SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 0-9989
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
STAKE TECHNOLOGY LTD.
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(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)
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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 |_|.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
Yes |X|. No |_|.
Revenue for the year ended December 31, 1999: CDN $47,304,000
At March 13, 2000 the registrant had outstanding and allotted 20,872,888 common
shares, 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 $40,441,000. The Company's
common shares traded on Nasdaq Small Cap Market tier of The Nasdaq Stock Market
under the symbol STKL.
Transitional Small Business Disclosure Format
Yes |_|. No |X|.
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There are 34 pages in the December 31, 1999 10-KSB and the index follows the
cover page.
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STAKE TECHNOLOGY LTD.
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Index and Cross Reference Sheet
Annual Report
on Form 10-KSB for
Year Ended December 31, 1999
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FORM 10-KSB Page
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PART I
Item 1. Description of Business...............................................1
Item 2. Description of Property..............................................10
Item 3. Legal Proceedings....................................................11
Item 4. Submission of Matters to a Vote of
Security Holders................................................11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.....................................12
Item 6. Management Discussion and Analysis or
Plan of Operations .............................................12
Item 7. Financial Statements.................................................19
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure............................................19
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act....................20
Item 10. Executive Compensation...............................................25
Item 11. Security Ownership of Certain Beneficial
Owners and Management...........................................28
Item 12. Certain Relationships and Related Transactions.......................28
Item 13. Exhibits and Reports on Form 8-K.....................................30
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Currency Presentation
All dollar amounts herein are expressed in Canadian dollars. Amounts expressed
in United States dollars are preceded by the symbols "US $". On March 13, 2000,
the noon buying rate, in New York City for cable transfers in Canadian dollars
for customs purposes by the Federal Reserve Bank of New York was US $0.6843 for
$1.00 Canadian.
The following table sets forth, for each of the years indicated, information
with respect to the exchange rate of the Canadian dollar into United States
currency. (1) the rates of exchange for the Canadian dollar, expressed in US
dollars, in effect at the end of the years indicated, (2) the average of
exchange rates in effect on the last day of each month during such years and (3)
the high and low exchange rates during such years, in each case based as
certified by the Board of Governors of the Federal Reserve System.
================================================================================
RATES 1995 1996 1997 1998 1999
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Last Day..(1).. $0.7323 $0.7301 $0.6999 $0.6530 $0.693
--------------------------------------------------------------------------------
Average..(2).. $0.7286 $0.7332 $0.7221 $0.6712 $0.673
--------------------------------------------------------------------------------
High..(3).. $0.7527 $0.7526 $0.7467 $0.7045 $0.6537
--------------------------------------------------------------------------------
Low..(3).. $0.7023 $0.7212 $0.6945 $0.6382 $0.693
================================================================================
PART I
Item 1. Description of Business
Stake Technology Ltd. ("Stake" or the "Company") operates in three principal
businesses. Through its division, Barnes Environmental International (BEI), the
Company sells abrasives and industrial materials and recycles inorganic
materials. The Company also operates a division developing and commercializing a
proprietary steam explosion technology for the production of pulp from straw and
other forms of biomass. In August 1999, the Company acquired Sunrich, Inc., a US
agritech company specializing in organic and non-GMO food ingredients.
The Company was incorporated under the laws of Canada on November 13, 1973. The
principle executive offices and the steam explosion technology division are
located at 2838 Highway 7, Norval, Ontario, Canada, L0P 1K0, telephone: (905)
455-1990, fax: (905) 455-2529, e-mail: [email protected] and Web site:
www.staketech.com. BEI operates from 407 Parkside Drive, Waterdown, Ontario,
Canada, L0R 2H0, telephone: (905) 689-6661, fax: (905) 689-0485, e-mail:
[email protected] and Web site: www.barnesenvironmental.com, BEI also
has a warehouse and sales facility at 2270 - 43rd Avenue, Lachine (Montreal),
Quebec, Canada, H8T 2J8, telephone: (514) 631-3578 and fax: (514) 631-7044, and
a abrasion manufacturing facility at 2 Elaine Street, New Orleans, Louisiana
USA, 70126, telephone: (504) 243-2205 and fax: (504) 243-2204. Sunrich operates
from 3824 - 93rd Street S.W., Hope, Minnesota, 56046-0128, telephone:
(507)-451-3316 fax: (507) 330-2910, e-mail: [email protected] and web site:
www.sunrich.com and its division Integrity Mills operates from 616 - 6 th Avenue
West, Cresco, Iowa.
Subsequent Event
On February 29, 2000 Stake acquired 100% of the shares of George F. Pettinos
(Canada) Limited, also known as PECAL from US Silica Company of Berkeley
Springs, West Virginia for $4,700,000 cash. The acquisition of Pettinos will
complement the business of the company's division, Barnes Environmental
International (BEI).
PECAL was a 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 be manufacturing and producing
coated sand, foundry mixes and
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Item 1 Description of Business (continued)
providing wholesaler and distribution service. The PECAL administration office
located at a separate rented site will be closed in the next few months and
certain employees relocated to the BEI Waterdown Head Office.
