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, 2001 Commission File No. 0-9989 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 STAKE TECHNOLOGY LTD. --------------------- (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 |_| At November 1, 2001 registrant had 36,827,828 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 US $35,487,000. The Company's common shares are traded on the Nasdaq Smallcap Market tier of the Nasdaq Stock Market under the symbol STKL. As of November 6, 2001, the Company's common shares also trade on The Toronto Stock Exchange under the symbol SOY. There are 34 pages in the September 30, 2001 10-Q and the index follows the cover page. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 1 September 30, 2001 10-Q
STAKE TECHNOLOGY LTD. FORM 10-Q September 30, 2001 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as at September 30, 2001 and December 31, 2000 Consolidated Statements of Retained Earnings for the nine months ended September 30, 2001 and the year ended December 31, 2000 Consolidated Statements of Earnings for the three months ended September 30, 2001 and 2000 Consolidated Statements of Earnings for the nine months ended September 30, 2001 and 2000 Consolidated Statements of Cash Flow for the three months ended September 30, 2001 and 2000 Consolidated Statements of Cash Flow for the nine months ended September 30, 2001 and 2000 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 PART II - OTHER INFORMATION All financial information is expressed in Canadian Dollars The closing rate of exchange on November 1, 2001 was CDN $1 = US $0.6285 - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 2 September 30, 2001 10-Q
PART I - FINANCIAL INFORMATION Item 1 - Consolidated Financial Statements Stake Technology Ltd. September 30, 2001 - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 3 September 30, 2001 10-Q
Stake Technology Ltd. Consolidated Balance Sheets as at September 30, 2001 and December 31, 2000 Unaudited (Expressed in Canadian Dollars) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------ September 30, December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> Assets (note 5) Current assets Cash and cash equivalents $ 11,696,000 $ 1,013,000 Restricted cash (note 5(a)) 417,000 - Accounts receivable - trade 17,696,000 13,111,000 Current portion of note receivable 2,117,000 2,150,000 Inventories (note 4) 15,224,000 15,290,000 Other receivables and prepaid expenses 2,982,000 1,341,000 Future income taxes 961,000 954,000 ------------------------------------- 51,093,000 33,859,000 Note receivable 1,974,000 3,036,000 Property, plant and equipment - at cost, less accumulated amortization of $12,501,000 (December 31, 2000 - $9,132,000) 45,642,000 43,158,000 Investments 394,000 382,000 Goodwill - at cost, less accumulated amortization of $1,525,000 (December 31, 2000 - $925,000) 11,017,000 11,231,000 Pre-operating costs - at cost, less accumulated amortization of $192,000 (December 31, 2000 - $nil) 576,000 768,000 Patents, trademarks, licences and other assets - at cost less accumulated amortization of $1,229,000 (December 31, 2000 - $1,034,000) (note 3) 4,431,000 432,000 ------------------------------------- $ 115,127,000 $ 92,866,000 ===================================== Liabilities Current liabilities Bank indebtedness (note 5) $ 7,274,000 $ 3,405,000 Accounts payable and accrued liabilities 18,508,000 19,359,000 Customer deposits 103,000 1,262,000 Current portion of long-term debt (note 5) 7,334,000 6,799,000 Current portion of preference shares of subsidiary companies 248,000 387,000 ------------------------------------- 33,467,000 31,212,000 Long-term debt (note 5) 22,089,000 24,756,000 Other long-term payable 1,803,000 1,651,000 Future income taxes (note 3) 3,224,000 1,508,000 Preference shares of subsidiary companies 438,000 462,000 ------------------------------------- 61,021,000 59,589,000 ------------------------------------- Shareholders' Equity Capital stock (note 6) Authorized Unlimited common shares without par value Issued 35,923,203 (December 31, 2000 - 28,186,972) common shares 42,358,000 22,710,000 Contributed surplus 4,635,000 4,635,000 Retained earnings (note 6 (b)) 6,988,000 5,869,000 Currency translation adjustment 125,000 63,000 ------------------------------------- 54,106,000 33,277,000 ------------------------------------- $ 115,127,000 $ 92,866,000 ===================================== </TABLE> (See accompanying notes to consolidated financial statements) - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 4 September 30, 2001 10-Q
Stake Technology Ltd. Consolidated Statements of Retained Earnings For the nine months ended September 30, 2001 and the year ended December 31, 2000 Unaudited (Expressed in Canadian Dollars) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------- Nine months ended Year ended September 30, 2001 December 31, 2000 - ------------------------------------------------------------------------------------------- <S> <C> <C> Retained Earnings - Beginning of the Period $ 5,869,000 $ 2,495,000 Net Earnings for the Period 1,119,000 3,374,000 -------------------------------------- Retained Earnings - End of Period $ 6,988,000 $ 5,869,000 ====================================== </TABLE> (See accompanying notes to consolidated financial statements) - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 5 September 30, 2001 10-Q
Stake Technology Ltd. Consolidated Statements of Earnings For the three months ended September 30, 2001 and 2000 Unaudited (Expressed in Canadian Dollars) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------- September 30, September 30, 2001 2000 - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Revenues $ 36,481,000 $ 25,007,000 Cost of goods sold 32,003,000 20,645,000 --------------------------------- Gross profit 4,478,000 4,362,000 --------------------------------- Expenses Research and development 152,000 113,000 Administration, market development and demonstration 3,454,000 2,501,000 Amortization of patents, trademarks, licences, pre-operating costs and goodwill 434,000 89,000 --------------------------------- 4,040,000 2,703,000 --------------------------------- Earnings from operations 438,000 1,659,000 Interest on long-term debt (447,000) (185,000) Other interest (187,000) (8,000) Interest and other income 167,000 -- Foreign exchange gain 553,000 38,000 Share of losses of equity accounted investee (5,000) (12,000) Dividend on preference shares of subsidiary company -- (8,000) --------------------------------- Earnings before income taxes 519,000 1,484,000 --------------------------------- Recovery of (provision for) income taxes Current (13,000) (478,000) Future (258,000) 747,000 --------------------------------- (271,000) 269,000 --------------------------------- Net earnings for the period $ 248,000 $ 1,753,000 ================================= Net earnings per share for the period - Basic $ 0.01 $ 0.08 ================================= - Diluted $ 0.01 $ 0.08 ================================= </TABLE> (See accompanying notes to consolidated financial statements) - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 6 September 30, 2001 10-Q
Stake Technology Ltd. Consolidated Statements of Earnings For the nine months ended September 30, 2001 and 2000 Unaudited (Expressed in Canadian Dollars) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------ September 30, September 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> Revenues $ 105,142,000 $ 70,448,000 Cost of goods sold 90,353,000 59,647,000 ---------------------------------- Gross profit 14,789,000 10,801,000 ---------------------------------- Expenses Research and development 372,000 362,000 Administration, market development and demonstration 10,444,000 6,857,000 Amortization of patents, trademarks, licences, pre-operating costs and goodwill 988,000 256,000 ---------------------------------- 11,804,000 7,475,000 ---------------------------------- Earnings from operations 2,985,000 3,326,000 Interest on long-term debt (1,783,000) (416,000) Other interest (457,000) (51,000) Interest and other income 568,000 79,000 Foreign exchange gain 535,000 68,000 Gain on dilution of investment interests in equity accounted investee -- 140,000 Share of losses of equity accounted investee (30,000) (36,000) Dividend on preference shares of subsidiary company (14,000) (22,000) ---------------------------------- Earnings before income taxes 1,804,000 3,088,000 ---------------------------------- Recovery of (provision for) income taxes Current (335,000) (469,000) Future (350,000) 652,000 ---------------------------------- (685,000) 183,000 ---------------------------------- Net earnings for the period $ 1,119,000 $ 3,271,000 ================================== Net earnings per share for the period - Basic $ 0.04 $ 0.15 ================================== - Diluted $ 0.04 $ 0.15 ================================== </TABLE> (See accompanying notes to consolidated financial statements) - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 7 September 30, 2001 10-Q
Stake Technology Ltd. Consolidated Statements of Cash Flow For the three months ended September 30, 2001 and 2000 Unaudited (Expressed in Canadian Dollars) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- September 30, September 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash provided by (used in) Operating activities Net earnings for the period $ 248,000 $ 1,753,000 Items not affecting cash Amortization 1,617,000 920,000 Share of losses of equity accounted investee 5,000 12,000 (Gain) loss on sale of property, plant and equipment (95,000) 2,000 Gain on settlement of preference shares of a subsidiary company (13,000) -- Write off of patents, trademarks, licenses and other assets -- 75,000 Imputed interest - net (36,000) 7,000 Future income taxes 258,000 (747,000) -------------------------------- 1,984,000 2,022,000 Change in non-cash working capital balances related to operations Accounts receivable - trade 762,000 681,000 Inventories (830,000) (3,328,000) Other receivables and prepaid expenses (478,000) (290,000) Accounts payable and accrued liabilities (1,773,000) 4,964,000 Customer deposits (133,000) (2,504,000) -------------------------------- (468,000) 1,545,000 -------------------------------- Investing activities Acquisition of company - net of cash acquired -- (488,000) Restricted cash 1,799,000 -- Acquisition of property, plant and equipment (1,516,000) (3,212,000) Acquisition of patents, trademarks, licences and other assets -- (383,000) Proceeds on sale of property, plant and equipment -- 99,000 (Increase) decrease in investments and advances (37,000) 334,000 Decrease in notes receivable 553,000 -- -------------------------------- 799,000 (3,650,000) -------------------------------- Financing activities Purchase and redemption of preference shares of subsidiary companies (19,000) (17,000) Repayment of long-term debt 98,000 (202,000) Issuance of long-term debt 1,000 708,000 Net repayments of bank indebtedness (290,000) (323,000) Issuance of common shares and warrants 8,841,000 113,000 Note payable -- 2,564,000 -------------------------------- 8,631,000 2,843,000 Foreign exchange gain on cash held in a foreign currency (41,000) (81,000) -------------------------------- Increase in cash during the period 8,921,000 657,000 Cash and cash equivalents - Beginning of period 2,775,000 -- -------------------------------- Cash and cash equivalents - End of period $ 11,696,000 $ 657,000 ================================ Supplemental cash flow information: Interest paid $ 836,000 $ 161,000 ================================ Income taxes paid $ 211,000 $ 441,000 ================================ </TABLE> (See accompanying notes to consolidated financial statements) - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 8 September 30, 2001 10-Q
