| The calculation of basic earnings per share is based on the weighted
average number of shares outstanding. Diluted earnings per share reflect
the dilutive effect of the exercise of warrants and options. The number of
shares for the diluted earnings per share was calculated as follows:
Three months ended Nine Months ended
---------------------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
$ $ $ $
Net earnings for the period 2,767 2,195 10,663 5,770
===============================================================
Weighted average number of shares outstanding 53,544,930 46,394,941 53,285,668 43,903,794
Dilutive Warrants 163,382 2,342,159 182,291 1,904,963
Dilutive Options 750,437 1,184,910 906,674 947,313
---------------------------------------------------------------
Diluted weighted average number of shares outstanding 54,458,749 49,922,010 54,374,633 46,756,070
===============================================================
Earningsoutstanding. Diluted earnings per share:
- Basic 0.05 0.05 0.20 0.13
===============================================================
- Diluted 0.05 0.04 0.20 0.12
===============================================================
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: | |
13. Supplemental cash flow information
| | Three months ended | | | |
| | | | March 31, 2005 $ | | March 31, 2004 $ | | | | | | | | | Net earnings for the period | 6,605 | | 1,870 | | | |
| | | | | | | | | Weighted average number of shares used in basic earnings per share | 56,238,585 | | 52,838,493 | | | | | | | | | Dilutive potential of the following: | | | | | | Employee/director stock options | 663,827 | | 1,035,219 | | | Dilutive Warrants | 25,761 | | 1,983,011 | | | |
| | | | | | | | | Diluted weighted average number of shares outstanding | 56,928,173 | | 55,856,723 | | | |
| | | Net earnings per share: | | | | | | Basic | 0.12 | | 0.04 | | | |
| | | Diluted | 0.12 | | 0.03 | | | |
| |
Three | | | Options to purchase 1,209,415 (March 31, 2004 – 242,900) common shares have been excluded from the calculations of diluted earnings per share due to their anti-dilutive effect. | | | 7. | Other income (expense) | | |
| | March 31, 2005 | | March 31, 2004 | | | | | | | | | Dilution gain, net of related costs of $976 (a) | 5,540 | | — | | | Reduction of assets (b) | (708 | ) | (186 | ) | | Other (c) | (797 | ) | 71 | | | |
| | | | 4,035 | | (115 | ) | | |
| |
| | | | (a) | The transaction costs of $976 incurred during the Opta Minerals Inc. initial public offering (refer note 4(a)) includes professional fees of $742 and compensation costs of $234 related to the share gifting to certain Opta Minerals Group employees. | | | | | (b) | Reduction of assets include the write-down of a business and facilities held for sale to net realizable value. | | | | | (c) | Other expenses of $797 relate primarily to certain unrecoverable legal fees (refer note 9(a)), litigation related costs and one time moving costs to a new facility within the Canadian Food Distribution Group segment. |
|
| SUNOPTA INC. | 11 | March 31, 2005 10-Q | |
|
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the three months ended NineMarch 31, 2005 Unaudited (Expressed in thousands of U.S. dollars, except per share amounts) | |
| |
8. | Supplemental cash flow information | | |
| | Three months ended | | | | |
| | | | | March 31, 2005 $ | | | March 31, 2004 $ | | | | Changes in non-cash working capital: | | | | | | | | Accounts receivable | (3,468 | ) | | (2,040 | ) | | | Inventories | (8,336 | ) | | (3,241 | ) | | | Recoveries of income taxes | 2,000 | | | — | | | | Prepaid expenses and other current assets | 465 | | | (791 | ) | | | Accounts payable and accrued liabilities | (7,173 | ) | | (2,194 | ) | | | Customer and other deposits | 1,596 | | | 1,193 | | | | | | | | | | | | |
| | | | | (14,916 | ) | | (7,073 | ) | | | |
| | | | Cash paid for: | | | | | | | | Interest | 319 | | | 200 | | | | |
| | | | Income taxes | — | | | — | | | | |
| | |
| | 9. | Commitments and contingencies | | |
| (a) | Included in Other assets is a receivable of $2,903 (December 31, 2004 - $3,343) representing a judgment awarded and recovery of certain legal fees and interest with respect to a suit the Company filed against a supplier for failure to adhere to the terms of a contract. The judgment was awarded on June 29, 2004 by a federal court jury in the United States District Court for the District of Oregon in favour of SunRich LLC, a subsidiary of the Company. On February 8, 2005 the supplier filed an appeal against this judgement. The Company and legal counsel believe this appeal is without merit and the Company believes the collectibility of this receivable is reasonably assured. During the quarter, certain legal fees were disallowed by the court and an amount of $440 has been charged to other expense during the period representing unrecoverable legal fees. | | | | | (b) | In the normal course of business, the SunOpta Food Group holds grain for the benefit of others. The Company is liable for any deficiencies of grade or shortage of quantity that may arise in connection with such grain. | | | | | (c) | Letters of credit: | | | | | | i) | An irrevocable letter of credit for $620 (Cdn $750) has been placed with the Ontario Ministry of Environment and Energy as a security deposit for the Certificate of Approval granted to the Company for certain recycling activities. This letter of credit must remain in place indefinitely as a condition of the Certificate of Approval. | | | | | | | ii) | An irrevocable letter of credit for $205 has been placed with the Commonwealth of Virginia Department of Environmental Qualities as a security deposit for the Certificate of Approval granted to the Company for certain recycling activities. This letter of credit must remain in place indefinitely as a condition of the Certificate of Approval. | | | | | | | iii) | Additional letters of credit totalling $31 have been placed with third parties as security on transactions occurring in the ordinary course of operations. | | | | | | | iv) | Standby letters of credit in the amount of $850 have been placed with a Hungarian bank in accordance with an agreement with a related party whereby both parties operate a Hungarian based sunflower business. These letters of credit expire on various dates between April 30, 2005 and August 30, 2005. |
|
| SUNOPTA INC. | 12 | March 31, 2005 10-Q | |
|
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the three months ended ---------------------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
$ $ $ $
ChangesMarch 31, 2005
Unaudited (Expressed in non-cash working capital:
Accounts receivable - trade 3,676 (2,621) (6,788) (5,526)
Inventories 3,178 71 1,660 (408)
Income tax recoverable -- -- 1,686 --
Prepaid expensesthousands of U.S. dollars, except per share amounts) | |
| |
10. Segmented information | | | | Industry segments | | | | The Company operates in three industry segments: (a) the SunOpta Food Group (Food Group), processes, packages and other current assets (484) 105 (3,693) (893)
Accounts payabledistributes a wide range of natural, organic and accrued liabilities (3,917) (1,980) (589) (1,822)
Customerspecialty food products via its vertically integrated operations with a focus on soy, natural and other deposits -- 490 (1,777) 187
---------------------------------------------------------------
2,453 (3,935) (9,501) (8,462)
===============================================================
Cash paid for:
Interest 572 611 915 1,329
===============================================================
Income taxes 860 1,041 1,918 2,099
===============================================================
|
- --------------------------------------------------------------------------------
SUNOPTA INC. 22 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars, except per share amounts)
- --------------------------------------------------------------------------------
14. Commitments and contingencies
(a) The Company is subject to a variety of claims and suits that arise
from time to time in the ordinary course of business. While
management currently believes that resolving all of these matters,
individually or in aggregate, will not have a material adverse
impact on the Company's financial position or the results of
operations, litigation and claims are subject to inherent
uncertainties and management's view of these matters may change in
the future. Were an unfavorable final outcome to occur, there exists
the possibility of a material adverse impact on the Company's
financial position and the results of operations for the period in
which the effect becomes reasonably estimable.
(b) The Company believes, with respect to both its operations and real
property that it is in material compliance with current
environmental laws. Based on known existing conditions and the
Company's experience in complying with emerging environmental
issues, the Company is of the view that future costs relating to
environmental compliance will not have a material adverse effect on
its financial position, but there can be no assurance that
unforeseen changes in the laws or enforcement policies of relevant
governmental bodies, the discovery of changed conditions on the
Company's real property or in its operations, or changes in use of
such properties and any related site restoration requirements, will
not result in the incurrence of significant costs. No provision has
been made in these consolidated financial statements for these
future costs since such costs, if any, are not determinable at this
time.
(c) In the normal course of business, the SunOpta Food Group holds grain
for the benefit of others. The Company is liable for any
deficiencies of grade or shortage of quantity that may arise in
connection with such grain.
(d) Letters of credit:
i) An irrevocable letter of credit for $593 has been placed with
the Ontario Ministry of Environment and Energy as a security
deposit for the Certificate of Approval granted to the Company
for certain recycling activities. This letter of credit must
remain in place indefinitely as a condition of the Certificate
of Approval.
ii) An irrevocable letter of credit for $205 has been placed with
the Commonwealth of Virginia Department of Environmental
Qualities as a security deposit for the Certificate of
Approval granted to the Company for certain recycling
activities. This letter of credit must remain in place
indefinitely as a condition of the Certificate of Approval.
iii) Additional letters of credit totalling $31 have been placed
with third parties as security on transactions occurring in
the ordinary course of operations.
- --------------------------------------------------------------------------------
SUNOPTA INC. 23 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
(e) Real property lease commitments:
The Company has entered into various leasing arrangements which have
fixed monthly rents that are adjusted annually each year for
inflation.
Commitments under operating leases, principally for distribution
centres, warehouse and equipment, are as follows:
2004 576
2005 2,850
2006 2,583
2007 2,052
2008 2,031
Thereafter 1,756
-----------
$11,848
===========
15. Segmented information
Industry segments
The Company operates in three industry segments: (a) the SunOpta Food
Group, processes, packages and distributes a wide range of natural and
organic food products via its vertically integrated operations with a
focus on soy, oat fiber, natural and organic food products. During 2003
the Company expanded its reporting structure and has further defined its
segments into Grains and Soy Products Group, Ingredients Group,
Distribution Group and Packaged Products Group (which combined form the
SunOpta Food Group). The addition of these segments reflects how
management views and manages the business and is aligned with the
Company's vertically integrated model; (b) Opta Minerals, processes,
distributes, and recycles industrial minerals;organic food products; (b) the Opta Minerals Group, processes, distributes, and recycles silica free loose abrasives, industrial minerals, specialty sands and related products; and (c) the StakeTech Steam
Explosion Group, markets proprietary steam explosion technology systems
for the pulp, biofuel and food processing industries. The Company's
assets, operations and employees are located in Canada and the United
States.
The Company has revised its reporting of segmented net earnings (loss) to
net earnings (loss) before interest expense and provision for income taxes
but inclusive of allocated corporate management fees, as this is better
aligned with how management views its operations. The SunRich Food Group
Inc., the holding company of U.S. operations, has also been reclassified
from the Food Group segment to Corporate.
