SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|_| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 2000
Commission File No. 0-9989
|X| 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 May 10, 2000 registrant had 20,887,888 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 U.S. $22,846,000. The Company's common shares
are traded on the Nasdaq Small Cap Market tier of the Nasdaq Stock Market under
the symbol STKL.
Transitional Small Business Disclosure Format
Yes |_| No.|X|
There are 21 pages in the March 31, 2000 10-QSB and the index follows the cover
page.
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STAKE TECHNOLOGY LTD. 1 March 31, 2000 10-QSB
<PAGE>
STAKE TECHNOLOGY LTD.
FORM 10-QSB
March 31, 2000
PART I - FINANCIAL INFORMATION*
Item 1. Management's Discussion and Analysis or Plan of Operations
Item 2. Consolidated Financial Statements
Consolidated Balance Sheets as at March 31, 2000, and December 31,
1999.
Consolidated Statements of Retained Earnings for the Period Ended
March 31, 2000, and the Year ended December 31, 1999.
Consolidated Statements of Operations for the First Three Months
Ended March 31, 2000 and 1999.
Consolidated Statements of Cash Flow for the First Three Months
Ended March 31, 2000 and 1999.
Condensed Notes to Consolidated Financial Statements.
PART II - OTHER INFORMATION
All financial information is expressed in Canadian Dollars
The noon rate of exchange on May 10, 2000 was CDN.
$1 = U.S. $0.6687
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STAKE TECHNOLOGY LTD. 2 March 31, 2000 10-QSB
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.
Management's Discussion and Analysis of Financial Condition,
Results of Operations and Plan of Operations
On February 29, 2000 Stake acquired 100% of the shares of George F. Pettinos
(Canada) Limited, also know as PECAL from US Silica Company of Berkeley Springs,
West Virginia for $4,700,000 in cash and acquisition costs of approximately
$300,000. The acquisition of PECAL will complement the business of the Company's
division, Barnes Environmental International (BEI).
PECAL was direct competitor of BEI in the sand, coated sand, bentonite,
chromite, and zircon businesses, and they have strengths in several other
businesses that are closely related to BEI's existing markets. PECAL will add to
BEI's product lines in several key areas, and will help to build sales in
Ontario and the US. PECAL has sales in the range of $15 million per year, with a
history of profitability and a broad customer base.
The PECAL plant located in Hamilton, Ontario will continue to manufacture and
produce coated sand, foundry mixes and provide wholesaler and distributor
service. The PECAL administration office located at a separate rented site will
be closed by the end of June, 2000 and certain employees relocated to the BEI
Waterdown Office.
The acquisition cost was financed by the assumption of a new five-year term loan
of $2,600,000, and the expansion of the Canadian line of credit from $3,000,000
to $5,000,000.
As the acquisition of PECAL closed on February 29, 2000, the assets of PECAL are
included in the March 31, 2000 balance sheet in this 10QSB and operations of
PECAL are included for one month: March 2000.
Major Developments at SunRich in 2000
In early, April, 2000, SunRich formed a joint venture with Northern Food &
Dairy, Inc., an independent soy processing company located in Alexandria,
Minnesota to be known as Nordic Aseptic Inc. (Nordic). Nordic assumed management
control of a Tetra-Pak soymilk packaging plant known as Hoffman on April 19,
2000, and has until June 11, 2000 to negotiate and formalize the acquisition of
this soymilk packaging facility. Management is currently focusing on increasing
production and creating more effective production while at the same time seeking
longer-term commitment from its customer base and lenders before committing to
this acquisition.
During the first quarter soymilk sales continue to climb rapidly as soymilk was
introduced throughout many National food chains in the U.S. Concerns over
genetically modified foods also stimulated SunRich sales of organic products.
Major Developments at BEI in 2000
The first quarter of 2000 was a particularly busy time due to the acquisition of
PECAL and the integration of its operations into BEI. Significant overhead
savings will be realized as a result of the acquisition and PECAL sales for
March were at record levels. Computer systems, accounting systems and sales
forces have now been fully integrated.
Also during the first quarter of 2000 Barnes Environmental (BEI) completed an
agreement with a major supplier to permit the sale of Ebony Grit (Copper Slag)
into the U.S. and initial results have been most encouraging.
Major Developments in Company's proprietary Steam Explosion technology in 2000
In the first quarter of 2000, the Company continued to focus Steam Explosion
Technology on marketing pulping systems to China through Pacitec Inc.
Under the terms of an agreement signed in August, 1999, Pacitec acquired
exclusive rights to market StakeTech's proprietary pulping systems for non-wood
applicants in China for a license fee of U.S. $4.0 million payable over
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STAKE TECHNOLOGY LTD. 3 March 31, 2000 10-QSB
<PAGE>
Major Developments in Company's proprietary Steam Explosion technology in 2000
(continued)
twelve years. Maintenance of these rights is conditional on achieving the sale
of a minimum of 40 StakeTech Systems valued at approximately U.S. $160 million
over the twelve-year period. StakeTech retains all rights to the design and
manufacture of StakeTech's proprietary steam explosion pulping systems.
