisition.
Pro Organics$390 including
acquisition costs.
Distribution A& L is a distributor of certified organic fresh foods in Canada with
distribution facilitiesabrasives to small and specialty customers
including retail markets. The acquisition gives Opta Minerals better access to
retails markets for their abrasives.
General Mills Oat Fiber Facility
On April 19, 2004 the Company completed the purchase of the General Mills
Bakeries & Foodservice oat fiber processing facility and related inventory
located in Vancouver, TorontoCedar Rapids, Iowa, for approximately $11,600 including associated
costs.
The Company's growth in oat fiber has been driven by the significant increase in
consumer demand for healthier food offerings, resulting from the popularity of
low-carb diets such as Atkins and Montreal. Pro Organics
supplies a rangeSouth Beach, and the general trend to improve
the nutritional content of certified organic produce as well as offerings in organic
bulk foods and dairy.
On August 11, 2003,foods. The facility complements the two other oat
fiber facilities that the Company entered into a public offering in the United
Statesoperates and certain provinces of Canada to sell 7,000,000 common shares at $7.00
per common share, for gross proceeds of $49,000,000. The common shares were
offered in the United States pursuant to a registration statement on Form S-3
filed bywill enable the Company withto
streamline oat fiber production across the Securitiesthree facilities, lengthening run
times and Exchange Commission, which became
effective on July 30, 2003. In connection with the offering, the Company also
filed a preliminary short form prospectus in Canada on August 11, 2003 and a
prospectus supplement in the United States on August 12, 2003. Funds from the
public offering were received on August 28, 2003. The Company also granted the
underwriters an over-allotment of 500,000 shares which was exercised on
September 4, 2003, for gross proceeds of $3,500,000. Total transaction costs
were $1,806,000, net of tax.
Concurrent with the offering described above, the Company entered into an
agreement with a trust of which Mr. Stephen Bronfman, a director of the Company,
is the beneficiary, whereby the Company sold 285,714 common shares at $7.00 per
common share for gross proceeds of $2,000,000.improving operating efficiencies.
Supreme Foods
On May 1, 2003,2004 the Company acquired 100% of the outstanding shares of Kettle
Valley Dried Fruits Ltd. and its related companies ("Kettle Valley") for a total
purchase consideration of $2,669,000. Consideration consisted of $874,000 in
cash, a note payable of $820,000, interest at 5%, repayable semi-annually over
five years, a note payable of $155,000, interest of 2.5% due in February 2004
and the issuance of 196,809 common shares for $820,000. Kettle Valley's results
since the date of acquisition have been included in the Company's consolidated
financial statements.
Kettle Valley produces natural and organic fruit bars and fruit leathers with an
apple base and markets these products under the Kettle Valley Real Fruit Snack
and Frunola brands. Kettle Valley operates two production facilities in
Summerland, British Columbia and has constructed a third plant in the State of
Washington, the center of the apple growing district of the Western U.S. In
addition, Kettle Valley produces a number of private label products for
customers in the U.S., Canada and the United Kingdom. Kettle Valley's products
are sold through agents and distributors to the health food and mass markets as
well as to various school districts.
During the second quarter, due tocompleted the acquisition of Kettle Valley, the Company
increased its Canadian line of credit to CDN $7,500,000 from CDN $5,000,000.
In March 2003, the Company amended its financing arrangements.Supreme Foods Limited
(Supreme) headquartered in Toronto, Ontario for approximately $7,700. The
amendment
syndicated the financing arrangements to a group of banks, which includes
existing lenders and increased the term loan by $7,800,000 to $21,700,000
($20,325,000 as at September 30, 2003). In addition, the U.S. line of credit
facility was increased by $4,000,000 to $9,000,000. The Company used the
incremental proceedsacquisition price will be adjusted based on the term loan, utilizedactual net assets owned by
Supreme at closing.
- --------------------------------------------------------------------------------
SUNOPTA INC. 24 March 31, 2004 10-Q
Supreme Foods
Supreme's focus and strength in grocery products will become the U.S. linebase of
credit facility
toSunOpta's growing natural, organic, kosher and specialty foods distribution
business in Eastern Canada. The combination of Supreme's business in the extentEast,
with the grocery business of $3,500,000Wild West in the West, creates a national platform
for SunOpta and utilized $3,886,000will allow for considerable expansion of cash on hand to repay the
tender facility which had been obtained to finance the acquisition of Opta Food
Ingredients, Inc. The term loan is repayable in quarterly installments and is
intended to amortize the debt over seven years. The term loan has a two-year
maturity at which
27
point the facility is renewable at the option of the lender and the Company. The
Company fully expects to renew this facility.product lines.
Operations For the Three Months Ended September 30, 2003ended March 31, 2004 Compared With the Three
Months Ended September 30, 2002March 31, 2003
Consolidated
Revenues in the first three months ended September 30, 2003of 2004 increased by 53.6% or
$17,584,00050.9% to $50,384,000 from $32,800,000$62,502,000
versus $41,411,000 in the first three months ended September
30, 2002. Netof 2003. The Company's net earnings
for the first three months ended September 30, 2003of 2004 were $2,100,000 or $0.05 per basic common share compared to $1,527,000$1,870,000 or $0.04 per basic common
share (diluted - $0.03) compared to $1,127,000 or $0.03 per basic common share
(diluted - $003) for the first three months of 2003, representing a 65.9%
increase.
The increase in the Company's revenues is due to a $19,732,000 increase in
revenue from the SunOpta Food Group and an increase of $1,440,000 from Opta
Minerals, partially offset by an $81,000 decrease in revenue attributable to the
StakeTech Steam Explosion Group. These increases are due to continued internal
growth in certain product lines and the impact of acquisitions completed to
date. Details are provided in the segmented analysis below.
Net earnings before interest expense, other income (expense), foreign exchange
gains (losses) and income taxes increased to $3,136,000 compared to $1,723,000
for the same period in the prior year, an 82% increase. The increases are due to
the acquisitions completed in the prior year, internal sales growth and
synergies and cost reductions realized throughout the organization. Further
details are included in segmented analysis detailed below.
Interest expense decreased to $208,000 in the three months ended September 30, 2002. The increase
in revenues is due to an increase in grain sales of $1,749,000, an increase in
sales of aseptic packaged product of $3,203,000, the acquisitions of Opta, Wild
West, Simply Organic and Kettle Valley, totalling $13,797,000, offset by a
decrease in certain consumer products revenues of $776,000 and other revenues of
$389,000.
