SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 Commission File No. 0-9989 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SunOpta Inc. (Exact name of registrant as specified in its charter) CANADA (Jurisdiction of Incorporation) Not Applicable (I.R.S. Employer Identification No.) 2838 Highway 7 Norval, Ontario L0P 1K0, Canada (Address of Principle Executive Offices) (905) 455-1990 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to 12(g) of the Act: Common Shares, no Par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes |X| No |_| At November 6, 2003 registrant had 52,578,460 common shares outstanding, the only class of registrant's common stock outstanding. There were no other classes of stock outstanding and the aggregate market value of voting stock held by non-affiliates at such date was $317,233,375. The Company's common shares are traded on the Nasdaq Smallcap Market tier of the Nasdaq Stock Market under the symbol STKL and The Toronto Stock Exchange under the symbol SOY. There are 42 pages in the September 30, 2003 10-Q and the index follows the cover page. - -------------------------------------------------------------------------------- 1
SUNOPTA INC. FORM 10-Q September 30, 2003 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as at September 30, 2003 and December 31, 2002. Consolidated Statements of Retained Earnings for the nine months ended September 30, 2003 and 2002, and the year ended December 31, 2002. Consolidated Statements of Earnings for the three and nine months ended September 30, 2003 and 2002. Consolidated Statements of Cash Flow for the three and nine months ended September 30, 2003 and 2002. Condensed Notes to Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure about Market Risk Item 4. Controls and Procedures PART II - OTHER INFORMATION All financial information is expressed in United States Dollars The closing rate of exchange on September 30, 2003 was CDN $1 = U.S. $0.7408 - -------------------------------------------------------------------------------- 2
PART I - FINANCIAL INFORMATION Item 1 - Consolidated Financial Statements (Expressed in thousands of U.S. dollars) SunOpta Inc. For the Nine Months Ended September 30, 2003 3
SunOpta Inc. Consolidated Balance Sheets As at September 30, 2003 and December 31, 2002 Unaudited (Expressed in thousands of U.S. dollars) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------- September 30, December 31, 2003 2002 $ $ - ----------------------------------------------------------------------------------------- <S> <C> <C> Assets Current assets Cash and cash equivalents 38,892 7,012 Short-term investments -- 2,038 Accounts receivable - trade 23,520 18,144 Note receivable -- 1,034 Inventories (note 4) 24,005 22,989 Prepaid expenses and other current assets 1,965 958 Future income taxes -- 115 -------------------------- 88,382 52,290 Property, plant and equipment, net 40,055 37,033 Goodwill and intangibles, net 17,220 14,992 Future income taxes 11,440 9,892 Other assets (note 5) 813 1,080 -------------------------- 157,910 115,287 ========================== Liabilities Current liabilities Bank indebtedness -- 3,963 Accounts payable and accrued liabilities 18,103 19,664 Customer and other deposits 608 421 Current portion of long-term debt (note 6) 2,769 11,650 Current portion of long-term payables (note 7) 872 3,458 -------------------------- 22,352 39,156 Long-term debt (note 6) 19,095 25,099 Long-term payables (note 7) 1,454 1,505 -------------------------- 42,901 65,760 -------------------------- Shareholders' Equity (note 10) Capital stock (note 8) 95,786 38,020 Authorized Unlimited common shares without par value Issued 52,325,281 (December 31, 2002 - 41,984,118) common shares Contributed surplus 2,968 2,914 Retained earnings 13,030 7,470 Currency translation adjustment 3,225 1,123 -------------------------- 115,009 49,527 -------------------------- 157,910 115,287 ========================== </TABLE> Commitments and contingencies (note 12) (See accompanying notes to consolidated financial statements) 4
SunOpta Inc. Consolidated Statements of Retained Earnings For the nine months ended September 30, 2003 and 2002 and the year ended December 31, 2002 Unaudited (Expressed in thousands of U.S. dollars) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------- Nine months ended Year ended ----------------- ---------- September 30, September 30, December 31, 2003 2002 2002 $ $ $ - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Retained Earnings - Beginning of the Year 7,470 3,704 3,704 Net earnings for the period 5,560 3,254 3,766 -------------------------------------------- Retained Earnings - End of Period 13,030 6,958 7,470 ============================================ </TABLE> (See accompanying notes to consolidated financial statements) 5
SunOpta Inc. Consolidated Statements of Earnings For the three months ended September 30, 2003 and 2002 Unaudited (Expressed in thousands of U.S. dollars, except per share amounts) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------- September 30, September 30, 2003 2002 $ $ - ------------------------------------------------------------------------------------- <S> <C> <C> Revenues 50,384 32,800 Cost of goods sold 41,404 27,510 -------------------------------- Gross profit 8,980 5,290 Selling, general and administrative expenses 5,887 3,240 -------------------------------- Earnings before the following 3,093 2,050 Interest expense (680) (302) Interest and other income 201 30 Foreign exchange loss (171) (322) -------------------------------- (650) (594) -------------------------------- Earnings before income taxes 2,443 1,456 Provision for (recovery of) income taxes 343 (71) -------------------------------- Net earnings for the period 2,100 1,527 ================================ Net earnings per share for the period (note 9) - Basic 0.05 0.04 ================================ - Diluted 0.04 0.04 ================================ </TABLE> (See accompanying notes to consolidated financial statements) 6
SunOpta Inc. Consolidated Statements of Earnings For the nine months ended September 30, 2003 and 2002 Unaudited (Expressed in thousands of U.S. dollars, except per share amounts) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------- September 30, September 30, 2003 2002 $ $ - -------------------------------------------------------------------------------------- <S> <C> <C> Revenues 144,436 87,461 Cost of goods sold 119,232 73,431 --------------------------------- Gross profit 25,204 14,030 Selling, general and administrative expenses 17,247 9,446 --------------------------------- Earnings before the following 7,957 4,584 Interest expense (1,664) (1,030) Interest and other income 411 238 Foreign exchange gain 425 140 --------------------------------- (828) (652) --------------------------------- Earnings before income taxes 7,129 3,932 Provision for income taxes 1,569 678 --------------------------------- Net earnings for the period 5,560 3,254 ================================= Net earnings per share for the period (note 9) - Basic 0.13 0.08 ================================= - Diluted 0.12 0.08 ================================= </TABLE> (See accompanying notes to consolidated financial statements) 7
SunOpta Inc. Consolidated Statements of Cash Flow For the three months ended September 30, 2003 and 2002 Unaudited (Expressed in thousands of U.S. dollars) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------- September 30, September 30, 2003 2002 $ $ - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash provided by (used in) Operating activities Net earnings for the period 2,100 1,527 Items not affecting cash Amortization 1,331 1,054 Future income taxes (867) (498) Other 354 85 ------------------------------- 2,918 2,168 Changes in non-cash working capital (note 11) (3,992) (1,574) ------------------------------- (1,074) 594 ------------------------------- Investing activities Acquisition of businesses, net of cash acquired (150) (573) Acquisition of property, plant and equipment (1,298) (903) Proceeds from note receivable 358 331 Other 220 364 ------------------------------- (870) (781) ------------------------------- Financing activities Decrease in bank indebtedness (10,004) (1,407) Repayment of term debt facilities (5,674) (297) Repayment of deferred purchase consideration (243) (322) Proceeds from the issuance of common shares, net of issuance costs 54,098 1,444 Financing costs (93) -- Purchase and redemption of Preference Shares of subsidiary companies (8) (5) ------------------------------- 38,076 (587) Foreign exchange gain (loss) on cash held in a foreign currency 111 (65) ------------------------------- Increase (decrease) in cash and cash equivalents during the period 36,243 (839) Cash and cash equivalents - Beginning of the period 2,649 7,647 ------------------------------- Cash and cash equivalents - End of the period 38,892 6,808 =============================== </TABLE> See note 11 for supplemental cash flow information (See accompanying notes to consolidated financial statements) 8
SunOpta Inc. Consolidated Statements of Cash Flow For the nine months ended September 30, 2003 and 2002 Unaudited (Expressed in thousands of U.S. dollars) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- September 30, September 30, 2003 2002 $ $ - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash provided by (used in) Operating activities Net earnings for the period 5,560 3,254 Items not affecting cash Amortization 3,757 2,917 Future income taxes (543) (715) Other 247 42 -------------------------------- 9,021 5,498 Changes in non-cash working capital (note 11) (8,564) (5,956) -------------------------------- 457 (458) -------------------------------- Investing activities Decrease in short term investments 2, 038 6,307 Acquisition of businesses, net of cash acquired (2,894) (1,080) Acquisition of property, plant and equipment (3,778) (3,055) Proceeds from note receivable 1,074 1,045 Other 199 101 -------------------------------- (3,361) 3,318 -------------------------------- Financing activities (Decrease) increase in bank indebtedness (4,285) 258 Repayment of term debt and tender facilities (24,009) (16,209) Borrowings under term debt facilities 7,800 15,000 Payment of deferred purchase consideration (490) (754) Proceeds from the issuance of common shares, net of issuance costs 56,028 1,805 Financing costs (343) (499) Decrease in restricted cash -- 1,147 Purchase and redemption of Preference Shares of subsidiary companies (139) (122) -------------------------------- 34,562 626 Foreign exchange gain (loss) on cash held in a foreign currency 222 (42) -------------------------------- Increase in cash and cash equivalents during the period 31,880 3,444 Cash and cash equivalents - Beginning of the period 7,012 3,364 -------------------------------- Cash and cash equivalents - End of the period 38,892 6,808 ================================ </TABLE> See note 11 for supplemental cash flow information (See accompanying notes to consolidated financial statements) 9