The purchase price of $4,700,000 cash was financed by the assumption of a new
five-year term loan of $2,600,000 and the expanding of the Canadian line of
credit from $3,000,000 to $5,000,000.
As the acquisition of PECAL closed after December 31, 1999, none of its
operations or assets are included in the December 31, 1999 10-KSB.
Acquisition of Sunrich, Inc.
The acquisition of Sunrich, Inc., on August 2, 1999 has significantly increased
the Company's balance sheet and the size of operations. As the operations and
net assets of Sunrich are included in the December 31, 1999 10-KSB for the first
time, a detailed description of Sunrich's business follows:
Sunrich is a US based national supplier and exporter of waxy corn, speciality
grains, food quality soybeans used for soymilk and soy meat substitute products,
Sweet Beans, vegetables, other natural food ingredients, maltodextrin and
natural sweeteners. Sunrich maintains a direct link with growers, processors and
food manufacturers, offering farmers such retail products as feed, chemical
herbicides and pesticides, fertilizer, seed, grain services, including buying,
storing and selling soybeans and field corn and other agricultural services.
Sunrich consistently provides non-genetically modified specialty grains and
other food products by taking a "full circle" approach to commodity marketing,
through which Sunrich takes part in all facets of commodity production,
including providing growers with seed and supplies, harvesting and processing,
direct shipping, and manufacturing and processing of food products. Sunrich's
divisions include: Integrity Mills, Inc., an organic corn milling company which
produces corn flour, grits, cones and germ and Hearty & Natural, a manufacturer
of soybean meat product substitutes.
Seven farmers conceived Sunrich in 1978 as a supplier of waxy corn for starch
manufacturing markets and other markets needing larger quantities of waxy corn
than an individual farmer could grow. The original company, under the name
Minnesota Waxy Corn Growers, Inc., consisted of approximately 300 founding
shareholders who were farmers and purchasers and conducted their operations
primarily out of Hope, Minnesota. Since then, Sunrich has progressively grown
expanding its operations into other food quality identity, preserved grains,
including blue corn, white corn, soybeans, and other soy products.
Sunrich provides a variety of food and agricultural products to domestic and
foreign customers. Its principal product lines include waxy and other specialty
corns, identify-preserved soybeans and other soy products, vegetable and bean
powders, frozen vegetables, and other food ingredients.
Identity-Preserved Specialty Grains: Sunrich is a leading processor and exporter
of specialty grains including waxy corn, blue corn and food grade soybeans. Many
Sunrich specialty grain products are certified organic by Quality Assurance
International as well as other national and international organic certifying
associations, and certified organic processing facilities are used throughout
the manufacturing process. For the period since acquisition, August 2, 1999 to
December 31, 1999, sales of identity-preserved specialty grains accounted for
approximately US $9,019,000 or 54% of Sunrich's net sales.
Identity-Preserved Soybeans and Soybean Products: Sunrich provides a variety of
soybean and soy products, including soymilk powder, tofu powder, soy beverage
powder, liquid soy base, low fat soymilk powder, and soy creamer. Each of the
soy-based products produced by Sunrich, along with organic beans, corns, and/or
other ingredients sold as an organic product, is certified organic by Quality
Assurance International. Sunrich produces the podded and peeled green soybean
called Edamame under the trademark Sweet Bean. Sunrich uses an automatic vision
colour scanner to sort out defective pods of Edamame soybeans and Sweet Beans to
ensure consistent high quality products for its customers. The facility is used
extensively to provide the highest quality soybeans for the production of
soymilk, tofu, and other soy foods. Sales of Sweet Bean, soybeans and other soy
related products accounted for approximately US $3,694,000 or 22% of Sunrich's
net sales, in the period since Sunrich was acquired.
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Item 1. Description of Business (continued)
Distribution, Marketing and Sales
Distribution systems: Sunrich is located on 93rd Street in Hope, Minnesota one
mile west of the Interstate 35 and alongside the Union Pacific Railroad. The
railroad is utilized for the grain elevator business and distribution of product
nationally.
Sales and Marketing: Sunrich's management believes that the nature of the
agricultural commodities business does not require extensive sales and marketing
staff. As a result, the Sunrich sales and marketing team consists of six
individuals, who develop all of the promotional materials, travel to and make
contact with growers and farmers, and respond to the high volume of inquires
channeled through Sunrich's interactive domain on the World Wide Web at
www.sunrich.com.
Sunrich ensures that it provides its customers with the highest quality
identity-preserved specialty grains, by serving as a grower's supplier of seed,
purchaser of growers identity-preserved specialty crops and distributor of
identity-preserved specialty products. Sunrich's "full circle" approach allows
Sunrich to satisfy the specific needs of foreign and domestic food manufacturers
and processors by providing products in the varieties and quantity needed in a
timely fashion, transporting products to meet customers' needs, packages in
containers, truck, rail or barge, providing product information and technical
support during the growing, processing, and marketing phases, and offering
complete service of product, including formulation, processing, grading, quality
control and packaging.