Pacitec is a US trade and development company with offices in Arlington, Texas
and Beijing, China. Pacitec specializes in developing business opportunities in
China and acts as a sales agent for such companies as Haliburton Energy Services
and Kellogg Brown and Root. Pacitec is in partnership with the China National
Beijing Contracting and Engineering Institute for Light Industry (BCEL) a
leading engineering design institute in China. BCEL is an experienced
engineering firm with Engineering, Procurement and Construction (EPC) capability
and has completed over 20 projects in the pulp and paper industry since 1981.
In January, 2000, Pacitec joined with an investment group to form New Chinese
Paper Investment Corporation (NCPIC). NCPIC has been established to purchase
existing mills in China and convert them to the StakeTech Steam Explosion
pulping process. The first mill has been identified and acquisition and
conversion are expected to begin in 2000.
In February, 2000, meetings were held between the Company and NCPIC in Hong Kong
and a detailed proposal for the supply of the first StakeTech Pulping Systems
was requested. This proposal was forwarded to Pacitec in March, 2000.
The First Three Months of 2000 Operations Compared with the First Three Months
of 1999 Operations
Acquisition of George F. Pettinos (Canada) Limited
On February 29, 2000, the Company acquired 100% of the common shares of George
F. Pettinos (Canada) Limited, also know as PECAL from US Silica Company of
Berkeley Springs, West Virginia for $4,700,000 cash and acquisition costs of
approximately $300,000. The acquisition of PECAL will complement the business of
the Company's division, BEI.
The acquisition of PECAL 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
excess of the estimated purchase price over the net assets acquired is
approximately $1,500,000 and will be amortized over twenty years.
Results of operations
Revenues in the first three months of 2000 increased by 213% to $16,009,000 from
$5,122,000 in the first quarter of 1999 and the Company's earnings for the first
quarter of 2000 were $408,000 or $0.02 per common share compared to $75,000 or
$0.01 per share for the quarter ended March 31, 1999.
Revenues in the first quarter of 2000 from SunRich operations were $10,504,000.
BEI/ PECAL's first quarter 2000 sales were $5,486,000 (1999 - $5,100,000) and
steam explosion and corporate sales in the first quarter of 2000 were $19,000
(1999 - $22,000). Substantially all revenues in the first quarter of 1999 were
derived from the BEI division.
In the first quarter of 2000, BEI/ PECAL sales consisted of sales of abrasives,
foundry sands and other products of $4,732,000 (1999 - $4,335,000), recycling
revenues were $448,000 (1999 - $421,000) and other sales were $306,000 (1999 -
$344,000). SunRich's sales in the first quarter were from soy and soybean
product sales were $6,066,000 or 58% of sales; identity preserved specialty
product sales were $2,186,000 or 21% of sales; other grain sales were $1,917,000
or 18% of sales; feed sales were $78,000 and other sales were $257,000. Steam
explosion and general corporate revenues of $19,000 in the first quarter of 2000
(1999 - $22,000) were generated primarily from other corporate revenues. No
Steam Explosion equipment sales or licence fees were recorded in the first three
months of 2000 or 1999.
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STAKE TECHNOLOGY LTD. 4 March 31, 2000 10-QSB
<PAGE>
Results of Operations (continued)
Cost of sales increased to $13,438,000 for the first quarter of 2000 compared to
$4,192,000 for the quarter ended March 31, 1999 due primarily to the acquisition
of SunRich. Cost of sales in the first quarter of 2000 attributable to the
BEI/PECAL segment were $4,730,000 (1999 - $4,184,000), and on SunRich, cost of
sales were $8,684,000. Steam Explosion division costs of sales were $24,000
(1999 - $8,000), which primarily relates to standard amortization charges.
The Company's consolidated gross margin was 16.1% in the first quarter of 2000
compared to 18.2% in the first quarter of 1999 due to the lower margins of BEI
in the quarter. BEI/PECAL's margin decreased to 13.8% in the first quarter of
2000 from 18.9% in 1999, due to the temporary loss of a high margin product line
customer and tight price competition in some of BEI's principal product lines.
Sunrich's margin was 17.3% for the first three months of 2000. Steam explosion/
corporate margins were negative due to standard amortization charges.
Research and development costs, principally related to steam explosion division
was $127,000 in the first quarter of 2000 compared to $72,000 for the quarter
ended March 31, 2000 due principally an increase into research into non-wood
applications for steam explosion technology, as well as applied research done at
SunRich during the quarter.
Administration, market development and demonstration expenditures increased in
the first quarter of 2000 to $2,036,000 compared to $619,000 for the quarter
ended March 31, 1999. In the first quarter of 2000 SunRich's administration
costs were $1,320,000; BEI/PECAL's operations accounted for $423,000 of the
administration costs (1999 - $373,000) and steam explosion marketing and
demonstration and corporate administration expenses were $293,000 (1999 -
$246,000). The principal reason for the increase in these expenses in the first
three months of 2000 compared to the first three months of 1999 results from the
inclusion of Sunrich's administration costs and one month of PECAL's
administrative expenses, as well as increased corporate costs related to the
redesign of the Company's web site and the retention of an investor relations
firm starting at the beginning of 2000.