Three months ended
September 30, 2004
------------------------------------------------------------- StakeTech Steam Explosion TechnologyGroup, markets proprietary non-wood processing technology with significant licensing and application potential in the pulp, food processing and bio-fuel industries. During 2004, the Company expanded its reporting segment of the Food Group and has further defined this segment into Grains and Soy Products Group, SunOpta Ingredients Group, Packaged Products Group and Canadian Food Distribution Group (which combined form the SunOpta Food Group). The addition of these segments better reflects how management views and manages the business and is aligned with the Company’s vertically integrated model. The Company’s assets, operations and employees are located in Canada and the United States. | |
| | Three months ended March 31, 2005 | | | |
| | | | SunOpta Food Group $ | | Opta Minerals Group $ | | StakeTech Steam Explosion Group and Corporate $ | | Consolidated $ | | | External revenues by market | | | | | | | | | | U.S | 44,670 | | 3,160 | | 280 | | 48,110 | | | Canada | 27,638 | | 4,568 | | — | | 32,206 | | | Other | 5,897 | | 10 | | — | | 5,907 | | | |
| | | | | | | | | | | | | Total revenues to external customers | 78,205 | | 7,738 | | 280 | | 86,223 | | | |
| | | | | | | | | | | | | Segment earnings before other income (expense), interest expense (net), income taxes and minority interest | 3,343 | | 837 | | (900 | ) | 3,280 | | | |
| | | | | | | | | | | | | Other income (expense) | | | | | 4,035 | | 4,035 | | | |
| | | | | | | | | | | | | Segment earnings before interest expense (net), income taxes and minority interest | 3,343 | | 837 | | 3,135 | | 7,315 | | | |
| | | | | | | | | | | | | Interest expense, net | — | | — | | 302 | | 302 | | | |
| | | | | | | | | | | | | Provision for income taxes | — | | — | | 235 | | 235 | | | |
| | | | | | | | | | | | | Minority interest | — | | — | | 173 | | 173 | | | |
| | | | | | | | | | | | | Net earnings | 3,343 | | 837 | | 2,425 | | 6,605 | | | |
| |
|
| SUNOPTA INC. | 13 | March 31, 2005 10-Q | |
|
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the three months ended March 31, 2005 Unaudited (Expressed in thousands of U.S. dollars, except per share amounts) | |
| |
10. Segmented information continued | | The SunOpta Food Group has the following segmented reporting: | |
| | Three months ended March 31, 2005 | | | |
| | | | Grains & Soy Products Group $ | | SunOpta Ingredients Group $ | | Packaged Products Group $ | | Canadian Food Distribution Group $ | | SunOpta Food Group $ | | | External revenues by market | | | | | | | | | | | | U.S | 15,509 | | 17,851 | | 11,247 | | 63 | | 44,670 | | | Canada | 249 | | 385 | | 1,585 | | 25,419 | | 27,638 | | | Other | 4,523 | | 1,335 | | 39 | | — | | 5,897 | | | |
| | | | | | | | | | | | | | | Total revenues from external customers | 20,281 | | 19,571 | | 12,871 | | 25,482 | | 78,205 | | | |
| | | | | | | | | | | | | | | Segment earnings before other income (expense), interest expense (net), income taxes and minority interest | 1,113 | | 1,106 | | 434 | | 690 | | 3,343 | | | |
| | | | | |
| | Three months ended March 31, 2004 | | | |
| | | | SunOpta Food Group $ | | Opta Minerals Group $ | | StakeTech Steam Explosion Group and 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 earnings before other income (expense), interest expense (net) and income taxes | 3,191 | | 677 | | (873 | ) | 2,995 | | | |
| | | | | | | | | | | | | Other income (expense) | — | | — | | (115 | ) | (115 | ) | | |
| | | | | | | | | | | | | Segment earnings before interest expense (net) and income taxes | 3,191 | | 677 | | (988 | ) | 2,880 | | | |
| | | | | | | | | | | | | Interest expense, net | — | | — | | 208 | | 208 | | | |
| | | | | | | | | | | | | Provision for income taxes | — | | — | | 802 | | 802 | | | |
| | | | | | | | | | | | | Net earnings (loss) | 3,191 | | 677 | | (1,998 | ) | 1,870 | | | |
| |
|
| SUNOPTA INC. | 14 | March 31, 2005 10-Q | |
|
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the three months ended March 31, 2005 Unaudited (Expressed in thousands of U.S. dollars, except per share amounts) | |
| | | The SunOpta Food Group has the following segmented reporting: | |
| | Three months ended March 31, 2004 | | | |
| | | | Grains & Soy Products Group $ | | SunOpta Ingredients Group $ | | Packaged Products Group $ | | Canadian Food Distribution Group $ | | SunOpta Food Group $ | | | External revenues by market | | | | | | | | | | | | U.S | 14,381 | | 13,277 | | 7,578 | | — | | 35,236 | | | Canada | 159 | | 493 | | 914 | | 14,001 | | 15,567 | | | Other | 3,143 | | 1,515 | | 55 | | — | | 4,713 | | | |
| | | | | | | | | | | | | | | Total revenues from external customers | 17,683 | | 15,285 | | 8,547 | | 14,001 | | 55,516 | | | |
| | | | | | | | | | | | | | | Segment earnings before other income, interest expense (net) and income taxes | 467 | | 1,812 | | (246 | ) | 1,158 | | 3,191 | | | |
| |
| 11. Canadian generally accepted accounting principle differences | |
| These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) which conform in all material respects applicable to the Company with those in Canada (Canadian GAAP) during the periods presented, except with respect to the following items: | | |
| | Three months ended | | | | |
| | | | | March 31, 2005 $ | | March 31, 2004 $ | | | | | | | | | | | Net earnings for the period - as reported | 6,605 | | 1,870 | | | | | | | | | | | Stock option compensation expense (i) | (525 | ) | (134 | ) | | | |
| | | | Net earnings for the period – Canadian GAAP | 6,080 | | 1,736 | | | | |
| | | | | | | | | | | Net earnings per share – Canadian GAAP – Basic | 0.11 | | 0.03 | | | | |
| | | | Net earnings per share – Canadian GAAP – Diluted | 0.11 | | 0.03 | | | | |
| | | | | | | | | | | | | | | | | | Retained earnings as reported | 33,426 | | 17,649 | | | | | | | | | | | Cumulative stock option compensation expense (i) | (2,572 | ) | (895 | ) | | | Accretion convertible debenture | (54 | ) | (54 | ) | | | |
| | | | Retained earnings – Canadian GAAP | 30,800 | | 16,700 | | | | |
| | | | | | | | | | | Shareholders’ equity – as reported | 150,742 | | 123,264 | | | | | | | | | | | Retained earnings change | (2,626 | ) | (949 | ) | | | |
| | | | Shareholders’ equity – Canadian GAAP | 148,116 | | 122,315 | | | | |
| | |
|
| SUNOPTA INC. | 15 | March 31, 2005 10-Q | |
|
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the three months ended March 31, 2005 Unaudited (Expressed in thousands of U.S. dollars, except per share amounts) | |
| |
11. Canadian generally accepted accounting principle differences continued | | | | | (i) | Under Canadian GAAP, the Company is required to record stock compensation expense on options granted to employees. | | | |
| In conjunction with the standard, under Canadian GAAP, the Company would have recorded $530 in stock compensation expense for the three months ended March 31, 2005 (2004 - $134). The cumulative impact of this difference is $2,988 as at March 31, 2005 and $1,311 as at March 31, 2004. | | | | Partially offsetting the balance above, are stock option expenses recognized under US GAAP, not recognized under Canadian GAAP, related to a delay between when options were granted to employees and when they were approved by shareholders. An amount of $416 was recorded as an expense prior to 2004, is a permanent difference between Canadian and US GAAP. |
| On April 5, 2005, SunOpta exercised its option to acquire the remaining 49.9% of the outstanding shares of Organic Ingredients, Inc. (Organic Ingredients), headquartered in Aptos, California for consideration of $2,416. Additional consideration may be payable based on Organic Ingredients achieving pre-determined earnings targets during the period January 1, 2005 to December 31, 2007. Any additional consideration will be recorded as goodwill when the outcome of the contingency becomes determinable. | | | | Organic Ingredients is an established provider of a wide range of certified organic industrial ingredients including processed fruit and vegetable based ingredients, sweeteners, vinegars and others. The company sources and contract manufactures through exclusive arrangements with suppliers located around the world, including North America, South America, Europe and Asia. These exclusive supply arrangements enable the company to maintain a strategic advantage in the organic food ingredient market, in terms of cost and availability of supply, and positions the company to provide value added private label products to key customers. Organic Ingredients has been included within the SunOpta Ingredients Group segment within the SunOpta Food Group. |
| Certain 2004 quarterly comparative figures have been reclassified to conform to the 2005 financial statement presentation. |
|
| SUNOPTA INC. | 16 | March 31, 2005 10-Q | |
|
PART I - FINANCIAL INFORMATION Item 2–Management’s Discussion and Analysis of Financial Condition and Results of Operations Significant Developments Initial Public Offering of Common Shares in Canada by a wholly-owned subsidiary of SunOpta, Opta Minerals Inc. On February 17, 2005, the Company’s subsidiary Opta Minerals Inc. completed its previously announced initial public offering and raised $14,294 (Cdn $17,496) in net proceeds, (gross proceeds Cdn 19,800) including an over-allotment option granted to the underwriters and exercised on March 16, 2005. The offer was for shares of the Company which consisted of the businesses and net assets that form the Opta Minerals Group segment (note 10). Immediately prior to this transaction the net assets and business of this segment were transferred into this wholly owned subsidiary Opta Minerals Inc.. The Company’s ownership was reduced to 70.4% of the outstanding common shares as a result of this transaction including the effect of gifting shares to certain employees of Opta Minerals Inc. in recognition of their contribution in building the Company. The Company recorded a dilution gain of $6,516 as a result of the sale of the approximate 29.6% minority interest in Opta Minerals Inc. The initial public offering consisted of 4,500,000 units at an initial offering price of Cdn $4.00 per unit. Each unit consisted of one common share and one-half of a common share purchase warrant of Opta Minerals Inc.. The shares and warrants are listed on the Toronto Stock Exchange under the symbols “OPM” and “OPM.WT”, respectively. Opta Minerals Inc. intends to use the proceeds for strategic acquisitions of, or investments in new products, technologies, and businesses that expand or complement Opta Minerals Inc.’s business and for general corporate purposes. During the quarter ended March 31, 2005, Opta Minerals Inc. repaid $4,098 (Cdn $5,000) to SunOpta relating to intercompany loans and repaid an additional $413 (Cdn $500) during the second quarter of 2005. Amendment to Credit Agreement In February 2005, the Company amended its credit agreement for the primary purpose of releasing all secured collateral relating to the Opta Minerals Group, as part of the group’s initial public offering. As part of the initial public offering Opta Minerals Inc. received a term sheet with a Canadian chartered bank that has committed to provide them with an operating facility of up to Cdn $5,000 and a term facility for up to Cdn $7,000. These facilities will be collaterized by a first priority security interest against substantially all of Opta Minerals Inc.’s assets Subsequent Event – Option exercised to acquire the remaining 49.9% of the outstanding shares of Organic Ingredients Inc. On April 5, 2005, SunOpta exercised its option to acquire the remaining 49.9% of the outstanding shares of Organic Ingredients, Inc. (Organic Ingredients), headquartered in Aptos, California for consideration of $2,416. Additional consideration may be payable based on Organic Ingredients achieving pre-determined earnings targets during the period January 1, 2005 to December 31, 2007. Operations for the Three Months ended March 31, 2005 Compared With the Three Months Ended March 31, 2004 Consolidated Revenues in the first three months of 2005 increased by 38% to $86,223,000 versus $62,502,000 in the first three months of 2004. The Company’s net earnings for the first three months of 2005 were $6,605,000 or $0.12 per basic common share (diluted - $0.12) compared to $1,870,000 or $0.04 per basic common share (diluted - $0.03) for the first three months of 2004, representing a 253% increase. The increase in the Company’s revenues is due to a $22,689,000 increase in revenue from the SunOpta Food Group, an increase of $899,000 from the Opta Minerals Group and Food Group Group Corporate Consolidated
$ $ $ $
Externalan increase of $133,000 in revenues by market
U.S 45,357 3,213 495 49,065
Canada 21,078 5,111 -- 26,189
Other 4,882 6 -- 4,888
-------------------------------------------------------------
Total revenuesfrom the StakeTech Steam Explosion Group. These increases are due to external customers 71,317 8,330 495 80,142
=============================================================
Segmentcontinued internal growth in certain product lines and the impact of acquisitions completed to date. Details are provided in the segmented analysis below. | | Net earnings (loss) before interest expense (net) and income taxes 3,865 909 (144) 4,630
-------------------------------------------------------------
increased to $7,315,000 compared to $2,880,000 for the same period in the prior year, a 153.9% increase. This increase included a $5,540,000 dilution gain, net of transaction costs of $976, resulting from the sale of approximately 29.6% minority interest in the Initial Public Offering of Opta Minerals Inc, a subsidiary of the company. Excluding other income (expense), net earnings before other income (expense), interest expense $2,995,000 for the same period in the prior year, an 9.5% increase. |
|
| SUNOPTA INC. | 17 | March 31, 2005 10-Q | |
|
Acquisitions completed in the prior year, internal sales growth, synergies and cost reductions realized throughout the organization are attributable to this increase. Further details are included in the segmented analysis detailed below. Interest expense -- -- 675 675
-------------------------------------------------------------
Provision(net) increased slightly to $302,000 in the three months ended March 31, 2005 from $208,000 in the three months ended March 31, 2004. The increase reflects the higher level of debt outstanding during the first quarter of 2005 from the amended credit agreement effective July 2004. Other income (expense) increased to $4,035,000 in the three months ended March 31, 2005 from $(115,000) in the three months ended March 31, 2004, primarily due to a net dilution gain from the Initial Public Offering of Opta Minerals Inc., as noted above of $5,540,000 a reduction of assets due to the write-down of a business and facilities held for sale to their net realizable value of ($708,000) and other expenses primarily related to certain unrecoverable legal fees, litigation related costs and one time moving costs to a new facility within the Canadian Food Distribution Group segment of ($797,000). Refer to note 7 in the Condensed Consolidated Financial Statements. Foreign exchange of $35,000 compared to ($141,000) in the same period in 2004 is due to the depreciation of the United States dollar in the three months ended March 31, 2005. The provision for income taxes -- -- 1,188 1,188