Net earnings before income taxesMarch 31, 2004
from $491,000 in the three month periodmonths ended September 30,
2003 were $2,443,000,March 31, 2003. The decrease in
borrowing costs reflects the decrease in debt outstanding during the quarter
compared to $1,456,000 over the same period in 2002, an
increase of $987,000 or 67.8%. The increase is primarily attributable to an
increase in margin in certain food processing gross profit of $215,000, earnings
resulting from the acquisitions noted above of $1,241,000three months ended March 31, 2003 and a reduction in the
foreign exchange losslower borrowing costs as a
result of fluctuationsimproved financial ratios impacting the premium over LIBOR that the
Company pays and lower LIBOR rates in the Canadian dollar of
$151,000. Significant offsetting factors include a reduction of $272,000 in
gross profit due to weak abrasive sales in the U.S. East coast, an increase in
selling general and administration costs of $355,000 due to increased bank
financing fees, public companygeneral.
Interest and other expenses, and an increaseincome (expense) decreased to ($115,000) in borrowing
costs of $194,000, primarily attributable to the accretion of interest on
extinguishment of debt repaid in the quarter.
Net earnings for the three months
ended September 30, 2003 increased by $573,000
or 37.5% over the same period in 2002 as a result of the factors noted above,
offset by an increaseMarch 31, 2004 from $37,000 in the effective income tax rate inthree months ended March 31, 2003,
primarily due to plant closing costs of $186,000 for the third quarterSt. Thomas and Hamilton
facilities.
Foreign exchange gain (loss) of 2003($141,000) compared to 14% from (4.9%)$341,000 in the same
period in 2002.2003 is due to the depreciation of the Canadian dollar in the three
months ended March 31, 2004 compared to significant appreciation in the Canadian
dollar in the same period last year.
The provision for income taxes in the first three months of 2004 reflects the
Company's estimated effective income tax rate for the third quarter 2003 reflects the cumulative year-to-date impactin 2004 of the recognition of certain loss carry-forwards and the implementation of tax
planning strategies. The effective rate in third quarter 2002 of (4.9%) reflects
the recognition of certain tax loss carry-forwards in the amount of $600,000.
U.S. readers30%.
Readers should note that due to differences between Canadian and U.S. GAAP, the
earnings for the three months ended September 30,March 31, 2003 was revised from $1,064,000
as previously reported under Canadian GAAP to $1,127,000 under U.S. GAAP are
$2,194,000 or $0.05 per basic common share versus $1,581,000 or $0.04 per basic
common share in the same period in 2002.GAAP. Note
1415 to the consolidated financial statements itemizes these differences.
Cost of goods sold increased by 50.5% to $41,404,000 for the three months ended
September 30, 2003 compared to $27,510,000 for the three months ended September
30, 2002. The increase is consistent with the revenue factors noted above.
The Company's consolidated gross profit margin of 17.8% for the three months
ended September 30, 2003 was higher than the 16.1% recognized in the same period
in 2002. Improvements attributable to higher margins in the businesses acquired
in 2002differences between U.S.
and 2003 and improvements in volumes at the Company's aseptic packaging
operation were offset by the significant increase in grain sales, a lower margin
business averaging less than 10% gross profit margin.
Selling, general and administrative expenses increased to $5,887,000 in the
three months ended September 30, 2003 compared to $3,240,000 for the three
months ended September 30, 2002. The increase in administrative costs is mainly
due to the acquisitions completed in 2002 and 2003 of $2,292,000, additional
amortization charges related to bank financing fees of $129,000 and an increase
of public company, insurance and other corporate expenses of $226,000.
Interest expense increased to $680,000 in the three months ended September 30,
2003 from $302,000 in the three months ended September 30, 2002. The increase in
borrowing costs reflects the loss on extinguishment of debt of $183,000, and the
increase in borrowings to support the acquisitions completed in 2002 and 2003.
Interest and other income of $202,000 in the three months ended September 30,
2003 is $172,000 greater than the $30,000 recognized in the three months ended
September 30, 2002. The increase is primarily due to a gain
28
recognized on a discharged liability and proceeds recorded on unexercised
foreign exchange option agreements entered into during the quarter.
Foreign exchange improved in the three months ended September 30, 2003 to a loss
of $171,000 compared to a loss of $322,000 in the three months ended September
30, 2002.
The provision for income taxes reflects the Company's estimated effective tax
rate in fiscal 2003 of 22%.Canadian GAAP.
Segmented Operations Information
(Note: Certain prior year figures have been adjusted to conform with the current
year presentation which eliminates all inter-company charges forand segmented reporting purposes)
The Company currently treats thereporting.)
SunOpta Food Group
as one reporting segment. With the
continued expansion of theThe SunOpta Food Group thecontributed $55,516,000 or 88.8% of total Company
isconsolidated revenues in the processfirst three months of transitioning its management structure and related reporting systems2004 versus $35,784,000 or
86.4% in supportthe same period in 2003. The increase of its vertically integrated food model. The Company intends to expand segmented
reporting once this transition is complete and information is compiled and
reviewed accordingly and intends to provide expanded segments no later than
December 31, 2003.$19,732,000 or 55.1% in
SunOpta Food Group Revenuesrevenues was primarily due to increased sales of oat fiber,
specialty food ingredients
- --------------------------------------------------------------------------------
SUNOPTA INC. 25 March 31, 2004 10-Q
and the acquisitions completed in 2003, partially offset by a decline in sales
of certain consumer products as discussed below.
Gross margins as a percentage of sales increased in the quarter from 16.3% to
19.7% reflecting the impact of improved product mix and cost rationalization
across the organization.
Net earnings before interest expense and income taxes in the SunOpta Food Group
were $43,826,000 or 87% of total revenuesincreased 90.8% to $3,221,000 in the three months ended September 30,March 31, 2004 compared
to $1,688,000 in the three months ended March 31, 2003.
Grains & Soy Products Group
The Grains and Soy Products Group contributed $17,683,000 in revenues in the
first three months of 2004 versus $12,854,000 in 2003, versus $26,057,000,a 37.6% increase.
Revenues were favourably impacted in the quarter by the acquisition of Sigco Sun
Products (Sigco) in late 2003, totalling $5,307,000, partially offset by revenue
decreases of $478,000 mainly attributable to a decrease in shipments of grain
products as a result of supply issues related to the 2003 crop year, net of
higher commodity prices.
Gross margin in the Grains and Soy Products Group increased by $512,000 in the
three months ended March 31, 2004 to $2,306,000 or 79%13.0% of total
revenues compared to
$1,794,000 or 14.0%, in the same period in 2002.2003. The increase of $17,769,000 or 68.2% in
Food Group revenues was due to an increase in grain sales of $1,749,000, an
increase in sales of aseptic packaged product of $3,203,000, the acquisition of
Opta, Wild West, Simply Organic and Kettle Valley, totalling $13,797,000, offset
by a decrease in consumer products revenues of $776,000 and a decrease in other
revenues of $204,000. The increase in Food Group revenues as a percentage of
consolidated revenues reflects the Company's focus on the natural and organic
food markets via a combination of internal growth projects and acquisitions.