Customers
Sunrich currently markets its specialty grains products to more than 30
distributors and suppliers. In Sunrich's agricultural elevator business, Sunrich
serves more than 500 growers, providing feed; seed; agro-chemicals, grain
buying, selling and storage; grain trucking; agro-services, grain conditioning
and livestock feed services. Sunrich's Hope, Minnesota facility has the capacity
to store approximately 1,328,500 bushels of grain to service these customers.
Sunrich's food ingredient business provides food ingredients to foreign and
national manufacturers and processors.
Management of Sunrich believes that it has strengthened its food ingredients
customer base by the integration of Integrity Mills into its business as a
division in 1998. Integrity annually accounts for approximately 2.6 million
pounds of the approximately 7 million pounds of the North American organic
milled-corn (non-feed) market. Lastly, through its retail business, Sunrich
currently services approximately 35 distributors, which the management of
Sunrich believes will continue to grow through its Hearty & Natural division
retail soybean based meat substitute product line. Sunrich believes that the
size and diversity of its customer base, and its "full circle" approach to
customers, suppliers, growers, manufacturers and processors reduces Sunrich's
dependence on any single customer, product line or market.
Barnes Environmental International Division (BEI)
BEI's operations have two principal segments: (1) the recycling of industrial
mineral wastes and from site reclamation projects; these materials are cleaned,
crushed and blended to specific chemistry for resale to cement and steel
industries; and (2) the manufacture and distribution of industrial mineral based
products such as speciality sands, bentonite clays, abrasives and products for
foundry and the steel industry, many which can subsequently be recycled.
During the year BEI's processing of cement additives slows down during January
to mid March corresponding to reduced cement production and difficult winter
operating conditions. The foundry and steel businesses on the other hand are not
considered seasonal. The seasonal effects of the cement and abrasive product
lines are partially offset by sales of other products. Also, the establishment
of the Louisiana manufacturing facility centre during 1998 has helped to
mitigate the seasonality of BEI sales.
Steam Explosion Technology Division
The Company has developed the StakeTech System, including process engineering
and the hardware required.
3
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Item 1. Description of Business (continued)
The patented StakeTech System provides a method for the rapid and continuous
steam treatment of biomass under high pressure. The biomass that can be
processed in the system includes material such as wood chips, sugarcane bagasse,
cereal straws and waste paper.
In their natural state, these materials are not easily separated into their
component parts. By processing with the addition of high-pressure steam, the
StakeTech System breaks the chemical and physical bonds that exist between the
components of these materials allowing their subsequent separation and
processing into products and components that potentially have wide and diverse
applications. The Company has demonstrated its equipment and technology on a
commercial scale in several applications including the production of the
sweetener xylitol, alcohol and pulp for paper.
In 1993, the Company completed the turnkey supply of a US $3 million biomass
demonstration plant to the Italian Commission for New Technology for Energy and
the Environment ("ENEA") in Italy. This plant is the first facility in the world
to utilize continuous steam explosion combined with continuous extractions to
fractionate biomass into its components to serve in several fibre and chemical
end-use applications.
In 1996, the Company delivered a StakeTech System to Weyerhaeuser Company
(Weyerhaeuser) which passed its performance tests and was fully accepted by
Weyerhaeuser. This was the first sale of a StakeTech System to the pulp and
paper industry.
Since 1995, the Company has focussed marketing efforts relative to the Steam
Explosion Technology on the production of pulp for paper from non-woody fibres
and the production of cellulose derivatives.
StakeTech's steam explosion business is not affected by seasonality.
Major Developments at BEI Division in 1999
In the second half of 1999 BEI expanded its distribution facility in Louisiana
to include an abrasive manufacturing plant and began to export raw material
directly by ship. This facility is being used to widen the distribution of
Barshot products to the marine and industrial markets in the US Gulf area.
BEI has a licence agreement with the patent holder of "Specular Hematite as an
Impact Material" which gives BEI the exclusive right to market this material in
two central Canadian provinces and 13 Great Lake and North East Atlantic region
states. BEI also has the first right of refusal for a licence in 5 other US
states.
Barshot:
Specular Hematite is marketed under the name Barshot as a recyclable abrasive
providing higher profit margins for the user and competing with existing
materials such as garnet, staurolite, aluminium oxide, various slags and steel
grit. The Company is continuing to develop agents/distributors primarily for the
US exclusive territory, focusing on companies and contractors capable of
recycling Barshot.
In 1999, BEI continued to develop certain speciality grades of Specular Hematite
to be used in industrial markets for higher value applications.
Slag Abrasives: BEI continues to market copper slag abrasives under the name
Ebony Grit into the Ontario and Quebec markets. A new three-year supply
agreement was signed in the last quarter of 1998, which confirms future supply
of this product.
Garnets: In the last quarter of 1998, the Company signed an exclusive
distribution agreement for North America with a garnet supplier in India to
market garnets to the water jet metal cutting market and the abrasives market
and in the second half of 1999 signed an exclusive agreement with a sand
supplier in China.