Amortization of patents, trademarks, licences and goodwill increased to $68,000
in the first quarter of 2000, compared to $48,000 in the first quarter of 1999
due to the amortization of the goodwill arising on the acquisition of SunRich,
Inc. and PECAL, offset by some of the assets in this category being fully
amortized by the end of the 1999.
The gain on sale of property, plant and equipment of $84,000 in the first
quarter of 2000 (1999 - nil) is principally due to the sale of non-essential
land at a location separate from the Company's principal operations.
Interest on long-term debt increased to $143,000 in the first quarter of 2000
from $28,000 in the first quarter of 1999, due principally to the acquisition of
SunRich and its debt obligations, and the new debt assumed by the Company to
purchase PECAL.
Interest and other income increased to $79,000 in the first quarter of 2000 from
nil in the first quarter of 1999 due to interest earned on cash balances during
the first quarter of 2000.
The share of losses of equity accounted investees of ($12,000) in the first
quarter of 2000 (1999 - ($7,000)) and dilution gain of $140,000 (1999 - nil) is
related to the Company's 35% equity investment in Easton Minerals Ltd.. (Easton)
is a mining exploration company listed on the Canadian Venture Exchange
(EM-CDNX). Easton is currently undergoing a change of business, subject to
regulatory and shareholder approval, to acquire an Internet company that owns
the web site: theultimatedream.com.
Dilution gains result from the increase in equity value of Easton due to issues
of capital above StakeTech's carrying cost of this investment. The market value
of Easton is based on limited trading values, and while it is unlikely that
these values will be received upon the sale of this investment at this time,
sale proceeds could add to the Company's net equity and management plans to use
any cash proceeds to reduce debt and increase working capital. U.S. readers
should note that dilution gains are not recognized as income for U.S. GAAP
purposes and accordingly, the effects of this gain are reversed in Note 7 of the
Company's financial statements.
The Company's investment in Easton is carried at a book value of $412,000. The
market value of StakeTech's shares in Easton at May 10, 2000 was $1,258,000. On
June 15, 1998, the Company's Board decided to sell its holdings in Easton as its
business is not related to the Company's primary businesses, and has filed
appropriate notification of this intent with Easton's regulators.
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STAKE TECHNOLOGY LTD. 5 March 31, 2000 10-QSB
<PAGE>
Results of operations (continued)
The foreign exchange gain of $10,000 in the first three months of 2000 (1999 -
loss of ($60,000)) is attributable to changes in the U.S. $ on the Company's net
foreign transactions and balances.
The dividend on preference shares of a subsidiary company for the first three
months of 2000 was $7,000 (1999 - $7,000) and the imputed interest of preference
shares of a subsidiary company for the first three months of 2000 was $8,000
(1999 - $8,000). Both of these expenses are related to the preference shares
issued for the acquisition of BEI.
Liquidity and Capital Resources at March 31, 2000
Cash and short-term deposits decreased to nil at March 31, 2000 from $2,464,000
at December 31, 1999. The decrease is principally due to the use of cash to
finance the purchase of PECAL as well as SunRich's need for cash in the first
quarter due to the seasonal nature of its business.
The $400,000 of cash held as a security deposit at December 31, 1999 was
released into non-restricted cash upon the re-issuance of the Canadian banking
agreement during the quarter.
Trade accounts receivable increased to $9,492,000 at March 31, 2000 from
$7,300,000 at December 31, 1999 due largely to the acquisition of PECAL. Trade
receivables at March 31, 2000 related to the BEI/PECAL operations were
$5,832,000 (December 31, 1999 - $3,375,000); SunRich operations receivables were
$3,419,000 at March 31, 2000 (December 31, 1999 -$3,747,000) and general
corporate activities and steam explosion $241,000 (1999 - $178,000).
Inventories increased to $9,659,000 at March 31, 2000 from $8,589,000 at
December 31, 1999, again, principally due to the addition of the PECAL inventory
balances, which are $887,000 at March 31, 2000. The Steam Explosion division is
not required to carry inventory.
Future income tax assets of $966,000 at March 31, 2000 ($1,020,000 - December
31, 1999) consists of $675,000 of Canadian tax losses and scientific research
expenditures recorded by the Canadian entity and $291,000 relates to the Sunrich
tax losses and accounting reserves. The Company believes that it is more likely
than not that the tax benefit of the recorded assets will be realized.
The Company has formal capital commitments of approximately $100,000 at of March
31, 2000, relating to normal equipment replacement at BEI/PECAL, SunRich, and in
the Steam Explosion/corporate division.