Gross profit in the Food Group increased by $4,088,000 in the three months ended
September 30, 2003 to $7,401,000 or 16.9% of revenues compared to $3,313,000 or
13.0% of revenues in the same period in 2002. The increase in gross profit
margins is related primarily to product mix as a
percentage of sales reflects thesunflower products lines acquired
have historically higher gross margins of the acquired businesses and
improvements in efficiencies and volumes at the Company's aseptic packaging
operation, partiallythan other grain products, offset by
the significant increaseprice pressure in grain sales, a lower
margin business.soy commodity and ingredient margins due in most part to
commodity pricing issues.
Selling, general and administrative expenses increased to $4,257,000$1,839,000 in the
three months ended September 30, 2003March 31, 2004 versus $1,953,000$1,457,000 in the three months ended
September 30, 2002.March 31, 2003. The increase of $2,304,000 is due primarily to acquisitionsthe Sigco acquisition completed
in 2002 and 2003 of $2,292,000.
Interest expense increased to $362,0002003. Other income in the three months ended September 30,
2003 from $216,000March 31, 2004 of $55,000 is
primarily related to a gain recognized on the disposition of assets.
Net earnings before interest expense and income taxes in the Grains and Soy
Products Group was $522,000 in the three months ended September 30, 2002, primarily as a
result of the acquisitions completed in 2002 and 2003.
Net earnings in the Food Group increased by 60.2%March 31, 2004 compared to
$2,451,000$337,000 in the three months ended September 30,March 31, 2003, compareddue in most part to net earningsthe
factors noted above.
SunOpta Ingredients Group
The SunOpta Ingredients Group (Ingredients Group) contributed $15,285,000
revenues in the first three months of $1,530,0002004 versus $11,251,000 in 2003 a 35.9%
increase. The increase in revenues is attributable to increased sales of oat
fiber and specialty food ingredients. Oat fibre increases of $2,117,000 resulted
from the demand generated by low carb diets (such as Atkins, South Beach and
Hampton diets) and fiber enriched foods and were supported by increased capacity
due to expansion projects completed in late 2003 and early 2004 at our Cambridge
facility. Increases in specialty food ingredients were primarily attributable to
increases in ingredient blends and strong soluble fiber sales.
Gross margin in the Ingredients Group increased by $1,704,000 in the three
months ended September 30, 2002March 31, 2004 to $3,687,000 or 24.1% of revenue compared to
$1,980,000 or 17.6% of revenue, in the same period in 2003. The increase in
gross margin reflects increased percentage of oat fiber revenues on a
comparative basis, improved plant utilization and cost rationalization
initiatives.
Selling, general and administrative expenses increased to $1,824,000 in the
three months ended March 31, 2004 versus $1,564,000 in the three months ended
March 31, 2003. The increase is primarily due to recruiting and new hires
related to filling previously vacant positions.
Other expenses in the three months ended March 31, 2004 increased to $77,000
compared to $28,000 in the same period in 2003. The increase is primarily
related to costs incurred to close the St. Thomas Facility and costs incurred to
prepare the Bedford facility for sale, partially offset by proceeds recognized
on the option to sell the Bedford Facility. The loss recognized in 2003 was
attributable to foreign exchange.
Net earnings before interest expense and income taxes in the Ingredients Group
were $1,786,000 in the three months ended March 31, 2004 compared to $388,000 in
the three months ended March 31, 2003, due primarily to the factors noted above.
- --------------------------------------------------------------------------------
SUNOPTA INC. 26 March 31, 2004 10-Q
Packaged & Distributed Products Group
The Packaged & Distributed Products Group contributed $22,548,000 revenues in
the first three months of 2004 versus $11,679,000 in 2003, an increase of
$10,869,000 or 93.1%. Revenues were favourably impacted by increased produce and
grocery revenues of $1,415,000 and revenues of $10,394,000 resulting from the
acquisitions completed in 2003 in the Canadian Distribution Group and in the
healthy convenience foods sector (including 24.6% internal growth in the
acquired companies from the same quarter in the prior year), partially offset by
a decline of $940,000 in certain consumer product revenues due to certain
customers balancing inventories.
Gross margin in the Packaged & Distributed Products Group increased by
$2,870,000 in the three months ended March 31, 2004 to $4,920,000 or 21.8%
compared to $2,050,000 or 17.6%, in the same period in 2003. The increase in
gross margin was attributable to the acquired businesses which inherently have
higher margin rates and other increases due to synergies recognized in legacy
companies within the Canadian Distribution Group. The increases noted were
offset by a reduction in contribution due to the decline in sales of aseptic
consumer products related to specific customers including the effects of reduced
production and fixed overhead absorption at our SunOpta aseptic facility.
Warehousing and distribution costs increased to $1,156,000 in the three months
ended March 31, 2004 versus $178,000 in the three months ended March 31, 2003.
Selling, general and administrative expenses increased to $2,823,000 in the
three months ended March 31, 2004 versus $940,000 in the three months ended
March 31, 2003. The increases noted are due primarily to the acquisitions noted
above.
Other expenses in the three months ended March 31, 2004 of $28,000 compared to
other income of $31,000 in same period in 2003. The expense recognized is due to
foreign exchange.
Net earnings before interest expense and income taxes in the Packaged &
Distributed Products Group were $913,000 in the three months ended March 31,
2004 compared to $963,000 in the three months ended March 31, 2003 due to the
factors noted above.
Net
earningsOpta Minerals
Opta Minerals contributed $6,839,000 or 10.9% of the total Company consolidated
revenues in the first three months of 2004, versus $5,399,000 or 13.0% in 2003.
Revenues were favourably impacted by increased demand for silica free abrasives
due to an increased activity level in the U.S..
Gross margins in Opta Minerals were $1,305,000 in the three months ended September 30, 2002 reflect the recognition of
certain tax loss carry forwards in the amount of $600,000.
Environmental Industrial Group
Revenues in the Environmental Industrial Group were $6,476,000 for the three
months ended September 30, 2003, compared to $6,667,000 in 2002. Improved
abrasive and mineral sales from the Canadian operations of $229,000 were offset
by weak abrasive sales in the U.S. East coast of $523,000. Weak abrasive sales
in the U.S. operations resulted from fewer ships in port undergoing cleaning and
maintenance as a result of the war effort and extreme weather conditions late in
the quarter. Specialty sands revenues including water filtration sands and
garnets improved by $94,000 over the same period in 2002.