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 1. Interim financial statements The interim consolidated financial statements of SunOpta Inc. (the Company) have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and in accordance with accounting principles generally accepted in Canada which conform, in all material respects (except as indicated in note 13, with accounting principles generally accepted in the U.S.). Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2003. For further information, see the Company's consolidated financial statements, and notes thereto, included in the Annual Report on Form 10-KA4 for the year ended December 31, 2002. As of October 31, 2003, Stake Technology Ltd. has changed its name to SunOpta Inc. (SunOpta). The name SunOpta better describes the Company's commitment to environmental responsibility and natural and organic food products nourished in the `sun' with `optimal' nutritional value. 2. Description of business and significant accounting policies The Company was incorporated under the laws of Canada on November 13, 1973 and operates in three principal businesses. The Food Group processes, packages, markets and distributes a wide range of natural and organic food products and ingredients via its vertically integrated operations with a focus on soy, oat and corn based products. The Environmental Industrial Group processes, distributes and recycles industrial minerals. The Steam Explosion Technology Group engineers and markets proprietary steam explosion technology systems for the pulp and food processing industries. The Company's assets, operations and employees at September 30, 2003 are located in the United States and Canada. The Company's significant accounting policies are outlined below. These consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada. Differences arising from the application of accounting principles generally accepted in the United States are described in note 14. Basis of presentation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant inter-company accounts and transactions have been eliminated on consolidation. Cash and cash equivalents Cash and cash equivalents consist of unrestricted cash and short-term deposits with a maturity at acquisition of less than 90 days. Short-term investments Short-term investments consist of portfolio investments in other companies and deposits with a maturity at acquisition of greater than 90 days, and are valued at market. Inventories Raw materials and finished goods inventories are valued at the lower of cost and estimated net realizable value. Cost is determined on a first-in, first-out basis. 10
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- Inventories, continued Inventories of grain are valued at market. Changes in market value are included in cost of goods sold. The Food Group generally follows a policy of hedging its grain transactions to protect gains and minimize losses due to market fluctuations. Futures and purchase and sale contracts are adjusted to market price and gains and losses from such transactions are included in cost of goods sold. The Company has a risk of loss from hedge activity if the grower does not deliver the grain as scheduled. Property, plant and equipment Property, plant and equipment are stated at cost, less accumulated amortization. Amortization is provided on property, plant and equipment on the diminishing balance basis or, in the case of certain U.S.-based subsidiaries, straight-line basis at rates based on the estimated useful lives of the assets as follows: 10% to 33% for office furniture and equipment, machinery and equipment and vehicles and 4% to 8% for buildings. Amortization is calculated from the time the asset is put into use. Included in land and buildings at September 30, 2003, are certain properties held for sale totaling $5,020 (December 31, 2002 - $5,020). The Company has entered into an option agreement to sell one of the properties with a net book value of $4,800 (note 12 c). Goodwill and intangibles The Company adopted the new CICA Handbook Section 3062 "Goodwill and Intangible Assets" on January 1, 2002. This new standard eliminated the need for amortization of goodwill and indefinite life intangible assets. Goodwill represents the excess of the purchase price over the assigned value of net assets acquired. Under the transitional provisions of the standard, a goodwill impairment test was carried out and no impairment was identified on January 1, 2002. In accordance with the new standard, the Company has assessed the carrying value of goodwill for possible impairment, and has determined that no such impairment exists as at December 31, 2002. Certain of the Company's trademarks are intangible assets with an indefinite life. The Company has further determined that there is no impairment in the value of these indefinite life trademarks. As required by the standard, the new rules related to goodwill and other intangible assets have been applied prospectively. Other assets i) Pre-operating costs Net costs incurred in the pre-operating stage of a start-up business are deferred until the business reaches commercial operation or the passage of a certain period of time as predetermined by management. During 2001, the Company initiated the start-up of an organic dairy business based in Canada. Certain pre-operating costs totaling $308 were deferred up to June 30, 2002. Amortization of these costs on a straight-line basis commenced in July 2002 and will result in these costs being fully amortized by December 31, 2003. During 2000, the Company acquired Nordic Aseptic, Inc., which was considered a start-up business from the date of acquisition to December 31, 2000. Certain operating costs, net of income earned during the pre-operating period totaling $482 were deferred. Amortization of these costs on a straight-line basis commenced in January 2001 and will result in these costs being fully amortized by December 31, 2003. 11
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- ii) Deferred financing costs Costs incurred in connection with obtaining long-term financing are deferred and amortized over the term of the related financing agreement. iii) Investments The Company has a 32% (2002 - 32%) investment in Easton Minerals Limited ("Easton). This investment is considered impaired and the carrying value at September 30, 2003 is $nil (2002 - $nil). The investment was accounted for using the equity method of accounting. The Company does not have any guaranteed obligations with respect to Easton or any commitment to provide further financial support, thus it is not anticipated that further losses will be recorded on this investment. All other subsidiaries are 100% owned at September 30, 2003. On November 1, 2002, the Company acquired the remaining 49% minority interest in International Materials & Supplies, Inc. Investments in these subsidiaries are recorded using the consolidation method, whereby revenues and expenses are consolidated with the results of the Company. Revenue recognition i) Food Group Grain revenues are recorded at the time of shipment. Revenues from custom processing services are recorded upon provision of services and upon completion of quality testing. All other Food Group revenues are recognized upon the sale and shipment of a product or the providing of a service to a customer. Revenues are generally recorded at the time of shipment unless there is a specific agreement with the customer for FOB destination. Customer rebates are recorded at the earlier of when the related revenue is recognized and when the rebate is determinable or when a reasonable estimate is available. ii) Environmental Industrial Group Revenues from the sale of industrial minerals are recognized upon the sale and shipment of the related minerals. Revenues from recycling activities are recognized upon the sale and shipment or the disposal of non-hazardous material received. iii) Steam Explosion Technology Group The percentage of completion method is used to account for significant contracts in progress when related costs can be reasonably estimated. The Company uses costs incurred to date as a percentage of total expected costs to measure the extent of progress towards completion. Revenues from consulting and contract research are recognized when the service is completed. License fees related to the right to sell the Company's technologies are recorded as revenues over the term of the license, when collectibility is reasonably assured. 12
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- Foreign currency translation The Company's Canadian operations are self-sustaining operations, with the exception of the Corporate office, which is considered to be an integrated operation. The assets and liabilities of the self-sustaining operations are translated at exchange rates in effect at the balance sheet date. Monetary assets and liabilities of the Corporate office are translated at exchange rates in effect at the balance sheet date. All other assets and liabilities of the Corporate office are translated at historical exchange rates. Revenues and expenses are translated at average exchange rates prevailing during the period. Unrealized gains or losses resulting from translating self-sustaining operations are accumulated and reported as currency translation adjustment in shareholders' equity. Unrealized gains or losses resulting from translating the Corporate office accounts are included in the determination of earnings. The functional currency of all operations located in the United States of America is the United States dollar. The functional currency of all operations located in Canada is the Canadian dollar. Customer and other deposits Customer and other deposits principally include prepayments by the Food Group's customers for merchandise inventory to be purchased during the spring planting season and $500 as at September 30, 2003, (December 31, 2002 - nil) related to a deposit received on an option agreement related to a property held for sale (note 12 c). Income taxes The Company follows the asset and liability method of accounting for income taxes whereby future income tax assets are recognized for deductible temporary differences and operating loss carry-forwards, and future income tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Future income tax assets are recognized only to the extent that management determines that it is more likely than not that the future income tax assets will be realized. Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment or substantive enactment. The income tax expense or benefit is the income tax payable or refundable for the period plus or minus the change in future income tax assets and liabilities during the period. Employee stock compensation Employee/director stock options granted by the Company contain exercise prices, which are equivalent to the closing market price of the shares on the day prior to the grant date. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to capital stock. No compensation expense is recorded upon issuance of stock options to employees. Stock options granted have a maximum life of six years and usually vest over a four-year period. Derivative instruments The Food Group enters into exchange-traded commodity futures and options contracts to hedge its exposure to price fluctuations on grain transactions to the extent considered practicable for minimizing risk from market price fluctuations. Futures contracts used for hedging purposes are purchased and sold through regulated commodity exchanges. Inventories, however, may not be completely hedged, due in part to the Company's assessment of its exposure from expected price fluctuations. Exchange purchase and sales contracts may expose the Company to risk in the event that a counter party to a transaction is unable to fulfill its contractual obligation. The Company manages its risk by entering into purchase contracts with pre-approved producers. The Company has a risk of loss from hedge activity if a grower does not deliver the grain as scheduled. Sales contracts are entered into with organizations of acceptable creditworthiness, as internally evaluated. All futures 13
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- transactions are marked to market. Gains and losses on futures transactions related to grain inventories are included in cost of goods sold. Earnings per share Basic earnings per share are computed by dividing the income available for common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the treasury stock method whereby the weighted average number of common shares used in the basic earnings per share calculation is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Use of estimates The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 3. Acquisition of businesses On May 1, 2003, SunOpta reached an agreement to acquire 100% of the outstanding shares of Kettle Valley Dried Fruit Ltd. (Kettle Valley) and its related companies. Kettle Valley produces natural and organic fruit bars and fruit leathers with an apple base and markets these products under the Kettle Valley Real Fruit Snack and Frunola brands. The Company operates two production facilities in Summerland, British Columbia, the heart of the B.C. apple growing district, and has constructed a third plant in the State of Washington, the center of the apple growing district of the Western U.S. The preliminary purchase price allocation of the net assets acquired and consideration given is summarized below: Net assets acquired: $ Non-cash working capital 471 Property, plant and equipment 1,217 Goodwill 1,063 Customer relationships and contracts 370 Trademark 401 Bank indebtedness and term debt (583) Future tax liability (270) ---------- 2,669 ========== Consideration given: Cash 874 Notes payable 975 Common shares 820 ---------- 2,669 ========== 14