-------------------------------------------------------------
Segment net earnings (loss) 3,865 909 (2,007) 2,767
-------------------------------------------------------------
|
- --------------------------------------------------------------------------------
SUNOPTA INC. 24 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
Forin the first three months of 2005 is 3.4% due to the majority of the dilution gain realized upon the Initial Public Offering of Opta Minerals Inc, being non-taxable while a portion of the costs netted against the dilution gain are taxable. Ignoring the effect of the dilution gain, the Company’s effective tax rate is estimated to be in the range of 26% - 31% for the year.Segmented Operations Information (Note: Certain prior year figures have been adjusted to conform with current year presentation and segmented reporting.) SunOpta Food Group The SunOpta Food Group contributed $78,205,000 or 90.7% of total Company consolidated revenues in the first three months of 2005 versus $55,516,000 or 88.8% in the same period in 2004. The increase of $22,689,000 or 40.9% in SunOpta Food Group revenues was primarily due to increased sunflower seed and Identity Preserved (IP) corn sales generated from the Grains & Soy Group, strong increases in sales from the Aseptic Packaging plant in the Packaging Products Group due to the recent expansion and process improvements implemented over the past year and acquisitions completed in 2004 within the SunOpta Ingredient and Canadian Food Distribution Groups. The above increases were somewhat offset by a decrease in fiber sales from the SunOpta Ingredients Group due to a decline in the low-carb market. The gross margin as a percentage of sales decrease in the quarter from 19.7% to 17.7% was largely due to the fiber sales resulting from increased competition and reduced demand and the shortage of fresh produce supply within the Canadian Food Distribution Group due to unfavourable weather conditions in California for produce growth. Selling, general and administrative expenses increased to $7,932,000 or 10.1% of revenues in the first three months of 2005 from $6,491,000 or 11.6% of revenues in the same period of 2004. The increase of $1,441,000 is due to the Supreme Foods, Snapdragon, Distribue-Vie and Kofman-Barenholtz acquisitions completed in the second and third quarters of 2004, partially offset by synergies and cost reduction programs implemented throughout the Group. Warehouse and distribution costs increased by $1,448,000 or 125% in the three months of 2005 to $2,604,000, compared to $1,156,000 in the same period in the prior year, again is due to acquisitions completed within the Canadian Food Distribution Group in 2004. A foreign exchange gain of $27,000 was recognized in the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
15. Segmented information continued
The SunOpta Food Group has the following segmented reporting:
Three months ended September 30, 2004
-----------------------------------------------------------------------------
Grains and Packaged
Soy Products Ingredients Distribution Products SunOpta
Group Group Group Group Food Group
$ $ $ $ $
External revenues by market
U.S 19,937 16,188 -- 9,232 45,357
Canada 287 481 19,374 936 21,078
Other 2,983 1,679 -- 220 4,882
-----------------------------------------------------------------------------
Total revenues from external customers 23,207 18,348 19,374 10,388 71,317
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SegmentMarch 31, 2005 compared to ($81,000) in the same period for the prior year.Net earnings before interest expense and income taxes 369 2,482 590 424 3,865
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Ninein the SunOpta Food Group increased 2.2% to $3,343,000 in the three months ended September 30, 2004
-------------------------------------------------------------
StakeTech
Steam Explosion
Technology
SunOpta Opta Minerals Group andMarch 31, 2005 compared to $3,191,000 in the three months ended March 31, 2004. Readers should be advised that internal product transfers between the groups are accounted for at cost. See the individual segments within the Food Group below for commentary related to Food Group Corporate Consolidated
$ $ $ $
Externalactivities and the 2005 outlook. | Effective January 1, 2005, the estimated useful lives of all asset categories for wholly owned subsidiaries were revised to better reflect the company’s previous experience in the useful life of plant and equipment and to standardize depreciation rates across divisions. Without this change in accounting estimate, additional amortization expense of approximately $310,000 would be been booked for the three months ended March 31, 2005, increasing amortization in the Grain & Soy Group by $65,000, SunOpta Ingredients Group by $190,000, Packaged Products Group by $120,000 and decreasing the Canadian Food Distribution Group by $65,000. |
|
| SUNOPTA INC. | 18 | March 31, 2005 10-Q | |
|
Grains & Soy Products Group The Grains and Soy Products Group contributed $20,281,000 in revenues in the first three months of 2005 versus $17,683,000 in 2004, a 14.7% internal growth increase. Revenues were favourably impacted in the quarter by market
U.S 125,417 10,918 933 137,268
Canada 57,766 13,085 -- 70,851
Other 15,311 158 -- 15,469
-------------------------------------------------------------
Totalincreased demand for High Oleic Kernel & Inshell sunflower seeds of $3,518,000, partially offset by weaker IP soybean sales due to the late opening of the river shipping season for the IP soybean crop. Gross margin in the Grains and Soy Products Group increased by $172,000 in the three months ended March 31, 2005 to $2,478,000 or 12.2% of revenues compared to external customers 198,494 24,161 933 223,588
-------------------------------------------------------------
Segment$2,306,000 or 13.0%, in the same period in 2004. The decrease in gross profit margins is primarily due to reduced margins on corn crop due to favourable pricing available in 2004, not available in 2005, partially offset by the increase in the higher margin sunflower seed sales. Selling, general and administrative expenses decreased to $1,417,000 in the three months ended March 31, 2005 versus $1,839,000 in the three months ended March 31, 2004. The decrease is due to cost rationalization initiatives and an allocation of certain administrative costs performed within Grains & Soy Products Group on behalf of the Packaged Products Segment. A foreign exchange gain of $52,000 was recognized in the three months ended March 31, 2005. Net earnings (loss) before other income (expense), interest expense and income taxes 15,056 3,162 (1,969) 16,249
-------------------------------------------------------------
Interest expense -- -- 1,035 1,035
-------------------------------------------------------------
Provision for income taxes -- -- 4,551 4,551
-------------------------------------------------------------
Segment net earnings (loss) 15,056 3,162 (7,555) 10,663
-------------------------------------------------------------
|
The SunOpta Food Group has the following segmented reporting:
Ninein the Grains and Soy Products Group was $1,113,000 in the three months ended March 31, 2005 compared to $467,000 in the three months ended March 31, 2004.SunOpta Ingredients Group The SunOpta Ingredients Group contributed $19,571,000 revenues in the first three months of 2005 versus $15,285,000 in 2004 a 28.0% increase. The increase in revenues is attributable to the acquisition of Organic Ingredients Inc., partially offset by a decrease in the oat fiber demand due to an increase in competition and a decline in the low carb diets (such as Atkins). Gross margin in the SunOpta Ingredients Group decreased by $284,000 in the three months ended March 31, 2005 to $3,403,000 or 17.4% of revenue compared to $3,687,000 or 24.1% of revenue, in the same period in 2004. The decrease in gross margin reflects the decline in the oat fiber revenues on a comparative basis and the acquisition of Organic Ingredients, which has inherently lower margins. Selling, general and administrative expenses increased to $2,303,000 in the three months ended March 31, 2005 versus $1,824,000 in the three months ended March 31, 2004. The increase is primarily due to the Organic Ingredient acquisition in September 30, 2004
-----------------------------------------------------------------------------
Grains and Packaged SunOpta
Soy Products Ingredients Distribution Products Food
Group Group Group Group Group
$ $ $ $ $
External revenues by market
U.S 54,420 44,231 -- 26,766 125,417
Canada 787 1,417 52,776 2,786 57,766
Other 10,313 4,673 -- 325 15,311
-----------------------------------------------------------------------------
Total revenues from external customers 65,520 50,321 52,776 29,877 198,494
-----------------------------------------------------------------------------
Segment2004. A foreign exchange gain of $6,000 was recognized in the three months ended March 31, 2005 compared to ($51,000) in the same period for the prior year. Net earnings before other income (expense), interest expense (net) and income taxes 2,033 6,311 3,138 3,574 15,056
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUNOPTA INC. 25 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
Forin the SunOpta Ingredients Group were $1,106,000 in the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
15. Segmented information continued
Three months ended September 30,March 31, 2005 compared to $1,812,000 in the three months ended March 31, 2004, due primarily to the factors noted above.Packaged Products Group The Packaged Products Group contributed $12,871,000 in the three months ended March 31, 2005 compared to $8,547,000 in 2004, an increase of $4,323,000 or 50.6%. Revenues were favourably impacted by internal growth within the 2003 -------------------------------------------------------------
acquisitions completed in the Healthy Convenience Food operation of $820,000 and increased aseptic packaged and consumer products revenues of $3,503,000. The increase in aseptic packaged and consumer products revenues reflects the benefits of an expansion and process improvements implemented over the past year at the aseptic packaging facility and new customer contracts. Gross margin in the Group increased by $433,000 in the three months ended March 31, 2005 to $1,260,000 or 9.8% of revenues compared to $826,000 or 9.7% in the same period of 2004. Selling, general and administrative expenses were $827,000 in the three months ended March 31, 2005 versus $1,063,000 in the same period of 2004. The decrease is primarily due to the cost rationalization initiatives within all divisions. A foreign exchange gain of $1,000 was recognized in the three months ended March 31, 2005 compared to ($9,000) in the same period of the prior year.
|
| SUNOPTA INC. | 19 | March 31, 2005 10-Q | |
|
Net earnings (loss) before other income (expense), interest expense (net) and income taxes in the Packaged Products Group were $434,000 in the three months ended March 31, 2005 compared to ($246,000) in the same period of 2004, due to the factors noted above. Canadian Food Distribution Group The Canadian Food Distribution Group contributed $25,482,000 of revenue in the first three months of 2005 versus $14,001,000 in the same period of 2004, an increase of $11,480,000 or 82.0%. Revenues were favourably impacted by increased produce and grocery revenues of $1,181,000 and revenues of $10,300,000 resulting from the acquisitions completed in 2004 in the Canadian Distribution Group. Gross margin in the Canadian Food Distribution Group increased by $2,610,000 in the three months ended March 31, 2005 to $6,711,000 or 26.3% compared to $4,100,000 or 29.3%, in the same period in 2004. The decrease in gross margin percentage was attributable to the lack of fresh produce supply from California due to unfavourable growing weather and increased competition in the fresh produce markets. Warehousing and distribution costs increased to $2,604,000 in the three months ended March 31, 2005 versus $1,156,000 in the three months ended March 31, 2004, which is attributable to the 2004 acquisitions of Supreme Foods, Distribue-Vie, Snapdragon and Kofman-Barenholtz within the Canadian Food Distribution Group. Selling, general and administrative expenses increased to $3,385,000 in the three months ended March 31, 2005 versus $1,765,000 in the three months ended March 31, 2004. The increases noted are due primarily to the acquisitions noted above. A foreign exchange loss of $32,000 was recognized in the three months ended March 31, 2005 compared to $21,000 in the same period in the prior year. Net earnings before other income (expense), interest expense (net) and income taxes in the Canadian Food Distribution Group were $690,000 in the three months ended March 31, 2005 compared to $1,158,000 in the three months ended March 31, 2004 due to the factors noted above. Opta Minerals Group Opta Minerals contributed $7,738,000 or 8.9% of the total Company consolidated revenues in the first three months of 2005, versus $6,839,000 or 10.9% in 2004. Opta Minerals revenues were favourably impacted by the Distribution A&L acquisition completed in 2004, increased sales of products sold to the bridge cleaning and foundry markets at the Waterdown and Lachine locations, revenues from the abrasive facility in Hardeeville, South Carolina acquired in the second quarter of 2004 and from the completion of an additional abrasives facility constructed in the third quarter of 2004. Gross margins in Opta Minerals were $1,691,000 in the three months ended March 31, 2005 versus $1,305,000 in the three months ended March 31, 2004. As a percentage of revenues, gross margin increased to 21.9% in the first three months of 2005 from 19.1% in the first three months of 2004. The increase in margin is due primarily increased selling prices and volumes. Selling, general and administrative expenses increased to $917,000 in the three months ended March 31, 2005 versus $694,000 in the three months ended March 31, 2004. The increase was a result of increased costs associated with a new public company and costs associated with the Distribution A&L acquisition in 2004. A foreign exchange gain of $63,000 was recognized in the three months ended March 31, 2005 and $66,000 in the three months ended March 31, 2004. Net earnings before other income (expense), interest expense (net) and income taxes were $837,000 in the three months ended March 31, 2005 versus $677,000 in the three months ended March 31, 2004. StakeTech Steam Explosion Technology