Gross profit in the Environmental Industrial Group was $1,495,000March
31, 2004 versus $1,066,000 in the three months ended September 30, 2003 versus $1,902,000 in the three months ended
September 30, 2002.March 31, 2003. As a
percentage of revenues, gross margin decreased to 23.1%19.1% in the first three
months ended September 30, 2003of 2004 from 28.5%19.7% in the first three months ended September
29
30, 2002.of 2003. The decrease in
margin is partially due primarily to increasing material costs within the shift in revenues to
the Canadian operations, which have inherently lower margins,foundry industry
and a reallocation
of certain plant operating costs from selling, general and administrative
expenses to cost of goods sold in 2003 of $104,000.
Selling, general and administrative expenses decreased to $642,000 in the three
months ended September 30, 2003 compared to $703,000 in the three months ended
September 30, 2002. The decrease in expenses was due to the reallocation of
certain plant costs noted above offset by incremental professional fees and
information system costs.
Interest expense increased to $96,000 in the three months ended September 30,
2003 from $86,000 in the three months ended September 30, 2002, mainly due to
cash utilization as a result of payments made as part of the acquisition of
Virginia Materials in 2001.
Net earnings were $638,000 in the three months ended September 30, 2003 versus
$726,000 in the three months ended September 30, 2002 due to the factors noted
above.
Steam Explosion Technology Group
Revenues of $82,000 for the three months ended September 30, 2003 (2002 -
$76,000) were primarily derived from licence fees.
Selling, general and administrative expenses were $91,000 for the three months
ended September 30, 2003 compared to $72,000 for the same period in 2002. These
costs reflect payroll and related expenses required to manage and maintain the
business.
Net loss for the period of $8,000 fell short of the profit of $9,000 recognized
in the same period in 2002.
Corporate Activities
Selling, general and administration expenses were $898,000 in the three months
ended September 30, 2003 compared to $513,000 in the three months ended
September 30, 2002. The increase of $385,000 reflects the additional
amortization of bank financing fees of $129,000, and an increase in other
administrative costs of $256,000 including investor relations, public company,
insurance and professional fees.
Operations For the Nine Months Ended September 30, 2003 Compared With the Nine
Months Ended September 30, 2002
Consolidated
Revenues in the first nine months of 2003 increased by 65.1% or $56,975,000 to
$144,436,000 from $87,461,000 in the first nine months of 2002, and the
Company's net earnings for the first nine months in 2003 were $5,560,000 or
$0.13 per basic common share compared to $3,254,000 or $0.08 per basic common
share for the first nine months of 2002. The increase in revenues is due to an
increase in grain sales of $12,480,000, an increase in sales of aseptic packaged
product of $7,908,000, the acquisitions of Opta, Organic Kitchen, Wild West,
Simply Organic and Kettle Valley, totalling $39,291,000, offset by decreases in
certain customer products, toll processing, and other revenues of $2,704,000.
Net earnings before income taxes in the nine-month period ended September 30,
2003 were $7,129,000, compared to $3,932,000 over the same period in 2002, an
increase of $3,197,000 or 81.3%. The increase is primarily attributable to
improved volumes and margins in aseptic packaged products of $1,752,000, net
increase in gross profit as a result of the increase in grain sales and change
of customer mix totalling $298,000, earnings derived from the acquisitions noted
above of $2,345,000 and an increase in the foreign exchange gain as a result of
the appreciation in the Canadian dollar of $285,000. Significant offsetting
factors include a reduction in dairy blend processing margins of $649,000 due to
low competitive costs, a shortfall in earnings due to weak abrasive sales in the
U.S. East Coast of $635,000, and an increase in administrative and other costs
of $199,000, excluding acquisitions.
Net earnings for the nine months ended September 30, 2003 increased by
$2,306,000 or 70.9% over the same period in 2002. The increase in earnings was
as a result of the factors noted above, offset by an increase in the effective
income tax rate to 22% in 2003 from 17% in 2002.
30
U.S. readers should note that due to differences between Canadian and U.S. GAAP,
the earnings for the nine months ended September 30, 2003 under U.S. GAAP are
$5,753,000 or $0.13 per basic common share versus $3,128,000 or $0.08 per basic
common share in the same period in 2002. Note 14 to the consolidated financial
statements itemizes these differences.
Cost of goods sold increased by 62.4% to $119,232,000 for the nine months ended
September 30, 2003 compared to $73,431,000 for the nine months ended September
30, 2002. The increasing factors are consistent with the revenue factors noted
above.
The Company's consolidated gross profit margin increased to 17.4% of revenue for
the nine months ended September 30, 2003 versus 16.0% of revenues in the nine
months ended September 30, 2002. The improvement in gross margin is attributable
to the higher gross profit margin in the businesses acquired in 2002 and 2003
and improvements in efficiencies and volumes at the Company's aseptic packaging
operation, offset by the significant increase in grain sales, a lower margin
business averaging less than 10% in gross margin.mix.
Selling, general and administrative expenses increased to $17,247,000 of
revenues$694,000 in the ninethree
months ended September 30,March 31, 2003 compared to $9,446,000 of
revenues forversus $559,000 in the ninethree months ended September 30,March 31,
2002. The increase in
administrative costs is mainly due to the acquisitions completed in 2002fulfillment of previously vacant positions and
2003 of $6,940,000, incremental legal costs of $150,000 related to the Company's
legal proceeding against a former supplier for failure to adhere to the terms of
a supply contact, as detailed in Part II -other general cost increases.
Other Information, additional
amortization charges related to bank financing fees of $278,000 and incremental
administrative costs applicable to managing a growing public company of
$433,000.
Interest expenseexpenses increased to $1,664,000 in the nine months ended September 30,
2003 from $1,030,000 in the nine months ended September 30, 2002. The increase
in interest expense reflects the loss on extinguishment of debt of $183,000 and
the increase in borrowings to support the acquisitions completed in 2002 and
2003.
Interest and other income increased to $411,000 in the nine months ended
September 30, 2003 from $238,000 recognized in the nine months ended September
30, 2002. The gains recorded in 2003 are primarily attributable to a gain on
sale of non-core property of $134,000, a gain recognized on a discharged
liability of $133,000, proceeds on an unexercised option agreement and interest
recognized on cash balances.
Foreign exchange gain increased to $425,000 from $140,000 in the same period in
2002 as a result of the appreciation of the Canadian dollar.
The provision for income taxes$104,000 in the first three months of 2003 reflects the
Company's estimated effective tax rate in 2003 of 22% due to the aforementioned
factors.