Stake Technology Ltd. Consolidated Statements of Cash Flow For the nine months ended September 30, 2001 and 2000 Unaudited (Expressed in Canadian Dollars) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- September 30, September 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash provided by (used in) Operating activities Net earnings for the period $ 1,119,000 $ 3,271,000 Items not affecting cash Amortization 4,289,000 1,785,000 Share of losses of equity accounted investee 30,000 36,000 Gain on sale of property, plant and equipment (82,000) (41,000) Gain on dilution of interest in investee -- (140,000) Gain on settlement of preference shares of a subsidiary company (38,000) -- Write off of patents, trademarks, licences and other assets -- 75,000 Imputed interest - net (166,000) 23,000 Future income taxes 350,000 (652,000) -------------------------------- 5,502,000 4,357,000 Change in non-cash working capital balances related to operations Accounts receivable - trade (4,067,000) (3,611,000) Inventories 578,000 (977,000) Other receivables and prepaid expenses (1,552,000) (543,000) Accounts payable and accrued liabilities (1,623,000) 2,281,000 Customer deposits (1,194,000) (1,664,000) -------------------------------- (2,356,000) (157,000) -------------------------------- Investing activities Acquisitions of companies - net of cash acquired (514,000) (4,996,000) Decrease (increase) in patents, trademarks, licences and other assets 11,000 (316,000) Restricted cash (417,000) 400,000 Acquisition of property, plant and equipment (3,960,000) (3,544,000) Proceeds on sale of property, plant and equipment -- 238,000 Increase in investments and advances (42,000) (6,000) Decrease in notes receivable 1,653,000 -- -------------------------------- (3,269,000) (8,224,000) -------------------------------- Financing activities Purchase and redemption of preference shares of subsidiary companies (168,000) (153,000) Repayment of long-term debt (4,490,000) (723,000) Issuance of long-term debt 98,000 3,343,000 Net borrowings of bank indebtedness 2,531,000 2,147,000 Issuance of common shares and warrants 18,367,000 479,000 Note payable -- 1,442,000 -------------------------------- 16,338,000 6,535,000 Foreign exchange (loss) gain on cash held in a foreign currency (30,000) 39,000 -------------------------------- Increase (decrease) in cash during the period 10,683,000 (1,807,000) Cash and cash equivalents - Beginning of period 1,013,000 2,464,000 -------------------------------- Cash and cash equivalents - End of period $ 11,696,000 $ 657,000 ================================ Supplemental cash flow information: Interest paid $ 2,084,000 $ 460,000 ================================ Income taxes paid $ 221,000 $ 441,000 ================================ </TABLE> (See accompanying notes to consolidated financial statements) - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 9 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- 1. Interim Financial Statement The accompanying interim consolidated financial statements of Stake Technology Ltd. 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 8), with accounting principles generally accepted in the U.S. Accordingly, these interim consolidated 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; all such adjustments are of a normal, recurring nature. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2001. For further information, see the Company's consolidated financial statements, including the accounting policies and notes thereto, included in the Annual Report on Form 10KSB for the year ended December 31, 2000. 2. Description of business and significant accounting policies Stake Technology Ltd. (the Company) was incorporated under the laws of Canada on November 13, 1973 and operates in three principal businesses. The SunRich Food Group manufactures and sells agricultural products with a focus on soy and other food products. The Environmental Industrial Group sells abrasives and industrial materials and recycles inorganic materials. The Company also operates a division developing and commercializing a proprietary steam explosion technology for processing of biomass into higher value products. The Company's assets, operations and employees at September 30, 2001 are located in Canada and the United States. The significant policies are outlined below: Basis of presentation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated on consolidation. Cash and cash equivalents Cash and cash equivalents consist of unrestricted cash and short-term deposits with a maturity at acquisition of less than 90 days. Inventories Raw materials, finished goods and merchandise inventory are valued at the lower of cost and estimated net realizable value. Cost is determined on a first-in, first-out basis. Inventories of grain are valued at market. Changes in market value are included in cost of sales. The SunRich Food Group generally follows a policy of hedging its grain transactions to protect gains and minimize losses due to market fluctuations. Hedge contracts are adjusted to market price and gains and losses from such transactions are included in cost of sales. The Company has a risk of loss from hedge activity if the grower does not deliver the grain as scheduled. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 10 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- Investments Investments in companies over which the Company exercises significant influence are accounted for by the equity method whereby the Company includes its proportionate share of earnings and losses of such companies in earnings. 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 US-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 4-8% for buildings. Amortization is calculated from the time the asset is put into use. Pre-operating costs Net costs incurred in the pre-operating stage of start-up businesses are deferred until the business reaches commercial operation or the passage of a certain period of time as predetermined by management. During 2000, the Company acquired Nordic Aseptic, Inc. (Nordic), 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, have been deferred. Amortization of these net costs is computed on a straight-line basis over 3 years and commenced on January 1, 2001. Patents, trademarks, licences and other assets Costs of acquiring or registering patents, trademarks and licences are capitalized and amortized on a straight-line basis over their expected lives of 10 to 20 years. Costs of renewing patents and trademarks are expensed as incurred. Costs incurred in connection with obtaining long-term financing are deferred and amortized over the term of the related financing agreement. Goodwill Goodwill represents the excess of the cost of subsidiaries and businesses over the assigned value of net assets acquired. Goodwill is amortized on a straight-line basis over its estimated life of 20 years. The Company reviews the recoverability of goodwill whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. The measurement of possible impairment is based primarily on the ability to recover the balance of the goodwill from expected future operating cash flows on an undiscounted basis. Revenue recognition i) Environmental Industrial Group Revenue from the sale of industrial minerals is recognized upon shipment or providing of a service to a customer. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 11 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- ii) SunRich Food Group Grain sales are recorded at the time of shipment. Revenues from custom drying services are recorded upon provision of services and on completion of quality testing. All other SunRich Food Group revenue is recognized upon the sale and shipment of a product or the providing of a service to a customer. iii) Steam Explosion Technology 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. Revenue from consulting and contract research is recognized when the service is completed. Licence fees related to sales of the Company's technologies are recorded as revenue when earned and collection is reasonably assured. Foreign currency translation The SunRich Food Group is considered to be a self-sustaining foreign operation. The SunRich Food Group's assets and liabilities are translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Resulting unrealized gains or losses are accumulated and reported as currency translation adjustment in shareholders' equity. Other revenues and expenses arising from foreign currency transactions are translated into Canadian dollars using the exchange rate in effect at the transaction date. Monetary assets and liabilities are translated using the rate in effect at the balance sheet date. Related exchange gains and losses are included in the determination of earnings. Customer deposits Customer deposits principally include prepayments by the SunRich Food Group's customers for merchandise inventory to be purchased during the spring planting season. 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 recoverable for the period plus or minus the change in future income tax assets and liabilities during the period. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 12 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- Derivative instruments The SunRich 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 counterparty 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 and options transactions are marked to market. Gains and losses on futures and options transactions related to grain inventories are included in cost of goods sold. Use of estimates The preparation of these 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 financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 3. Acquisition of a business First Light Foods On February 1, 2001, the Company acquired 100% of the common shares of Jenkins and Gournoe Inc., which operates under the name of First Light Foods. Consideration consisted of the issuance of 833,333 common shares, US $300,000 in cash, a US $700,000 note payable that is repayable quarterly over 2 years by payments of US $87,500, plus interest at US Prime, 35,000 warrants exercisable at US $1.70 for five years to February, 2006 and acquisition costs of approximately US $60,000. In addition, contingent consideration may be payable on this acquisition; (a) if certain predetermined profit targets are achieved by the acquired business up to an additional 140,000 warrants may be issued in 2002 through to 2005, and (b) a percentage of gross profits in excess of US $1,100,000 per annum from 2001- 2005 will be paid to the vendors of First Light Foods. First Light Foods owns several trademarked brands that are marketed as the private label brands of a major California food chain. The acquisition of First Light Foods complements the SunRich Food Group's strategy of becoming a vertically integrated group - from seed to merchandisable products of soymilk. The acquisition of First Light Foods has been accounted for using the purchase method, and accordingly, the consolidated financial statements include the results of operations of the acquired business from the date of the acquisition. The purchase price has been allocated to the assets acquired and the liabilities assumed based on management's best estimate of fair values. Given the complexity of the acquired operations, as well as the short time that has elapsed since acquisition, the cost and the allocation thereof, of the acquisition is subject to change based on the final resolution of those estimates. However, management believes that the final resolution of the estimates will not have a material impact on the financial position or results of operations of the Company. The fair value of the net assets acquired consists primarily of trademarks of $4,000,000 and future income tax liabilities of $1,000,000. The trademarks will be amortized over twenty years. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 13 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- 4. Inventories <TABLE> <CAPTION> September 30, December 31, 2001 2000 -------------- -------------- $ $ <S> <C> <C> Raw materials 7,051,000 4,991,000 Finished goods and merchandise 7,633,000 7,834,000 Grain 540,000 2,465,000 ------------------------------- 15,224,000 15,290,000 =============================== </TABLE> Grain inventories consist of the following: <TABLE> <CAPTION> September 30, December 31, 2001 2000 -------------- -------------- $ $ <S> <C> <C> Company owned grain 262,000 2,208,000 Unrealized gain on Contracts with producers 181,000 156,000 Futures contracts 97,000 101,000 ------------------------------- 540,000 2,465,000 =============================== </TABLE> 5. Long-term debt and banking facilities a) The SunRich Food Group and certain of its subsidiary companies have co-guaranteed a bank loan payable by the Group's wholly owned subsidiary Nordic of $4,938,000 (December 31, 2000 - $5,286,000). The loan contains restrictive financial covenants for the SunRich Food Group and certain subsidiaries. As at December 31, 2000 and March 31, 2001, Nordic was not in compliance with certain of the financial covenants. On April 12, 2001, the Company entered into an agreement with the lender whereby the lender agreed to forebear taking action (if any), until April 15, 2002, with respect to the various covenant breaches, which existed at December 31, 2000 and March 31, 2001. As part of the agreement, the Company renegotiated the financial covenants of the bank loan payable and agreed to maintain US $264,000 on deposit with the lender. This deposit has been included in restricted cash on the balance sheet of the Company at September 30, 2001. As at September 30, 2001, the Company was not in compliance with certain covenants of the above referenced forbearance agreement. As a result, the Company has entered into an agreement with the lender whereby the lender will waive the covenant breach as at September 30, 2001 in return for a payment of US $1,000,000 to be applied against the principal balance of the loan. Regular payments will continue as per the normal terms of the loan agreement, with the remaining balance due and payable on October 1, 2002. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 14 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- In connection with the agreement to pay US $1,000,000 on the above referenced loan, the Company has entered into an agreement with a director/shareholder to issue a note payable for US $1,000,000 bearing interest at 6%, interest payable monthly, with the balance due January 31, 2003. b) During the first quarter of 2001, the SunRich Food Group issued a US $700,000 note payable in connection with the acquisition of First Light Foods, which is repayable over 2 years by payments of US $87,500 per quarter plus interest at US Prime (note 3). c) During the second quarter of 2001, the Company repaid a US dollar term loan of US $1,000,000. Substantially all of the Company's assets are pledged as collateral under various lending agreements, with the exception of the real property at Stake's corporate offices in Norval, and the lease and physical assets in Louisiana. 6. Capital stock (a) The following is a summary of changes in share capital during the period. <TABLE> <CAPTION> Warrants Common shares --------------------------------------------------------------------------- Number $ Number $ Total $ --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance at December 31, 2000 500,000 30,000 28,186,972 22,680,000 22,710,000 Shares and warrants to acquire First Light Foods (c) 35,000 13,000 833,333 1,268,000 1,281,000 Options exercised (d) -- -- 91,400 146,000 146,000 April 2001 private placement (f) 705,749 808,000 1,411,498 1,843,000 2,651,000 May 2001 private placement (g) 1,200,000 1,214,000 2,400,000 5,515,000 6,729,000 September 2001 private placement (h) 2,250,000 2,628,000 3,000,000 6,213,000 8,841,000 =========================================================================== Balance at September 30, 2001 4,690,749 4,693,000 35,923,203 37,665,000 42,358,000 =========================================================================== </TABLE> (b) During 1997, the shareholders of the Company agreed to reduce the capital account of the Company's common shares by $25,026,000 through a reduction of the deficit. (c) In February 2001, the Company issued 833,333 common shares as a component of the purchase price to acquire First Light Foods (note 3) as partial consideration of the acquired company; the Company also issued 35,000 warrants which are exercisable at US $1.70 for five years to February 2006. An additional 140,000 warrants may be issued prior to 2006 if First Light Foods achieves certain gross profits targets. (d) In the first nine months of 2001, employees and directors exercised 91,400 options and 91,400 common shares were issued for net proceeds of $146,000. During the period ended September 30, 2001 127,500 options to employees and directors were granted with exercise prices of US $1.53 to US $1.90 and expire between May 5 and September 19, 2006. (e) On March 5, 2001, the Board approved a resolution extending the exercise period of 304,375 options from March 10, 2001 to December 31, 2003. (f) On April 18, 2001, the Company entered into a transaction for the private placement of 1,411,498 units. Each unit was comprised of one common share plus a warrant to purchase one-half of a common share. As a result, the company issued 1,411,498 common shares and 705,749 whole warrants which are exercisable at US $1.75 to purchase 705,749 common shares until April 30, 2004. The net proceeds of this transaction were US $1,728,000 (CDN. $2,651,000) after associated commission, legal and other related costs. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 15 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- (g) The Company entered into an agreement on May 18, 2001 for the private placement, outside of the United States of 2,400,000 units at US $2.00 per unit. Each unit consisted of one common share plus a warrant to purchase one-half of a common share. As a result, the Company issued 2,400,000 common shares and 1,200,000 whole warrants which are exercisable at US $2.40 to purchase 1,200,000 common shares until March 31, 2004. The Company's agent on this transaction was paid a cash commission and was granted a compensation warrant, exercisable until June 8, 2003, to purchase 144,000 option units at US $2.00 per unit. Each option unit is comprised of one common share plus a warrant to purchase one-half a common share. As a result, the Company may issue 144,000 common shares and 72,000 whole warrants which are exercisable at US $2.40 to purchase 72,000 common shares until March 31, 2004. One quarter of the gross proceeds of this private placement, which amounted to US $1,200,000, was held in escrow at June 30, 2001 and under terms of this agreement the cash was released from escrow during the third quarter. The net proceeds of this transaction were approximately US $4,375,000 (CDN. $6,279,000) after associated commission, legal and other related costs. (h) The Company entered into an agreement, on September 28, 2001 for the private placement, of 3,000,000 units at US $2.00 per unit. Each unit consisted of one common share plus a warrant to purchase three quarters of a common share. As a result, the Company issued 3,000,000 common shares and 2,2500,000 whole warrants which are exercisable at US $2.40 to purchase 2,250,000 common shares until September 30, 2004. The Company's agent on this transaction was paid a cash commission and was granted a compensation warrant, exercisable until September 28, 2003 to purchase 150,000 option units at US $2.00 per unit. Each option unit is comprised of one common share plus a warrant to purchase three-quarters of a common share. As a result, the Company may issue 150,000 common shares and 112,500 whole warrants which are exercisable at US $2.40 to purchase 112,500 common shares until September 30, 2004. The net proceeds of this transaction were approximately US $5,650,000 (CDN. $8,841,000) after associated commission, legal and other related costs. (i) As at September 30, 2001 there were options vested to Employees and Directors to acquire 1,476,125 common shares at exercise prices of US $0.75 to US $1.90. In addition, at September 30, 2001 options to acquire an additional 457,200 common shares at US $1.063 to US $1.90 had been granted but had not yet vested. Subsequent to September 30, 2001, 904,625 options were exercised and 904,625 common shares were issued for gross proceeds of US $962,000. Also subsequent to September 30, 2001, 894,125 options were granted to employees and directors with an exercise price of US $1.86 with 487,500 expiring on December 11, 2003; 282,625 expiring on December 31, 2003 and 124,000 expiring on December 31, 2004. 7. Segmented information The Company operates in three industry segments: (a) Steam Explosion Technology Group: which designs, engineers and sells customized steam explosion technology systems; (b) Environmental Industrial Group, which sells abrasives and industrial materials and recycles in-organic materials and (c) the SunRich Food Group, which manufactures, markets, distributes and packages grains and other food products with a focus on soy products. The Company's assets, operations and employees are located in Canada and the United States. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 16 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Industry segments September 30, 2001 ----------------------------------------------------------------------- Steam Explosion Technology Environmental Group and Industrial SunRich Corporate Group Food Group Consolidated $ $ $ $ ----------------------------------------------------------------------- <S> <C> <C> <C> <C> External sales by market Canada 27,000 17,074,000 213,000 17,314,000 US 454,000 5,496,000 76,758,000 82,708,000 Asia -- -- 4,968,000 4,968,000 Other -- 152,000 -- 152,000 ----------------------------------------------------------------------- Total sales to external customers 481,000 22,722,000 81,939,000 105,142,000 ----------------------------------------------------------------------- Interest expense 50,000 355,000 1,835,000 2,240,000 ----------------------------------------------------------------------- Income tax provision (recovery) (108,000) 360,000 433,000 685,000 ----------------------------------------------------------------------- Segment net income (loss) (746,000) 923,000 942,000 1,119,000 ----------------------------------------------------------------------- Identifiable assets 16,987,000 19,785,000 78,355,000 115,127,000 ----------------------------------------------------------------------- Amortization 117,000 728,000 3,444,000 4,289,000 ----------------------------------------------------------------------- Expenditures on property, plant and equipment 14,000 749,000 3,197,000 3,960,000 ----------------------------------------------------------------------- Equity accounted investment 394,000 -- -- 394,000 ----------------------------------------------------------------------- <CAPTION> September 30, 2000 ----------------------------------------------------------------------- Steam Explosion Technology Group and Environmental SunRich Corporate Industrial Group Food Group Consolidated $ $ $ $ ----------------------------------------------------------------------- <S> <C> <C> <C> <C> External sales by market Canada 14,000 19,354,000 267,000 19,635,000 US 766,000 3,831,000 44,580,000 49,177,000 Asia -- -- 1,498,000 1,498,000 Other -- 91,000 47,000 138,000 ----------------------------------------------------------------------- Total sales to external customers 780,000 23,276,000 46,392,000 70,448,000 ----------------------------------------------------------------------- Interest expense -- 290,000 177,000 467,000 ----------------------------------------------------------------------- Income tax provision (recovery) (753,000) -- 570,000 (183,000) ----------------------------------------------------------------------- Segment net income (loss) (191,000) 2,521,000 941,000 3,271,000 ----------------------------------------------------------------------- Identifiable assets 3,783,000 20,955,000 66,088,000 90,826,000 ----------------------------------------------------------------------- Amortization 99,000 574,000 1,112,000 1,785,000 ----------------------------------------------------------------------- Expenditures on property, plant and equipment 48,000 1,327,000 2,169,000 3,544,000 ----------------------------------------------------------------------- Equity accounted investment 391,000 -- -- 391,000 ----------------------------------------------------------------------- </TABLE> - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 17 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Geographic segments September 30, 2001 December 31, 2000 --------------------------------------------------------------------------------------------- Canada US Total Canada US Total $ $ $ $ $ $ <S> <C> <C> <C> <C> <C> <C> Property, plant and equipment 10,028,000 35,614,000 45,642,000 9,944,000 33,214,000 43,158,000 ---------------------------------------------- ---------------------------------------------- Goodwill 2,635,000 8,382,000 11,017,000 2,774,000 8,457,000 11,231,000 ---------------------------------------------- ---------------------------------------------- Total assets 36,272,000 78,855,000 115,127,000 21,526,000 71,340,000 92,866,000 ---------------------------------------------- ---------------------------------------------- </TABLE> 8. United States 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 (US GAAP) during the periods presented except with respect to the following: Under US GAAP, the gain on dilution resulting from the dilution of the Company's ownership of the common share equity of Easton Minerals Limited (Easton) would have been excluded from income and included as a separate component of shareholders' equity as Easton is a development stage company. Also, under US GAAP, certain development, start-up and pre-operating costs deferred in these financial statements would be expensed. Amortization related to the development, start-up and pre-operating costs would not have been expensed. During 2000, the Company repriced certain options. As a result compensation expense would be recognized under US GAAP. Accordingly, the following would have been reported under US GAAP: <TABLE> <CAPTION> Nine months ended Year ended ------------------------------------------------------ September September 30, December 31, 30, 2001 2000 2000 ------------------------------------------------------ <S> <C> <C> <C> Net earnings for the period - as reported $ 1,119,000 $ 3,271,000 $ 3,374,000 Dilution gain -- (140,000) (140,000) Development, start-up and pre-operating costs expensed 253,000 138,000 157,000 Pre-operating costs capitalized -- (222,000) (768,000) Option compensation expense (485,000) -- (52,000) Tax effect of above items 93,000 -- -- ------------------------------------------------------ Net earnings for the period - US GAAP $ 980,000 $ 3,047,000 $ 2,571,000 ------------------------------------------------------ Net earnings per share - US GAAP $ 0.03 $ 0.14 $ 0.11 ------------------------------------------------------ Weighted average number of common shares outstanding 30,569,000 21,268,000 22,976,000 ------------------------------------------------------ Shareholders' equity - as reported $ 54,106,000 $ 35,244,000 $ 33,277,000 Cumulative development, start-up and pre-operating costs expensed (net of related amortization and taxes) (698,000) (323,000) (850,000) Cumulative stock compensation expense (net of taxes) (343,000) -- (52,000) ------------------------------------------------------ Shareholders' equity - US GAAP $ 53,065,000 $ 34,921,000 $ 32,375,000 ------------------------------------------------------ </TABLE> - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 18 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- Other U.S. GAAP disclosures <TABLE> <CAPTION> September 30, December 31, 2001 2000 --------------- --------------- $ $ <S> <C> <C> Allowance for doubtful accounts 1,215,000 939,000 -------------------------------- Due from Related Parties 571,000 451,000 -------------------------------- Inventory provisions 15,000 61,000 -------------------------------- </TABLE> Comprehensive income US 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 distribution to owners. The comprehensive income statement reconciles the reported net income to the comprehensive income. The following is a comprehensive income statement (prepared in accordance with US GAAP), which, under US GAAP, would have the same prominence as other financial statements. <TABLE> <CAPTION> Nine months ended Year ended ----------------- ---------- September September 30, December 30, 2001 2000 31, 2000 ------------------------------------------ <S> <C> <C> <C> Net earnings for the period - US GAAP $ 980,000 $3,047,000 $2,571,000 Currency translation adjustment (net of taxes of nil) 62,000 323,000 258,000 ------------------------------------------ Comprehensive income $1,042,000 $3,370,000 $2,829,000 ------------------------------------------ </TABLE> 9. Subsequent Event Virginia Materials Effective October 31, 2001, the Company acquired certain assets of Virginia Material and Supply, Inc. (Virginia Materials) as well as 51% of International Materials and Supplies, Inc. (International Materials) for cash consideration and acquisition costs of approximately US $1,835,000. The new business was incorporated, as Virginia Material, Inc. Virginia Materials is a supplier of abrasives to the shipbuilding and repair industry, in particular to the Newport News Shipyard and also to the bridge repair and roofing granular markets. It has a production facility located in Norfolk, Virginia and a second plant is scheduled to open shortly in Baltimore, Maryland. Virginia Materials also recycles spent abrasives, which are used in the production of Portland cement and converts aluminum smelting waste into a roofing and abrasive product. International Materials produces industrial garnets as a by-product from a mining operation and processes these garnets for sale to the water filtration, water jet cutting and abrasives markets. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 19 September 30, 2001 10-Q
Stake Technology Ltd. Condensed Notes to Consolidated Financial Statements For the nine months ended September 30, 2001 Unaudited (Expressed in Canadian Dollars) - -------------------------------------------------------------------------------- The acquisition of these businesses complements the Company's environmental industrial group as it broadens both the current abrasive and filtration product lines and expands on the Company's customer base. The Eastern US seaboard and New York locations of these acquired assets link the Company's existing plant facilities in Louisiana and Waterdown/Hamilton for optimum supply and production. As the acquisition of these two companies was completed after September 30, 2001, the assets acquired will be included in the Company's balance sheet starting October 31, 2001 and the operating results for the months of November and December 2001 will be included in the Company's final 2001 results. The fair value of the net tangible assets acquired is equivalent to the purchase price and accordingly no goodwill arises on this acquisition. 10. Comparative balances Certain comparative account balances have been reclassified to achieve comparability to current period balances - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 20 September 30, 2001 10-Q
PART I - FINANCIAL INFORMATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Recent corporate developments Between April and September 2001, the Company completed three private placements, the most recent which was completed on September 28, 2001. Total shares issued under these private placements were 6,811,498 common shares. In addition, up to 4,634,249 warrants exercisable until September 30, 2004 into common shares at US $1.75 to US $2.40 were issued related to these transactions. The net proceeds of these transactions were $18,221,000 after associated commission, legal and other related costs. From the proceeds of these placements, the Company has repaid a US $1,000,000 corporate loan that was drawn in 2000 to provide working capital to Northern Food and Dairy, Inc. The Company also transferred US $1,995,000 up to September 30, 2001 and a further US $560,000 subsequent to September 30, 2001 to the SunRich Food Group, Inc. to fund the Wyoming soy plant expansion; to replace funds used in the start up of Nordic Aseptic, Inc. (Nordic), the Company's aseptic packaging company and improve the Food Group's working capital. Also subsequent to September 30, 2001, the Company repaid lines of credit totaling $1,755,000, and paid the purchase price on closing of $2,757,000 for the assets of Virginia Materials and Supplies, Inc. and 51% of International Minerals and Supplies, Inc. The remaining proceeds will be used for working capital as needed and for future business acquisitions. New directors/management changes During the quarter, Mr. Camillo Lisio, the former President of Saputo, Inc. and Mr. Stephen Bronfman of the Claridge Group joined the Board of Directors of Stake Technology Ltd. Also during the quarter, in order to address the dramatic increase in finance and administrative requirements within the organization, Ms. Leslie Markow relinquished the position of Chief Financial Officer and assumed the position of Vice President of Regulatory Reporting/Corporate Compliance and Chief Administrative Officer. Mr. Steven Bromley assumed the role of Vice President, Finance and Chief Financial Officer of the Company. Prior to this appointment, Mr. Bromley held the position of Chief Financial Officer of the Company's wholly owned subsidiary, SunRich Food Group, Inc. Toronto Stock Exchange Listing On November 6, 2001, the Company's common shares commenced trading on the Toronto Stock Exchange (TSE) under the symbol "SOY". The Company's common shares also continue to trade on the Nasdaq Smallcap market tier of the Nasdaq Stock Market under the symbol "STKL". The Company added the TSE listing to better serve its Canadian based shareholders and to better represent the Company to the Canadian business market. Developments at SunRich Food Group, Inc. Acquisition in 2001 - Jenkins & Gournoe, Inc. In February, 2001, the Company's wholly owned subsidiary, SunRich Food Group, Inc. acquired 100% of the common shares of Jenkins & Gournoe, Inc. (First Light Foods), a private Illinois company that owns certain soy trademarks including Soy-Um and Rice-Um that are licenced under an agreement to a major California based food retailer who purchases finished product from First Light Foods. The purchase price was approximately $3,000,000 plus certain contingent consideration. The fair value of the assets acquired consists primarily of trademarks of $4,000,000 less future tax liabilities of $1,000,000. The acquisition of First Light Foods complements the SunRich Food Group's strategy of becoming a vertically integrated group - from seed to merchandisable products of soymilk. Sales for this profitable company are - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 21 September 30, 2001 10-Q