In the first quarter of 2000, $140,000 was spent at BEI/PECAL for machinery and
equipment improvements in Waterdown and Louisiana and general upgrading of
computers. SunRich spent $103,000 on capital expenditures in the first three
months of 2000 for general production equipment and vehicles and $9,000 was
spent at the corporate office, primarily on computer equipment.
Investments increased to $412,000 at March 31, 2000 from $281,000 at December
31, 1999 due primarily to the equity loss on Easton of ($12,000) (1999 -
($7,000)) offset by the dilution gain of $140,000 (1999 - nil).
Goodwill increased to $5,328,000 at March 31, 2000 from $3,922,000 at December
31, 1999 due to the goodwill recorded on the acquisition of PECAL offset by
amortization of this goodwill and goodwill recorded on the SunRich acquisition
in 1999 and the BEI acquisition in 1995.
Patents, trademarks, licences and other assets has increased to $495,000 at
March 31, 2000 from $446,000 at December 31, 1999 due to further investments in
the Company's proprietary positions during 2000, offset by the amortization of
these assets, and the deferment of $47,000 of debt issuance costs that will be
amortized over the 5-year term of the loan.
Bank indebtedness increased to $2,986,000 at March 31, 2000 from nil at December
31, 1999, due to short-term bank indebtedness being used to finance the
acquisition of PECAL and to finance SunRich in the first quarter due to the
nature of their business. Included in this balance is $2,133,000 drawn on the
Canadian line of credit, plus U.S. $1,300,000, which is drawn on SunRich's cash
lines of credit, off set by offsetable cash balances of U.S. $778,000 on the
balance sheet of SunRich.
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STAKE TECHNOLOGY LTD. 6 March 31, 2000 10-QSB
<PAGE>
Liquidity and Capital Resources at March 31, 2000 (continued)
The payment of nearly half of the purchase price of PECAL and related costs of
the acquisition was done in order that the Company is able to repay this debt at
any time from the operating efficiencies that will flow from the combination of
BEI and PECAL operations and the closure of the business office of PECAL. The
ability to finance the acquisition this way is due to the expansion of the
Company's Canadian line of credit to $5,000,000 from $3,000,000.
Accounts payable and accrued liabilities decreased to $7,630,000 at March 31,
2000 from $10,179,000 at December 31, 1999. This major decrease is due to the
nature of SunRich's business, which is reflected by the Sunrich payables being
$3,921,000 at March 31, 2000 compared to $7,705,000 at December 31, 2000. This
decrease is offset by the inclusion of the PECAL payable balances at March 31,
2000 of $1,046,000. (At acquisition - $2,012,000). The remaining increase in the
accounts payable balance principally relates to the accrual of severance and
other costs related to the acquisition of PECAL. A accrued recycling reserve of
$406,000 (December 31, 1999 - $384,000) is included in accounts payable at March
31, 2000 relates to BEI's business and represents the future costs to process
and dispose of the reclaimed materials that BEI has accepted for recycling, and
were on site at March 31, 2000.
The note payable of $162,000 at March 31, 2000 (December 31, 1999 - $208,000) is
a demand note related to Sunrich's hedging activities. The loan may be drawn up
to U.S. $200,000 with interest at prime. Borrowings under this note are due May
31, 2000.
Customer deposits of $1,796,000 recorded at March 31, 2000 ($1,618,000 -
December 31, 1999) are related to cash deposits made by Sunrich customers in
1999 and early year 2000 for year 2000 purchases. No recognition of revenue or
accrual of costs is booked on these transactions until the goods are shipped.
The increase in the short term portion of long-term debt and long-term debt is
due to the new 5-year term loan for $2,600,000 obtained to partially finance the
acquisition price of PECAL. The loan requires payments of a minimum of $100,000
per quarter starting in July 2000, which are to aggregate to $600,000 by April
30 of each year, the loan anniversary date. The financing methodology on this
loan has been set up to allow for full repayment of the loan based on the
maturity of the underlying debt instruments. The interest rate on the new loan
is Canadian prime +1 1/4%, or banker's acceptances + 1.5%. Costs of $47,000 were
incurred on in obtaining this loan and will be amortized over 5 years. This
balance is included in patents, trademarks and other assets on the balance
sheet.
In addition to the term bank loan, the Company has bank lines of credit of
$5,000,000 and US $3,500,000 available based on margining of trade accounts
receivable and inventory. At March 31, 2000 combined bank lines of credit
outstanding is $2,986,000 compared to nil at December 31, 1999. This increase
use of bank lines was principally incurred to pay the purchase price of PECAL,
as well as supply cash to Sunrich's business in the quarter, due to its seasonal
nature.
Also, at March 31, 2000, amounts that are drawn on the two line of credits, but
not included in the above balance are $1,120,000 (December 31, 1999 -
$1,116,000) drawn on the Canadian bank line of credit for letters of credit to
the Ontario Ministry of the Environment and Energy for the Certificate of
Approval; for the importation of materials for BEI/PECAL; for two key suppliers
and for security on the Louisiana lease. There is also U.S. $65,000 drawn on the
U.S. line of credit at March 31, 2000 for the purchase of a product held for
resale.