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 4. Inventories <TABLE> <CAPTION> September 30, December 31, 2003 2002 $ $ <S> <C> <C> Raw materials 9,093 7,859 Finished goods 12,867 11,750 Grain 2,045 3,380 -------------------------------- 24,005 22,989 ================================ </TABLE> Grain inventories consist of the following: <TABLE> <CAPTION> September 30, December 31, 2003 2002 $ $ <S> <C> <C> Company owned grain 2,074 3,338 Unrealized gain (loss) on Sales and purchase contracts (39) (79) Futures contracts 10 121 -------------------------------- 2,045 3,380 ================================ </TABLE> 5. Other assets <TABLE> <CAPTION> September 30, December 31, 2003 2002 $ $ <S> <C> <C> Pre-operating costs, net of accumulated amortization of $690 (2002 - $432) 98 358 Deferred financing costs, net of accumulated amortization of $572 (2002 - $201) 644 619 Other 71 103 -------------------------------- 813 1,080 ================================ </TABLE> 6. Long-term debt and banking facilities <TABLE> <CAPTION> September 30, December 31, 2003 2002 $ $ <S> <C> <C> Term loan (a) 20,325 13,900 Tender facility (b) -- 15,186 Convertible debenture (e) -- 4,697 Other long-term debt (c)(d) 1,539 2,966 -------------------------------- 21,864 36,749 Less: current portion (2,769) (11,650) -------------------------------- 19,095 25,099 ================================ </TABLE> 15
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 6. Long-term debt and banking facilities, continued (a) In March 2003, the Company amended its financing arrangement with its current lenders and entered into a syndication agreement. As part of the amendment, the term loan increased by $7,800 and the credit facility increased by $4,000. (b) During the first quarter of 2003, the Company repaid the tender facility with proceeds from the amended term loan of $7,800, $3,500 from an increase in a line of credit facility (noted in (a) above) and the utilization of $3,886 in cash. (c) During the first nine months of 2003, the Company repaid certain other long-term debt of $2,097, in addition to making regularly scheduled repayments of $202. (d) As part of the acquisition of Kettle Valley, the Company has recorded an $872 (CDN $1,174) note payable in other long-term debt. In addition, the Company increased its Canadian line of credit to CDN $7,500 from CDN $5,000 as a result of the acquisition. (e) During the third quarter of 2003, the Company redeemed the convertible debenture at the face value of $5,000. As a result of the early redemption a loss on extinguishment of debt of $183, representing the accelerated interest accretion was recorded. 7. Long-term payables <TABLE> <CAPTION> September 30, December 31, 2003 2002 $ $ <S> <C> <C> Product rebate payable 1,427 1,330 Deferred purchase consideration 177 667 Preference shares of subsidiary companies 152 291 Payable to former shareholders of acquired companies (a) 570 2,675 --------------------------------- 2,326 4,963 Less: current portion (872) (3,458) --------------------------------- 1,454 1,505 ================================= </TABLE> (a) During the first quarter $1,871 was paid to the former shareholders of Opta Food Ingredients, Inc.(Opta) in respect of untendered shares converted to a right to receive $2.50 per share in cash as a result of the amalgamation of Stake Acquisition Corp. with Opta. 16
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 8. Capital stock <TABLE> <CAPTION> September 30, December 31, 2003 2002 $ $ <S> <C> <C> (a) Issued and fully paid - 52,325,281 common shares (December 31, 2002 - 41,984,118) 93,813 35,230 3,090,175 warrants (December 31, 2002 - 4,224,600) 1,973 2,790 ------------------------------------ 95,786 38,020 ==================================== </TABLE> (b) In the first nine months of 2003, employees and directors exercised 1,008,215 (September 30, 2002 - 238,540) common share options and an equal number of common shares were issued for net proceeds of $1,882 (September 30, 2002 - $373). (c) In the first nine months of 2003, 1,134,425 warrants were exercised (September 30, 2002 - 655,000) and an equal number of common shares were issued for net proceeds of $1,963 (September 30, 2002 - $1,471). In addition, 216,000 (September 30, 2002 - $nil) compensation warrants were exercised in the first nine months for net proceeds of $461 (September 30, 2002 - $nil). (d) On May 1, 2003, the Company issued 196,809 common shares at a price of $4.17 per common share, in respect of the acquisition of Kettle Valley. (e) On August 28, 2003, the Company issued 7,500,000 common shares at a price of $7.00 per common share, in respect to a public offering for gross proceeds of $52,500. The Company incurred $1,806 in share issuance costs (net of tax). (f) On August 29, 2003, the Company issued 285,714 common shares pursuant to a private placement with a significant shareholder, for proceeds of $2,000. (g) As at September 30, 2003 there were options vested to employees and directors to acquire 886,080 common shares at exercise prices of $1.06 to $9.11. In addition, at September 30, 2003, options to acquire an additional 985,340 common shares at $1.06 to $9.11 have been granted to employees and directors but have not yet vested. (h) In the first nine months of 2003, 731,850 options were granted to employees at a price range of $3.06 to $9.11. Employee stock options granted by the Company in 2003 and 2002 were granted at prices which approximated the value of stock on the grant date. These options vest at various dates ranging from the date of the grants to September 29, 2007 and expire two to six years subsequent to the grant date. The fair value of the options granted during the first nine months of 2003 was estimated using the Black-Scholes option-pricing model with the assumptions of a dividend yield of 0% (2002 - 0%), an expected volatility of 60% (2002 - 60%), a risk-free interest rate of 3% (2002 - 3%), and an expected life of one to six years. 17
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars, except per share amounts) - -------------------------------------------------------------------------------- 8. Capital stock, continued Pro-forma net earnings reflecting stock compensation for the three and nine months ended September 30, 2003 and 2002 are as follows: <TABLE> <CAPTION> Three months ended Nine months ended -------------------------------------------------------------- September 30, September 30, September 30, September 30, 2003 2002 2003 2002 $ $ $ $ <S> <C> <C> <C> <C> Number of options granted 152,400 -- 731,850 110,000 ============================================================== $ $ $ $ Total fair value 715 -- 2,049 118 ============================================================== Net earnings for the period as reported 2,100 1,527 5,560 3,254 Stock compensation expense: Options vested in current period from current year grants 179 12 306 36 Options vested in current period from prior years grants 60 22 181 66 -------------------------------------------------------------- 239 34 487 102 -------------------------------------------------------------- Pro-forma net earnings for the period 1,861 1,493 5,073 3,152 ============================================================== Pro-forma net earnings per common share - Basic 0.04 0.04 0.12 0.08 ============================================================== - Diluted 0.04 0.03 0.11 0.07 ============================================================== </TABLE> 9. Earnings per share The calculation of basic earnings per share is based on the weighted average number of shares outstanding. Diluted earnings per share reflect the dilutive effect of the exercise of warrants and options. The number of shares for the diluted earnings per share was calculated as follows: <TABLE> <CAPTION> Three months ended Nine months ended ------------------------------------------------------------------ September 30, September 30, September 30, September 30, 2003 2002 2003 2002 $ $ $ $ <S> <C> <C> <C> <C> Weighted average number of shares used in basic earnings per share 46,394,941 41,879,000 43,903,794 41,402,000 Dilutive potential of the following Warrants 2,342,159 765,519 1,904,963 765,519 Employee/director stock options 1,184,910 648,597 947,313 648,597 ------------------------------------------------------------------ Weighted average number of shares used in diluted earnings per share 49,922,010 43,293,116 46,756,700 42,816,116 ================================================================== Earnings per share: - Basic 0.05 0.04 0.13 0.08 ================================================================== - Diluted 0.04 0.04 0.12 0.08 ================================================================== </TABLE> For the three months ended September 30, 2003, 90,000 options have been excluded from the calculation due to their anti-dilutive nature. For the nine months ended September 30, 2003, 152,400 options have been excluded from the calculation due to their anti-dilutive nature. 18
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 10. Shareholders' equity <TABLE> <CAPTION> Cumulative Capital Contributed Retained Translation Stock Surplus Earnings Adjustment Total $ $ $ $ $ <S> <C> <C> <C> <C> <C> Balance at December 31, 2002 38,020 2,914 7,470 1,123 49,527 Options exercised 1,882 -- -- -- 1,882 Warrants exercised 1,963 -- -- -- 1,963 Compensation warrants exercised 461 -- -- -- 461 Shares issued to acquire Kettle Valley 820 -- -- -- 820 Proceeds of equity issue, net of issuance costs 50,694 -- -- -- 50,694 Proceeds of private placement 2,000 -- -- -- 2,000 Elimination of convertible right (54) 54 -- -- - Net earnings for the period -- -- 5,560 -- 5,560 Currency translation adjustment -- -- -- 2,102 2,102 ------------------------------------------------------------------------- Balance at September 30, 2003 95,786 2,968 13,030 3,225 115,009 ========================================================================= </TABLE> 11. Supplemental cash flow information <TABLE> <CAPTION> Three months ended ------------------------------------- September 30, September 30, 2003 2002 $ $ <S> <C> <C> Changes in non-cash working capital: Accounts receivable - trade (2,621) (1,192) Inventories 71 (536) Prepaid expenses and other current assets 105 41 Accounts payable and accrued liabilities (2,037) 334 Customer and other deposits 490 (221) ------------------------------------- (3,992) (1,574) ===================================== Cash paid for: Interest 611 401 ===================================== Income taxes 1,041 793 ===================================== <CAPTION> Nine months ended ------------------------------------- September 30, September 30, 2003 2002 $ $ <S> <C> <C> Changes in non-cash working capital: Accounts receivable - trade (5,526) (5,450) Inventories (408) (145) Prepaid expenses and other current assets (893) (39) Accounts payable and accrued liabilities (1,924) 989 Customer and other deposits 187 (1,311) ------------------------------------- (8,564) (5,956) ===================================== Cash paid for: Interest 1,329 1,253 ===================================== Income taxes 2,099 873 </TABLE> On May 1, 2003, the Company issued 196,809 common shares in respect of the acquisition of Kettle Valley. 19
Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 12. Commitments and contingencies (a) Various claims or potential claims arising in the normal course of business are pending against the Company. It is the opinion of management that these claims or potential claims are without merit and the amount of potential liability, if any, to the Company is not determinable. Management believes the final determination of these claims or potential claims will not materially affect the financial position or results of the Company. Legal counsel has concluded the outcome of these claims or potential claims is not determinable. (b) The Company believes, with respect to both its operations and real property that it is in material compliance with current environmental laws, with the exception of its processing and packaging facilities located in Alexandria, Minnesota. These facilities are currently not in complete compliance with the industrial permit limits for the discharge of industrial wastewater. The Company has applied for increased discharge limits and is also re-engineering certain processes and installing pre-treatment equipment to remedy this issue. Other than this, based on known existing conditions and the Company's experience in complying with emerging environmental issues, the Company is of the view that future costs relating to environmental compliance will not have a material adverse effect on its financial position, but there can be no assurance that unforeseen changes in the laws or enforcement policies of relevant governmental bodies, the discovery of changed conditions on the Company's real property or in its operations, or changes in use of such properties and any related site restoration requirements, will not result in the incurrence of significant costs. No provision has been made in these consolidated financial statements for these future costs since such costs, if any, are not determinable at this time. (c) During the quarter the Company's subsidiary, Opta Food Ingredients, Inc. (Opta) entered into an option agreement whereby a Purchaser was granted a one year option to purchase the former Opta Corporate Headquarters and Development Centre (45,000 square feet) at a price of $4,850. The option was granted for a period of one year and expires on September 22, 2004. As per the terms of the option agreement, as of September 30, 2003 Opta has received a $500 non-refundable option deposit which will be applied to the sale price at closing should the option be exercised. Opta will also receive non-refundable monthly option payments of $30, which will not be applied to the purchase price. An option deposit in the amount of $700 is due on or before December 15, 2003 and Opta will also receive monthly option deposits of $20, all of which will be applied to the purchase price if exercised. The $500 is recorded on the Company's balance sheet under customer and other deposits. (d) In the normal course of business, the Food Group holds grain for the benefit of others. The Company is liable for any deficiencies of grade or shortage of quantity that may arise in connection with such grain. (e) Letters of credit: i) An irrevocable letter of credit for $555 has been placed with the Ontario Ministry of Environment and Energy as a security deposit for the Certificate of Approval granted to the Company for certain recycling activities. This letter of credit must remain in place indefinitely as a condition of the Certificate of Approval. ii) An irrevocable letter of credit for $195 has been placed with the Commonwealth of Virginia Department of Environmental Qualities as a security deposit for the Certificate of Approval granted to the Company for certain recycling activities. This letter of credit must remain in place indefinitely as a condition of the Certificate of Approval. 20
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 12. Commitments and contingencies, continued iii) Additional letters of credit totalling $28 have been placed with third parties as security on transactions occurring in the ordinary course of operations. (f) Commitments under operating leases, principally for distribution centres, warehouse and equipment, are as follows: $ 2003 247 2004 1,665 2005 1,597 2006 1,516 2007 1,320 2008 and thereafter 1,433 --------------- 7,778 =============== 13. Segmented information Industry segments The Company operates in three segments: a) the Food Group, processes, packages and distributes a wide range of natural and organic food products via its vertically integrated operations with a focus on soy, natural and organic food products; (b) the Environmental Industrial Group, processes, distributes, and recycles industrial minerals; and (c) the Steam Explosion Technology Group, engineers and markets proprietary steam explosion technology systems for the pulp and food processing industries. Management has identified its segments based on the nature of the products and services being sold and its organizational structure in support of these segments. Operating segments have been aggregated within the Food Group segment. The Company's assets, operations and employees are located in Canada and the United States. <TABLE> <CAPTION> Three months ended September 30, 2003 --------------------------------------------------------------------------------- Steam Explosion Technology Environmental Group and Food Group Industrial Group Corporate Consolidated $ $ $ $ <S> <C> <C> <C> <C> External revenues by market U.S. 36,118 3,798 82 39,998 Canada 6,274 2,609 -- 8,883 Other 1,434 69 -- 1,503 ------------------------------------------------------------------------------ Total revenues to external customers 43,826 6,476 82 50,384 ------------------------------------------------------------------------------ Interest expense 362 96 222 680 ------------------------------------------------------------------------------ Provision for (recovery of) income taxes 457 124 (234) 343 ------------------------------------------------------------------------------ Segment net earnings (loss) 2,451 638 (989) 2,100 ------------------------------------------------------------------------------ Identifiable assets 101,508 23,523 32,879 157,910 ------------------------------------------------------------------------------ Amortization 864 277 190 1,331 ------------------------------------------------------------------------------ Expenditures on property, plant and equipment 1,097 185 16 1,298 ------------------------------------------------------------------------------ </TABLE> 21
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 13. Segmented information, continued <TABLE> <CAPTION> Three months ended September 30, 2002 ------------------------------------------------------------------------------ Steam Explosion Technology Environmental Group and Food Group Industrial Group Corporate Consolidated $ $ $ $ <S> <C> <C> <C> <C> External revenues by market U.S. 24,985 3,323 76 28,384 Canada 386 3,258 -- 3,644 Other 686 86 -- 772 ------------------------------------------------------------------------------ Total revenues to external customers 26,057 6,667 76 32,800 ------------------------------------------------------------------------------ Interest expense 216 86 -- 302 ------------------------------------------------------------------------------ Provision for (recovery of) income taxes (130) 451 (392) (71) ------------------------------------------------------------------------------ Segment net earnings (loss) 1,530 726 (729) 1,527 ------------------------------------------------------------------------------ Identifiable assets 53,366 20,859 8,769 82,994 ------------------------------------------------------------------------------ Amortization 793 220 41 1,054 ------------------------------------------------------------------------------ Expenditures on property, plant and equipment 722 162 19 903 ------------------------------------------------------------------------------ <CAPTION> Nine months ended September 30, 2003 ------------------------------------------------------------------------------ Steam Explosion Technology Environmental Group and Food Group Industrial Group Corporate Consolidated $ $ $ $ <S> <C> <C> <C> <C> External revenues by market U.S. 103,800 8,335 383 112,518 Canada 17,305 10,060 -- 27,365 Other 4,406 144 3 4,553 ------------------------------------------------------------------------------ Total revenues to external customers 125,511 18,539 386 144,436 ------------------------------------------------------------------------------ Interest expense 1,165 277 222 1,664 ------------------------------------------------------------------------------ Provision for income taxes 1,561 454 (446) 1,569 ------------------------------------------------------------------------------ Segment net earnings 5,532 1,608 (1,580) 5,560 ------------------------------------------------------------------------------ Amortization 2,663 686 408 3,757 ------------------------------------------------------------------------------ Expenditures on property, plant and equipment 3,208 513 57 3,778 ------------------------------------------------------------------------------ </TABLE> 22
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 13. Segmented information, continued <TABLE> <CAPTION> Nine months ended September 30, 2002 -------------------------------------------------------------------------- Steam Explosion Technology Environmental Group and Food Group Industrial Group Corporate Consolidated $ $ $ $ <S> <C> <C> <C> <C> External revenues by market U.S. 65,687 8,744 226 74,657 Canada 652 9,608 -- 10,260 Other 2,370 174 -- 2,544 -------------------------------------------------------------------------- Total revenues to external customers 68,709 18,526 226 87,461 -------------------------------------------------------------------------- Interest expense 808 222 -- 1,030 -------------------------------------------------------------------------- Provision for (recovery of) income taxes 352 909 (583) 678 -------------------------------------------------------------------------- Segment net earnings (loss) 2,583 1,589 (918) 3,254 -------------------------------------------------------------------------- Amortization 2,174 640 103 2,917 -------------------------------------------------------------------------- Expenditures on property, plant and equipment 2,169 794 92 3,055 -------------------------------------------------------------------------- </TABLE> Geographic segments <TABLE> <CAPTION> September 30, December 31, 2003 2002 -------------------------------------- --------------------------------------- U.S. Canada Total U.S. Canada Total $ $ $ $ $ $ <S> <C> <C> <C> <C> <C> <C> Property, plant and equipment 29,520 10,535 40,055 29,568 7,465 37,033 ====================================== ======================================= Goodwill and intangibles 11,669 5,551 17,220 11,655 3,337 14,992 ====================================== ======================================= Total assets 92,782 65,128 157,910 87,399 27,888 115,287 ====================================== ======================================= </TABLE> Customer concentration The Company has one customer in the Food Group whose purchases were 14.8% (September 30, 2002 - 13.6%) of the Company's third quarter total revenue and 12.7% of the Company's total revenue in the first nine months of 2003 (September 30, 2002 - 14.0%). 23