Segmented Operations Information
Food Group
The Food Group contributed $125,511,000 or 86.9% of total Company consolidated
revenues2004 versus
$35,000 in the first ninethree months of 20032003. The increase was due to costs
incurred in the quarter on the rationalization of the Hamilton Facility.
Net earnings before interest expense and income taxes were $507,000 in the three
months ended March 31, 2004 versus $68,709,000 or 78.6%$472,000 in the three months ended March 31,
2003.
StakeTech Steam Explosion Group and Corporate
Revenues of $147,000 for the three months ended March 31, 2004, versus $228,000
in same period in 2002. The increase of $56,802,000 or 82.7% in Food Group revenues
was due to an increase in grain sales of $12,480,000, an increase in sales of
aseptic packaged product of $7,908,000,2003, were derived from pre-engineering work undertaken during
the acquisitions of Opta, Organic
Kitchen, Wild West, Simply Organic and Kettle Valley totalling $39,291,000,
partially offset by decreases in certain toll processing revenues of $2,134,000,
a decrease in certain consumer products of $446,000 and a net decrease in other
revenues of $297,000.
Gross profit in the Food Group increased by $12,047,000 in the nine months ended
September 30, 2003 to $20,887,000 or 16.6% of revenues compared to $8,840,000 or
12.9% of revenues in the same period in 2002. The increase in gross profit
reflects the higher gross profit margins of the acquired businesses and
improvements in efficiencies and volumes at the Company's aseptic packaging
operation, partially offset by the significant increase in grain sales, a lower
margin business.
Selling, general and administrative expenses increased to $12,727,000 in the
nine months ended September 30, 2003 versus $5,492,000 in the nine months ended
September 30, 2002. The increase of $7,235,000 is due primarily to
31
acquisitions completed in 2002 and 2003 of $6,940,000 and legal costs of
$150,000 associated with an action against a former supplier for failure to
adhere to the terms of a supply contact, as detailed in Part II - Other
Information.
Interest expense increased to $1,170,000 in the nine months ended September 30,
2003 from $808,000 in the nine months ended September 30, 2002, primarily as a
result of additional borrowings to fund the acquisitions completed in 2002 and
2003.
Net earnings in the Food Group were $5,532,000 in the nine months ended
September 30, 2003 compared to net earnings of $2,583,000 in the nine months
ended September 30, 2002 due to the factors noted above.
Environmental Industrial Group
The Environmental Industrial Group contributed $18,539,000 or 12.8% of the total
Company consolidated revenuesquarter. Licence fees recognized in the first nine monthsquarter of 2003 compared to
$18,526,000 or 21.2% in 2002. Improved abrasive and mineral sales from the
Canadian operations of $752,000 were offset by weak abrasive sales$225,000.
There were no licence fee revenues recognized in the U.S.
East coast as a resultfirst quarter of reduced ship repair activity of $1,001,000. Specialty
sands revenues, including coated sands, water filtration sands and garnets
improved by $249,000 over the same period in 2002.2004.
Gross profitmargin in the Environmental IndustrialStakeTech Steam Explosion Group was $3,930,000$54,000 in the ninethree
months ended September 30, 2003March 31, 2004 versus $4,964,000$228,000 in the ninethree months ended September 30, 2002.March 31,
2003. As a percentage of revenues, gross margin decreased to
21.2%- --------------------------------------------------------------------------------
SUNOPTA INC. 27 March 31, 2004 10-Q
36.5% in the first ninethree months of 20032004 from 26.8%100% in the first ninethree months of
2002.
The decrease2003. Gross margin recognized in margin is partially due2003 was attributed to the shift in revenues to the Canadian
operations,license fees which have
inherently lower margins versus abrasive sales in the
U.S., and a reallocation of certain plant operating costs from selling, general
and administrative expenses to cost of goods sold in 2003 of approximately
$404,000 (after adjustment for the reallocation, 2002 gross margin was 24.6%).
Selling, general and administrative expenses decreased to $1,671,000 in the nine
months ended September 30, 2003 from $2,211,000 in the nine months ended
September 30, 2002, primarily due to the allocation noted above of $404,000, and
net cost reduction programs implemented throughout the Group of $136,000.
Interest expense increased to $277,000 in the first nine months of 2003 from
$222,000 in the first nine months of 2002, mainly due to cash utilization as a
result of payments made as part of the acquisition of Virginia Materials in
2001.
Net earnings were $1,608,000 in the nine months ended September 30, 2003 versus
$1,589,000 in the nine months ended September 30, 2002.
Steam Explosion Technology Group
Revenues of $386,000 for the nine months ended September 30, 2003 (2002 -
$226,000) were primarily derived from licence fees. The increase in 2003 over
the prior year is primarily derived from the recognition of $150,000 in license
fees relating to 2002 in 2003.no associated service costs.
Selling, general and administrative expenses were $264,000$798,000 for the first ninethree
months of 20032004 compared to $227,000$697,000 for the same period in 2002. These2003. The increase
was a result of payroll expenses and increased costs reflect payrollassociated with a growing
public company including the addition of in-house legal counsel and internal
audit functions. In addition, the Company incurred increased personnel and
associated costs within the StakeTech Steam Explosion Group in anticipation of
additional bio-fuel contracts and work related to the use of steam technology in
food applications.
Other income expenses requiredwas $104,000 in the first three months of 2004 versus a
gain $410,000 in the first three months of 2003. The decrease was mainly due to
manage and maintain the business.
Net earnings were $95,000depreciation of the Canadian dollar in the three months ended March 31, 2004
compared to a net loss of ($13,000)significant appreciation in the Canadian dollar in the same period
in 2002.
Corporate Activities
Selling, generallast year.
Net loss before interest expense and administration expenses were $2,583,000income taxes was $848,000 in the ninethree
months ended September 30, 2003 compared to $1,580,000March 31, 2004 versus $59,000 in the ninethree months ended September 30, 2002. The increase of $1,003,000 reflects the additional
amortization of bank financing fees of $278,000, an increase in costs related to
the administration of a growing public company of $220,000 and an increase in
insurance and professional fees of $252,000.
32
March 31,
2003.
Liquidity and Capital Resources at September 30, 2003
Current assets
CashMarch 31, 2004
Sources of Liquidity
The Company obtains its short term financing through a combination of cash
generated from operating activities, cash and cash equivalents, increased to $38,892,000 at September 30, 2003
(December 31, 2002 - $7,012,000), primarily due to the funds raised through the
share issuance in August 2003, offset by the repayment of certain term debt and available
operating lines of credit throughoutcredit. At March 31, 2004, the period.