Silica Sands: The Company will continue to supply its major foundry customers in
Quebec and Ontario with silica products; however, growth in this market in 1999
was limited due to competition from a local low cost supplier. During the last
quarter of 1998, the Company signed an exclusive distribution agreement with US
Silica to market their silica sands to the foundry industry in Ontario and
Quebec.
4
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Item 1. Description of Business (continued)
Zircon Sands: In 1999, BEI continued to explore the opportunities of recycling
higher value added products and has an agreement with a large automobile
manufacturer in southern Ontario to recycle very high value zircon sand used in
the manufacturing of engine castings. This product is being produced at the
Waterdown location, with a portion of the recycled product being sold back to
the automobile manufacturer, and the remainder is sold into the industrial
materials market.
A quality system was put into place during 1996 and 1997 and BEI was awarded
ISO-9002 registration after successful completion in May, 1997. A number of
ISO-9002 update audits have been successfully completed, the most recent in
December, 1999.
Major Developments in Steam Explosion Division in 1999
During 1999, the Company continued to apply its Steam Explosion Technology to
specific opportunities in the pulp and paper industry. In 1999, testing in the
Company's Technical Centre focused on opportunities relating to the processing
of sugarcane in South Africa, the processing of hardwoods in North America and
the processing of straw in China.
The Company has been actively seeking to establish marketing alliances that can
strengthen its ability to sell steam explosion pulping systems internationally
and on August 17, 1999, the Company signed an agreement with Pacitec Inc., of
Arlington, Texas for marketing StakeTech's non-woody pulping systems to the
Peoples Republic of China.
Under the terms of the agreement, Pacitec acquired exclusive rights to market
StakeTech's proprietary pulping systems for non-woody applications in China for
a license fee of US $4.0 million payable over twelve years. Maintenance of these
rights is conditional on achieving the sale of a minimum of 40 StakeTech Systems
valued at approximately US $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 Halliburton Energy
Services and Kellogg Brown & Root. Pacitec is in partnership with the China
National Beijing Contracting & 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.
Segmented Information
The Company operates in three industries:
(1) the sale or processing, recycling and resale of inorganic materials;
(2) the design and engineering of customized steam explosion technology systems,
and
(3) the production and marketing of organic and transmutagenetic food organisms
(non-GMO) food ingredients.
The Company's operations and assets are located in both Canada and the US.
5
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Item 1. Description of Business (continued)
Competition
Competition for Sunrich, Inc.
Today's grain market is subject to change, which results in constantly changing
market pressures and competitive forces. Sunrich's specialty grain operation
competes in the larger US commercial grain handling market. Sunrich's organic
specialty grains compete, in the smaller niche US commercial organic grains
market. In the agri-business industry, the Company competes with other grain
merchandisers, grain processors and end-users for the purchase of grains, as
well as with other grain merchandisers, private elevator operators and
co-operatives for the sale of grain. While Sunrich believes it has substantial
market share in the organic specialty grain market, many of its competitors in
the non-organic grain market are significantly larger and compete in wider
markets.
Sunrich's retail business is also highly competitive in part due to the growing
consumer demand for organic soy based products. Sunrich competes with a variety
of organic food processors and retailers, primarily smaller organic food
producers in the Midwest markets. Some of these competitors are larger than
Sunrich with a larger distribution of products in grocery stores than Sunrich,
however; Sunrich believes that the Hearty & Natural meat substitute lines may
allow a greater penetration into retail prepared food markets.
Competition in BEI Division
BEI conducts its businesses primarily in the region comprising the
Quebec-Detroit corridor and through its new distribution facility in New
Orleans, to the Louisiana Gulf region. BEI also believes it can be competitive
in various other areas such as upstate New York, Michigan and Northern Ontario.
In 1995, BEI was awarded a Certificate of Approval from the Ontario Ministry of
Environment and Energy to recycle non-hazardous and hazardous solid waste at its
Waterdown site. The significance of this Certificate of Approval, is that BEI
can now handle certain types of solid waste which it had recycled in the past,
but could not recycle without a Certificate of Approval, as these materials have
been declared hazardous by the Ontario Ministry of Environment and Energy over
the past few years. The Certificate of Approval has no fixed expiry date,
however the Company must comply with requirements listed in the terms of
Certificate of Approval to maintain it's good standing.
Materials that can be recycled under the Certificate of Approval represent
approximately 40% of the materials processed by BEI, however management expects
that, through product formulation changes, BEI will be able to process
additional quantities of materials to incorporate these materials into certain
of its existing products. In addition to its higher profit potential, there is a
strong strategic fit for BEI to process non-hazardous, hazardous and recyclable
materials.
The Certificate of Approval serves as a barrier to entry by other operators. BEI
has one of only two Certificate of Approval's in South Western Ontario for the
recycling of certain non-hazardous and hazardous solid waste. BEI therefore
competes in its recycling business with the holder of the other Certificate of
Approval; Philip Services Corp. and Ontario landfill site operators, including
those operated by municipal and regional governments. Furthermore, due to the
difficulty in gaining local community and political support, it is very
difficult, expensive and time consuming to obtain a Certificate of Approval.