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars, except per share amounts) - -------------------------------------------------------------------------------- 14. United States generally accepted accounting principles differences These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP) which conform in all material respects applicable to the Company with those in the United States (U.S. GAAP) during the periods presented, except with respect to the following: Under U.S. GAAP, certain pre-operating costs of $nil incurred in the nine months ended September 30, 2003, (2002 - $276), deferred in these financial statements would be expensed. Amortization of $258 in the nine months ended September 30, 2003, (2002 - $170) related to pre-operating costs would not have been expensed. In conjunction with the issuance of the convertible debenture in 2002 for Canadian GAAP purpose, the fair value of the convertible right was determined to be $54. For U.S. GAAP purposes, the convertible right would not be recorded until the option right is exercisable. On March 11, 2002, the Company committed to grant certain employees 114,000 options to acquire 114,000 common shares at $2.15. These options were provided to employees' contingent upon approval by the shareholders of the 2002 stock option plan. This approval was received on June 18, 2002. Under U.S. GAAP, the difference in stock price between the exercise price and the closing price the day immediately preceding the day of shareholders' approval is considered to be compensation expense. Accordingly, $62 would be recorded under U.S. GAAP in 2002 as stock option compensation expense. Accordingly, the following would have been reported under U.S. GAAP: <TABLE> <CAPTION> Three months ended Nine months ended Year ended --------------------------------------------------------------------------------- September 30, September 30, September 30, September 30, December 31, 2003 2002 2003 2002 2002 $ $ $ $ $ <S> <C> <C> <C> <C> <C> Net earnings for the period - as reported 2,100 1,527 5,560 3,254 3,766 Pre-operating costs expensed 98 90 258 170 271 Pre-operating costs capitalized -- -- -- (276) (276) Accretion on convertible debenture 54 -- 54 -- -- Stock option compensation expense -- -- -- (62) (62) Tax effect of above items (58) (36) (119) 42 42 ---------------------------------------------------------------------------- Net earnings for the period - U.S. GAAP 2,194 1,581 5,753 3,128 3,701 ============================================================================ Net earnings per common share - U.S. GAAP - Basic 0.05 0.04 0.13 0.08 0.09 ============================================================================ - Diluted 0.04 0.04 0.12 0.07 0.09 ============================================================================ Shareholders' equity - as reported 115,009 43,701 49,527 Cumulative pre-operating costs, net of amortization, net of tax (61) (268) (215) Cumulative stock compensation expense (416) (416) (416) ---------------------------------------------- Shareholders' equity - U.S. GAAP 114,532 43,017 48,896 ============================================== </TABLE> 24
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 14. United States generally accepted accounting principles differences, continued Comprehensive income U.S. GAAP requires that a comprehensive income statement be prepared. Comprehensive income is defined as "The change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner events". It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners. The comprehensive statement reconciles the reported net income to the comprehensive income. The following is a comprehensive income statement (prepared in accordance with U.S. GAAP), which, under U.S. GAAP, would have the same prominence as other financial statements. <TABLE> <CAPTION> Three months ended Nine months ended Year ended ---------------------------------------------------------------------------------- September 30, September 30, September 30, September 30, December 31, 2003 2002 2003 2002 2002 $ $ $ $ $ <S> <C> <C> <C> <C> <C> Net earnings for the period-U.S. GAAP 2,194 1,581 5,753 3,128 3,701 Currency translation adjustment 40 (587) 2,102 4 112 ---------------------------------------------------------------------------------- Comprehensive income for the period 2,234 994 7,855 3,132 3,813 ================================================================================== </TABLE> Other U.S. GAAP disclosures <TABLE> <CAPTION> Changes in reserves Three months ended Nine months ended Year ended ---------------------------------------------------------------------------------- September 30, September 30, September 30, September 30, December 31, 2003 2002 2003 2002 2002 $ $ $ $ $ <S> <C> <C> <C> <C> <C> Allowance for doubtful accounts Balance - beginning of period 675 510 709 367 367 Additions charged to expense including effects of foreign exchange rate 322 674 427 817 450 differences Accounts receivable charged off, net (230) -- (369) -- (108) of recoveries ---------------------------------------------------------------------------------- Balance - end of period 767 1,184 767 1,184 709 ================================================================================== Future income tax valuation allowance Balance - beginning of period 4,107 479 4,107 479 479 Additions to valuation allowance -- -- -- -- 4,107 Adjustments to valuation allowance -- -- -- -- (479) ---------------------------------------------------------------------------------- Balance - end of period 4,107 479 4,107 479 4,107 ================================================================================== </TABLE> 25
SunOpta Inc. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2003 Unaudited (Expressed in thousands of U.S. dollars) - -------------------------------------------------------------------------------- 14. United States generally accepted accounting principles differences, continued September December 31, 30, 2003 2002 $ $ Accrued payroll 2,167 1,235 ================= =============== Proforma data (unaudited) Condensed proforma income statement, as if the acquisitions of Opta, Wild West, Organic Kitchen, Simply Organic and Kettle Valley had occurred at the beginning of 2002, is as follows: <TABLE> <CAPTION> Three months ended Nine months ended Year ended ------------------------------------------------------------------------------------- September 30, September 30, September 30, September 30, December 31, 2003 2002 2003 2002 2002 $ $ $ $ $ <S> <C> <C> <C> <C> <C> Revenues 50,384 44,185 145,760 120,278 153,686 Net earnings 2,100 1,837 5,622 4,060 4,875 Earnings per share - Basic 0.05 0.04 0.13 0.10 0.12 - Diluted 0.04 0.04 0.12 0.09 0.11 </TABLE> 15. Subsequent Events On October 10, 2003, the Company acquired 100% of the outstanding shares of Pro Organics Marketing Inc, and related companies ("Pro Organics") for cash consideration of approximately $5,000 including transaction costs. The terms of the agreement also provide for an earn out during the three year period commencing January 1, 2004. Pro Organics results will be included in the Company's consolidated financial statements from the date of acquisition. Pro Organics is a leading distributor of certified organic fresh foods in Canada with distribution facilities located in Vancouver, Toronto and Montreal. 16. Comparative balances Certain line items in the prior year consolidated balance sheet and prior years consolidated statements of earnings and consolidated statements of cash flows have been combined to achieve comparability to current year's presentation. The reclassifications of these prior year balances did not have a significant impact on the presentation of the consolidated financial statements. 26
PART I - FINANCIAL INFORMATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Significant Developments Effective October 31, 2003 the Company changed it's name from Stake Technology Ltd. to SunOpta Inc. The new name combines the names of two of the Company's historical operating food groups, the Sunrich Food Group and Opta Food Ingredients. The change reflects the Company's commitment to environmental responsibility and to the natural and organic foods markets. On October 10, 2003, the Company acquired 100% of the outstanding shares of Pro Organics Marketing Inc, and related companies ("Pro Organics") for cash consideration of approximately $5,000,000. The terms of the agreement also provide for an earn out during the three year period commencing January 1, 2004. Pro Organics results will be included in the Company's consolidated financial statements from the date of acquisition. Pro Organics is a distributor of certified organic fresh foods in Canada with distribution facilities located in Vancouver, Toronto and Montreal. Pro Organics supplies a range of certified organic produce as well as offerings in organic bulk foods and dairy. On August 11, 2003, the Company entered into a public offering in the United States and certain provinces of Canada to sell 7,000,000 common shares at $7.00 per common share, for gross proceeds of $49,000,000. The common shares were offered in the United States pursuant to a registration statement on Form S-3 filed by the Company with the Securities and Exchange Commission, which became effective on July 30, 2003. In connection with the offering, the Company also filed a preliminary short form prospectus in Canada on August 11, 2003 and a prospectus supplement in the United States on August 12, 2003. Funds from the public offering were received on August 28, 2003. The Company also granted the underwriters an over-allotment of 500,000 shares which was exercised on September 4, 2003, for gross proceeds of $3,500,000. Total transaction costs were $1,806,000, net of tax. Concurrent with the offering described above, the Company entered into an agreement with a trust of which Mr. Stephen Bronfman, a director of the Company, is the beneficiary, whereby the Company sold 285,714 common shares at $7.00 per common share for gross proceeds of $2,000,000. On May 1, 2003, the Company acquired 100% of the outstanding shares of Kettle Valley Dried Fruits Ltd. and its related companies ("Kettle Valley") for a total purchase consideration of $2,669,000. Consideration consisted of $874,000 in cash, a note payable of $820,000, interest at 5%, repayable semi-annually over five years, a note payable of $155,000, interest of 2.5% due in February 2004 and the issuance of 196,809 common shares for $820,000. Kettle Valley's results since the date of acquisition have been included in the Company's consolidated financial statements. Kettle Valley produces natural and organic fruit bars and fruit leathers with an apple base and markets these products under the Kettle Valley Real Fruit Snack and Frunola brands. Kettle Valley operates two production facilities in Summerland, British Columbia and has constructed a third plant in the State of Washington, the center of the apple growing district of the Western U.S. In addition, Kettle Valley produces a number of private label products for customers in the U.S., Canada and the United Kingdom. Kettle Valley's products are sold through agents and distributors to the health food and mass markets as well as to various school districts. During the second quarter, due to the acquisition of Kettle Valley, the Company increased its Canadian line of credit to CDN $7,500,000 from CDN $5,000,000. In March 2003, the Company amended its financing arrangements. The amendment syndicated the financing arrangements to a group of banks, which includes existing lenders and increased the term loan by $7,800,000 to $21,700,000 ($20,325,000 as at September 30, 2003). In addition, the U.S. line of credit facility was increased by $4,000,000 to $9,000,000. The Company used the incremental proceeds on the term loan, utilized the U.S. line of credit facility to the extent of $3,500,000 and utilized $3,886,000 of cash on hand to repay the tender facility which had been obtained to finance the acquisition of Opta Food Ingredients, Inc. The term loan is repayable in quarterly installments and is intended to amortize the debt over seven years. The term loan has a two-year maturity at which 27