Trade accounts receivable increased to $23,520,000 at September 30, 2003 from
$18,144,000 at December 31, 2002. Trade receivables at September 30, 2003
attributable to the Food Group were $19,051,000 (December 31, 2002 -
$14,889,000). Trade receivables in the Environmental Industrial Group were
$4,072,000 (December 31, 2002 - $3,255,000). The increases in trade account
receivables in the Food GroupCompany's cash and the Environmental Industrial Group are
consistent with the increase in sales in the respective Groups, as a result of
seasonality and acquisitions. The Steam Explosion Technology Group has a
receivable of $397,000 related to license fee revenues (December 31, 2002 -
$nil).
The note receivable of $nil (December 31, 2002 - $1,034,000) and the product
rebate payable in long-term payables of $1,427,000 (December 31, 2002 -
$1,330,000) are related to an agreement with a major European based company to
supply product. This agreement required the Food Group to expand a food
processing plant to the customer's specifications, which was completed in 2001.
In accordance with the terms of the agreement, the customer paid 36 monthly
instalments of $119,000. The last payment of the note receivable was received in
the period ended September 30, 2003. Commencing October 2003 the agreement
requires the Company to provide the customer with a product rebate on all
purchases until a total of $1,720,000cash
equivalents totalled $19,503,000. An additional $10,688,000 is repaid. Upon the application of
purchase accounting in 2000, both the receivable and payable were fair valued
using a discount rate of 9.5%.
Inventories increased $1,016,000 to $24,005,000 at September 30, 2003 from
$22,989,000 at December 31, 2002. The Food Group accounts for $18,647,000 of the
consolidated balance (December 31, 2002 - $18,492,000) and the Environmental
Industrial Group accounts for $5,358,000 (December 31, 2002 - $4,497,000). The
Steam Explosion Technology Group is not required to carry significant
inventories. The higher inventory balance in the Food Group is primarily due to
the acquisition of Kettle Valley, accounting for $466,000 of the increase. The
increase in inventories in the Environmental Industrial Group is due to timing
of supply shipments. In order to achieve more efficient and competitive cost
structures, inventories are purchased in large quantities less frequently, and
therefore timing of these shipments can result in significant fluctuations from
quarter to quarter.
Prepaid expenses and other current assets increased to $1,965,000 at September
30, 2003 from $958,000 at December 31, 2002. The increase is mainly due to an
increase in prepaid insurance as a result of policy renewals in the first nine
months, receivables from the sale of non-core properties and prepaid expenses
associated with Kettle Valley.
Property, plant and equipment
In the first nine months of 2003, the Company expended $3,778,000 (September 30,
2002 - $3,055,000) on property, plant and equipment, of which, the Food Group
comprised of $3,208,000. Key projects in the period included the micro filter
sweetener project at the Group's operation in Alexandria, MN, the expansion of
the grain cleaning and transfer system in Hope, MN and the completion of the
Kettle Valley plant in the state of Washington. During the first nine months of
2003, $513,000 was expended by the Environmental Industrial Group on general
additions, betterments and replacements and $57,000 was spent by the Steam
Explosion Technology Group and the Corporate Office on office equipment and
furniture.
Goodwill and intangibles
Goodwill and intangibles increased to $17,220,000 at September 30, 2003 from
$14,992,000 at December 31, 2002. The increase is due to the acquisition of
Kettle Valley of $1,564,000, a foreign exchange valuation increase of Canadian
goodwill and intangibles of $710,000, less amortization of $46,000.
Future income taxes
The future income tax asset relates primarily to loss carry-forwards recorded on
the acquisition of Opta Food Ingredients, Inc., loss carry-forwards in Canada
and scientific research and development creditsimmediately
available in Canada.
33
Other assets
Other assets decreased to $813,000 at September 30, 2003 from $1,080,000 at
December 31, 2002, due in most part to amortization of pre-operating costs and
financing fees of $629,000, offset by the capitalization of $343,000 in bank
financing fees.
Current liabilities
Bank indebtedness at September 30, 2003 was $nil (December 31, 2002 -
$3,963,000). The decrease relates primarily to the repayment of the operating lines of credit with proceedsa syndicate of lenders.
The Company obtains its long term financing through its credit agreement with a
syndicate of lenders. The Company fully intends to renew this agreement prior
to, or upon maturity in 2005, and may expand this credit agreement, and/or
obtain additional long term financing for internal expansion uses, acquisitions
or other strategic purposes.
The Company has the following sources from which it can fund its operating 2004
cash requirements:
o Cash and cash equivalents.
o Available operating lines of credit.
o Cash flows generated from operating activities.
o Cash flows generated from the sharesale of assets held for sale.
o Cash flows generated from receipts of warrants and options currently
in-the-money.
o Additional long term financing based on securitization of existing
assets.
In order to finance significant acquisitions beyond those already completed in
2004, the Company would need additional sources of cash which could be obtained
through a combination of additional bank or subordinated financing, a private or
public offering, or the issuance of shares in relation to an acquisition or a
divestiture. The Company intends to maintain a target term debt to equity ratio
of 0.60 to 1 versus the current position of 0.20 to 1.
The Company anticipates having no issues in obtaining additional long term
financing in view of its current financial position and past experience in the
third quarter (note
8).
Accounts payable and accrued liabilities decreased to $18,103,000 at September
30, 2003capital markets.
Cash Flows from $19,664,000 at December 31, 2002. The decrease is primarily due to
timing of vendor payments.
Customer and other deposits of $608,000 at September 30, 2003 (December 31, 2002
- - $421,000) relate to cash deposits madeOperating Activities
Cash flows provided by Food Group customers for purchases
made throughout the growing season in 2003, and to a deposit received on an
option agreement related to certain properly held for sale (note 12 (c)).
No recognition of revenue or accrual of costs is booked until the goods are
shipped. Deposits decrease during the planting season as customers purchase
seeds and agronomy products.
Long term debt
At September 30, 2003, the Company's long-term debt, including current portion,
is $21,864,000, a net decrease of $14,885,000 from December 31, 2002. The
decrease relates to the repayment of the tender facility of $15,186,000,
repayment of the convertible debenture of $5,000,000 and net repayments of other
term debt of $3,319,000, offset by the increase in the term debt facility of
$7,800,000 as a result of the refinancing completed in March 2003, and the note
payable to the former shareholders of Kettle Valley of $820,000.
Long-term payables
The Company had deferred purchase consideration of $177,000 at September 30,
2003 (December 31, 2002 - $667,000) related to the acquisition of Virginia
Materials. The deferred purchase consideration is paid on the purchase of the
vendor's inventory as acquired by the Company. It is expected that this
liability will be extinguish by December 31, 2003.