At present, most solid industrial waste that is hazardous is disposed of at
hazardous waste landfill sites. There are three hazardous landfill sites
operating in this market: Chemical Waste Management (New York state),
Saftey-Kleen (Sarnia, Ontario) and Stablex (Blaineville, Quebec).
In general, BEI's competitive advantages in its core recycling area include:
o Superior knowledge of many industrial minerals and the local markets
for these materials.
o Long standing relationships with both generators and potential users
of industrial mineral waste.
o Efficient and cost effective material handling and processing
skills, based on decades of experience.
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Item 1. Description of Business (continued)
o Expertise necessary to provide cement companies and other customers
with materials of a consistent and reliable quality, and the ability
to adjust chemical composition as required.
o The ability to combine the sale of certain materials with a waste
removal service as one transaction.
o The ability to inventory some materials. This is attractive to
cement companies as a source of uninterrupted and "just in time"
supply.
o Being known in the market as a recycler, in contrast to the large
traditional waste management companies, which derive most of their
profit from landfill and trucking operations.
o The specular hematite licence and certain exclusive supply
arrangements.
Competition in Steam Explosion Division
The Company is focussing its marketing efforts on applying the Steam Explosion
Technology to the production of pulp for paper.
The Company believes the ability of StakeTech Systems to operate at high
pressure presents advantages in terms of reducing chemical requirements and
improving product yields.
The Company's success in marketing to the pulp and paper industry will depend on
the extent to which the StakeTech System can be shown to have advantages over
the technology of existing suppliers. These existing suppliers include:
Ahlstrom, Kvaerner, Valmet and Andritz Sprout-Bauer.
The Company is aware of other groups that are attempting to develop and market
new pulping processes. These include the NACO process from Italy and the Saicca
process from Spain.
It is anticipated that competition from suppliers of alternative systems and
equipment in these markets will be strong and that the potential advantages for
the StakeTech System will have to be demonstrated.
Availability of Raw Materials and Suppliers
Sunrich, Inc. Suppliers
The products distributed by Sunrich are grown, processed and manufactured by
over 550 growers, processors or manufacturers, the ten largest of which provided
approximately 6% of the products purchased by Sunrich. Organic specialty beans
are sourced by Sunrich's buyer who personally visits organic farms throughout
the agricultural states of the Midwest to locate and contract for specific beans
required for Sunrich's customers. Non-organic specialty beans are purchased
from, other contract growers, and members of Southwest Iowa Specialty Crop
Growers, Inc., in which Sunrich owns a 45% stake. Southwest Iowa Specialty Crop
Growers is an organization formed to provide geographical diversification from
regional crop disease and weather problems. Sunrich believes that obtaining
product through Southwest Iowa Specialty Crop Growers allows Sunrich to avoid
temporary shortage of product or price fluctuations that may affect other
distributors, and also allows Sunrich to sell seed to growers for the contract
growing of special varieties of grain. Contract growers in Southern Minnesota
grow Sunrich's waxy corn. Unlike specialty beans, most of Sunrich's waxy corn
growers are located in Southern Minnesota and as a result, Sunrich may be
exposed to regional weather or disease problems that could negatively affect
profits.
BEI Division's Suppliers
Most of BEI's critical raw materials are purchased through approved suppliers to
ensure the highest quality and the supplier's ability to adhere to BEI's usage
requirements.
There is an abundance of inorganic materials that are increasingly becoming
subject to federal, provincial and state
7
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Item 1. Description of Business (continued)
legislative restrictions. The Company expects the supply of contaminated
materials to increase due to increased awareness by the general public and the
resulting laws that will require these wastes to be recycled in the future.
However, the availability of these materials could be reduced if the demand for
recycling subsides. While BEI's sources of hazardous and non-hazardous waste
materials are expected to eventually come from a variety of industries, many of
the opportunities identified to date are from its existing customer base in the
foundry, steel and industrial sandblasting industries.
BEI receives materials from over 200 suppliers. While BEI has several
alternative sources of supply for many of the inputs it requires, it also has
several key supplier relationships, which are summarized below.
BEI obtains its key abrasive raw materials from certain Canadian mines. Specular
Hematite reserves at the current mine supplier are estimated to be sufficient to
supply BEI's needs for many years. Ebony Grit, a product produced from copper
slag is supplied on exclusive basis by a Canadian mining company. BEI has
adequate inventory reserves of this product to meet 2000 demand.
BEI has the exclusive right to distribute high purity silica sand to the foundry
industry in Quebec and Ontario for US Silica. BEI is one of US Silica's largest
distributors.
BEI represents the Bentonite Corporation focusing on sales to the foundry
market, as well as other bentonite sales to the industrial market in Quebec and
Ontario.
BEI has recently signed an exclusive North American agreement to market garnet
from a supplier in India and a second agreement with a supplier to China.
Steam Explosion Division's Suppliers
Waste biomass such as straw is currently available in abundant supply in many
parts of the world. If other economic uses for waste biomass increase, the
Company may find that the supply of such raw materials is reduced. The
unavailability or significantly increased cost of raw materials would have a
materially adverse effect on the Company's business.