point the facility is renewable at the option of the lender and the Company. The Company fully expects to renew this facility. Operations For the Three Months Ended September 30, 2003 Compared With the Three Months Ended September 30, 2002 Consolidated Revenues in the three months ended September 30, 2003 increased by 53.6% or $17,584,000 to $50,384,000 from $32,800,000 in the three months ended September 30, 2002. Net earnings for the three months ended September 30, 2003 were $2,100,000 or $0.05 per basic common share compared to $1,527,000 or $0.04 per basic common share for the three months ended September 30, 2002. The increase in revenues is due to an increase in grain sales of $1,749,000, an increase in sales of aseptic packaged product of $3,203,000, the acquisitions of Opta, Wild West, Simply Organic and Kettle Valley, totalling $13,797,000, offset by a decrease in certain consumer products revenues of $776,000 and other revenues of $389,000. Net earnings before income taxes in the three month period ended September 30, 2003 were $2,443,000, compared to $1,456,000 over the same period in 2002, an increase of $987,000 or 67.8%. The increase is primarily attributable to an increase in margin in certain food processing gross profit of $215,000, earnings resulting from the acquisitions noted above of $1,241,000 and a reduction in the foreign exchange loss as a result of fluctuations in the Canadian dollar of $151,000. Significant offsetting factors include a reduction of $272,000 in gross profit due to weak abrasive sales in the U.S. East coast, an increase in selling general and administration costs of $355,000 due to increased bank financing fees, public company and other expenses, and an increase in borrowing costs of $194,000, primarily attributable to the accretion of interest on extinguishment of debt repaid in the quarter. Net earnings for the three months ended September 30, 2003 increased by $573,000 or 37.5% over the same period in 2002 as a result of the factors noted above, offset by an increase in the effective income tax rate in the third quarter of 2003 to 14% from (4.9%) in the same period in 2002. The effective income tax rate for the third quarter 2003 reflects the cumulative year-to-date impact of the recognition of certain loss carry-forwards and the implementation of tax planning strategies. The effective rate in third quarter 2002 of (4.9%) reflects the recognition of certain tax loss carry-forwards in the amount of $600,000. U.S. readers should note that due to differences between Canadian and U.S. GAAP, the earnings for the three months ended September 30, 2003 under U.S. GAAP are $2,194,000 or $0.05 per basic common share versus $1,581,000 or $0.04 per basic common share in the same period in 2002. Note 14 to the consolidated financial statements itemizes these differences. Cost of goods sold increased by 50.5% to $41,404,000 for the three months ended September 30, 2003 compared to $27,510,000 for the three months ended September 30, 2002. The increase is consistent with the revenue factors noted above. The Company's consolidated gross profit margin of 17.8% for the three months ended September 30, 2003 was higher than the 16.1% recognized in the same period in 2002. Improvements attributable to higher margins in the businesses acquired in 2002 and 2003 and improvements in volumes at the Company's aseptic packaging operation were offset by the significant increase in grain sales, a lower margin business averaging less than 10% gross profit margin. Selling, general and administrative expenses increased to $5,887,000 in the three months ended September 30, 2003 compared to $3,240,000 for the three months ended September 30, 2002. The increase in administrative costs is mainly due to the acquisitions completed in 2002 and 2003 of $2,292,000, additional amortization charges related to bank financing fees of $129,000 and an increase of public company, insurance and other corporate expenses of $226,000. Interest expense increased to $680,000 in the three months ended September 30, 2003 from $302,000 in the three months ended September 30, 2002. The increase in borrowing costs reflects the loss on extinguishment of debt of $183,000, and the increase in borrowings to support the acquisitions completed in 2002 and 2003. Interest and other income of $202,000 in the three months ended September 30, 2003 is $172,000 greater than the $30,000 recognized in the three months ended September 30, 2002. The increase is primarily due to a gain 28
recognized on a discharged liability and proceeds recorded on unexercised foreign exchange option agreements entered into during the quarter. Foreign exchange improved in the three months ended September 30, 2003 to a loss of $171,000 compared to a loss of $322,000 in the three months ended September 30, 2002. The provision for income taxes reflects the Company's estimated effective tax rate in fiscal 2003 of 22%. Segmented Operations Information (Note: Certain prior year figures have been adjusted to conform with the current year presentation which eliminates all inter-company charges for segmented reporting purposes) The Company currently treats the Food Group as one reporting segment. With the continued expansion of the Food Group, the Company is in the process of transitioning its management structure and related reporting systems in support of its vertically integrated food model. The Company intends to expand segmented reporting once this transition is complete and information is compiled and reviewed accordingly and intends to provide expanded segments no later than December 31, 2003. Food Group Revenues in the Food Group were $43,826,000 or 87% of total revenues in the three months ended September 30, 2003 versus $26,057,000, or 79% of total revenues in the same period in 2002. The increase of $17,769,000 or 68.2% in Food Group revenues was due to an increase in grain sales of $1,749,000, an increase in sales of aseptic packaged product of $3,203,000, the acquisition of Opta, Wild West, Simply Organic and Kettle Valley, totalling $13,797,000, offset by a decrease in consumer products revenues of $776,000 and a decrease in other revenues of $204,000. The increase in Food Group revenues as a percentage of consolidated revenues reflects the Company's focus on the natural and organic food markets via a combination of internal growth projects and acquisitions. Gross profit in the Food Group increased by $4,088,000 in the three months ended September 30, 2003 to $7,401,000 or 16.9% of revenues compared to $3,313,000 or 13.0% of revenues in the same period in 2002. The increase in gross profit as a percentage of sales reflects the higher margins of the acquired businesses and improvements in efficiencies and volumes at the Company's aseptic packaging operation, partially offset by the significant increase in grain sales, a lower margin business. Selling, general and administrative expenses increased to $4,257,000 in the three months ended September 30, 2003 versus $1,953,000 in the three months ended September 30, 2002. The increase of $2,304,000 is due primarily to acquisitions completed in 2002 and 2003 of $2,292,000. Interest expense increased to $362,000 in the three months ended September 30, 2003 from $216,000 in the three months ended September 30, 2002, primarily as a result of the acquisitions completed in 2002 and 2003. Net earnings in the Food Group increased by 60.2% to $2,451,000 in the three months ended September 30, 2003 compared to net earnings of $1,530,000 in the three months ended September 30, 2002 due to the factors noted above. Net earnings in the three months ended September 30, 2002 reflect the recognition of certain tax loss carry forwards in the amount of $600,000. Environmental Industrial Group Revenues in the Environmental Industrial Group were $6,476,000 for the three months ended September 30, 2003, compared to $6,667,000 in 2002. Improved abrasive and mineral sales from the Canadian operations of $229,000 were offset by weak abrasive sales in the U.S. East coast of $523,000. Weak abrasive sales in the U.S. operations resulted from fewer ships in port undergoing cleaning and maintenance as a result of the war effort and extreme weather conditions late in the quarter. Specialty sands revenues including water filtration sands and garnets improved by $94,000 over the same period in 2002. Gross profit in the Environmental Industrial Group was $1,495,000 in the three months ended September 30, 2003 versus $1,902,000 in the three months ended September 30, 2002. As a percentage of revenues, gross margin decreased to 23.1% in the three months ended September 30, 2003 from 28.5% in the three months ended September 29
30, 2002. The decrease in margin is partially due to the shift in revenues to the Canadian operations, which have inherently lower margins, and a reallocation of certain plant operating costs from selling, general and administrative expenses to cost of goods sold in 2003 of $104,000. Selling, general and administrative expenses decreased to $642,000 in the three months ended September 30, 2003 compared to $703,000 in the three months ended September 30, 2002. The decrease in expenses was due to the reallocation of certain plant costs noted above offset by incremental professional fees and information system costs. Interest expense increased to $96,000 in the three months ended September 30, 2003 from $86,000 in the three months ended September 30, 2002, mainly due to cash utilization as a result of payments made as part of the acquisition of Virginia Materials in 2001. Net earnings were $638,000 in the three months ended September 30, 2003 versus $726,000 in the three months ended September 30, 2002 due to the factors noted above. Steam Explosion Technology Group Revenues of $82,000 for the three months ended September 30, 2003 (2002 - $76,000) were primarily derived from licence fees. Selling, general and administrative expenses were $91,000 for the three months ended September 30, 2003 compared to $72,000 for the same period in 2002. These costs reflect payroll and related expenses required to manage and maintain the business. Net loss for the period of $8,000 fell short of the profit of $9,000 recognized in the same period in 2002. Corporate Activities Selling, general and administration expenses were $898,000 in the three months ended September 30, 2003 compared to $513,000 in the three months ended September 30, 2002. The increase of $385,000 reflects the additional amortization of bank financing fees of $129,000, and an increase in other administrative costs of $256,000 including investor relations, public company, insurance and professional fees. Operations For the Nine Months Ended September 30, 2003 Compared With the Nine Months Ended September 30, 2002 Consolidated Revenues in the first nine months of 2003 increased by 65.1% or $56,975,000 to $144,436,000 from $87,461,000 in the first nine months of 2002, and the Company's net earnings for the first nine months in 2003 were $5,560,000 or $0.13 per basic common share compared to $3,254,000 or $0.08 per basic common share for the first nine months of 2002. The increase in revenues is due to an increase in grain sales of $12,480,000, an increase in sales of aseptic packaged product of $7,908,000, the acquisitions of Opta, Organic Kitchen, Wild West, Simply Organic and Kettle Valley, totalling $39,291,000, offset by decreases in certain customer products, toll processing, and other revenues of $2,704,000. Net earnings before income taxes in the nine-month period ended September 30, 2003 were $7,129,000, compared to $3,932,000 over the same period in 2002, an increase of $3,197,000 or 81.3%. The increase is primarily attributable to improved volumes and margins in aseptic packaged products of $1,752,000, net increase in gross profit as a result of the increase in grain sales and change of customer mix totalling $298,000, earnings derived from the acquisitions noted above of $2,345,000 and an increase in the foreign exchange gain as a result of the appreciation in the Canadian dollar of $285,000. Significant offsetting factors include a reduction in dairy blend processing margins of $649,000 due to low competitive costs, a shortfall in earnings due to weak abrasive sales in the U.S. East Coast of $635,000, and an increase in administrative and other costs of $199,000, excluding acquisitions. Net earnings for the nine months ended September 30, 2003 increased by $2,306,000 or 70.9% over the same period in 2002. The increase in earnings was as a result of the factors noted above, offset by an increase in the effective income tax rate to 22% in 2003 from 17% in 2002. 30