running at approximately US $11,000,000 per annum. First Light Foods operations are included for 242 days in 2001 and its net assets are included in the September 30, 2001 balance sheet. SunRich, Inc. has realized a record nine months on both a revenue and earnings basis as a result of improved product mix and related margins, the acquisition of First light Foods and reduced marketing costs. Northern Food and Dairy, Inc. revenues declined in the second quarter of 2001, but have improved significantly in the third quarter and the outlook remains quite positive going forward. Northern commenced production at its' Wyoming processing facility in September 2001. This plant allows Northern to increase total production and better serve its customers needs for Western US distribution. The Company has also announced its intention to double the capacity of this plant in early 2002. Nordic has incurred significant start-up losses in the first nine months of 2001 as a result of ongoing production problems. As a result of significant volume increases and improved manufacturing capabilities. Nordic is expected to be profitable by the end of the fourth quarter of 2001. The Company also announced that it intends to build a third plant in Eastern North America early in 2002 in order to meet the demand for production in this region. Developments at the Environmental Industrial Group Acquisition of Virginia Materials & Supplies, Inc. and 51% of International Materials and Supplies, Inc. On October 31, 2001, the Company completed the acquisition of the business and certain assets of privately held Virginia Materials & Supplies, Inc. ("Virginia Materials") of Norfolk, Virginia. In addition, the Company purchased a 51% interest in International Materials & Supplies, Inc. ("International Materials") located south of Plattsburgh, New York. The purchase price including associated legal, accounting and acquisition costs was approximately US $1,835,000. Both Virginia Materials and International Materials are profitable companies with combined sales of approximately US $8.0 million. The Company has retained the services of the current management of both acquired companies. Virginia Materials is a supplier of abrasives to the shipbuilding and repair industry, in particular to the Newport News Shipyard and also to the bridge repair and roofing granular markets. It has a production facility located in Norfolk, Virginia and a second plant is scheduled to open shortly in Baltimore, Maryland. Virginia Materials also recycles spent abrasives, which are used in the production of Portland cement and converts aluminum smelting waste into a roofing and abrasive product. International Materials produces industrial garnets as a by-product from a mining operation and processes these garnets for sale to the water filtration, water jet cutting and abrasives markets. The acquisition of these businesses complements the Company's environmental industrial group as it broadens both the current abrasive and filtration product lines and expands the Company's customer base. The Eastern US seaboard and New York locations of these acquired assets link the Company's existing plant facilities in Louisiana and Waterdown/Hamilton for optimum supply and production. As the acquisition of these two companies was completed after September 30, 2001, the assets acquired will be included in the Company's balance sheet starting October 31, 2001 and the operating results for the months of November and December 2001 will be included in the Company's final 2001 results. The Environmental Industrial Group's aggregates blasting business has secured significant sales contracts for supply of the aggregate materials for most of the major bridges in the City of New York, the Holland Tunnel and 45 bridges in Michigan, however a number of the New York contracts have been delayed due to the September 11th tragedy. Sales of garnets from China continue to expand with the appointment of three new distributors. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 22 September 30, 2001 10-Q
Significant new markets are being penetrated in 2001 in the water filtration and golf sand trap markets as a result of having a raw material source acquired in the Temisca acquisition. The worldwide shortage of zircon has resulted in significant price increases, which has benefited current inventory balances and margins. During the period, the Environmental Industrial Group successfully achieved ISO9002 registration for its Hamilton plant operations. During the period, the Temisca sales functions were integrated with the BEI/PECAL national sales force resulting in a growth in sales. The financial systems were fully integrated in the second quarter of 2001. The Environmental Industrial Group has been profitable each month during the three quarters of 2001, however earnings were affected by two bad debts of foreign controlled customers. The foundry and steel business have slowed in the second and third quarter with a commensurate slowdown in this Group's sales, however business remains strong and costs are being carefully controlled. Developments in the Steam Explosion Technology Group During 2001, activities in the steam explosion group have focused on supporting Pacitec Inc. (Pacitec) to market the Company's proprietary pulping systems in China. Pacitec acquired certain exclusive marketing rights for China under an agreement signed in August 1999. In conjunction with Pacitec, the Company is pursuing three separate opportunities for system sales. In the third quarter, straw from a client in China was processed at the Company's Norval pilot plant. The resulting samples were forwarded to the client for evaluation. Securing the first system sale contract to China remains subject to several factors including client financing and approval of various government authorities in China. The Operations for the nine months to September 30, 2001 compared with the Operations for the nine months of 2000 Results of operations Revenues in the first nine months of 2001 increased by 49% to $105,142,000 from $70,448,000 in 2000 and the Company's net earnings for the first nine months of 2001 were $1,119,000 or $0.04 per common share compared to $3,271,000 or $0.15 per share for the nine months ended September 30, 2000. Revenues in the third quarter ended September 30, 2001 increased by 46% to $36,481,000 from $25,007,000 in 2000 and the Company's net earnings for the third quarter of 2001 were $248,000 or $0.01 per common share compared to $1,753,000 or $0.08 per share in the third quarter of 2000. Revenues have increased due to the inclusion of the revenues from companies acquired over the past year that were not owned by the Company in the first nine months of 2000; specifically Northern, Nordic, First Light Foods and Temisca. The decrease in earnings in the nine months of 2001 compared to 2000 is due to pre tax losses on Nordic's operations of $2,260,000. The Company expects that Nordic will become profitable during the fourth quarter of 2001. Revenues in the first nine months of 2001 from SunRich Food Group operations were $81,939,000 (2000 - $46,392,000). Environmental Industrial Group's 2001 sales to date were $22,722,000 (2000 - $23,276,000) and Steam Explosion and Corporate sales in 2001 to date were $481,000 (2000 - $780,000). - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 23 September 30, 2001 10-Q
Cost of sales increased to $90,353,000 for the first nine months of 2001 compared to $59,647,000 for the 2000. Cost of sales in the nine months of 2001 attributable to the Environmental Industrial Group segment were $18,890,000 (2000 - $19,182,000), and the SunRich Food Group, cost of sales were $71,370,000 (2000 - $40,393,000). Steam Explosion division costs of sales were $93,000 (2000 - $72,000), which primarily relates to standard amortization charges. The Company's consolidated gross margin decreased to 14.1% for the nine months to September 30, 2001 compared to 15.3% in 2000 due principally to a negative gross margin of $1,195,000 resulting from Nordic's operating losses. Without these costs of Nordic, which were not in the comparative 2000 margin, the Company's 2001 margin would have increased to 15.2% from 14.1%, comparable to 2000 margins of 15.3%. Research and development costs, principally related to steam explosion division as well as applied research done in the SunRich Food Group was $372,000 in the nine months to September 30, 2001 (2000 - $362,000). Administration, market development and demonstration expenditures increased in the nine months to September 30, 2001 to $10,444,000 compared to $6,857,000 for the period ended September 30, 2000. The principal reason for the increase in these expenses results from the inclusion of the acquired companies: Northern on September 15, 2000, Nordic in August, 2000, Temisca in November, 2000 and First Light Foods in February, 2001 and as well as one additional month of PECAL's administrative expenses in 2001 compared to 2000; increased corporate costs related to the retention of an investor relations firm starting in the fall of 2000 and the increased costs of administering a larger company. In addition, commencing in June 2001, the Company began the study and subsequent development of a Canadian based organic and natural foods business. The Company expects to commence active operations early in fiscal 2002. At September 30, 2001, the Company has expensed $60,000 of study related costs, which are, included as corporate administrative expenses. The Company has also entered into the study and analysis of a European based soy business. At September 2001 the Company has expensed $177,000 of the third party consultant and related costs and these are included in the SunRich Food Group administrative costs. In the first nine months of 2001, SunRich Food Group's administration costs were $6,799,000 (2000 - $4,174,000); Environmental Industrial Group's operations accounted for $2,111,000 of the administration costs (2000 - $1,505,000) and steam explosion marketing and demonstration and corporate administration expenses were $1,534,000 (2000 - $1,178,000). Amortization of patents, trademarks, licences, pre-operating costs and goodwill increased to $988,000 in the first nine months of 2001, compared to $256,000 in the comparable period in 2000 due principally to the additional amortization of the goodwill from the acquisitions completed over the past year. In addition the Company deferred $768,000 of pre-operating costs at December 31, 2000 related to Nordic, which is comprised of the portion of the operating losses from April to December 31, 2000 that were related to the pre-operating phase of the plant. This amount will be written off equally over 36 months and $192,000 of these deferred costs was amortized in the first nine months of 2001. US readers should note that the $768,000 of pre-operating costs was expensed under US GAAP in 2000 and the $192,000 in amortization expensed under Canadian GAAP in the first nine months of 2001 would not be recorded under US GAAP. For the nine months ended September 30, 2001 operating earnings were $2,985,000 compared to $3,326,000 in the same period in 2000, even after absorbing $1,914,000 (2000 - $279,000) of operating losses resulting from Nordic's operations. Operating earnings for the nine months of 2001, without the Nordic losses, would have improved by 64% to $4,899,000 from the operating earnings reported. (2000 - $3,605,000). Interest on long-term debt and other interest increased to $2,240,000 in the nine months to September 30, 2001 from $467,000 in the same period of 2000, due principally to the acquisition of Northern and Nordic and the existing debt instruments into the SunRich Food Group in August and September 2000. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 24 September 30, 2001 10-Q