SunOptaGroup and Corporate Revenues of $280,000 for the three months ended March 31, 2005, versus $147,000 in same period in 2004, were derived from pre-engineering and research and development work with Abengoa Bio Energy on processes to be utilized in the production of ethanol fuel. The group continues to work with both external and internal groups on a number of food based and fuel applications. Gross margin in the StakeTech Steam Explosion Group was $93,000 in the three months ended March 31, 2005 versus $54,000 in the three months ended March 31, 2004. As a percentage of revenues, gross margin decreased to 33.2% in the first three months of 2005 from 36.7% in the first three months of 2004. |
|
| SUNOPTA INC. | 20 | March 31, 2005 10-Q | |
|
Selling, general and administrative expenses were $938,000 for the first three months of 2005 compared to $801,000 for the same period in 2004. The increase was a result of increased costs associated with a growing public company including the addition of in-house counsel and internal audit functions, partially offset by increased management fees to the operating groups. A foreign exchange loss of $55,000 was recognized in the three months ended March 31, 2005 compared to a loss of $126,000 in the same period of the previous year. Net loss before other income (expense), interest expense (net) and income taxes was ($900,000) in the three months ended March 31, 2005 versus ($873,000) in the three months ended March 31, 2004. Liquidity and Capital Resources at March 31, 2005 Sources of Liquidity The Company obtains its short term financing through a combination of cash generated from operating activities, cash and cash equivalents, and available operating lines of credit. At March 31, 2005, the Company had availability under certain lines of credit of approximately $29,000,000. A revolving acquisition line is also available with maximum draws up to $10,000,000. The Company obtains its long term financing through its credit agreement with a syndicate of lenders. The Company may expand this credit agreement, and/or obtain additional long term financing for internal expansion uses, acquisitions or other strategic purposes as required. In February 2005, the Company amended its credit agreement for the primary purpose of releasing all secured collateral relating to the Opta Minerals Group, as part of the group’s initial public offering (refer above to Part I – Item 2 Amendment to Credit Agreement). The Company has the following sources from which it can fund its operating 2005 cash requirements: | |
| • | Cash and cash equivalents. | | | | | • | Available operating lines of credit. | | | | | • | Cash flows generated from operating activities. | | | | | • | Cash flows generated from the sale of assets held for sale. | | | | | • | Cash flows generated from receipts of warrants and options currently in-the-money. | | | | | • | Additional long term financing based on securitization of existing assets. |
| In order to finance significant acquisitions, the Company may need additional sources of cash which could be obtained through a combination of additional bank or subordinated financing, a private or public offering, or the issuance of shares in relation to an acquisition or a divestiture. The Company intends to maintain a maximum term debt to equity ratio of 0.60 to 1.00 versus the current position of 0.25 to 1.00. Cash Flows from Operating Activities Net cash and cash equivalents increased $2,562,000 during first three months of 2005 (2004 – ($2,487,000)) to $10,643,000 as at March 31, 2004 (2003 - $19,503,000). Cash flows provided by operations for the first three months of 2005 before working capital changes was $3,286,000 (2004 – $4,046,000), a decrease of $760,000 or 18.7%. The decrease was due primarily to charges of $742,000 incurred during the Initial Public Offering of Opta Minerals Inc.. Cash provided (used) by operations after working capital changes was ($11,630,000) for the three months ended March 31, 2005 (2004 – ($3,027,000)), reflecting the use of funds for non-cash working capital of ($14,916,000) (2003 – ($7,073,000)). This utilization consists principally of an increase in inventories ($8,336,000), a decrease in accounts payable and accrued liabilities of ($7,173,000) and an increase in accounts receivable ($3,468,000), partially offset by a decrease in recoveries of income taxes of $2,000,000, a decrease in customer deposits of $1,596,000 and a decrease in prepaid expenses and other current assets of $465,000. The usage of cash flows to fund working capital in 2005 reflects the increase in working capital requirements to fund seasonal usage of cash for the purchase of grains within the Grains and Soy Products Group and the seasonal increase in kosher products within the Canadian Food Distribution Group for the Passover season. |
|
| SUNOPTA INC. | 21 | March 31, 2005 10-Q | |
|
Cash Flows from Investing Activities Cash provided (used) by investment activities of ($5,984,000) in the first three months of 2005 (2004 – ($3,763,000)), reflects cash used to purchase of property, plant and equipment of ($4,769,000) (2004 – ($3,849,000)), earnout paid on previous acquisitions of companies of ($1,234,000) (2004 – ($911,000)) and other of $nil (2004 – ($17,000)) and offset by proceeds from the sale of property, plant and equipment of $19,000 (2004 - $1,014,000). Cash Flows from Financing Activities Cash provided (used) by financing activities was $20,199,000 in the first three months of 2005 (2004 – ($4,177,000)), consisting primarily of net proceeds from the Opta Minerals Inc. share issuance of $14,290,000 (2004 - $nil), increase in bank indebtedness of $6,815,000 (2004 - $3,227,000), from the issuance of common shares of $209,000 (2003 - $1,650,000), partially offset by net repayment on long-term debt facilities of ($1,107,000) (2004 – ($663,000)) and other of ($8,000) (2004 – (37,000)). Item 3 -Quantitative and Qualitative Disclosures about Market Risk Interest rate risk The primary objective of our investment activities is to preserve principal and limit risk. To achieve this objective, the company maintains its portfolio in a variety of securities, including both government and corporate obligations and money market funds. These securities are generally classified as cash and cash equivalents or short-term investments and are recorded on the balance sheet at fair value with unrealized gains or losses reported through profit and loss. As at March 31, 2005 all of SunOpta’s excess funds were held in cash and cash equivalents with a maturity less than 90 days. Debt in both fixed rate and floating rate interest carry different types of interest rate risk. Fixed rate debt may have their fair market value adversely affected by a decline in interest rates. In general, longer date debts are subject to greater interest rate risk than shorter dated securities. Floating rate term debt gives less predictability to cash flows as interest rates change. As at March 31, 2005, the weighted average interest rate of the fixed rate term debt was 4.7% (2004 – 4.5%) and $2,215,000 (2004 - $2,422,000) of the Company’s outstanding term debt is at fixed interest rates. Variable rate term debt of $32,450,000 (2004 - $33,400,000) at an interest rate of 3.7% (2004 – 3.7%) is partially hedged by variable rate cash equivalent investments. The Company looks at varying factors to determine the percentage of debt to hold at fixed rates including, the interest rate spread between variable and fixed (swap rates), the Company’s view on interest rate trends, the percent of offset to variable rate debt through holding variable rate investments and the Company’s ability to manage interest rate volatility and uncertainty. For every 1% increase (decrease) in interest rates the Company’s after tax earnings would (decrease) increase by approximately $240,000 (2004 - - $200,000). 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 the U.S. dollar is also the Company’s reporting currency. The Company is exposed to foreign exchange rate fluctuations as the financial results of the Company and its Canadian subsidiaries are translated into U.S. dollars on consolidation. Since 2003, the Canadian dollar has appreciated significantly against the U.S. dollar with closing rates moving from Cdn $1.5776 at January 1, 2003 to Cdn $1.2020 at December 31, 2004 and Cdn 1.2096 at March 31, 2005. The net effect of this three month depreciation has been a $35,000 (2004 - ($141,000)) net exchange gain (loss) and a ($130,000) (2004 – (4,571,000)) 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 $5,673,0000 (2004 - $4,808,000). The functional currency of all operations located in Canada is the Canadian dollar. For these operations all transaction gains or losses in relation to the U.S. dollar are recorded as foreign exchange gain (loss) in the Consolidated Statement of Earnings while gains (losses) on translation of net assets to U.S. dollars on consolidation are recorded in cumulative other comprehensive income account within Shareholders’ Equity. The functional currency of the corporate head office is the U.S. dollar. Transaction gains or losses as well as translation gains and losses on monetary assets and liabilities are recorded within foreign exchange gains (losses) on the Condensed Consolidated Statement of Earnings. U.S. based SunOpta Food Group Group Corporate Consolidated
$ $ $ $
External revenues by market
U.S 36,885 3,798 82 40,765
Canada 5,507 2,609 -- 8,116
Other 1,434 69 -- 1,503
-------------------------------------------------------------
Total revenuesoperations have no exposure to external customers 43,826 6,476 82 50,384
-------------------------------------------------------------
Segment earnings (loss) before interest expenseother currencies since almost all sales and income taxes 3,257 834 (815) 3,276
-------------------------------------------------------------
Interest expense -- -- 680 680
-------------------------------------------------------------
Provision for income taxes -- -- 401 401
-------------------------------------------------------------
Segment net earnings (loss) 3,257 834 (1,896) 2,195
-------------------------------------------------------------
purchases are made in U.S. dollars. It is the Company’s intention to hold excess funds in the currency in which the funds are likely to be used, which will, from time to time, potentially expose the Company to exchange rate fluctuations when converted into U.S. dollars. |
|
| SUNOPTA INC. | 22 | March 31, 2005 10-Q | |
|
Commodity risk The SunOpta Food Group has the following segmented reporting:
Three months ended
September 30, 2003
-----------------------------------------------------------------------------
Grains and Packaged
Soy Products Ingredients Distribution Products SunOpta
Group Group Group Group Food Group $ $ $ $ $
External revenuesenters 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 market
U.S 15,576 11,410 -- 9,899 36,885
Canada 126 289 4,599 493 5,507
Other 203 1,231 -- -- 1,434
-----------------------------------------------------------------------------
Total revenuesentering into purchase contracts with pre-approved producers. The Company has a risk of loss from external customers 15,905 12,930 4,599 10,392 43,826
-----------------------------------------------------------------------------
Segment earnings before interest expensehedge 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 income taxes 794 1,646 52 765 3,257
-----------------------------------------------------------------------------
Nine months ended
September 30, 2003
----------------------------------------------------------------losses on futures transactions related to grain inventories are included in cost of goods sold. At March 31, 2005 the Company owned 528,053 (2004 – 595,294) bushels of corn with a weighted average price of $1.83 (2004 - $1.64) and 182,642 (2004 – 61,682) bushels of soy beans with a weighted average price of $6.87 (2004 - $11.47). The Company has at March 31, 2005 net long positions on corn and soy beans of 8,758 (2004 – 7,009) and 36,393 (2004 –27,484) bushels respectively. An increase/decrease in commodity prices of 10% would not be material. There are no futures contracts in the other SunOpta Food Group segments, Opta Minerals, the StakeTech Steam Explosion Technology
SunOpta Opta Minerals Group or related to Corporate office activities.Item 4. Controls and Food Group Group Corporate Consolidated
$ $ $ $
External revenuesProcedures Under the supervision and with the participation of management, the Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2005, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed by market
U.S 104,567 8,335 383 113,285
Canada 16,538 10,060 -- 26,598the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are also designed to ensure that information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal Control over Financial Reporting There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
|
| SUNOPTA INC. | 23 | March 31, 2005 10-Q | |
|
PART II - OTHER INFORMATION. Item 1. Legal proceedings | |
| Included in Other 4,406 144 3 4,553
----------------------------------------------------------------
Total revenuesassets is a receivable of $2,903,000 (December 31, 2004 - $3,343,000) representing a judgment awarded and recovery of certain legal fees and interest with respect to external customers 125,511 18,539 386 144,436
----------------------------------------------------------------
Segment earnings (loss) before interest expense
and income taxes 8,237 2,269 (1,401) 9,105
----------------------------------------------------------------
Interest expense -- -- 1,664 1,664
----------------------------------------------------------------
Provisiona suit the Company filed against a supplier for income taxes -- -- 1,671 1,671
----------------------------------------------------------------
Segment net earnings (loss) 8,237 2,269 (4,736) 5,770
----------------------------------------------------------------
|
- --------------------------------------------------------------------------------
SUNOPTA INC. 26 September 30,failure to adhere to the terms of a contract. The judgment was awarded on June 29, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
15. Segmented information continued
The SunOpta Food Group has the following segmented reporting:
Nine months ended
September 30, 2003
-----------------------------------------------------------------------------
Grains and Packaged
Soy Products Ingredients Distribution Products SunOpta
Group Group Group Group Food Group
$ $ $ $ $
External revenues by market
U.S 46,737 32,258 -- 25,572 104,567
Canada 254 867 13,868 1,549 16,538
Other 797 3,609 -- -- 4,406
-----------------------------------------------------------------------------
Total revenues from external customers 47,788 36,734 13,868 27,121 125,511
-----------------------------------------------------------------------------
Segment earnings before interest expense and
income taxes 2,440 3,101 308 2,388 8,237
-----------------------------------------------------------------------------
Customer concentration
The Company had one customer in the Food Group whose purchases were
greater than 10% of the Company's revenue for the period ending September
30, 2003. No customer was greater than 10% for the period ending September
30, 2004.
16. Canadian generally accepted accounting principle differences
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (U.S.