U.S. readers should note that due to differences between Canadian and U.S. GAAP, the earnings for the nine months ended September 30, 2003 under U.S. GAAP are $5,753,000 or $0.13 per basic common share versus $3,128,000 or $0.08 per basic common share in the same period in 2002. Note 14 to the consolidated financial statements itemizes these differences. Cost of goods sold increased by 62.4% to $119,232,000 for the nine months ended September 30, 2003 compared to $73,431,000 for the nine months ended September 30, 2002. The increasing factors are consistent with the revenue factors noted above. The Company's consolidated gross profit margin increased to 17.4% of revenue for the nine months ended September 30, 2003 versus 16.0% of revenues in the nine months ended September 30, 2002. The improvement in gross margin is attributable to the higher gross profit margin in the businesses acquired in 2002 and 2003 and improvements in efficiencies and volumes at the Company's aseptic packaging operation, offset by the significant increase in grain sales, a lower margin business averaging less than 10% in gross margin. Selling, general and administrative expenses increased to $17,247,000 of revenues in the nine months ended September 30, 2003 compared to $9,446,000 of revenues for the nine months ended September 30, 2002. The increase in administrative costs is mainly due to the acquisitions completed in 2002 and 2003 of $6,940,000, incremental legal costs of $150,000 related to the Company's legal proceeding against a former supplier for failure to adhere to the terms of a supply contact, as detailed in Part II - Other Information, additional amortization charges related to bank financing fees of $278,000 and incremental administrative costs applicable to managing a growing public company of $433,000. Interest expense increased to $1,664,000 in the nine months ended September 30, 2003 from $1,030,000 in the nine months ended September 30, 2002. The increase in interest expense reflects the loss on extinguishment of debt of $183,000 and the increase in borrowings to support the acquisitions completed in 2002 and 2003. Interest and other income increased to $411,000 in the nine months ended September 30, 2003 from $238,000 recognized in the nine months ended September 30, 2002. The gains recorded in 2003 are primarily attributable to a gain on sale of non-core property of $134,000, a gain recognized on a discharged liability of $133,000, proceeds on an unexercised option agreement and interest recognized on cash balances. Foreign exchange gain increased to $425,000 from $140,000 in the same period in 2002 as a result of the appreciation of the Canadian dollar. The provision for income taxes in the first three months of 2003 reflects the Company's estimated effective tax rate in 2003 of 22% due to the aforementioned factors. Segmented Operations Information Food Group The Food Group contributed $125,511,000 or 86.9% of total Company consolidated revenues in the first nine months of 2003 versus $68,709,000 or 78.6% in the same period in 2002. The increase of $56,802,000 or 82.7% in Food Group revenues was due to an increase in grain sales of $12,480,000, an increase in sales of aseptic packaged product of $7,908,000, the acquisitions of Opta, Organic Kitchen, Wild West, Simply Organic and Kettle Valley totalling $39,291,000, partially offset by decreases in certain toll processing revenues of $2,134,000, a decrease in certain consumer products of $446,000 and a net decrease in other revenues of $297,000. Gross profit in the Food Group increased by $12,047,000 in the nine months ended September 30, 2003 to $20,887,000 or 16.6% of revenues compared to $8,840,000 or 12.9% of revenues in the same period in 2002. The increase in gross profit reflects the higher gross profit margins of the acquired businesses and improvements in efficiencies and volumes at the Company's aseptic packaging operation, partially offset by the significant increase in grain sales, a lower margin business. Selling, general and administrative expenses increased to $12,727,000 in the nine months ended September 30, 2003 versus $5,492,000 in the nine months ended September 30, 2002. The increase of $7,235,000 is due primarily to 31
acquisitions completed in 2002 and 2003 of $6,940,000 and legal costs of $150,000 associated with an action against a former supplier for failure to adhere to the terms of a supply contact, as detailed in Part II - Other Information. Interest expense increased to $1,170,000 in the nine months ended September 30, 2003 from $808,000 in the nine months ended September 30, 2002, primarily as a result of additional borrowings to fund the acquisitions completed in 2002 and 2003. Net earnings in the Food Group were $5,532,000 in the nine months ended September 30, 2003 compared to net earnings of $2,583,000 in the nine months ended September 30, 2002 due to the factors noted above. Environmental Industrial Group The Environmental Industrial Group contributed $18,539,000 or 12.8% of the total Company consolidated revenues in the first nine months of 2003, compared to $18,526,000 or 21.2% in 2002. Improved abrasive and mineral sales from the Canadian operations of $752,000 were offset by weak abrasive sales in the U.S. East coast as a result of reduced ship repair activity of $1,001,000. Specialty sands revenues, including coated sands, water filtration sands and garnets improved by $249,000 over the same period in 2002. Gross profit in the Environmental Industrial Group was $3,930,000 in the nine months ended September 30, 2003 versus $4,964,000 in the nine months ended September 30, 2002. As a percentage of revenues, gross margin decreased to 21.2% in the first nine months of 2003 from 26.8% in the first nine months of 2002. The decrease in margin is partially due to the shift in revenues to the Canadian operations, which have inherently lower margins versus abrasive sales in the U.S., and a reallocation of certain plant operating costs from selling, general and administrative expenses to cost of goods sold in 2003 of approximately $404,000 (after adjustment for the reallocation, 2002 gross margin was 24.6%). Selling, general and administrative expenses decreased to $1,671,000 in the nine months ended September 30, 2003 from $2,211,000 in the nine months ended September 30, 2002, primarily due to the allocation noted above of $404,000, and net cost reduction programs implemented throughout the Group of $136,000. Interest expense increased to $277,000 in the first nine months of 2003 from $222,000 in the first nine months of 2002, mainly due to cash utilization as a result of payments made as part of the acquisition of Virginia Materials in 2001. Net earnings were $1,608,000 in the nine months ended September 30, 2003 versus $1,589,000 in the nine months ended September 30, 2002. Steam Explosion Technology Group Revenues of $386,000 for the nine months ended September 30, 2003 (2002 - $226,000) were primarily derived from licence fees. The increase in 2003 over the prior year is primarily derived from the recognition of $150,000 in license fees relating to 2002 in 2003. Selling, general and administrative expenses were $264,000 for the first nine months of 2003 compared to $227,000 for the same period in 2002. These costs reflect payroll and related expenses required to manage and maintain the business. Net earnings were $95,000 compared to a net loss of ($13,000) in the same period in 2002. Corporate Activities Selling, general and administration expenses were $2,583,000 in the nine months ended September 30, 2003 compared to $1,580,000 in the nine months ended September 30, 2002. The increase of $1,003,000 reflects the additional amortization of bank financing fees of $278,000, an increase in costs related to the administration of a growing public company of $220,000 and an increase in insurance and professional fees of $252,000. 32
Liquidity and Capital Resources at September 30, 2003 Current assets Cash and cash equivalents increased to $38,892,000 at September 30, 2003 (December 31, 2002 - $7,012,000), primarily due to the funds raised through the share issuance in August 2003, offset by the repayment of certain term debt and operating lines of credit throughout the period. Trade accounts receivable increased to $23,520,000 at September 30, 2003 from $18,144,000 at December 31, 2002. Trade receivables at September 30, 2003 attributable to the Food Group were $19,051,000 (December 31, 2002 - $14,889,000). Trade receivables in the Environmental Industrial Group were $4,072,000 (December 31, 2002 - $3,255,000). The increases in trade account receivables in the Food Group and the Environmental Industrial Group are consistent with the increase in sales in the respective Groups, as a result of seasonality and acquisitions. The Steam Explosion Technology Group has a receivable of $397,000 related to license fee revenues (December 31, 2002 - $nil). The note receivable of $nil (December 31, 2002 - $1,034,000) and the product rebate payable in long-term payables of $1,427,000 (December 31, 2002 - $1,330,000) are related to an agreement with a major European based company to supply product. This agreement required the Food Group to expand a food processing plant to the customer's specifications, which was completed in 2001. In accordance with the terms of the agreement, the customer paid 36 monthly instalments of $119,000. The last payment of the note receivable was received in the period ended September 30, 2003. Commencing October 2003 the agreement requires the Company to provide the customer with a product rebate on all purchases until a total of $1,720,000 is repaid. Upon the application of purchase accounting in 2000, both the receivable and payable were fair valued using a discount rate of 9.5%. Inventories increased $1,016,000 to $24,005,000 at September 30, 2003 from $22,989,000 at December 31, 2002. The Food Group accounts for $18,647,000 of the consolidated balance (December 31, 2002 - $18,492,000) and the Environmental Industrial Group accounts for $5,358,000 (December 31, 2002 - $4,497,000). The Steam Explosion Technology Group is not required to carry significant inventories. The higher inventory balance in the Food Group is primarily due to the acquisition of Kettle Valley, accounting for $466,000 of the increase. The increase in inventories in the Environmental Industrial Group is due to timing of supply shipments. In order to achieve more efficient and competitive cost structures, inventories are purchased in large quantities less frequently, and therefore timing of these shipments can result in significant fluctuations from quarter to quarter. Prepaid expenses and other current assets increased to $1,965,000 at September 30, 2003 from $958,000 at December 31, 2002. The increase is mainly due to an increase in prepaid insurance as a result of policy renewals in the first nine months, receivables from the sale of non-core properties and prepaid expenses associated with Kettle Valley. Property, plant and equipment In the first nine months of 2003, the Company expended $3,778,000 (September 30, 2002 - $3,055,000) on property, plant and equipment, of which, the Food Group comprised of $3,208,000. Key projects in the period included the micro filter sweetener project at the Group's operation in Alexandria, MN, the expansion of the grain cleaning and transfer system in Hope, MN and the completion of the Kettle Valley plant in the state of Washington. During the first nine months of 2003, $513,000 was expended by the Environmental Industrial Group on general additions, betterments and replacements and $57,000 was spent by the Steam Explosion Technology Group and the Corporate Office on office equipment and furniture. Goodwill and intangibles Goodwill and intangibles increased to $17,220,000 at September 30, 2003 from $14,992,000 at December 31, 2002. The increase is due to the acquisition of Kettle Valley of $1,564,000, a foreign exchange valuation increase of Canadian goodwill and intangibles of $710,000, less amortization of $46,000. Future income taxes The future income tax asset relates primarily to loss carry-forwards recorded on the acquisition of Opta Food Ingredients, Inc., loss carry-forwards in Canada and scientific research and development credits available in Canada. 33