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.
The Company considers its relationship with its principal Canadian bankers and
Sunrich bankers to be very satisfactory.
The Company believes that the cash to be generated from operations, the
operational efficiencies that will flow from the BEI/PECAL operations due to the
combination of their operations, the movement from the cash negative to cash
positive season of SunRich's business and the Company's Canadian and U.S. lines
of credit are sufficient for the Company's consolidated operations during 2000.
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STAKE TECHNOLOGY LTD. 7 March 31, 2000 10-QSB
<PAGE>
Liquidity and Capital Resources at March 31, 2000 (continued)
The increase in the future tax liability of $1,240,000 at March 31, 2000
($579,000 - December 31, 1999) relates principally to PECAL and the difference
between the tax and accounting base of its physical assets. The December 31,
1999 amount relates to SunRich. This balance represents differences between
accounting and taxable income that will result in taxes being payable in a
future period, primarily related to property, plant and equipment.
Cash flow from operations before working capital changes increased to $554,000
in the first quarter of 2000 compared to $274,000 in the first quarter of 1999,
due principally to higher earnings.
Cash flow used for operations after working capital changes was $3,707,000 for
the first three months of 2000 compared to cash provided of $91,000 in the first
three months of 1999. This large change is due primarily to SunRich's
agricultural business which results in a large amount of accounts payable
recorded at year end being settled in the early part of the first quarter of
each year, at the request of the vendor's, due to the change to a new tax year.
This large use of cash to settle the previous years' grain accounts will repeat
on an annual basis in each first quarter due to the nature of SunRich's
business.
Cash used in investment activities increased to $4,199,000 in the first three
months of 2000 compared to cash used of $118,000 in the first three months of
1999 is due principally to the acquisition of PECAL.
Cash provided for financing activities was $2,442,000 the first three months of
2000 compared to cash provided of $128,000 in the first three months of 1999.
The increase in cash provided by financing is principally due to the new term
loan debt acquired in the first quarter of 2000 that enabled the Company to
finance the acquisition of PECAL.
PART II - OTHER INFORMATION.
Item 6.
8K filed March 12, 2000 relating to the acquisition of PECAL.
PART I - FINANCIAL INFORMATION
Item 2.
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STAKE TECHNOLOGY LTD. 8 March 31, 2000 10-QSB
<PAGE>
Consolidated Financial Statements
Stake Technology Ltd.
For the First Three Months Ended March 31, 2000
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STAKE TECHNOLOGY LTD. 9 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Consolidated Balance Sheets as at March 31, 2000 and December 31, 1999
(Expressed in Canadian Dollars)
--------------------------------------------------------------------------------
March 31, December 31,
2000 1999
--------------------------------------------------------------------------------
Assets (note 5)
Current assets
Cash and cash equivalents $ -- $ 2,464,000
Cash held as security deposit -- 400,000
Accounts receivable - trade 9,492,000 7,300,000
Inventories 9,659,000 8,589,000
Miscellaneous receivables and other assets 316,000 246,000
Future income taxes 966,000 1,020,000
----------------------------
20,433,000 20,019,000
Property, Plant and Equipment - at cost
less accumulated amortization of $7,298,000
(December 31, 1999 - $6,976,000) 12,952,000 10,766,000
Investments - at cost
quoted market value - $3,145,000
(December 31, 1999 - $550,000) 412,000 281,000
Goodwill at cost - less accumulated
amortization of $584,000
(December 31, 1999 - $516,000) 5,328,000 3,922,000
Patents, trademarks and licences and other assets
- at cost, less accumulated amortization of
$945,000 (December 31, 1999 - $925,000) 495,000 446,000
----------------------------
$ 39,620,000 $ 35,434,000
============================
Liabilities
Current liabilities
Bank indebtedness $ 2,986,000 $ --
Accounts payable and accrued liabilities 7,630,000 10,179,000
Note payable 162,000 208,000
Customer deposits 1,796,000 1,618,000
Current portion of long-term debt (note 5) 1,439,000 950,000
Current portion of preference shares 140,000 240,000
----------------------------
14,153,000 13,195,000
Long-term debt and bank facilities (note 5) 4,746,000 2,955,000
Future income taxes 1,240,000 579,000
Preference shares of subsidiary company 597,000 607,000
----------------------------
20,736,000 17,336,000
----------------------------
Shareholders' Equity
Capital stock (note 6) 11,527,000 11,163,000
Contributed surplus 4,635,000 4,635,000
Retained earnings (note 5) 2,903,000 2,495,000
Current translation adjustment (181,000) (195,000)
----------------------------
18,884,000 18,098,000
----------------------------
$ 39,620,000 $ 35,434,000
============================
(See accompanying notes to consolidated financial statements)
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STAKE TECHNOLOGY LTD. 10 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Consolidated Statements of Retained Earnings
For the Period Ended March 31, 2000 and the Year Ended December 31, 1999
(Expressed in Canadian Dollars)
--------------------------------------------------------------------------------
Three months ended Year ended
March 31, December 31,
2000 1999
--------------------------------------------------------------------------------