Interest and other income increased to $568,000 in the first nine months of 2001 from $79,000 in the same period in 2000 due to imputed interest earned on the note receivable and interest earned on cash received from the private placements. The foreign exchange gain of $535,000 (2000 - $68,000) principally arises from unrealized foreign exchange gains on corporate cash held in US $ related to the private placement funds received in the second and third quarters. The share of losses of equity accounted investees of $30,000 in the first nine months of 2001 (2000 - $36,000) and dilution gain of $nil (2000 - $140,000) is related to the Company's 32% equity investment in Easton Minerals Ltd. Income before taxes decreased to $1,804,000 in 2001 compared to $3,088,000 for the first nine months of 2000 principally due to the pre-tax loss of Nordic of $2,260,000. Without this loss from Nordic, the Company's pre-tax earnings would have improved to $4,064,000 due to the contribution of the acquired companies during the period. The Company's income before taxes for the third quarter decreased to $519,000 for the period of July 1- September 30, 2001 compared to $1,484,000 in the comparable period of 2000, largely due to Nordic's pre-tax loss before taxes. During the year the Company received a $135,000 tax refund related to a reassessment of an acquired company's 1998 income taxes. Effective January 2, 2001, the Company restructured the US operations which allows the US companies to file consolidated tax returns and therefore the SunRich Food Group, Inc. has recognized the benefits of the Nordic's operating losses incurred in the nine month period ended September 30, 2001. Net earnings of $1,119,000 were reported for the nine months of 2001 compared to $3,271,000 in the nine months of 2000, resulting in an earnings per share of $0.04 in 2001 on an average number of shares of 30,569,000 compared to an earnings per share of $0.15 in 2000 on an average number of shares of 21,268,000. The year to date loss of Nordic negatively impacted earnings by $1,356,000 or $0.04 per common share after tax. A large part of this decrease is also due to the Company's taxes on earnings in the nine months of 2001 being $685,000 or 38% compared to a recovery of $183,000 or (6%) in 2000, due to the 2000 tax provision including the recognition of the benefit of the previously unrecognized Canadian tax loss carry-forwards. As a result of the Nordic losses, net earnings of $248,000 result from the third quarter compared to $1,753,000 in 2000. In addition to the decreased operating earnings as a result of the Nordic losses, this decrease is also directly connected to the fact that $271,000 or 52% of tax was provided against Q-3 2001 income compared to a recovery of $269,000 or (18)% against 2000 income due to the 2000 tax provision including the recognition of the benefit of the previously unrecognized Canadian tax loss carry-forwards. Segmented Operations Information The SunRich Food Group The SunRich Food Group contributed 78% or $81,939,000 of the $105,142,000 in consolidated revenues in the first nine months. (2000 - $46,392,000 or 66% of consolidated sales). For the nine months ended September 30, 2001, SunRich, which now includes First Light Foods, sales were $52,556,000 (2000 - 45,345,000); Northern sales were $25,499,000 (2000 - $1,047,000), and Nordic's were $3,884,000 (2000 - nil). The SunRich Food Group's cost of sales in the first nine months of 2001 was $71,370,000 (2000 - $40,393,000). The SunRich Food Group's margin in the first nine months of 2001 was 13% (2000 - 13%). The addition of higher margin businesses acquired during the year is offset by Nordic's negative gross margin in the year of $1,195,000. (2000 - $nil). - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 25 September 30, 2001 10-Q
In the first nine months of 2001, the SunRich Food Group's administration costs were $6,799,000 (2000 - $4,174,000). The increase in administrative costs is due to additional administration costs of the newly acquired companies in the Group; Northern; Nordic and First Light Foods. Pre-tax earnings of the SunRich Food Group were $1,375,000 (2000 - $1,511,000). While the net earnings of the Group have increased due to the addition of Northern and First Light Foods in 2001 compared to 2000, the net earnings of the SunRich Food Group were significantly impacted by the pre-tax tax loss from the Nordic operations, which totaled $2,260,000 (2000 - $279,000) in the period. The Company expects Nordic to become profitable by the end of the fourth quarter. As a result of a corporate restructuring in the US companies, the benefit of tax losses of Nordic in the first nine months have been offset against the tax provisions of the profitable companies in the Sunrich Food Group; Northern, SunRich and First Light Foods. As a result, a tax provision of $433,000 (2000 - $570,000) was recorded on consolidated US earnings in the period. Environmental Industrial Group The Environmental Industrial Group contributed 22% or $22,722,000 of the nine months of 2001 consolidated revenues (2000 - $23,276,000). The decrease is due to a general slow down in the automotive and heavy industrial industries that this Group sells to due to general economic conditions as well as specific sale cancellations and delays associated with the tragedy of September 11, 2001. In addition, some of the decrease is related to the Group's decision to exit long-term low margin supply arrangements, offset by additional revenues contributed by Temisca in Q-3 of 2001 over 2000 as they were acquired in November of 2000. Cost of sales in the first nine months of 2001 for the Environmental Industrial Group was $18,890,000 (2000 - $19,182,000). The Environmental Industrial Group's margin decreased to 16.9% in the first nine months of 2001 (2000 - 17.6%). The decrease in margins in 2001 compared to 2000 is due to fewer higher margin products being sold in 2001 compared to 2000 due to supply difficulties, as slow downs in the steel and foundry industries due to general economic uncertainty and a slow down of shipments of abrasives to New York City for bridge work following the September 11, 2001 tragedy. The Environmental Industrial Group's operations accounted for $2,111,000 of consolidated administration costs (2000 - $1,505,000). The 40% increase in these costs is due to the addition of three salesmen, the addition of the Temisca administrative staff, the retention of certain administration staff from the PECAL acquisition to create a new customer service function for the Environmental Industrial Group and the costs of running a larger Group with more locations. The lower sales, lower margins and increased administration costs has resulted in pre-tax earnings from operations of the Environmental Industrial Group being $1,283,000 to September 30, 2001 compared to $2,521,000 in 2000. Steam Explosion Technology Group and Corporate Activities Revenue of $481,000 was derived from the Steam Explosion Technology Group and corporate activities to September 30, 2001 (2000 - $780,000) and is related mainly to license fees and private industry projects. The Group's cost of sales in the period was $93,000 (2000 - $72,000), which primarily relates to standard amortization charges. Steam Explosion Technology Group and corporate margins fluctuate significantly due to the nature of the revenues in this Group. Marketing, demonstration and corporate administration expenses in the first nine months of 2001 were $1,534,000 (2000 - $1,178,000). The increase in these costs was due to more aggressive investor relations' activities, the increased costs of insurance, salaries and other costs of operating a larger public company. The pre-tax loss from operations of $854,000 (2000 - ($944,000)) has decreased due to a large unrealized foreign exchange gain on US cash balances held at corporate office related to the US funds received from private placements earlier in the year. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 26 September 30, 2001 10-Q
Liquidity and capital resources at September 30, 2001 Cash and cash equivalents of $11,696,000 results from the cash balances of $13,489,000 at corporate office remaining from the private placement of common shares offset by amounts drawn on the Canadian line of credit of $2,494,000 with the ability of offset and cash of $701,000 in the Sunrich Food Group. From the proceeds of the three private placements, the Company has repaid a US $1,000,000 corporate loan that was drawn in 2000 to provide working capital to Northern Food and Dairy, Inc. The Company also transferred US $1,995,000 up to September 30, 2001 to the SunRich Food Group, Inc. to fund the Wyoming soy plant expansion; to replace funds used in the start up of Nordic, the Company's aseptic packaging company and improve its working capital. The remaining proceeds will be used for working capital as needed and for future business acquisitions. Restricted cash of $417,000 (December 31, 2000 - nil) is US $264,000 in cash that is held on deposit with Nordic's lender as part of security provided under terms of the lending agreement. Trade accounts receivable increased to $17,696,000 at September 30, 2001 from $13,111,000 at December 31, 2000 due the increase in sales in the third quarter of 2001 compared to the third quarter of 2000. Trade receivables at September 30, 2001 related to the Environmental Industrial Group's operations were $5,361,000 (December 31, 2000 - $4,836,000); SunRich Food Group's operations receivables were $12,127,000 at September 30, 2001 (December 31, 2000 - $8,250,000) and general corporate activities and Steam Explosion were $208,000 (December 31, 2000 - $25,000). The note receivable totalling $4,091,000 at September 30, 2001 (December 31, 2000 - $5,186,000) and the other long-term payable of $1,803,000 (December 31, 2000 - $1,651,000) are related to an agreement with a major European based company. In the three quarters of 2001, Northern has received payments of $1,653,000 on the note receivable. Inventories were comparable at $15,224,000 at September 30, 2001 (December 31, 2000 - $15,290,000). First Light Foods and the Steam Explosion business do not carry an inventory balance. Future income tax assets of $961,000 at September 30, 2001 ($954,000 - December 31, 2000) consist principally of the benefit of Canadian tax losses and scientific research expenditures recorded by the Canadian entity. In the first nine months of 2001, $3,960,000 was spent on capital additions throughout the Company for scheduled and budgeted machinery and equipment improvements and the construction of the Star Valley facility in Afton, Wyoming, which started up in September 2001. The Company has agreed to a US $2,400,000 operating lease that relates to certain manufacturing and processing equipment that will be installed between now and March 2002 in the SunRich Food Group. Investments increased to $394,000 at September 30, 2001 from $382,000 at December 31, 2000 due primarily to the equity loss on Easton of $30,000 (2000 - $36,000) offset by cash advances of $42,000 (2000 - $6,000). The Company deferred $768,000 of pre-operating costs in 2000 related to Nordic, and as previously discussed, expensed $192,000 of these costs in the first nine months of 2001, resulting in a net balance of $576,000 at September 30, 2001. Goodwill decreased to $11,017,000 at September 30, 2001 from $11,231,000 at December 31, 2000 due to amortization of goodwill on the acquisitions of Northern, SunRich, PECAL, Nordic and BEI offset by currency fluctuations. Patents, trademarks, licences and other assets has increased to $4,431,000 at September 30, 2001 from $432,000 at December 31, 2000 due to the addition of trademarks acquired in the First Light Foods acquisition of approximately $4,000,000 (which is being amortized over 20 years on a straight line basis), offset by the amortization of existing patents and other assets. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 27 September 30, 2001 10-Q
Accounts payable and accrued liabilities are comparable at $18,508,000 at September 30, 2001 compared to $19,359,000 at December 31, 2000. Customer deposits decreased to $103,000 at September 30, 2001 versus $1,262,000 at December 31, 2000. This balance fluctuates on a seasonal basis and relates to cash deposits made by SunRich customers in late 2000 for year 2001 purchases. Revenue is booked on these transactions when the goods are shipped. Lines of credit The Company has total available lines of credit of $10,614,000, comprised of $4,300,000 in two Canadian facilities and two US lines comprising US $4,000,000 in facilities. The increase in the use of lines of credit from $3,405,000 at December 31, 2000 to $7,274,000 at September 30, 2001 is principally due to the nature of the SunRich business. SunRich has increased their line of credit to US $2,896,000 at September 30, 2001 compared to US $900,000 at December 31, 2000. This increase in bank indebtedness is a seasonal occurrence and relates primarily to deposits normally received from customers late in the calendar year for future agronomy inputs, which decrease the line of credit at year-end from its normal level. Also, during 2001, SunRich has funded capital expenditures related to improvements to their conditioning plant of approximately US $850,000 from the line of credit. The Company is currently perusing options to consolidate its US banking. As part of this strategy the SunRich Food Group is currently considering a line of credit of up to US $5,000,000 to replace US $3,000,000 of the US $4,000,000 in line of credit. The US $5,000,000 line of credit for the entire SunRich Food Group is subject to completion of the lender's due diligence on the security being provided. The Company expects new arrangements to be completed during the fourth quarter. In addition to the above cash draws against the lines of credit, at September 30, 2001 - $962,000 (December 31, 2000 - $900,000) was drawn against the $4,000,000 Canadian facility for a letter of credit to the Ontario Ministry of the Environment and Energy for the Certificate of Approval, to three key suppliers and for security on the Louisiana lease. There are no amounts drawn against the US lines for letters of credit as at September 30, 2001. Long term-debt Long-term debt, current and long-term portions combined, total $29,423,000 at September 30, 2001 compared to $31,555,000 at December 31, 2000. The decrease in the long-term debt is due to scheduled repayments and the repayment of the corporate loan of $1,500,000, offset by a new loan issued as part of the consideration paid for First Light Foods. The new loan is for US $700,000 and is to be repaid quarterly in principal payments of US $87,500 plus interest at US Prime. Substantially all of the Company's assets are pledged as collateral under various lending agreements, with the exception of the real property at Stake's corporate offices in Norval and physical assets in Louisiana. The SunRich Food Group and certain of its subsidiary companies have co-guaranteed a bank loan payable by the Group's wholly owned subsidiary, Nordic of $4,938,000 (December 31, 2000 - $5,286,000). The loan contains restrictive financial covenants for the SunRich Food Group and certain subsidiaries. As at December 31, 2000 and March 31, 2001, Nordic was not in compliance with certain of the financial covenants. On April 12, 2001, the Company entered into an agreement with the lender whereby the lender agreed to forebear taking action (if any), until April 15, 2002, with respect to the various covenant breaches, which existed at December 31, 2000 and March 31, 2001. As part of the agreement, the Company renegotiated the financial covenants of the bank loan payable and agreed to maintain US $264,000 on deposit with the lender. This deposit has been included in restricted cash on the balance sheet of the Company at September 30, 2001. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 28 September 30, 2001 10-Q
As at September 30, 2001, the Company was not in compliance with certain covenants of the above referenced forbearance agreement. As a result, the Company has entered into an agreement with the lender whereby the lender will waive the covenant breach as at September 30, 2001 in return for a payment of US $1,000,000 to be applied against the principal balance of the loan. Regular payments will continue as per the normal terms of the loan agreement, with the remaining balance due and payable on October 1, 2002. In connection with agreement to pay US $1,000,000 on the above referenced loan, the Company has entered into an agreement with a director/shareholder to issue a note payable for US $1,000,000 bearing interest at 6%, interest payable monthly, with the balance due January 31, 2003. The Company considers its relationship with its principal Canadian bankers and the various SunRich Food Group bankers in the US to be satisfactory. The Company believes that the cash to be generated from operations in 2001, its available lines of credit and its ability to secure additional working capital financing through an increased US line of credit in hand with current cash resulting from the private placement of common shares is sufficient for the Company's operations during 2001. Other long-term liabilities The long-term future tax liability of $3,224,000 (December 31, 2000 - $1,508,000) has increased principally due to the recording of a future tax liability related to the trademarks acquired in the First Light Food acquisition. The short-term portion of the preference shares in subsidiary companies decreased to $248,000 at September 30, 2001 compared to $387,000 at December 31, 2000 due to $168,000 in preference shares being redeemed or purchased in the year to date. The remaining balance is due when Temisca achieves certain profit and balance sheet stability tests which management anticipates may be achieved during fiscal 2001 as well as the scheduled yearly payments for the preference shares related to the purchase of land in the BEI acquisition. Cash flow Cash flow provided by operations before working capital changes for the nine months ended September 30, 2001 increased by $1,145,000 to $5,502,000 (2000 - $4,357,000). This was principally due to an increase in amortization up to $4,289,000 in the period (2000 - $1,785,000), due in most part to the larger capital base of the Company as a result of the acquisitions over the past year, offsetting the lower earnings of $1,119,000 for the nine months ended September 30, 2001 (2000 - $3,271,000). Cash flow used by operations after working capital changes was lower by $2,199,000 resulting in cash used of $2,356,000 compared to cash used of $157,000 to September 30, 2000; due to the use of cash to improve working capital balances during the period. Cash flow provided by operations before working capital changes for the third quarter representing the period of July 1 - September 30, 2001 decreased by $38,000 to $1,984,000 (Q-3 2000 - $2,022,000) due principally to the increase in amortization to $1,617,000 for Q-3 2001 compared to $920,000 in Q-3 2000, due in most part to the larger capital base of the Company as a result of acquisitions over the past year. Cash used in investment activities decreased to $3,269,000 in the nine months to September 30, 2001, (2000 - $8,224,000). In 2001, investment activities were related to the acquisition of certain property plant and equipment of $3,960,000 (2000 - $3,544,000), the cash component of the First Light Foods acquisition and $417,000 of cash used as a deposit in respect of the Nordic term debt offset by funds received on the note receivable. In 2000, cash of $4,508,000 was used to acquire PECAL, which is now part of the Environmental Industrial Group, $3,544,000 was expended on certain property, plant and equipment and cash of $488,000 was used to acquire Nordic and Northern. Cash provided by investment activities increased to $799,000 for the third quarter of 2001 compared to a use of cash for investment activities of $3,650,000 in the third quarter of 2000. In the third quarter of 2001 the provision of cash is due to the release of cash in the quarter of $1,799,000 (Q-3 2000 - $nil) that was held in - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 29 September 30, 2001 10-Q