GAAP) which conform in all material respects applicable to the Company
with those in Canada (Canadian GAAP) during the periods presented, except
with respect to the following items:
Three months ended Nine months ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
$ $ $ $
Net earningsa federal court jury in the United States District Court for the period - as reported 2,767 2,195 10,663 5,770
Pre-operating costs expenses (i) -- (98) -- (258)
Stock option compensationDistrict of Oregon in favour of SunRich LLC, a subsidiary of the Company. On February 8, 2005 the supplier filed an appeal against this judgement. The Company and legal counsel believe this appeal is without merit and the Company believes the collectibility of this receivable is reasonably assured. During the quarter, certain legal fees were disallowed by the court and an amount of $440,000 has been charged to other expense (ii) (194) -- (500) --
Convertible debenture -- (54) -- (54)
Tax effect of above items -- 58 -- 103
----------------------------------------------------
Net earnings forduring the period representing unrecoverable legal fees. | |
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities–Not applicable |
| Item 3. Defaults upon Senior Securities -Not applicable Item 4. Submission of Matters to a Vote of Security Holders– Not applicable Item 5. Other Information (a) Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits- Canadian GAAP 2,573 2,101 10,163 5,561
====================================================
Net earnings per share - Canadian GAAP - Basic 0.05 0.05 0.19 0.13
====================================================
Net earnings per share - Canadian GAAP - Diluted 0.05 0.04 0.18 0.12
====================================================
Shareholders' equity - as reported 140,116 57,701
Cumulative pre-operating costs, net | |
| 31.1 | Certification by Jeremy Kendall, Chief Executive Officer pursuant to Rule 13(a) – 14(a) under the Exchange Act. | | | | | 31.2 | Certification by John Dietrich, Chief Financial Officer pursuant to Rule 13(a) – 14(a) under the Exchange Act. | | | | | 32 | Certifications by Jeremy Kendall, Chairman and Chief Executive Officer and John Dietrich, Vice President and Chief Financial Officer pursuant to Section 18 U.S.C Section 1350. | | | |
| (b) Reports on Form 8-K – None SIGNATURES Pursuant to the requirements of amortization, netthe Securities Exchange Act of tax -- 98
------------------------
Shareholders' equity - Canadian GAAP 140,116 57,799
========================
Retained earnings as reported 26,442 10,415
Cumulative pre-operating costs, net of amortization, net of tax (i) -- 98
Stock option compensation expense, net of tax (ii) (744) 417
------------------------
Retained earnings - Canadian GAAP 25,698 10,930
========================
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. | |
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SUNOPTA INC. 27 September 30, 2004 10-Q
SunOpta Inc.
Condensed Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2004
Unaudited
(expressed in thousands of U.S. dollars)
- --------------------------------------------------------------------------------
16. Canadian generally accepted accounting principles differences, continued
(i) Under Canadian GAAP, certain costs expensed in prior years under U.S. GAAP
would have been deferred and amortized. Net costs incurred in the
pre-operating stage of a start-up business can be deferred until the
business reaches commercial operation or the passage of a certain period
of time as predetermined by management. The Company has not deferred any
costs under Canadian GAAP in 2004.
Under Canadian GAAP, the Company would have deferred pre-operating
expenses of $308 in 2002 relating to the start up of an organic dairy
business in Canada. Amortization of these costs on a straight line basis
would have commenced in July 2002 and as at December 31, 2003 these costs
would have been fully amortized.
In 2000, the Company acquired Nordic Aseptic, Inc., (renamed to SunOpta
Aseptic Inc.) which under Canadian GAAP would have been considered a
start-up business from the date of acquisition to December 31, 2000.
Certain operating costs, net of income earned during the pre-operating
period totaling $482 would have been deferred. Amortization of these costs
would have commenced January 1, 2001 and as of December 31, 2003 these
deferred costs would have been fully amortized.
Amortization of $nil in the nine months ended September 30, 2004
(September 30, 2003 - $258) relating to these pre-operating costs would
have been expensed under Canadian GAAP.
(ii) Effective January 1, 2004, Canadian GAAP requires the Company to record
stock compensation expense on options granted to employees. Under the
transitional provisions of this new standard, the Company would record a
charge through retained earnings representing the cumulative impact of
stock options granted since January 2002 and would record an expense for
existing and any new options over the remaining vesting period.
In conjunction with the standard, under Canadian GAAP, the Company would
have recorded $500 in stock compensation expense for the nine months ended
September 30, 2004 (2003 - $nil) and a charge to retained earnings of $661
for prior year expenses.
Partially offsetting the balance above, are stock option expenses
recognized under US GAAP, not recognized under Canadian GAAP, related to a
delay between when options were granted to employees and when they were
approved by shareholders. An amount of $417 was recorded as an expense
prior to 2003, is a permanent difference between Canadian and US GAAP.
17. Proforma data (unaudited)
Condensed proforma income statement, as if the acquisitions of
Kofman-Barenholtz, Organic Ingredients, Supreme, Distribution A & L, Snap
Dragon, Distribue-Vie, Kettle Valley, Pro Organics, Sigco Sun Products and
Sonne Labs Inc. had occurred at the beginning of 2003, is as follows:
Three months ended Nine Months ended
-----------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
$ $ $ $
Revenues 83,733 75,323 250,285 219,161
Net earnings 2,827 2,521 11,450 6,778
Earnings per share
- Basic 0.05 0.06 0.22 0.15
-----------------------------------------------------
-Diluted 0.05 0.05 0.21 0.15
-----------------------------------------------------
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SUNOPTA INC. 28 September 30, 2004 10-Q
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Significant Developments
Change to U.S. GAAP
As of January 1, 2004, SunOpta changed the basis of financial statement
preparation from generally accepted accounting principles in Canada to those
generally accepted in the United States. This change was made as a majority of
the Company's operations and shareholders are located in the U.S. As a result of
this change comparative financial statement balances and related notes have been
amended to reflect the change to U.S. GAAP. Note 16 to the condensed
consolidated financial statements reconciles differences between U.S. and
Canadian GAAP.
Initial Public Offering of Common Shares in Canada by a wholly-owned subsidiary
of SunOpta, Opta Minerals Inc.
On October 21, 2004, the Company announced that Opta Minerals Inc., a
wholly-owned subsidiary of SunOpta, filed a preliminary prospectus with the
securities regulatory authorities in each of the provinces of Canada, in
connection with an initial public offering of its common shares. Prior to
completion of the proposed initial public offering, SunOpta intends to complete
an internal reorganization of its corporate and capital structure pursuant to
which all of its interest in the assets and subsidiaries comprising the Opta
Minerals Group, a reporting segment of the Company, will be transferred to Opta
Minerals Inc.
Amended and Restated Financing Agreement
On July 7, 2004, the Company amended and restated its credit agreement. The
amended and restated agreement increased the term loan by $16,300,000 to
$35,000,000, increased the Canadian line of credit facility from CDN $7,500,000
to CDN $15,000,000 and increased the U.S. line of credit facility from
$9,000,000 to $17,500,000. In addition the agreement added a revolving
acquisition facility with maximum borrowings up to $10,000,000, which can be
used to finance future acquisitions and significant internal growth
opportunities. The term loan has quarterly payments with a seven year
amortization. Draws from the revolving acquisition line will pay down the
principal on a quarterly basis equal to the greater of (a) 1/20 of the initial
drawdown amount of the facility, or (b) 1/20 of the outstanding principal amount
as of the date of the last draw. Both the term loan and borrowings under the
revolving acquisition facility have a maturity of June 30, 2008. The Canadian
and U.S. line of credit facilities and unused portion of the revolving
acquisition facility are subject to annual extensions.
Acquisitions during 2004
In the first nine months of 2004, the Company acquired seven businesses. All of
these acquisitions have been accounted for using the purchase method and the
consolidated financial statements include the results of operations for these
businesses from the date of acquisition, less minority interest on acquisitions
when the Company owns less than 100%. The purchase price has been allocated to
the assets acquired and the liabilities assumed based on management's best
estimate of fair values.
(a) Organic Ingredients
On September 10, 2004, SunOpta acquired 50.1% of the outstanding shares of
Organic Ingredients, Inc. ("Organic Ingredients"), headquartered in Aptos,
California, for cash consideration of $2,258,000 inclusive of acquisition
costs. As part of this transaction, SunOpta has also obtained an option to
acquire the remaining 49.9% minority position in 2005.
Organic Ingredients is a leading trader and provider of a wide range of
certified organic industrial ingredients including processed fruit and
vegetable based ingredients, sweeteners, vinegars and others. The company
sources and contract manufactures through exclusive arrangements with
suppliers located around the world, including North America, South
America, Europe and Asia. These exclusive supply arrangements enable the
company to maintain a strategic advantage in the organic food ingredient
market, in terms of cost and availability of supply.
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SUNOPTA INC. 29 September 30, 2004 10-Q
(b) Kofman-Barenholtz
On September 2, 2004, SunOpta acquired 100% of the outstanding shares of
Kofman-Barenholtz Foods Limited (Kofman-Barenholtz) for cash consideration
of $3,214,000 (Cdn $4,200,000). An additional Cdn $900,000 of
consideration is contingent upon the Company's ability to satisfy certain
product line distribution maintenance requirements under the agreement.
Upon satisfaction of those terms, any amount paid will be allocated to
goodwill.
Kofman-Barenholtz is an established market leader in the distribution of
kosher and specialty grocery products across Canada, with over 50 years of
experience. Kofman-Barenholtz, headquartered in Toronto, maintains a
number of exclusive sourcing arrangements with kosher foods suppliers from
around the world, including Israel and the United States.
Kofman-Barenholtz's focus and strength in the kosher and specialty grocery
products market further strengthens SunOpta's Canadian natural, organic,
kosher and specialty foods distribution network. This transaction
positions SunOpta as the dominant kosher foods distributor in Canada.
(c) Snapdragon
On June 1, 2004 SunOpta acquired the inventory and business of Snapdragon
Natural Foods Inc. (Snapdragon) for $878,000. Additional consideration may
be payable equal to 5% of net sales greater than a predetermined target
during the period September 1, 2004 to August 31, 2005.
Snapdragon distributes organic groceries and frozen products to both mass
market and natural food retailers throughout Canada from warehousing
facilities located in Montreal, Quebec, Toronto, Ontario and Calgary,
Alberta. The Snapdragon operation will further contribute to the Company's
stated objective of building Canada's first national natural and organics
food distribution network.
(d) Supreme Foods
On May 1, 2004, SunOpta acquired the outstanding shares of Supreme Foods
Limited ("Supreme") for $8,282,000 including acquisition costs and the
assumption of a note payable to shareholders of $590,000.
Supreme is a leading distributor of certified organic, natural, kosher and
specialty grocery products across Canada, with headquarters in Toronto,
Ontario. Supreme has a number of exclusive sourcing agreements as well as
products marketed under its own trade names.
Supreme's focus and strength in grocery products will become the base of
SunOpta's growing natural organic and specialty foods distribution
business. The combination of Supreme's business in eastern Canada with
Wild West Organic Harvest in western Canada creates a national grocery
platform for SunOpta and allows for considerable expansion of product
lines.
(e) General Mills Bakeries and Food Service Oat Fiber Facility
On April 16, 2004 SunOpta acquired the assets of General Mills Bakeries
and Food Service oat fiber processing facility for $11,651,000 including
acquisition costs.
With the addition of this facility, the Company continued to increase its
total annual oat fiber processing capacity. The Company's growth in oat
fiber has been driven by the significant increase in consumer demand for
healthier food offerings, and the general trend to improve the nutritional
content of foods via the addition of fiber.
SunOpta's purchase of this facility is expected to generate efficiencies
in the Company's oat fiber processing operations enabling the Company to
streamline oat fiber production across the three facilities, lengthening
run times and improving operating efficiencies.
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SUNOPTA INC. 30 September 30, 2004 10-Q
(f) Distribution A & L
On April 1, 2004 SunOpta acquired the outstanding shares of Distribution
A&L for $381,000 including acquisition costs. An additional $381,000 of
contingent consideration may be payable if certain predetermined profit
targets are achieved by the acquired business during the period between
April 1, 2004 to June 30, 2009, and will be recorded as goodwill when the
amount and outcome of the consideration becomes determinable.
Distribution A&L specializes in the distribution of specialty abrasive and
related products. Distribution A&L focuses on smaller markets currently
not serviced by the Opta Minerals via its network of selling professionals
specializing in the industrial, automotive and pool filtration industries.
The skills contained within this operation are key as the Opta Minerals
group continues to strategically expand products and sales capabilities.
(g) Distribue-Vie
On March 1, 2004 SunOpta acquired the outstanding shares of Distribue-Vie
Fruits & Legumes Biologiques Inc. ("Distribue-Vie") for $911,000 including
acquisition costs.
Distribue-Vie specializes in the distribution of organic fresh foods with
an emphasis on produce. Distribue-Vie is the dominant player in the
distribution of organic produce in Quebec and operates from a warehousing
facility located in Montreal, servicing the key Quebec market along with
geographic reach to Eastern Ontario and the Maritime provinces. An
additional $229,000 of contingent consideration may be payable if certain
predetermined profit targets are achieved by the acquired business during
the period April 1, 2004 to March 31, 2006 and will be recorded as
goodwill when the amount and outcome of this contingency becomes
determinable.
The addition of Distribue-Vie to SunOpta's Canadian natural and organic
distribution network is expected to bring significant benefits to the
customer base in the form of broader product lines and greater support for
consumer education of organics through marketing and retail merchandising
initiatives.
Operations For the Three Months Ended September 30, 2004 Compared With the Three
Months Ended September 30, 2003
Consolidated
Revenues in the three months ended September 30, 2004 increased by 59.1% to
$80,142,000 versus $50,384,000 in the comparable three months of 2003. The
Company's net earnings for the three months of 2004 were $2,767,000 or $0.05 per
basic common share (diluted - $0.05) compared to $2,195,000 or $0.05 per basic
common share (diluted - $0.04) for the three months ended September 30, 2003,
representing a 26.1% increase.