Retained Earnings - Beginning of the Year $2,495,000 $ 971,000
Net Earnings for the Period 408,000 1,524,000
------------------------------
Retained Earnings - End of Period $2,903,000 $2,495,000
==============================
(See accompanying notes to consolidated financial statements)
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STAKE TECHNOLOGY LTD. 11 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Consolidated Statements of Operations
For the First Three Months Ended March 31, 2000 and 1999
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
March 31, March 31,
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 16,009,000 $ 5,122,000
----------------------------
Cost of goods sold 13,438,000 4,192,000
----------------------------
Gross profit 2,571,000 930,000
----------------------------
Expenses
Research and development 127,000 72,000
Administration, market development
and demonstration 2,036,000 619,000
Amortization of patents, trademarks, licences
and goodwill 68,000 48,000
Gain on sale of property, plant and equipment (84,000) --
----------------------------
2,147,000 739,000
----------------------------
Earnings from operations 424,000 191,000
Interest on long-term debt (143,000) (28,000)
Other interest (16,000) (6,000)
Interest and other income 79,000 --
Foreign exchange gain (loss) 10,000 (60,000)
Gain on dilution of investment interests
in equity accounted investee 140,000 --
Share of loss of equity accounted investees (12,000) (7,000)
Dividend on preference shares of subsidiary company (7,000) (7,000)
Imputed interest on preference shares of
subsidiary company (8,000) (8,000)
----------------------------
Earnings before taxes 467,000 75,000
----------------------------
Recovery of income taxes - future income taxes 40,000 --
Provision for income taxes (99,000) --
----------------------------
Net Earnings for the Period $ 408,000 $ 75,000
============================
Net Earnings per Share for the Period $ 0.02 $ 0.01
============================
</TABLE>
(See accompanying notes to consolidated financial statements)
--------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 12 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Consolidated Statements of Cash Flow
For the First Three Months ended March 31, 2000 and 1999
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
March 31, March 31,
2000 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in)
Operating activities
Net earnings for the period $ 408,000 $ 75,000
Items not affecting cash
Amortization 410,000 192,000
Share of losses of investee 12,000 7,000
Gain on sale of property, plant and equipment (84,000) --
Gain on dilution of interest in investee (140,000) --
Imputed interest on preference shares 8,000 --
Future income taxes (60,000) --
--------------------------
554,000 274,000
Change in non-cash working capital balances
related to operations
Accounts receivable - trade 175,000 (196,000)
Inventories (122,000) 295,000
Miscellaneous receivables and other assets 69,000 32,000
Accounts payable and accrued liabilities (4,561,000) (314,000)
Customer deposits 178,000 --
--------------------------
(3,707,000) 91,000
--------------------------
Investing activities
Acquisition of company - net of cash acquired (2,093,000) --
Acquisition of patents, trademarks, licences
and other assets (69,000) --
Cash held as security deposit 400,000 --
Acquisition of property, plant and equipment (2,546,000) (124,000)
Proceeds on sale of property, plant and equipment 112,000 --
Increase in investments and advances (3,000) 6,000
--------------------------
(4,199,000) (118,000)
--------------------------
Financing activities
Purchase of preference shares in subsidiary company (100,000) (100,000)
Redemptions of preference shares in subsidiary company (10,000) (10,000)
Repayment of long-term debt and note payable (447,000) --
Issuance of long-term debt 2,635,000 --
Issuance of common shares 364,000 238,000
--------------------------
2,442,000 128,000
--------------------------
Foreign exchange gain on cash held in a foreign
currency 14,000 --
--------------------------
(Decrease) increase in cash during the period (5,450,000) 101,000
Cash and cash equivalents - Beginning of period 2,464,000 181,000
--------------------------
(Bank indebtedness) Cash and cash equivalents - End
of period (2,986,000) 282,000
==========================
</TABLE>
Cash and cash equivalents consist of unrestricted cash and
short-term deposits maturing in less than 90 days.
(See accompanying notes to consolidated financial statements)
--------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 13 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the First Three Months ended March 31, 2000
(Expressed in Canadian Dollars)
================================================================================
1. Independent chartered accountants have not audited the information
presented in the accompanying Consolidated Financial Statements. In the
opinion of the Company, such statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly
the financial position of the Company, the results of its operations and
the changes in its financial position for the applicable periods, in
conformity with generally accepted accounting principles in Canada, which
differ in some respects from accounting principles accepted in the United
States, the effect of which is explained in note 7, applied on a
consistent basis. The consolidated balance sheet at December 31, 1999 has
been taken from the Company's Annual Report to Shareholders for the year
then ended. The consolidated financial statements as at December 31, 1999
should be read in conjunction therewith.
2. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
3. 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.