Other assets Other assets decreased to $813,000 at September 30, 2003 from $1,080,000 at December 31, 2002, due in most part to amortization of pre-operating costs and financing fees of $629,000, offset by the capitalization of $343,000 in bank financing fees. Current liabilities Bank indebtedness at September 30, 2003 was $nil (December 31, 2002 - $3,963,000). The decrease relates primarily to the repayment of the operating lines of credit with proceeds from the share issuance in the third quarter (note 8). Accounts payable and accrued liabilities decreased to $18,103,000 at September 30, 2003 from $19,664,000 at December 31, 2002. The decrease is primarily due to timing of vendor payments. Customer and other deposits of $608,000 at September 30, 2003 (December 31, 2002 - - $421,000) relate to cash deposits made by Food Group customers for purchases made throughout the growing season in 2003, and to a deposit received on an option agreement related to certain properly held for sale (note 12 (c)). No recognition of revenue or accrual of costs is booked until the goods are shipped. Deposits decrease during the planting season as customers purchase seeds and agronomy products. Long term debt At September 30, 2003, the Company's long-term debt, including current portion, is $21,864,000, a net decrease of $14,885,000 from December 31, 2002. The decrease relates to the repayment of the tender facility of $15,186,000, repayment of the convertible debenture of $5,000,000 and net repayments of other term debt of $3,319,000, offset by the increase in the term debt facility of $7,800,000 as a result of the refinancing completed in March 2003, and the note payable to the former shareholders of Kettle Valley of $820,000. Long-term payables The Company had deferred purchase consideration of $177,000 at September 30, 2003 (December 31, 2002 - $667,000) related to the acquisition of Virginia Materials. The deferred purchase consideration is paid on the purchase of the vendor's inventory as acquired by the Company. It is expected that this liability will be extinguish by December 31, 2003. The Preference Shares of subsidiary companies were reduced to $152,000 from $291,000 as a result of regularly scheduled repurchases during the period and an additional repurchase of preferred shares related to a settlement with a former director relating to certain actions taken while he was the president of an operating division. Payables to former shareholders of acquired companies decreased by $2,105,000 to $570,000 at September 30, 2003. The reduction is due primarily to the payment for the untendered shares of the former shareholders of Opta, in addition to payments related to the acquisition of Virginia Materials, offset by a note payable to former shareholders of Kettle Valley of $165,000 ($155,000 at acquisition plus foreign exchange valuation of $10,000). Cash flow For the nine months ended September 30, 2003, cash flow provided by operations before working capital changes was $9,021,000, an increase of 64.1% from $5,498,000 in the same period in 2002. The increase is due primarily to improvements in earnings and higher amortization charges in the first nine months of 2003 versus 2002. Cash flow provided by operations after working capital changes was $457,000 for the nine months ended September 30, 2003 (2002 - ($458,000)), reflecting the utilization of funds for non-cash working capital of ($8,564,000) (2002 - ($5,956,000)). This utilization consists principally of an increase in accounts receivable of ($5,526,000), an increase in inventories of ($408,000), an increase in prepaid expenses and other current assets of ($893,000) and a decrease in accounts payable and accrued liabilities of ($1,924,000), offset by an increase in customer and other deposits of $187,000. The working capital deficiencies in the first nine months of 2003 reflects the impact of 34
seasonality of the business on working capital, including the purchase and payment method with grain suppliers in the Food Group, the growth in the operations and the economic market seasonality in the Environmental Industrial Group. Cash used in investing activities was ($3,361,000). The Company sold its short term investments for proceeds of $2,038,000 (2002 - $6,307,000), received payments on a note receivable of $1,074,000 (2002 - $1,045,000), and received payments from other investing activities of $199,000 (2002 - $101,000), offset by acquisitions of property, plant and equipment of ($3,778,000) (2002 - ($3,055,000)) and payment for the acquisition of companies of ($2,894,000) (2002 - - ($1,080,000)). Cash generated from financing activities was $34,562,000 in the nine months ended September 30, 2003 (2002 - $626,000), consisting primarily of proceeds from the issuance of common shares of $56,028,000 (2002 - $1,805,000) and an increase in borrowings under term debt facilities of $7,800,000 (2002 - $15,000,000), offset by a net decrease in bank indebtedness of ($4,285,000) (2002 - $258,000), net debt repayments of ($24,009,000) (2002 - ($16,209,000)), deferred purchase consideration payments of ($490,000) (2002 - ($754,000)), purchase and redemption of preferred shares of subsidiary companies of ($139,000) (2002 - ($922,000)) and financing costs of ($343,000) (2002 - ($499,000)). In the nine months ended September 30, 2003, there was no comparable decrease in restricted cash (2002 - $1,147,000). Item 3 -Quantitative and Qualitative Disclosures about Market Risk Interest rate risk The primary objective of our investment activities is to preserve principal and limit risk. To achieve this objective, the Company 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 equivalents and are recorded on the balance sheet at fair value with unrealized gains or losses reported through profit and loss. At September 30, 2003 the Company had $38,892 in cash and cash equivalents. Debt in both fixed rate and floating rate interest carry varying degrees of interest rate risk. Fixed rate debt may have their fair market value adversely affected by a decline in interest rates. In general, longer date debts are subject to greater interest rate risk than shorter dated securities. Floating rate term debt gives less predictability to cash flows as interest rates change. As of September 30, 2003, the weighted average interest rate of the fixed rate term debt was 5.3% and $1,339,000 of the Company's outstanding term debt is at fixed interest rates. Variable rate term debt of $20,525,000 at an interest rate of 3.67% is outstanding at September 30, 2003. The Company looks at varying factors to determine the percentage of debt to hold at fixed rates including the interest rate spread between variable and fixed (swap rates), the Company's view on interest rate trends, the percent of offset to variable rate debt through holding variable rate investments and the Company's ability to manage the business with interest rate volatility and uncertainty. For every 1% increase (decrease) in interest rates, the Company's after-tax earnings would decrease (increase) by approximately $171,000. Given the short duration of fixed rate debt, changes in interest rates would have a negligible affect on fixed rate debt valuations. Foreign currency risk All U.S. subsidiaries use the U.S. dollar as their functional currency, and since January 1, 2002, the United States dollar has been the Company's reporting currency. Canadian subsidiaries and corporate office use the Canadian dollar as their functional currency. The subsidiaries are subject to risks typical of multi-jurisdiction businesses, including, but not limited to differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely affected by changes in these or other factors. The Company is exposed to foreign exchange rate fluctuations as the financial results of the Company and its Canadian subsidiaries are translated into U.S. dollars on consolidation. During the first nine months in 2003, the Canadian dollar has appreciated significantly against the U.S. dollar with closing rates moving from CDN $1.5776 at December 31, 2002 to CDN $1.3499 at September 30, 2003 for each U.S. dollar. The net effect of this appreciation has been a $425,000 exchange gain and a $2,103,000 increase in net assets. A 10% movement in the levels of foreign currency exchange rates in favour of (against) the Canadian dollar with all other variables held constant would result in an increase (decrease) in the fair value of the Company's net assets by $2,327,000. Changes would flow through the Company's cumulative translation adjustment account in shareholders' equity for self -sustaining operations and through the statement of earnings for integrated operations. 35
The Food Group and the Environmental Group Canadian operations have U.S. based receivables and payables that on a net basis provide limited exchange exposure. The Food Group U.S. operations have no exposure to other currencies since all sales are made in U.S. dollars. It is the Company's intention to hold 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, 2003, the Company owned 150,780 bushels of corn with a weighted average price of $1.86 and 173,945 bushels of soybeans with a weighted average price of $7.46. The Company has at September 30, 2003 net long positions on corn and soy beans of 75,415 bushels and 197,060 bushels, respectively. An increase/(decrease) in the commodity prices of 10% would result in a gain/(loss) of $14,000 in corn and $147,000 in soy beans, respectively. There are no futures contracts in the Environmental Industrial Group or the Steam Explosion Technology Group or related to Corporate activities. Item 4. Controls and Procedures The Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of the Company's disclosure controls (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, in ensuring that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods. During the period covered by this report, there have been no changes in internal controls, or other factors that have materially affected, or are reasonably likely to material to affect, the Company's internal controls over financial reporting. 36
PART II - OTHER INFORMATION. Item 1. Legal proceedings The Food Group continues to pursue a suit against a former supplier for failure to adhere to the terms of a contract. The Company and its legal counsel believe that this claim has merit. The Company has ceased co-packing arrangements under the existing contract and has commenced packing under separate arrangements. It cannot, however, be determined if there will be any recovery by the Company at this time and the Group is expensing the costs of pursuing this suit on a monthly basis. Other than this action, the Group has not been and is not currently party to any material litigation other than stated above. The supplier has counter-sued the Company for breach of contract. The Company believes this suit is without merit. Item 2. Changes in securities and use of proceeds Net proceeds from the public offering and concurrent private placement, as described in significant developments was approximately $52,694,000. During the quarter approximately $16,200,000 was used to pay down the revolving and term credit facilities and to repay the convertible debenture. Subsequent to the quarter, approximately $5,738,000 of the proceeds was used to purchase Pro Organics and repay associated debts. We intend to use the remaining proceeds resulting from the share issuance for general corporate purposes including future acquisitions, internal expansion projects and working capital requirements. Item 3. Defaults on senior securities - Not applicable Item 4. Submission of matters to a vote of security holders - Not applicable Item 5. Other - Not applicable 37
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned hereunto duly authorized. SUNOPTA INC. (Registrant) /s/ John Dietrich Date November 7, 2003 SunOpta Inc. by John Dietrich Vice President & Chief Financial Officer 38
EXHIBIT INDEX Exhibit No. Page No. - ----------- -------- 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 40 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 41 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 42 39