The increase of $29,750,000 in the Company's revenues is due to a $27,491,000
increase in revenue from the SunOpta Food Group, an increase of $1,854,000 from
Opta Minerals, and an increase of $413,000 in revenue attributable to the
StakeTech Steam Explosion Group. These increases are due to continued internal
growth in certain product lines and the impact of acquisitions completed
throughout 2003 and in 2004 to date. Details are provided in the segmented
analysis below.
Earnings before interest expense, interest and other income (expense), foreign
exchange gains (losses) and income taxes increased to $4,572,000 compared to
$3,192,000 for the same period in the prior year, a 43.2% increase. The increase
is due to the acquisitions completed in the prior year and the first nine months
of this year, pricing on certain product lines, internal sales growth, synergies
and cost reductions realized throughout the organization, offset by expenses
related to, addressing the requirements of the Sarbanes-Oxley Act, totalling
approximately $300,000. In addition, the Company incurred certain integration
costs related to its Toronto and Montreal-based distribution operations during
the third quarter which had a negative impact of approximately $600,000. Further
details are included in segmented analysis detailed below.
Interest expense decreased slightly to $675,000 in the three months ended
September 30, 2004 from $680,000 in the three months ended September 30, 2003.
Borrowing costs reflect the increase in debt outstanding compared to the three
months ended September 30, 2003 and banking fees incurred on the amended
facility. Three months ended September 30, 2003 included costs on extinguishing
the convertible debenture of $183,000.
Interest and other income (expense) was ($169,000) in the three months ended
September 30, 2004 versus income of $255,000 in the three months ended September
30, 2003. The 2004 expense is primarily due to costs incurred in the
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SUNOPTA INC. 31 September 30, 2004 10-Q
pending 'Initial Public Offering' of common shares of Opta Minerals announced
October 27, 2004. The 2003 other income is primarily due to a gain recognized on
a discharged liability and gains realized on the sale of excess assets.
Foreign exchange gain in the quarter increased to $227,000 compared to a foreign
exchange loss of $171,000 in the same period in 2003. The gain is due to the
favourable movement in the value of the Canadian dollar on the Company's
Canadian dollar denominated balances.
The provision for income taxes in the three months ended September 30, 2004
reflects the Company's estimated effective tax rate in 2004 of 30.0%. In 2003
the tax rate of 15.4% reflects the recognition of certain tax loss
carry-forwards in the quarter.
Readers should note that due to differences between Canadian and U.S. GAAP, the
earnings for the three months ended September 30, 2003 was revised from
$2,100,000 as previously reported under Canadian GAAP to $2,195,000 under U.S.
GAAP. Note 16 to the consolidated financial statements itemizes differences
between U.S. and Canadian GAAP.
Segmented Operations Information
(Note: Certain prior year figures have been adjusted to conform with the current
year presentation and segmented reporting.)
SunOpta Food Group
The SunOpta Food Group contributed $71,317,000 or 89.0% of total Company
consolidated revenues in the three months ended September 30, 2004 versus
$43,826,000 or 87.0% in the same period in 2003. The increase of $27,491,000 or
62.7% in SunOpta Food Group revenues was primarily due the acquisitions
completed in 2003 and 2004 and internal growth, partially offset by a decline in
revenues due to a short supply of soybean and non-GMO corn as discussed below.
Gross margins as a percentage of sales increased in the quarter from 16.9% to
19.0% reflecting the impact of improved product mix, pricing, higher margins
within the Distribution Group which has become a more significant segment and
cost rationalization within the Food Group, offset by lower margins within the
Grain & Soy Products Group due to reduced yields and the short grains crop in
2003.
Earnings before interest expense and income taxes in the SunOpta Food Group
increased 18.7% to $3,865,000 in the three months ended September 30, 2004
compared to $3,257,000 in the three months ended September 30, 2003.
Grains & Soy Products Group
The Grains and Soy Products Group contributed $23,207,000 in revenues in the
third quarter of 2004 versus $15,905,000 in the same quarter of 2003, a 45.9%
increase. Revenues were favourably impacted in the quarter by the acquisition of
Sigco Sun Products (Sigco) in late 2003, totalling $7,817,000, and increased
waxy corn sales. These increases were offset by revenue decreases of $2,340,000
mainly attributable to reduced yields and the short soybean and non-GMO corn
crops in 2003 which resulted in lost revenue. Expectations are for an improved
soy and corn crop in 2004 which should see revenues, and margins returning to
2003 levels in 2005.
Gross margin in the Grains and Soy Products Group decreased by $28,000 in the
quarter to $1,988,000 or 8.6% of revenues compared to $2,016,000 or 12.7%, in
the same period in 2003. The decrease in gross profit margins is primarily
attributable to mix, lower volumes of high margin specialty grains and margin
pressures on soy beans due to requirements to source soy beans at higher prices
to meet sales commitments.
Selling, general and administrative expenses increased to $1,647,000 in the
three months ended September 30, 2004 versus $1,222,000 in the three months
ended September 30, 2003. The increase is due primarily to the Sigco acquisition
completed in 2003. Other income in the three months ended September 30, 2004 was
$28,000.
Earnings before interest expense and income taxes in the Grains and Soy Products
Group was $369,000 in the three months ended September 30, 2004 compared to
$794,000 in the three months ended September 30, 2003, due to the factors noted
above.
Ingredients Group
The Ingredients Group contributed revenues of $18,348,000 in the three months of
2004 versus $12,930,000 in 2003, a 41.9% increase. The Organic Ingredients
acquisition completed in the third quarter of 2004 increased revenue by
$995,000. Oat fiber increases of $2,921,000 resulted from the demand generated
by low carb diets (such as Atkins, South
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SUNOPTA INC. 32 September 30, 2004 10-Q
Beach and Hampton diets) and fiber enriched foods and were supported by
increased capacity with expansion projects at our Cambridge facility and the
procurement of an additional facility in the second quarter of 2004 (see
significant developments). Increased revenues in dairy blending of $591,000 were
due to increased pricing and volumes. The remainder of the revenue increase
relates to increases in specialty food ingredients attributable to increased
technical processing and custom blending.
Gross margin in the Ingredients Group increased by $1,425,000 in the three
months ended September 30, 2004 to $4,563,000 or 24.9% of revenue, compared to
$3,138,000 or 24.3% of revenue in the same period in 2003. The increase in gross
margin reflects increased percentage of oat fiber revenues on a comparative
basis, improved plant utilization and cost rationalization initiatives.
Selling, general and administrative expenses increased to $2,035,000 in the
three months ended September 30, 2004 versus $1,605,000 in the three months
ended September 30, 2003. The increase is primarily due to an increased reserve
for bad debts related to certain customers, recruiting costs, increased
marketing expenditures and the acquisition of Organic Ingredients.
Other income (expenses) net of foreign exchange in the three months ended
September 30, 2004 increased to ($46,000) compared to $113,000 in the same
period in 2003. Last year's other income is primarily due to the discharge of a
long-term liability.
Earnings before interest expense and income taxes in the Ingredients Group were
$2,482,000 in the three months ended September 30, 2004 compared to $1,646,000
in the three months ended September 30, 2003, due primarily to the factors noted
above.
Packaged Products Group
The Packaged Products Group contributed revenues of $10,388,000 in the three
months of 2004 versus $10,392,000 in 2003, a slight decrease of $4,000. Revenues
were unfavourably impacted by decreased aseptic & consumer product sales of
$1,447,000 but offset by an increase of $1,443,000 resulting from the
acquisitions and internal growth within Kettle Valley and Dakota Gourmet which
were acquired in 2003. The decline in the aseptic and consumer product sales is
due to timing of sales to a significant customer. The agreement with Vitasoy
USA, announced on July 6, 2004, had a minimal impact on third quarter revenues,
however is expected to contribute fully in the fourth quarter.
Gross margin in the Packaged Products Group increased by $138,000 in the three
months ended September 30, 2004 to $1,546,000 or 14.9% of revenues compared to
$1,408,000 or 13.5% of revenues in the same period in 2003. The increase in
gross margin was attributable to the acquired businesses which have inherently
higher margin rates, offset by a reduction in contribution due to the decline in
sales of aseptic and consumer products.
Selling, general and administrative expenses increased to $1,097,000 in the
three months ended September 30, 2004 versus $585,000 in the three months ended
September 30, 2003. The increases are due to the acquisitions noted above.
Other income (expenses) including foreign exchange for the three months ended
September 30, 2004 is ($25,000) compared to ($58,000) in same period in 2003.
Earnings before interest expense and income taxes in the Packaged Products Group
were $424,000 in the three months ended September 30, 2004 compared to $765,000
in the three months ended September 30, 2003, due to the factors noted above.
Distribution Group
The Distribution Group contributed revenues of $19,374,000 in the three months
ended September 30, 2004 versus $4,599,000 in 2003, an increase of $14,775,000
or 321.3%. Revenues were favourably impacted by increased grocery revenues of
$1,024,000 in our existing divisions and an increase in revenues of $13,751,000
resulting from the acquisitions completed in late 2003 and the first nine months
of 2004, offset by certain business attrition due to integration issues within
central Canada.
Gross margin in the Distribution Group increased by $4,645,000 in the three
months ended September 30, 2004 to $5,487,000 or 28.3% of revenue compared to
$842,000 or 18.3% of revenue, in the same period in 2003. The increase in gross
profit is attributable to the acquired businesses and synergies recognized in
both the acquisition and existing operations within the Distribution Group.
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SUNOPTA INC. 33 September 30, 2004 10-Q
Warehousing and distribution costs increased to $1,547,000 in the three months
ended September 30, 2004 versus $221,000 in the three months ended September 30,
2003. Selling, general and administrative expenses increased to $3,415,000 in
the three months ended September 30, 2004 versus $580,000 in the three months
ended September 30, 2003. The increases noted are due primarily to the
acquisitions noted above.
Other expenses net of foreign exchange gain in the three months ended September
30, 2004 resulted in a $65,000 gain compared to other income of $11,000 in same
period in 2003.
Earnings before interest expense and income taxes in the Distribution Group were
$590,000 in the three months ended September 30, 2004 compared to $52,000 in the
three months ended September 30, 2003, due to the factors noted above.
Opta Minerals Group
Opta Minerals contributed $8,330,000 or 10.4% of the total Company consolidated
revenues in the three months ended September 30, 2004, versus $6,476,000 or
12.9% in 2003 for the same period. Revenues were favourably impacted by the
acquisition of Distribution A&L in the amount of $480,000, an increase in demand
for silica free abrasives and general increases in sales activities within
Canadian based operations.
Gross margin was $1,707,000 in the three months ended September 30, 2004 versus
$1,495,000 in the three months ended September 30, 2003. As a percentage of
revenues, gross margin decreased to 20.5% in the three months of 2004 from 23.1%
in the three months of 2003. The decrease in margin is due primarily to product
mix and an increased percentage of sales from Canadian based businesses which
have inherently lower margins.
Selling, general and administrative expenses remained stable at $664,000 in the
three months ended September 30, 2004 compared to the three months ended
September 30, 2003. Additional costs incurred due to the acquisition of
Distribution A&L was offset by cost savings in other areas of the business.
Other income (expense) increased to ($183,000) in the three months ended
September 30, 2004 versus $14,000 in the comparable three months of 2003. Other
expense recognized in 2004 relates to incremental audit costs incurred with
respect to the Initial Public Offering of common shares for this group which was
announced October 21, 2004. Foreign exchange gain (loss) for the three months
ended September 30, 2004 was $49,000 compared to an exchange loss of ($11,000)
for the comparable period in 2003.
Earnings before interest expense and income taxes were $909,000 in the three
months ended September 30, 2004 versus $834,000 in the three months ended
September 30, 2003.
StakeTech Steam Explosion Group and Corporate
Revenues of $495,000 for the three months ended September 30, 2004, versus
$82,000 in same period in 2003, were derived from engineering and research and
development work undertaken during the quarter for the investigation of
converting certain bio-mass for the production of ethanol. The 2003 revenue was
primarily driven from licence fees. There have been no licence fee revenues
recognized in 2004.
Gross margin in the StakeTech Steam Explosion Group was $178,000 in the three
months ended September 30, 2004 versus $81,000 in the three months ended
September 30, 2003. As a percentage of revenues, gross margin was 36.0% in the
three months ended September 30, 2004 compared to 62.1% in the comparable three
months of 2003. Gross margin recognized in 2003 was attributed to license fees
which have no associated service costs offset by depreciation expenses.
Selling, general and administrative expenses were $492,000 for the three months
ended September 30, 2004 compared to $911,000 for the same period in 2003. The
decrease was a result of reclassification of certain costs to interest expense
and cost of goods sold and reduced professional fees.