Through its wholly owned U.S. subsidiary Sunrich, Inc. (SunRich), which
was acquired on August 2, 1999, the Company sells agricultural products.
Its division, Barnes Environmental International (BEI), and its
subsidiary, George F. Pettinos (Canada) Limited (PECAL) acquired February
29, 2000 sell 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 March 31, 2000 are located in Canada and the U.S.
These financial statements are prepared in accordance with accounting
principles generally accepted in Canada. Differences arising from the
application of accounting principles generally accepted in the United
States are described in note 7. 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
inter-company accounts and transactions have been eliminated on
consolidation.
Cash and cash equivalents
Cash and cash equivalents consist of unrestricted cash and short-term
deposits with a maturity at acquisition of less than 90 days.
Inventories
Inventories related to the recycling and industrial minerals business of
BEI/PECAL and merchandise inventories of SunRich are valued at the lower
of cost and estimated net realizable value. Cost is determined on a
first-in, first-out basis.
--------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 14 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the First Three Months ended March 31, 2000
(Expressed in Canadian Dollars)
================================================================================
Inventories (continued)
Inventories of grain are valued at market. Changes in market value are
included in cost of sales. SunRich 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.
Investments and marketable securities
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. Other long-term investments are recorded at cost and are
written down to their estimated recoverable amount if there is evidence of
a decline in value which is other than temporary.
Amortization of capital assets
Amortization is provided on plant and equipment on the diminishing balance
basis at rates of 20% to 33% per annum for office furniture and equipment,
machinery and laboratory equipment and vehicles and 4-8% for buildings.
Amortization is calculated from the time the asset is put into use.
Costs of acquiring or filing patents, trademarks and licenses 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.
Revenue recognition
i) SunRich
Grain sales are recorded at the time of shipment. Other SunRich
revenue is recognized upon the sale and shipment of a product or the
providing of a service to a customer.
ii) BEI/PECAL
Revenue from the sale of industrial minerals is recognized upon
shipment.
Tipping fee revenue, which consists of a per ton fee paid to BEI for
waste recycling materials being received by the BEI is recognized at
the time the material is received. Provision is made for the net
costs of processing and disposal of the material.
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. License fees related to
sales of the Company's technologies are recorded as revenue when
earned and collection is reasonably assured.
Foreign currency translation
--------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 15 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the First Three Months ended March 31, 2000
(Expressed in Canadian Dollars)
================================================================================
SunRich is considered to be a self-sustaining operation. SunRich'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 transaction adjustment in
shareholders' equity.
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.
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.
Customer deposits
Customer deposits principally include prepayments by SunRich's customers
for fertilizer and chemicals to be purchased during the spring planting
season.
Income taxes
During 1998, the Company adopted the asset and liability method of
accounting for income taxes whereby future income tax assets are
recognized for deductible temporary differences and operating loss
carry-forwards, and future income tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the amounts of assets and liabilities recorded for income tax and
financial reporting purposes. Future income tax assets are recognized only
to the extent that management determines that it is more likely than not
that the future income tax assets will be realized. Future income tax
assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment or substantive enactment. The income
tax expense or benefit is the income tax payable or refundable for the
period plus or minus the change in future income tax assets and
liabilities during the period.
Derivative instruments
SunRich enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on grain transaction
to the extent considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging purposes are purchased
and sold through regulated commodity exchanges. Inventories, however, may
not be completely hedged, due in part to the Company's assessment of its
exposure from expected price fluctuations. Exchange purchase and sales
contracts may expose the Company to risk in the event that a counter-party
to a transaction is unable to fulfill its contractual obligation.
--------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 16 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the First Three Months ended March 31, 2000
(Expressed in Canadian Dollars)
================================================================================
Derivative instruments (continued)
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 future transactions are marked to market. Gains
and losses on futures transactions related to grain inventories are
included in cost of goods sold.
Earnings per share
The computation of earnings per share is based on the weighted average
number of common shares outstanding during the period.
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.
4. Acquisition of a Business
On February 29, 2000, the Company acquired 100% of the common shares of
George F. Pettinos (Canada) Limited, also know as PECAL from US Silica
Company of Berkeley Springs, West Virginia for $4,700,000 cash and
approximately $300,000 in acquisition costs. The acquisition of PECAL will
complement the business of the Company's division, BEI.
The acquisition of PECAL 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 excess of the estimated purchase
price over the net assets acquired is approximately $1,500,000, which will
be amortized over twenty years.
5. Long-term debt and banking facilities
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. In order to finance the acquisition of PECAL, the Company's
principal bankers extended the Company's Canadian line of credit to
$5,000,000 from $3,000,000 based on the margining of certain working
capital balances. As part of this expanded line of credit, the Company's
interest rate increased from Canadian prime to Canadian prime +0.2%. In
addition, a new $2,600,000 term loan was provided to pay the remaining
portion of the PECAL acquisition price. The new term loan is payable in
minimum $100,000 quarterly instalments, which are to total at
--------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 17 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the First Three Months ended March 31, 2000
(Expressed in Canadian Dollars)
================================================================================
least $600,000 per annum to each April 30, the anniversary date of the
loan. The interest rate of the term loan is Canadian prime +1.25%.