In respect of the design and engineering of the customized steam explosion
technology systems, the Company provides equipment fabricators with detailed
drawings and equipment specifications. All major pieces of equipment and major
components have at least two alternative Company approved suppliers.
Government Regulation and Environmental Hazards
The Company believes, with respect to both its operations and real property,
that it is in material compliance with environmental laws and the requirements
of its Certificate of Approval., at the BEI property in Waterdown, Ontario.
BEI Regulation
BEI's business primarily involves the handling of materials, which are
inorganic, and mineral based. These types of materials are generally benign and
should not give rise to environmental problems. Accordingly, to date there has
been low potential for environmental liabilities to arise. The Ontario Ministry
of Environment and Energy has the right to inspect the site and review the
results of third party monitoring and perform its own testing.
Based on known existing conditions and the Company's experience in complying
with emerging environmental issues, the Company is of the view that future costs
relating to environmental compliance will not have a material adverse effect on
its financial position, but there can be no assurance that unforeseen changes in
the laws or enforcement policies of relevant governmental bodies, or the
discovery of changed conditions on the Company's real property or in its
operations, will not result in the occurrence of significant costs.
8
<PAGE>
Item 1. Description of Business (continued)
Sunrich, Inc Regulation
The agri-business and meat substitute industries are affected by governmental
agricultural policies. Government-sponsored price supports and acreage set aside
programs are two examples of policies that may affect Sunrich's business. There
can be no assurance that government policies will not change from time to time
in a manner adverse to Sunrich's business.
In addition, several of Sunrich's business activities are subject to US
environmental regulations. Sunrich is involved in the manufacture, supply,
processing and marketing of organic seed and food products and, as such, is
voluntarily subject to certain organic quality assurance standards. Sunrich is
currently in compliance with all state and federal fertilizer, pesticide, food
processing, grain buying and warehousing, and wholesale food-handling
regulations. While Sunrich endeavours to comply in all material respects with
applicable environmental, safety and health regulations, there can be no
assurance that existing environmental regulations will be revised or that new
regulations will not be adopted or become applicable that may have a material
adverse effect on Sunrich's business or financial condition.
Steam Explosion Technology Regulation
The Stake steam explosion technology may use chemicals in addition to steam to
treat fibrous material. This technology does not generally produce appreciable
pollutants and the Company believes that its existing facilities are in full
compliance with applicable laws concerning the environment. The Company has not
to date found it necessary to spend material amounts in order to comply with
applicable environmental laws. It is anticipated that future sales or licenses
of the Company's technology will be made where the StakeTech System is but one
part of a larger process, as for example in the manufacture of pulp. In these
instances, the overall project may be subject to Federal, State or local
provisions regulating the discharge of materials into the environment.
Compliance with such provisions may result in significant increases in the costs
associated with the overall project.
Research and Development
The Company spent $367,000 in 1999 and $357,000 in 1998 on research and
development related activities. In 1999, these development activities were
primarily directed to furthering the application of the steam explosion
technology to the production of pulp for paper.
Research and development in BEI Division
Environmental: In 1999, BEI continued to evaluate the processing and recycling
of a number of waste mineral streams into higher value added products. These
spent materials originating primarily from the foundry, steel and industrial
sectors can often be separated back into their original composition, which
increases the value of the recycled product and can lead to a greater number of
markets.
Specular Hematite: In 1999, BEI continued to study the use of Specular Hematite
in a number of value-added markets, requiring fast cutting and cleaning speed,
as well as developing new markets in nuclear shielding, non-slip flooring and
ballast products.
Research and development in Steam Explosion Division
In 1999, major technical developments were related to the application of steam
explosion to the pulping of bagasse in South Africa, hardwoods in North America,
and wheat and rice straw in China.
Easton Minerals Ltd.
In addition to its core businesses, the Company has a 35% interest in Easton
Minerals Ltd. (Easton), a mining exploration company listed on the Canadian
Venture Exchange (EM-CDNX). Easton is in the process of diversifying its
business interests beyond mining exploration. The Company's investment is
represented by two of Stake's directors who are members of the Easton Board of
Directors. It is the Company's intention to sell its interest in Easton in the
future, as mining development and exploration is not related to the Company's
primary businesses.
9
<PAGE>
Item 1. Description of Business (continued)
Employees
As of March 13, 2000 the Company had 88 employees, 46 at Sunrich, 34 at BEI and
8 at StakeTech's corporate office and steam explosion technology centre.
Sunrich has 46 full-time employees, of whom 7 were engaged in executive and
administrative activities, 15 were engaged in sales and marketing, 2 were
engaged in customer service, 10 were engaged in production, 9 were engaged in
elevator operations, and 3 were engaged in truck driving operations. Sunrich has
no union activity, and Sunrich considers its relations with its employees to be
good.