The Preference Shares of subsidiary companies were reduced to $152,000 from
$291,000 as a result of regularly scheduled repurchases during the period and an
additional repurchase of preferred shares related to a settlement with a former
director relating to certain actions taken while he was the president of an
operating division.
Payables to former shareholders of acquired companies decreased by $2,105,000 to
$570,000 at September 30, 2003. The reduction is due primarily to the paymentoperations for the untendered sharesfirst three months of the former shareholders of Opta, in addition to
payments related to the acquisition of Virginia Materials, offset by a note
payable to former shareholders of Kettle Valley of $165,000 ($155,000 at
acquisition plus foreign exchange valuation of $10,000).
Cash flow
For the nine months ended September 30, 2003, cash flow provided by operations2004 before
working capital changes was $9,021,000,$4,046,000 (2003 - $2,311,000), an increase of
64.1% from
$5,498,000 in the same period in 2002.$1,735,000 or 75%. The increase iswas due primarily to improvementsan increase in net earnings
and higher amortization chargesan increase in the first nine
monthsadd-back of 2003 versus 2002.amortization and future income taxes.
Cash flow provided (used) by operations after working capital changes was
$457,000($3,027,000) for the ninethree months ended September 30, 2003 (2002March 31, 2004 (2003 - ($458,000)391,000)),
reflecting the utilizationuse of funds for non-cash working capital of ($8,564,000) (20027,073,000) (2003 -
($5,956,000)2,702,000)). This utilization consists principally of an increase in accounts
receivable of ($5,526,000)2,040,000), an increase in inventories of ($408,000)3,241,000), an increase in
prepaid expenses and other current assets of ($893,000)791,000) and a decrease in accounts
payable and accrued liabilities of ($1,924,000)2,194,000), partially offset by an increase in
customer and other deposits of
$187,000.- --------------------------------------------------------------------------------
SUNOPTA INC. 28 March 31, 2004 10-Q
$1,193,000. The usage of cash flows to fund working capital deficienciesin 2004 reflects the
increase in working capital requirements required to fund the rapid growth in
operations and seasonal usage of cash to fund the purchase of grains within the
Grains and Soy Products Group.
Cash Flows from Investing Activities
Cash provided (used) in investment activities of ($3,763,000) in the first ninethree
months of 20032004 (2003 - ($851,000)), reflects the impactcash used to complete acquisitions,
net of 34
seasonalitycash acquired, of the business on working capital, including the purchase($911,000) (2003 - ($1,871,000)) and
payment method with grain suppliers in the Food Group, the growth in the
operations and the economic market seasonality in the Environmental Industrial
Group.
Cash used in investing activities was ($3,361,000). The Company sold its short
term investments for proceeds of $2,038,000 (2002 - $6,307,000), received
payments on a note receivable of $1,074,000 (2002 - $1,045,000), and received
payments from other investing activities of $199,000 (2002 - $101,000), offset
by acquisitions of
property, plant and equipment of ($3,778,000) (20023,849,000) (2003 - ($3,055,000)1,229,000)), offset by a
decrease of short term investments for proceeds of $nil (2003 - $2,038,000),
payments received on a note receivable of $nil (2003 - $358,000), and payment forproceeds
from the acquisitionsale of companiesproperty of ($2,894,000) (2002$1,014,000 (2003 - - ($1,080,000))$nil).
Cash generatedFlows from Financing Activities
Cash provided (used) by financing activities was $34,562,000$4,177,000 in the nine months
ended September 30, 2003 (20022004 (2003 -
$626,000)($4,088,000)), consisting primarily of net proceeds from the issuance of common
shares of $56,028,000 (2002$1,650,000 (2003 - $1,805,000)$1,130,000), primarily from warrants expiring in
the quarter, and an increase in borrowings under termbank indebtedness of $3,227,000 (2003 -
$5,228,000), partially offset by net repayment on long-term debt facilities of
$7,800,000 (2002($633,000) (2003 - $15,000,000), offset by a net decrease in bank indebtedness($10,019,000)) payment of ($4,285,000)
(2002 - $258,000), net debt repayments of ($24,009,000) (2002 - ($16,209,000)), deferred purchase consideration payments of
($490,000) (200221,000) (2003 - ($754,000)227,000)), financing costs of $nil (2003 - ($70,000)) and
the purchase and redemption of preferredpreference shares of subsidiary companies of
($139,000) (200216,000) (2003 - ($922,000)130,000)) and financing costs of ($343,000) (2002 -
($499,000)). In the nine months ended September 30, 2003, there was no
comparable decrease in restricted cash (2002 - $1,147,000).
Item 3 -Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk
The primary objective of our investment activities is to preserve principal and
limit risk. To achieve this objective, the Company maintainscompany restricts its portfolio into a
variety of securities, including both government and corporate obligations and money
market funds. These securities are generally classified as cash and cash
equivalents or short-term investments and are recorded on the balance sheet at
fair value with unrealized gains or losses reported through profit and loss. At September 30, 2003 the
Company had $38,892As
at March 31, 2004 all of SunOpta's excess funds were held in cash and cash
equivalents.equivalents with a maturity of less than 90 days.
Debt in both fixed rate and floating rate interest carry varying degreesdifferent types of
interest rate risk. Fixed rate debt may have their fair market value adversely
affected by a decline in interest rates. In general, longer date debts are
subject to greater interest rate risk than shorter dated securities. Floating
rate term debt gives less predictability to cash flows as interest rates change.
As of September 30, 2003,at March 31, 2004, the weighted average interest rate of the fixed rate term
debt was 5.3%4.0% (2003 - 3.9%) and $1,339,000$2,796,000 (2003 - $2,796,000) of the Company's
outstanding term debt is at fixed interest rates. Variable rate term debt of
$20,525,000$21,715,000 (2003 - $22,240,000) at an interest rate of 3.67%2.3% (2003 - 2.3%) is
outstanding at September 30, 2003.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 the
business with interest rate volatility and uncertainty. For every 1% increase
(decrease) in interest rates the Company's after-taxafter tax earnings would decrease
(increase)(decrease)
increase by approximately $171,000.$150,000. Given the short duration of fixed rate debt,
changes in interest rates would have a negligible affect on fixed rate debt
valuations.