6. Capital Stock
March 31, December 31,
2000 1999 1999
---- ---- ----
(a) Issued and fully paid -
20,886,888 common shares
(March 31, 1999 - 15,082,543
December 31, 1999 - 20,653,788) $ 11,527,000 4,705,000 $ 11,163,000
------------ --------- ------------
(b) During 1997, the shareholders of the Company agreed to amend the Company's
by-laws. These changes included reducing the stated capital account of the
Company in respect of its common shares in the amount of $25,026,000 and
applying this amount against the deficit.
(c) To March 31, 2000, 233,100 options have been exercised for gross proceeds
of $364,000. There was a further 1,000 options exercised between April 1,
2000 and May 10, 2000.
(d) As at May 10, 2000, there were options vested to Employees and Directors
to acquire 1,267,750 common shares at exercise prices of U.S. $1.063. In
addition, at May 10, 2000 options to acquire an additional 620,000 common
shares at U.S. $1.063 have been granted but have not yet vested.
7. 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 (U.S. GAAP) during the periods presented except
with respect to the following:
Under U.S. GAAP, the gain on dilution in the amount of $140,000 in the
first quarter of 2000 (December 31, 1999 - nil) resulting from the
dilution of the Company's ownership of the common share equity of 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 U.S. GAAP, certain development and start-up costs of nil in the
first quarter of 2000 (December 31, 1999 - $75,000) deferred in these
financial statements would be expensed.
Also under U.S. GAAP, the allowance for doubtful accounts at March 31,
2000 of $746,000 (December 31, 1999 - $665,000) needs to be disclosed, as
does the amounts due from related parties at March 31, 2000 of $107,000
(December 31, 1999 - $44,000). Also included in accounts payable and
accrued liabilities is an accrual for recycling costs of $406,000 at March
31, 2000 (December 31, 1999 - $384,000).
--------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 18 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the First Three Months ended March 31, 2000
(Expressed in Canadian Dollars)
================================================================================
Accordingly, the following would have been reported under U.S. GAAP:
<TABLE>
<CAPTION>
March 31, March 31, December December
2000 1999 31, 1999 31, 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings for the year - as reported $ 408,000 $ 75,000 $ 1,524,000 $ 822,000
Dilution gain (taxes - nil) (140,000) -- -- (26,000)
Development and start-up costs expensed -- -- (75,000) (35,000)
------------------------------------------------------------
Net earnings for the year - U.S. GAAP $ 268,000 $ 75,000 $ 1,449,000 $ 761,000
============================================================
Net earnings per share - U.S. GAAP $ 0.01 $ 0.01 $ 0.08 $ 0.05
============================================================
Weighted average number of common shares
outstanding 20,736,190 14,827,000 17,384,644 14,702,000
============================================================
Shareholders' equity - as reported $ 18,884,000 $ 10,386,000 $ 18,098,000 $ 10,073,000
Cumulative development and start-up costs
expensed (239,000) (164,000) (239,000) (164,000)
------------------------------------------------------------
Shareholders' equity - U.S. GAAP $ 18,645,000 $ 10,222,000 $ 17,859,000 $ 9,909,000
------------------------------------------------------------
</TABLE>
Comprehensive Income
U.S. GAAP requires that a comprehensive income statement be prepared.
Comprehensive income is defined as "The change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner events". It includes all changes in equity during a period,
except those resulting from investments by owners and distribution to owners.
The comprehensive statement reconciles the reported net income to the
comprehensive income.
The following is a comprehensive income statement (prepared in accordance with
U.S. GAAP), which, under U.S. GAAP, would have the same prominence as other
financial statements.
<TABLE>
<CAPTION>
March 31, March 31, December December 31,
2000 1999 31, 1999 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings for the year - U.S. GAAP $ 268,000 $ 75,000 $ 1,449,000 $ 761,000
Dilution gain (taxes - nil) 140,000 -- -- 26,000
Currency translation adjustment
(taxes - nil) 14,000 -- (195,000) --
-----------------------------------------------------------
Comprehensive income $ 422,000 $ 75,000 $ 1,254,000 $ 787,000
===========================================================
</TABLE>
8. Comparative Balances
--------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 19 March 31, 2000 10-QSB
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the First Three Months ended March 31, 2000
(Expressed in Canadian Dollars)
================================================================================
Certain comparative account balances have been reclassified to achieve
comparability to current period balances
--------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 20 March 31, 2000 10-QSB
<PAGE>
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/ Leslie N. Markow
Date May 10, 2000
----------------
Stake Technology Ltd.
by Leslie N. Markow
Vice President - Finance
& Chief Financial Officer
--------------------------------------------------------------------------------
STAKE TECHNOLOGY LTD. 21 March 31, 2000 10-QSB