BEI's 34 employees are engaged in the following: 5 in administrative positions,
6 in sales and marketing, 1 responsible for environmental compliance, 2 in
research and quality control, 3 in production supervision and traffic, 1 in
plant engineering, 12 in production and warehousing and 4 in plant maintenance.
15 of the 16 BEI production and maintenance employees are represented by
Teamsters Local Union #879. The current Collective Bargaining Contract with the
Teamsters is in effect from July 1, 1999 to June 30, 2002. The 1999 contract was
renegotiated with no work stoppages. The Company experienced no work stoppages
in 1999.
The Steam Explosion Technology and corporate office division has 8 employees: 2
engaged in research and development, 1 engaged in engineering, 1 engaged in
marketing and selling and 4 employees involved in executive and administrative
activities. Since the Company subcontracts out the production of its equipment,
it does not anticipate significantly increasing the size of its work force.
The Company depends and will continue to depend in the foreseeable future on the
services of its present officers and key employees. The loss of three or more of
these senior persons at the same time would have a serious adverse effect on the
Company's ability to implement its business plans on a timely basis.
Commodities
Sunrich uses the commodity futures market on the Chicago Board of Trade to
"hedge" its grain positions, as it is common in the grain industry. Sunrich will
buy or sell future contracts to offset its cash grain purchase and sales
contracts, effectively protecting the company's margins. This process is
considered a "hedge" and is non-speculative in nature. The accounting for
commodities is monitored daily and the transactions arising from these
activities are booked monthly.
There are no future contracts in the BEI division and steam explosion/corporate
activities.
Item 2. Description of Properties
The Company's executive offices and Steam Explosion Technology division are
located at 2838 Highway 7, Norval, Ontario, Canada L0P 1K0. The property is
approximately 10 acres and is within 15 minutes of Pearson (Toronto)
International Airport. The property consists of 3 principal buildings, the
corporate office; which covers approximately 7,500 square feet, a separate
laboratory facility, and a pilot plant facility. The Company owns this property,
and no security is held against this property.
BEI operates from 3 locations: the primary operating facility, administrative,
laboratory and principal production facilities are located on a 31.6 acre site
at 407 Parkside Drive, Waterdown, Ontario, Canada L0R 2H0, which is 60 miles
from Toronto; a warehouse facility in Lachine (Montreal), Quebec and a
distribution and manufacturing facility outside of New Orleans, Louisiana.
The Waterdown site has a Canadian Pacific Railways rail spur and good access to
major highways. There are eight structures on site including four, which are
primarily production related, two warehouse type facilities and two, which are
primarily used as offices. This property is owned by the Company and has been
pledged as collateral for long-term debt. Both the Quebec and Louisiana
facilities are leased. Quebec's lease runs until 2004 and Louisiana's lease is
renewable yearly by the Company and the Port Authority of New Orleans.
10
<PAGE>
Item 2. Description of Properties (continued)
Major capital equipment at the Waterdown site includes bulk sand handling and
storage equipment, automated equipment to fill bags with sand and to stack
pallets, other mixing equipment, various material handling equipment such as
front-end loaders and forklifts, laboratory equipment, truck scales, conveyer
systems, mixers, crushing and screening equipment. The distribution facility
located in Lachine, Quebec consists of a 20,000 square foot warehouse and office
space. The manufacturing and distribution facility in New Orleans, Louisiana
consists of a dryer, storage bins, loading, distribution facilities and an
office.
Sunrich's principal executive offices are located at 3824 Southwest 93rd Street,
Hope, Minnesota, 56046 and has approximately 4,100 square feet. Sunrich owns all
of its facilities. The Union Pacific Railroad runs alongside the Sunrich
property and is utilized for the grain elevator business. Sunrich is also
adjacent to Interstate 35. The Sunrich property is not located in a flood hazard
zone and is centrally located within the Owatonna County fire-fighting district.
Major capital equipment at the Hope site includes a grain elevator system with
scale, storage bins and truck and rail loading capabilities. Also at the Hope
site is a grain conditioning system which includes grain cleaners, spirals,
gravity table and colour sorting equipment. In addition, Sunrich has bulk and
bag storage facilities for fertilizer, chemical and feed.
Sunrich owns a dry-milling corn plant in Cresco, Iowa. Equipment here includes
various grain cleaning equipment such as screeners, a gravity table, roller
mill, an aspirator, a degermer and grain bins.
Sunrich leases a facility in Blaine, Minnesota to manufacture its "Veggie
Burgers". Equipment at this location, which Sunrich owns, includes ovens, a
freezer, a scale, and a mixing unit.
Item 3. 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 35% equity investment.
The Company and its legal counsel believe their claim has merit and that the
counterclaim is without merit. 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.
Although the nature of Sunrich's business could lead to litigation incidental to
the conduct of such business, Sunrich has not been, and is not currently, a
party to any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of the year ended December 31, 1999.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table indicates the high and low bid prices for Stake's common
shares for each quarterly period during the past two years as reported by
Nasdaq. The Company's common shares trade on The Nasdaq Small Cap Market tier of
The Nasdaq Stock Market under the symbol STKL. The prices shown are
representative inter-dealer prices, do not include retail mark ups, mark downs
or commissions and do not necessarily reflect actual transactions.