Other income including a foreign exchange gain was $170,000 in the three months
ended September 30, 2004 versus $15,000 in the three months ended September 30,
2003. The gain in 2004 is mainly due to foreign exchange gains recognized in the
quarter.
Loss before interest expense and income taxes was $144,000 in the three months
ended September 30, 2004 versus $815,000 in the three months ended September 30,
2003 which was attributable to the factors listed above.
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SUNOPTA INC. 34 September 30, 2004 10-Q
Operations For the Nine Months Ended September 30, 2004 Compared With the Nine
Months Ended September 30, 2003
Consolidated
Revenues in the first nine months of 2004 increased by 54.8% to $223,588,000
versus $144,436,000 in the first nine months of 2003. The Company's net earnings
for the first nine months of 2004 were $10,663,000 or $0.20 per basic common
share (diluted - $0.20) compared to $5,770,000 or $0.13 per basic common share
(diluted - $0.12) for the first nine months of 2003, representing an 84.8%
increase.
The increase in the Company's revenues is due to a $72,983,000 increase in
revenue from the SunOpta Food Group, an increase of $5,622,000 from Opta
Minerals and an increase of $547,000 in revenue attributable to the StakeTech
Steam Explosion Group. These increases are due to continued internal growth in
certain product lines and the impact of acquisitions completed to date. Details
are provided in the segmented analysis below.
Earnings before interest expense, interest and other income (expense), foreign
exchange gains (losses) and income taxes increased to $13,569,000 compared to
$8,215,000 for the same period in the prior year, a 65.2% increase. The
increases are due to the acquisitions completed in the prior year, internal
sales growth, synergies and cost reductions realized throughout the
organization. In addition, net earnings for the nine months ended September 30,
2004 included a gain recognized on the judgment received in a lawsuit against a
supplier for breach of contract as described in Note 8 (Other Income) of the
condensed consolidated financial statements. Further details are included in
segmented analysis detailed below.
Interest expense decreased to $1,035,000 in the nine months ended September 30,
2004 from $1,664,000 in the nine months ended September 30, 2003. The decrease
in borrowing costs reflects a lower average debt balance outstanding during the
year compared to the prior period ended September 30, 2003 and lower borrowing
costs as a result of improved premiums and lower LIBOR rates in general.
Interest and other income increased to $2,238,000 in the nine months ended
September 30, 2004 versus $465,000 in the nine months ended September 30, 2003.
This increase is due to a favourable judgment received in a lawsuit against a
supplier for breach of contract for $2,646,000 (see Note 8 - Prepaid Expenses
and Other Current Assets). Foreign exchange gains of $442,000 compared to
$425,000 in the same period in 2003 are due to the realization of gains due to
movements in the Canadian dollar during the first nine months of 2004.
The provision for income taxes in the first nine months of 2004 reflects the
Company's estimated effective tax rate in 2004 of 30%. The provision for income
tax in 2003 of 22.5% included the realization of loss carryforwards available to
the Company.
Readers should note that due to differences between Canadian and U.S. GAAP, the
earnings for the nine months ended September 30, 2003 was revised from
$5,560,000 as previously reported under Canadian GAAP to $5,770,000 under U.S.
GAAP. Note 16 to the consolidated financial statements itemizes differences
between U.S. and Canadian GAAP.
Segmented Operations Information
(Note: Certain prior year figures have been adjusted to conform with the current
year presentation and segmented reporting.)
SunOpta Food Group
The SunOpta Food Group contributed $198,494,000 or 88.8% of total Company
consolidated revenues in the first nine months of 2004 versus $125,511,000 or
86.9% in the same period in 2003. The increase of $72,983,000 or 58.1% is
attributable to the acquisitions completed over the past year and internal
growth from the Company's existing business, which was partially offset by a
decline in revenues in 2004 due to the short soybean and corn crop in 2003. For
detailed explanations see segments analysis below.
Gross margins as a percentage of sales increased for the first nine months from
16.6% to 19.2% reflecting the impact of improved product mix and pricing, cost
rationalization and higher margins within the Distribution Group which has
become a more significant segment within the Food Group.
Earnings before interest expense and income taxes in the SunOpta Food Group
increased 82.8% to $15,056,000 in the nine months ended September 30, 2004 as
compared to $8,237,000 in the nine months ended September 30, 2003.
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SUNOPTA INC. 35 September 30, 2004 10-Q
Grains & Soy Products Group
The Grains and Soy Products Group contributed $65,520,000 in revenues in the
first nine months of 2004 versus $47,788,000 in 2003, a 37.1% increase. Revenues
were favourably impacted by the acquisition of Sigco Sun Products in late 2003,
totalling $21,255,000 and increases in certain grain revenues. These increases
were offset by revenue decreases in 2004 attributable to the short soybean and
corn crop in 2003.
Gross margin in the Grains and Soy Products Group increased by $292,000 in the
nine months ended September 30, 2004 to $6,691,000 or 10.2% of revenues as
compared to $6,399,000 or 13.4%, in the same period in 2003. The decrease in
gross profit margins is related to reduced margins on soybean crop sales,
especially in the third quarter, fixed sales contracts of organic feed which had
a significant impact in the second quarter and the lower volumes noted above.
The decrease was offset by the sunflower product lines acquired which have
historically higher gross margins than other grain products.
Selling, general and administrative expenses increased to $4,877,000 in the nine
months ended September 30, 2004 versus $3,962,000 in the nine months ended
September 30, 2003. The increase is due primarily to the Sigco acquisition
completed in 2003.
Other income in the nine months ended September 30, 2004 of $219,000, compared
to $3,000 in the prior year is primarily related to the sale of non-core assets
during the year.
Earnings before interest expense and income taxes in the Grains and Soy Products
Group was $2,033,000 in the nine months ended September 30, 2004 compared to
$2,440,000 in the nine months ended September 30, 2003, due to the factors noted
above.
Ingredients Group
The Ingredients Group contributed revenues of $50,321,000 in the first nine
months of 2004 as compared to $36,734,000 in 2003, a 37.0% increase. The
increase in revenues is attributable to increased sales of oat fiber, dairy
blends, soluble fiber and technical processing. Oat fiber increases of
$7,899,000 resulted from the demand generated by low carb diets and fiber
enriched foods and were supported by increased capacity at our Cambridge
facility and our newly acquired facility in Cedar Rapids, Iowa. An increase of
$2,303,000 in dairy blends was realized due to increased volumes and pricing
compared to the prior year.
Gross margin in the Ingredients Group increased by $4,117,000 in the nine months
ended September 30, 2004 to $12,044,000 or 23.9% of revenue compared to
$7,927,000 or 21.6% of revenue, in the same period in 2003. The increase in
gross margin reflects increased percentage of oat fiber revenues on a
comparative basis, improved pricing, plant utilization and cost rationalization
initiatives.
Selling, general and administrative expenses increased to $5,534,000 in the nine
months ended September 30, 2004 versus $4,883,000 in the nine months ended
September 30, 2003. The increase is due to the acquisition of Organic
Ingredients in the third quarter of 2004 and increased compensation costs as a
result of previously vacant positions with the group.
Other income (expenses) in the first nine months ended September 30, 2004 was
($283,000) compared to $198,000 in the first nine months of 2003. The expenses
in 2004 are related to the closure of the St. Thomas Facility and costs incurred
to prepare the Bedford facility for sale, partially offset by a small gain
recognized on the sale of the Bedford Facility. The 2003 gain is a result of a
gain recognized on a discharged liability. In 2004, the Ingredients group had an
exchange gain of $84,000 compared to a loss of ($141,000) in 2003. As the
Canadian based St. Thomas facility is now closed, future exchange gains and
losses within this group will be minimal.
Earnings before interest expense and income taxes in the Ingredients Group were
$6,311,000 in the nine months ended September 30, 2004 as compared to $3,101,000
in the nine months ended September 30, 2003, due primarily to the factors noted
above.
Packaged Products Group
The Packaged Products Group contributed $29,877,000 revenues in the first nine
months of 2004 versus $27,121,000 in 2003, an increase of $2,756,000 or 10.2%.
Revenues were favourably impacted by internal growth within the acquisitions
completed in 2003 of Kettle Valley and Dakota Gourmet of $4,353,000, increased
Canadian packaged revenues of $769,000 offset by a year to date decline of
$2,171,000 in aseptic packaged and consumer products. The aseptic packaged and
consumer products revenues have been affected by our largest customer who has
changed its ordering patterns.
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SUNOPTA INC. 36 September 30, 2004 10-Q
Gross margin in the Group increased by $407,000 in the first nine months ended
September 30, 2004 to $4,310,000 or 14.4% compared to $3,903,000 or 14.4%, in
the same period in 2003. The gross margin percentage in the year included a
reduction in contribution due to a decline in sales of aseptic products
including the effects of fixed overhead absorption, offset by higher margins in
the acquired businesses.
Selling, general and administrative expenses increased to $3,285,000 in the nine
months ended September 30, 2004 versus $1,466,000 in the nine months ended
September 30, 2003. The increases noted are due primarily to the acquisitions
made in the healthy convenience food sector.
Other income (expenses) including foreign exchange effects in the first nine
months ended September 30, 2004 were $2,549,000 as compared to ($49,000) in same
period in 2003. A gain of $2,646,000 was recognized on the judgment received in
a lawsuit against a supplier for breach of contract as described in Note 8
(Prepaid Expenses and Other Current Assets) in the second quarter.
Earnings before interest expense and income taxes in the Packaged Products Group
were $3,574,000 in the nine months ended September 30, 2004 compared to
$2,388,000 in the nine months ended September 30, 2003 due to the factors noted
above.
Distribution Group
The Distribution Group contributed revenues of $52,776,000 in the nine months of
2004 versus $13,868,000 in 2003, an increase of $38,908,000 or 280.6%. Revenues
were favourably impacted by increased produce and grocery revenues of
$37,765,000 resulting from the acquisitions completed in 2003 (Pro Organics) and
2004 (Supreme Foods, Snapdragon, Kofman-Barenholtz), however hampered by certain
integration issues related to the Toronto and Montreal-based operations.
Gross margin increased by $12,312,000 in the nine months ended September 30,
2004 to $14,972,000 as compared to $2,660,000 in the same period in 2003. The
increase in gross profit was attributable to acquisitions and the synergies
recognized in our previously existing and acquired businesses.
Warehousing and distribution costs increased to $4,144,000 in the nine months
ended September 30, 2004 versus $628,000 in the nine months ended September 30,
2003, which reflects the impact of acquisitions and cost of certain integration
issues experienced in the third quarter of 2004. Selling, general and
administrative expenses increased to $7,694,000 in the nine months ended
September 30, 2004 versus $1,782,000 in the nine months ended September 30,
2003. The increases noted are due primarily to the acquisitions noted above.
Other income (expenses) in the nine months ended September 30, 2004 including
exchange gains (losses) were $4,000 compared to other income of $58,000 in same
period in 2003.
Earnings before interest expense and income taxes in the Distribution Group were
$3,138,000 in the nine months ended September 30, 2004 as compared to $308,000
in the nine months ended September 30, 2003, due to the factors noted above.
Opta Minerals
Opta Minerals contributed $24,161,000 or 10.8% of the total Company consolidated
revenues in the first nine months of 2004, versus $18,539,000 or 12.8% in 2003.
Revenues were favourably impacted by an increase in revenues due to the
acquisition of Distribution A&L and internal growth via an increase in demand
for abrasives products.
Gross margins in Opta Minerals were $5,572,000 in the nine months ended
September 30, 2004 versus $3,930,000 in the nine months ended September 30,
2003. As a percentage of revenues, gross margin increased to 23.1% in the first
nine months of 2004 from 21.2% in the first nine months of 2003. The increase in
margin is due primarily to increased demand for abrasive sales, primarily in
U.S. based operations.
Selling, general and administrative expenses increased to $2,144,000 in the nine
months ended September 30, 2004 versus $1,741,000 in the nine months ended
September 30, 2003. The increase in costs is attributable to the acquisition
noted above.
Other income (expense) increased to ($324,000) in the first nine months of 2004
versus a gain of $134,000 in the first nine months of 2003. The increase was due
to costs incurred in the first quarter due to the rationalization of the
Hamilton facility and costs incurred in the third quarter relating to the
pending 'Initial Public Offering' of common shares of Opta
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SUNOPTA INC. 37 September 30, 2004 10-Q
Minerals. The Group also has foreign exchange gains/(losses) of $58,000 for the
nine months ended September 30, 2004 and ($54,000) in the comparable period of
the previous year.
Earnings before interest expense and income taxes were $3,162,000 in the nine
months ended September 30, 2004 versus $2,269,000 in the nine months ended
September 30, 2003.
StakeTech Steam Explosion Group and Corporate
Revenues of $933,000 for the nine months ended September 30, 2004, versus
$386,000 in same period in 2003, were derived from pre-engineering work and
research and development undertaken during the period. Majority of the 2003
revenue relates to licence fees that were recognized. There have been no license
fees recognized in 2004.