Foreign currency risk
All U.S. subsidiaries use the U.S. dollar as their functional currency, and
since January 1, 2002, the United States dollar has been the Company's reporting
currency. Canadian subsidiaries and corporate office use the Canadian dollar as
their functional currency. The subsidiaries are subject to risks typical of
multi-jurisdiction businesses, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely affected by changes
in these or other factors. The
Company is exposed to foreign exchange rate fluctuations as the financial
results of the Company and its Canadian subsidiaries are translated into U.S.
dollars on consolidation. During the first nine months in 2003,quarter of 2004, the Canadian dollar
has appreciated significantlydepreciated slightly against the U.S. dollar with closing rates moving from
CDN $1.5776$1.2965 at December 31, 20022003 to CDN $1.3499$1.3113 at September 30, 2003March 31, 2004 for each U.S.
dollar. The net effect of this appreciation has been a $425,000$141,000 net exchange
gainloss and a $2,103,000 increase$338,000 decrease in net assets. A 10% movement in the levels of
foreign currency exchange rates in favour of (against) the Canadian dollar with
all other variables held constant would result in an increase (decrease) in the
fair value of the Company's net assets by $2,327,000. Changes would flow through$3,308,000 (2003 - $2,230,000).
The functional currency of all operations located in Canada is the Company's cumulativeCanadian
dollar. For these operations all transaction gains or losses in relation to the
U.S. dollar are recorded as foreign exchange gain (loss) in the Consolidated
Statement of Earnings while gains (losses) on translation adjustmentof net assets to U.S.
dollars on consolidation are recorded in Accumulated other comprehensive income
account in shareholders' equity for self -sustaining
operationswithin Shareholders' Equity. The functional
- --------------------------------------------------------------------------------
SUNOPTA INC. 29 March 31, 2004 10-Q
currency of the corporate head office is the U.S. dollar. Transaction gains or
losses as well as translation gains and throughlosses on monetary assets and
liabilities are recorded within foreign exchange gains (losses) on the
statementConsolidated Statement of earnings for integrated operations.
35
The Food Group and the Environmental Group Canadian operations haveEarnings. U.S. based receivables and payables that on a net basis provide limited exchange exposure.
The Food Group U.S. operations have no
exposure to other currencies since 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;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 partycounter-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,March 31, 2003 the Company owned 150,780590,943
(2003 - 482,600) bushels of corn with a weighted average price of $1.86$2.89 (2003 -
$2.15) and 173,945526,215 (2003 - 389,868) bushels of soybeanssoy beans with a weighted average
price of $7.46.$10.85 (2003 - $7.07). The Company has at September 30, 2003March 31, 2004 net long
positions on corn and soy beans of 75,415 bushels501,067 (2003 - 4,576) and 197,060352,417 (2003
- -167,294) bushels respectively. An increase/(decrease)decrease in the commodity prices of 10%
would result in a gain/gain (loss) of $14,000$144,808 (2003 - $984) in corn and $147,000$382,372
(2003 - $118,277) in soy beans, respectively. There are no futures contracts in
the Environmental
Industrialother Food Group orsegments, Opta Minerals, the StakeTech Steam Explosion Technology
Group or related to Corporate office activities.
Item 4. Disclosure Controls and Procedures
The Company'sUnder the supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer conducted an evaluation, as of the endCompany have evaluated the
effectiveness of the period covered
by this report, of the effectivenessdesign and operation of the Company's disclosure controls
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Basedprocedures as of March 31, 2004, and, based on thistheir evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's disclosurethese controls
and procedures were effective, as of the
end of the period covered by this report, in ensuringare 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
time
periods. During the period covered by this report, there havedisclosure.
Internal Control over Financial Reporting
There has been no changeschange in the Company's internal controls, or other factorscontrol over financial
reporting that haveoccurred during the Company's quarter ended March 31, 2004 that
has materially affected, or areis reasonably likely to material tomaterially affect, the
Company's internal controlscontrol over financial reporting.
36- --------------------------------------------------------------------------------
SUNOPTA INC. 30 March 31, 2004 10-Q
PART II - OTHER INFORMATION.
Item 1. Legal proceedings
The Food Group continues to pursueSunrich Inc., a subsidiary of the Company has commenced a suit against a former
supplier for failure to adhere to the terms of a contract. The Company and its
legal counsel believe that this claim has merit. The Company has ceased
co-packing arrangements under the existing contract and has commenced packing
under separate arrangements. It cannot however be determined if there will be
any recovery by the Company at this time and the GroupCompany is expensing the costs
of pursuing this suit on a
monthly basis. Other than this action, the Group has not been and is not
currently party to any material litigation other than stated above.as incurred. The supplierSupplier has counter-sued the Company for
breach of contract. The Company believes this suit is without merit.unfounded. Other than this
action, the Company has not been and is not currently a party to any other
material litigation.
Item 2. Changes in securitiesSecurities, Use of Proceeds and useIssuer Purchases of proceeds
Net proceeds from the public offering and concurrent private placement, as
described in significant developments was approximately $52,694,000. During the
quarter approximately $16,200,000 was used to pay down the revolving and term
credit facilities and to repay the convertible debenture. Subsequent to the
quarter, approximately $5,738,000 of the proceeds was used to purchase Pro
Organics and repay associated debts. We intend to use the remaining proceeds
resulting from the share issuance for general corporate purposes including
future acquisitions, internal expansion projects and working capital
requirements.Equity
Securities - Not applicable
Item 3. Defaults on senior securitiesupon Senior Securities - Not applicable
Item 4. Submission of mattersMatters to a voteVote of security holdersSecurity Holders - Not applicable
Item 5. Other -Information
(a) Not applicable
37
(b) The Company has implemented procedures to enable security holders to
recommend nominees for election to the Company's Board of Directors. These
procedures are outlined in detail on page 9 of the Company's current
Information Circular, for its shareholder meeting to be held May 13, 2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
31.1 Certification ofby Jeremy Kendall, Chief Executive Officer Pursuantpursuant to
Section 302 ofRule 13(a) - 14(a) under the Sarbanes-Oxley Act of 2002Exchange Act.
31.2 Certification ofby John Dietrich, Chief Financial Officer Pursuantpursuant to
Section 302 ofRule 13(a) - 14(a) under the Sarbanes-Oxley Act of 2002
32.1 Certification ofExchange Act.
32 Certifications by Jeremy Kendall, Chairman and Chief Executive
Officer and John Dietrich, Vice President and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuantpursuant to Section 906 of the Sarbanes-Oxley Act of 200218 U.S.C Section 1350.
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned hereunto duly authorized.
SUNOPTA INC.
(Registrant)
/s/ John Dietrich
Date NovemberMay 7, 20032004
SunOpta Inc.
by John Dietrich
Vice President
& Chief Financial Officer
38
EXHIBIT INDEX
Exhibit No. Page No.
- ----------- --------
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 40
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 41
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 42
39- --------------------------------------------------------------------------------
SUNOPTA INC. 31 March 31, 2004 10-Q