restricted cash at June 30, 2001 related to certain conditions of one of the private placements, offsetting capital expenditures of $1,516,000 in the third quarter of 2001 (Q-3 2000- $3,212,000). Cash provided by financing activities was $16,338,000 for the nine months of 2001 (2000 - $6,535,000). The increase is largely due to the issuance of common shares primarily related to the three private placements completed during the year which provided $18,367,000 (2000 - $479,000), offset by larger repayments of long-term debt in 2001 of $4,490,000 (2000 - $723,000) and lower borrowings under new debt and lines of credit which totalled $2,629,000 in 2001 compared to $5,490,000 for the nine months ended September 30, 2000. In 2000, the additional debt acquired was substantially connected to the acquisition of PECAL in the first quarter of 2000, which is now part of the Environmental Industrial Group. Cash provided by financing activities in the third quarter was $8,631,000 compared to $2,843,000 for the three months ended September 30, 2001. The increase is largely due to the issuance of common shares from private placements completed in the third quarter, which provided $8,841,000 (Q-3 2000-$113,000 from the exercise of options). Item 3 - Quantitative and Qualitative Disclosures about Market Risk Interest rate risk The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including both government and corporate obligations and money market funds. These securities are generally classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of tax. 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 impacted due to a rise in interest rates. In general, longer date debts are subject to greater interest rate risk than shorter dated securities. Floating rate securities generally are subject to less interest rate risk than fixed rate securities. As of September 30, 2001, the weighted average interest rate of the fixed rate debt was 9%. If interest rates were to instantaneously increase (decrease) by 100 basis points, the fair market value of the total fixed rate debt could decrease (increase) by approximately $235,000. Foreign currency risk International sales are made mostly from our foreign sales in the US and other countries by our US subsidiaries that also incur most of their expenses in the local currency. Accordingly, all US subsidiaries use the local currency as their functional currency. Our international business is subject to risks typical of international business, 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, our future results could be materially adversely impacted by changes in these or other factors. These intercompany accounts are typically denominated in US $, the functional currency of the US subsidiaries order to centralize foreign exchange risk with the parent Company in Canada. We are also exposed to foreign exchange rate fluctuations as the financial results of US subsidiaries are translated into Canadian $ on consolidation. As exchange rates vary, these results when translated may vary from expectations and adversely impact overall expected profitability. A 10% movement in the levels of foreign currency exchange rates against the Canadian dollar with all other variables held constant would result in a decrease in the fair value of the Company's financial instruments by $2,439,000. A 10% movement in favour of the Canadian dollar with all other variables held constant would result in an increase in the fair value of the Company's financial instructions by $2,439,000. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 30 September 30, 2001 10-Q
Commodity risk The SunRich 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 counterparty 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. As at September 30, 2001, the quantity of grain was not significant and therefore a change in the market price would not have a material impact. PART II - OTHER INFORMATION. Item 1. Legal proceedings The Company has filed a claim against a former director relating to certain actions taken when he was the President of its operating division, BEI. The former director has counter-claimed against the Company and its subsidiaries, the Chairman of the Company and Easton, the Company's 32% equity investment. The Company and its legal counsel believe in the first matter their claim has merit and that the counter-claim is without merit. In addition, this former director has claimed that the Montreal distribution facility that the Environmental Industrial Group leases from the former director needs significant repairs. This lawsuit will be eliminated if the Company purchases this facility. Final surveys are being completed and this transaction is expected to be completed by mid November 2001. The Company has determined that it is connected to the first matter, and the Company and its legal counsel believe the claim is without merit as to the full extent of the claim. It cannot be determined if there will be any recovery by the Company at this time or if there will be an additional loss to the Company, and no provision has been made in the Company's financial statements in respect of these matters. During 2001, the SunRich Food Group has commenced a suit against a supplier for failure to adhere to the terms of a contract. The Company and its legal counsel believe that this claim has merit. It cannot however be determined if there will be any recovery by the Company at this time and the Group is providing for the costs of pursuing this suit on a monthly basis. Other than this action, the Group has not been and is not currently a party to any material litigation. The Environmental Industrial Group has not been and is not currently a party to any material litigation. The Steam Explosion Technology Group has not been and is not currently a party to any material litigation. Item 2. Changes in securities and use of proceeds In February 2001, the Company issued to the shareholders of Jenkins and Gournoe, Inc., which operate under the name First Light Foods, 833,333 of its common shares as a component of the purchase price for 100% of the common stock of Jenkins and Gournoe. In addition, the Company also issued 35,000 warrants to acquire common shares of the Company, which are exercisable at US $1.70 per share for a five - year period ending February 2006. Up to an additional 140,000 warrants to acquire common shares of the Company may be issued prior to February 2006 if First Light Foods achieves certain pre determined gross profit targets. The exercise price for these warrants, if issued, will be the market price of the Company's common shares at the time the warrants are issued. The warrants will have a term of five years from the date of issue. See note 3 to the Financial Statements for further information. - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 31 September 30, 2001 10-Q
On April 18, 2001, the Company entered into a transaction for the private placement of 1,411,498 units. Each unit was comprised of one common share plus a warrant to purchase one-half of a common share. As a result, the Company issued 1,411,498 common shares and 705,749 whole warrants which are exercisable at US $1.75 to purchase 705,749 common shares until April 30, 2004. The net proceeds of this transaction were US $1,728,000 after associated commission, legal and other related costs. The Company entered into an agreement on May 18, 2001, which closed on June 8, 2001 for the private placement, outside of the United States of 2,400,000 units at US $2.00 per unit. Each unit consisted of one common share plus a warrant to purchase one-half of a common share. As a result, the Company issued 2,400,000 common shares and 1,200,000 whole warrants which are exercisable at US $2.40 to purchase 1,200,000 common shares until March 31, 2004. In addition to commission, the agent was granted a compensation warrant, exercisable until June 8, 2003, to purchase 144,000 option units at the US $2.00 per unit sale price. Each option unit is comprised of one common share plus a warrant to purchase one-half a common share. As a result, the Company issued 144,000 common shares and 72,000 whole warrants which are exercisable at US $2.40 to purchase 72,000 common shares until March 31, 2004. The net proceeds of this transaction were US $4,375,000 after associated commission, legal and other related costs. The Company entered into an agreement, which closed September 28, 2001 for the private placement, of 3,000,000 units at US $2.00 per unit. Each unit consisted of one common share plus a warrant to purchase three quarters of a common share. As a result, the Company issued 3,000,000 common shares and 2,250,000 whole warrants which are exercisable at US $2.40 to purchase 2,250,000 common shares until September 30, 2004. The Company's agent on this transaction was paid a cash commission and was granted a compensation warrant, exercisable until September 28, 2003 to purchase 150,000 option units at US $2.00 per unit. Each option unit is comprised of one common share plus a warrant to purchase one-half a common share. As a result, the Company may issue 150,000 common shares and 112,500 whole warrants which are exercisable at US $2.40 to purchase 72,000 common shares until September 30, 2004. The net proceeds of this transaction were approximately US $5,650,000 after associated commission, legal and other related costs. From the proceeds of these placements, the Company has repaid a US $1,000,000 corporate loan that was drawn in 2000 to provide working capital at to Northern Food and Dairy, Inc. The Company also transferred US $1,995,000 up to September 30, 2000 and a further US $560,000 subsequent to September 30, 2001 to the SunRich Food Group, Inc. to fund the Wyoming soy plant expansion; to replace funds used in the start up of Nordic, the Company's aseptic packaging company and improve the Group's working capital. Also subsequent to September 30, 2001, the Company repaid lines of credit totalling $1,755,000, and paid the purchase price on closing of $2,757,000 for the assets of Virginia Materials and Supplies, Inc. and 51% of Industrial Material and Supplies, Inc. The remaining proceeds will be used for working capital as needed and for future business acquisitions As of the November 1, 2001 Stake has 36,827,828 Common Shares outstanding, and 7,092,074 additional common shares are reserved for issuance and are detailed as follows: 1) Warrants to purchase 500,000 shares exercisable at US $1.50 expiring September 15, 2005 from the acquisition of Northern; 2) Warrants to purchase 35,000 shares exercisable at US $1.70 expiring February 28, 2006 from the acquisition of Jenkins & Gournoe Inc.; 3) Warrants to purchase 705,749 shares exercisable at US $1.75 expiring March 31, 2004 from the private placement completed on April 18, 2001; 4) Warrants to purchase 1,200,000 shares exercisable at US $2.40 expiring March 31, 2004 from the private placement completed on June 8, 2001; 5) Option to acquire 144,000 shares which may be acquired by the agent under the terms of the May 18, 2001 private placement agreement which was completed June 8, 2001 at US $2.00 until June 8, 2003; - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 32 September 30, 2001 10-Q
6) Warrants to purchase 72,000 shares, which may be acquired by the agent under the terms of the May 18, 2001 private placement agreement, which closed on June 8, 2003, if the 144,000 options (noted above in 5) are exercised. The warrants to purchase 72,000 shares are exercisable at US $2.40 expiring March 31, 2004; 7) Warrants to purchase 2,250,000 shares exercisable at US $2.40 expiring September 30, 2004 from the private placement completed on September 28, 2001; 8) Option to acquire 150,000 shares which may be acquired by the agent under the terms of the September 28, 2001 private placement agreement at US $2.00 until September 28, 2003; 9) Warrants to purchase 112,500 shares, which may be acquired by the agent under the terms of the September 28, 2001 private placement agreement if the 150,000 options (noted above in 8) are exercised. The warrants to purchase 112,500 shares are exercisable at US $2.40 expiring September 30, 2004; and 10) Options to acquire 1,922,825 shares previously granted to employees, directors and consultants under various company stock option plans. 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 Item 6. Exhibits and reports on Form 8-K (a) Exhibits- Not applicable (b) Reports on Form 8-K - No current report on Form 8-K was filed by the Company during the nine month period ended September 30, 2001 - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 33 September 30, 2001 10-Q
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. STAKE TECHNOLOGY LTD. /s/ Steve Bromley Date November 7, 2001 Stake Technology Ltd. ---------------- by Steve Bromley Vice President - Finance & Chief Financial Officer - -------------------------------------------------------------------------------- STAKE TECHNOLOGY LTD. 34 September 30, 2001 10-Q