Gross margin in the StakeTech Steam Explosion Group was $378,000 in the nine
months ended September 30, 2004 versus $384,000 in the nine months ended
September 30, 2003. As a percentage of revenues, gross margin decreased to 39.7%
in the first nine months of 2004 from 87.0% in the first nine months of 2003.
Gross margin recognized in 2003 was attributed to license fees which had no
associated service costs.
Selling, general and administrative expenses were $2,720,000 for the nine months
of 2004 compared to $2,526,000 for the same period in 2003. The increase was a
result of payroll expenses and increased costs associated with a growing public
company including the addition of in-house legal counsel, internal audit
functions and compliance costs related to Sarbanes Oxley. In addition, the
Company incurred increased personnel and associated costs within the StakeTech
Steam Explosion Group in anticipation of additional bio-fuel contracts and work
related to the use of steam technology in food applications. These increases
have been partially offset by reduced professional fees.
Other income was $373,000 in the first nine months of 2004 versus $741,000 in
the first nine months of 2003. The gains are primarily related to foreign
exchange due to significant fluctuations in the Canadian Dollar.
Loss before interest expense and income taxes was $1,969,000 in the nine months
ended September 30, 2004 versus $1,401,000 in the nine months ended September
30, 2003.
Liquidity and Capital Resources at September 30, 2004
Sources of Liquidity
The Company obtains its short term financing through a combination of cash
generated from operating activities, cash and cash equivalents, and available
operating lines of credit. At September 30, 2004, the Company has availability
under certain lines of credit of approximately $29,000,000. A revolving
acquisition line is also available with maximum draws up to $10,000,000.
The Company obtains its long term financing through its credit agreement with a
syndicate of lenders. The Company may expand this credit agreement, and/or
obtain additional long term financing for internal expansion uses, acquisitions
or other strategic purposes as required. On July 7, 2004, the Company increased
its term loan to $35,000,000 and its operating lines of credit.
The Company has the following sources from which it can fund its operating 2004
cash requirements:
o Cash and cash equivalents.
o Available operating lines of credit.
o Cash flows generated from operating activities.
o Cash flows generated from the sale of assets held for sale.
o Cash flows generated from receipts of warrants and options currently
in-the-money.
o Additional long term financing based on securitization of existing
assets.
In order to finance significant acquisitions, the Company may need additional
sources of cash which could be obtained through a combination of additional bank
or subordinated financing, a private or public offering, or the issuance of
shares in relation to an acquisition or a divestiture. The Company intends to
maintain a target term debt to equity ratio of 0.60 to 1.00 versus the current
position of 0.26 to 1.00.
The Company anticipates having no issues in obtaining additional long term
financing in view of its current financial position and past experience in the
capital markets.
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SUNOPTA INC. 38 September 30, 2004 10-Q
Cash Flows from Operating Activities
Cash provided by operations for the first nine months of 2004 before changes in
working capital was $17,466,000 (2003 - $8,919,000), an increase of $8,547,000
or 95.8%. The increase was due primarily to an increase in net earnings.
Cash provided by operations after working capital changes was $7,965,000 for the
nine months ended September 30, 2004 (2003 -$457,000), reflecting the use of
funds for non-cash working capital of ($9,501,000) (2003 - ($8,462,000)). This
utilization consists principally of an increase in accounts receivable
($6,788,000), an increase in prepaid expenses and other assets of ($3,693,000),
a decrease in accounts payable and accrued liabilities of ($509,000) and a
decrease in customer deposits of ($1,777,000), partially offset by a decrease in
inventories $1,660,000 and the recovery of income taxes of $1,686,000. The usage
of cash flows to fund working capital in 2004 reflects the increase in working
capital requirements required to fund the rapid growth in operations.
Cash Flows from Investing Activities
Cash used in investment activities of $35,274,000 in the first nine months of
2004 (2003 -$3,361,000), reflects cash used to complete acquisitions, net of
cash acquired, of ($27,448,000) (2003 - ($2,894,000)) and acquisitions of
property, plant and equipment of ($14,833,000) (2003 - ($3,778,000)), offset by
proceeds from the sale of property of $5,864,000 (2003 - $nil), a decrease in
short term investments for proceeds of $nil (2003 - $2,038,000) and payments
received on a note receivable of $1,250,000 (2003 - $1,074,000).
Cash Flows from Financing Activities
Cash provided by financing activities was $19,066,000 in 2004 (2003 -
$34,562,000), consisting primarily of increased borrowings under term debt
facilities $17,007,000 (2003 - $7,800,000), net proceeds from the issuance of
common shares of $7,848,000 (2003 - $56,028,000), partially offset by decrease
in bank indebtedness $nil (2003 - ($4,285,000)), repayment on long-term debt
facilities of ($5,310,000) (2003 - ($24,009,000)), payment of deferred purchase
consideration of ($65,000) (2003 - ($490,000)), financing costs of ($198,000)
(2003 - ($343,000)) and the purchase and redemption of preference shares of
subsidiary companies of ($216,000) (2003 - ($139,000)).
Item 3 -Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk
The primary objective of our investment activities is to preserve principal and
limit risk. To achieve this objective, the company restricts its portfolio to a
variety of securities, including government and corporate obligations and money
market funds. These securities are generally classified as cash and cash
equivalents or short-term investments and are recorded on the balance sheet at
fair value with unrealized gains or losses reported through profit and loss. As
at September 30, 2004 all of SunOpta's excess funds were held in cash and cash
equivalents with a maturity of less than 90 days.
Debt in both fixed rate and floating rate interest carry different types of
interest rate risk. Fixed rate debt may have its fair market value adversely
affected by a decline in interest rates. In general, longer date debts are
subject to greater interest rate risk than shorter dated securities. Floating
rate term debt gives less predictability to cash flows as interest rates change.
As at September 30, 2004, the weighted average interest rate of the fixed rate
term debt was 3.5% (2003 - 5.3%) and $2,538,000 (2003 - $1,339,000) of the
Company's outstanding term debt is at fixed interest rates. Variable rate term
debt of $34,200,000 (2003 - $20,525,000) at an interest rate of 2.7% (2003 -
3.67%) is partially hedged by variable rate cash equivalent investments. The
Company looks at varying factors to determine the percentage of debt to hold at
fixed rates including, the interest rate spread between variable and fixed (swap
rates), the Company's view on interest rate trends, the percent of offset to
variable rate debt through holding variable rate investments and the Company's
ability to manage interest rate volatility and uncertainty. For every 1%
increase (decrease) in interest rates the Company's after tax earnings would
(decrease) increase by approximately $240,000. Given the short duration of fixed
rate debt, changes in interest rates would have a negligible effect on fixed
rate debt valuations.
Foreign currency risk
All U.S. subsidiaries use the U.S. dollar as their functional currency. The
Company is exposed to foreign exchange rate fluctuations as the financial
results of the Company and its Canadian subsidiaries are translated into U.S.
dollars on consolidation. During the first nine months of 2004, the Canadian
dollar has depreciated slightly against the U.S. dollar with closing rates
moving from CDN $1.2965 at December 31, 2003 to CDN $1.2616 at September 30,
2004 for each U.S. dollar. The net effect of this depreciation has been a
$442,000 net exchange gain and a $1,307,000 increase in net assets. A 10%
movement in the levels of foreign currency exchange rates in favour of (against)
the Canadian dollar with all other variables
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SUNOPTA INC. 39 September 30, 2004 10-Q
held constant would result in an increase (decrease) in the fair value of the
Company's net assets by $4,855,000 (2003 - $2,327,000).
The functional currency of all operations located in Canada is the Canadian
dollar. For these operations all transaction gains or losses in relation to the
U.S. dollar are recorded as foreign exchange gain (loss) in the Consolidated
Statements of Earnings while gains (losses) on translation of net assets to U.S.
dollars on consolidation are recorded in Accumulated other comprehensive income
account within Shareholders' Equity. The functional currency of the corporate
head office is the U.S. dollar. Transaction gains or losses as well as
translation gains and losses on monetary assets and liabilities are recorded
within foreign exchange gains (losses) on the Consolidated Statement of
Earnings. U.S. based Food Group operations have no exposure to other currencies
since almost all sales and purchases are made in U.S. dollars. It is the
Company's intention to hold excess funds in the currency in which the funds are
likely to be used, which will, from time to time, potentially expose the Company
to exchange rate fluctuations when converted into U.S. dollars.
Commodity risk
The Food Group enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on grain transactions to
the extent considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging purposes are purchased and sold
through regulated commodity exchanges. Inventories, however, may not be
completely hedged, due in part to the Company's assessment of its exposure from
expected price fluctuations. Exchange purchase and sales contracts may expose
the Company to risk in the event that a counter-party to a transaction is unable
to fulfill its contractual obligation. The Company manages its risk by entering
into purchase contracts with pre-approved producers. The Company has a risk of
loss from hedge activity if a grower does not deliver the grain as scheduled.
Sales contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated. All futures transactions are marked
to market. Gains and losses on futures transactions related to grain inventories
are included in cost of goods sold. At September 30, 2004 the Company owned
111,885 (2003 - 150,780) bushels of corn with a weighted average price of $2.48
(2003 - $1.86) and 38,361 (2003 - 173,945) bushels of soy beans with a weighted
average price of $11.69 (2003 - $7.46). The Company has at September 30, 2004
net long/(short) positions on corn and soy beans of (153,983) (2003 - 75,415)
and (52,954) (2003 -197,060) bushels respectively. An increase/decrease in
commodity prices of 10% would result in a gain (loss) of $130,794 (2003 -
$14,000) in corn and $9,514 (2003 - $147,000) in soy beans, respectively. There
are no futures contracts in the other Food Group segments, Opta Minerals, the
StakeTech Steam Explosion Group or related to Corporate office activities.
Item 4. Controls and Procedures
Under Section 404 of the Sarbanes-Oxley Act of 2002 ("404"), we are required to
include, for the first time in our Annual Report on Form 10-K for 2004 (the
"10-K"), management's assessment of the effectiveness of our internal controls
over financial reporting (the "Assessment"), and our independent auditor's
attestation of that assessment (the "Attestation"). We are working diligently to
complete our work required for the Assessment and Attestation. To date, however,
we have experienced an increased workload versus initial expectations and have
realized some delays in executing against our internal 404 project plan. In the
third quarter of 2004 we re-evaluated that plan, adding both significant
internal staffing resources and external consultants to our 404 project team.
The revised 404 project plan contains many time-critical milestones. Our efforts
during November and December 2004 will be critical to our success.
Under the supervision and with the participation of management, the Chief
Executive Officer and Chief Financial Officer of the Company have evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of September 30, 2004, and, based on their evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that these
controls and procedures are effective. Disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures are also designed to ensure that information is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Internal Control over Financial Reporting
There has been no change in the Company's internal control over financial
reporting that occurred during the Company's quarter ended September 30, 2004
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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SUNOPTA INC. 40 September 30, 2004 10-Q
PART II - OTHER INFORMATION.
Item 1. Legal proceedings
Included within prepaid expenses and other current assets is a receivable
of $3,343,000 representing a judgment awarded and recovery of legal fees
and interest relating to a suit the Company filed against a supplier for
failure to adhere to the terms of a contract. The judgment was awarded on
June 29, 2004 by a federal court jury in the United States District Court
for the District of Oregon in favour of Sunrich Inc. (Sunrich) a
subsidiary of the Company. The supplier counter-sued the Company for
breach of contract however, as part of this judgment these counter-claims
were dismissed. The supplier has since filed post trial motions. The
Company and it's legal counsel believe these motions and counter-claims
are without merit and the Company believes the collectibility of this
receivable is reasonably assured. Included within other income and expense
for the nine months ended September 30, 2004 is a recorded pre-tax gain of
$2,646,000.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities - Not applicable
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not applicable
Item 5. Other Information
(a) Not applicable
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SUNOPTA INC. 41 September 30, 2004 10-Q
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
31.1 Certification by Jeremy Kendall, Chief Executive Officer pursuant to
Rule 13(a) - 14(a) under the Exchange Act.
31.2 Certification by John Dietrich, Chief Financial Officer pursuant to
Rule 13(a) - 14(a) under the Exchange Act.
32 Certifications by Jeremy Kendall, Chairman and Chief Executive
Officer and John Dietrich, Vice President and Chief Financial
Officer pursuant to Section 18 U.S.C Section 1350.
** Filed herewith
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SUNOPTA INC.
/s/ John Dietrich
Date November 5 2004
SunOpta Inc.
by John Dietrich
Vice President
and Chief Financial Officer
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SUNOPTA INC. 42 September 30, 2004 10-Q
| SUNOPTA INC. | | | | | | /s/ John Dietrich | Date May 9, 2005 | | | SunOpta Inc. by John Dietrich Vice President and Chief Financial Officer |
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| SUNOPTA INC. | 24 | March 31, 2005 10-Q | |
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