Trade Prices (US Dollars)
================================================================================
1999 HIGH LOW
--------------------------------------------------------------------------------
First Quarter 1 15/32 5/8
--------------------------------------------------------------------------------
Second Quarter 1 17/32 3/4
--------------------------------------------------------------------------------
Third Quarter 1 15/32 15/32
--------------------------------------------------------------------------------
Fourth Quarter 15/32 11/16
--------------------------------------------------------------------------------
1998 HIGH LOW
--------------------------------------------------------------------------------
First Quarter 1 7/8 1 5/16
--------------------------------------------------------------------------------
Second Quarter 1 13/16 1 5/32
--------------------------------------------------------------------------------
Third Quarter 1 7/16 19/32
--------------------------------------------------------------------------------
Fourth Quarter 15/16 1/2
================================================================================
At December 31, 1999, the Company has 750 record holders. Based on proxy
requests from shareholders and nominee holders at the last annual meeting date,
the Company estimates that there are at least 3,300 beneficial holders of the
Company's common shares. The Company has never paid dividends on its common
stock and does not anticipate paying dividends for the foreseeable future. The
receipt of cash dividends by United States shareholders from a Canadian
corporation, such as the Company, may be subject to Canadian withholding tax.
Item 6. Management's Discussion and Analysis or Plan of Operations
The Company is pleased to report net earnings of $1,524,000 or $0.09 per share
in 1999 compared to $822,000 or $0.06 per share in 1998, and a 114% increase in
revenue for 1999 of $47,304,000 (1998 - $22,077,000).
Working capital has improved to $6,824,000 in 1999 compared to $3,551,000 in
1998. The increase in working capital is primarily due to the acquisition of the
Sunrich assets in August 1999, as well as growth in the working capital assets
over the year.
1997 Change to Capital Structure
A change to the Company's capital structure in 1997 was made under rules of the
Canadian Business Corporations Act, the Company's incorporating statute that
must be disclosed in its financial statements for 10 years to December 31, 2006.
In 1997, the Company's shareholders approved and the Company:
1. eliminated the 5,000,000 Class "A " non dividend bearing, non-voting,
redeemable, preference shares that were authorized but never issued;
2. increased the authorized common shares from 25,000,000 to an unlimited
number; and
3. reduced the stated capital account of the Company in respect of its common
shares by $25,026,000, being the deficit at December 31, 1996.
12
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operations (continued)
These changes result in the common share class being the only authorized capital
of the Company. This change should eliminate the confusion that existed
concerning the purpose of the previously authorized but unissued Class "A"
preference shares.
In addition, the reduction of the stated capital account by the deficit provides
better presentation in the shareholder's equity section of the balance sheet, as
it reflects the Company as the operating Company it is today, rather than the
development Company it was before the acquisition of BEI in 1995.
Acquisition of Sunrich, Inc.
On August 2, 1999, the Company acquired 100% of the common shares of Sunrich,
Inc. an agritech company in Minnesota, in exchange for 5,471,866 common shares
of the Company and 104,821 common share warrants of the Company. The common
shares warrants were exercisable for 30 days at US $0.50, and if these warrants
were exercised, the shareholders would be entitled to another warrant
exercisable at US $1.00 to December 31, 1999, rising to US $2.00 on January 1,
2000 and expiring on December 29, 2000.
Certain shareholders of Sunrich chose to exercise dissenter's rights and
received $49,000 in cash for their Sunrich shares.
The acquisition has been accounted for using the purchase method. The net assets
acquired and consideration given is summarized below.
Net assets acquired
Cash 368,000
Net working capital 3,044,000
Property, plant and equipment 4,911,000
Goodwill 2,183,000
Notes payable (1,325,000)
Long-term debt (2,370,000)
Net future income tax liability (18,000)
----------
6,793,000
----------
Consideration
Common shares 6,346,000
Common share warrants 55,000
Cash 392,000
----------
6,793,000
----------
The company has consolidated the operations of Sunrich from the date of
acquisition.
Year 2000 Issue
The Year 2000 issue arises because many computer systems use two digits rather
than four to identify a year. Date sensitive systems may recognize the year 2000
as 1900, or some other date, resulting in errors when information-using dates
beyond 1999 is processed.
The Company experienced no significant year 2000 problems and does not
anticipate any time sensitive issues will occur.
13
<PAGE>
1999 Operations Compared with 1998 Operations
Revenues in 1999 increased by 114% to $47,304,000 from $22,077,000 in 1998 and
the Company's earnings for 1999 were $1,524,000 or $0.09 per common share
compared to $822,000 or $0.06 per share for the year ended December 31, 1998.
Revenues in 1999 were derived from Sunrich of $24,991,000, from BEI 1999 sales
were $21,829,000 (1998 - $21,995,000) and steam explosion and corporate sales in
1999 were $484,000 (1998 - $82,000). Substantially all revenues in 1998 were
derived from the BEI division.
In 1999, BEI sales consisted of sales of abrasives, foundry sands and other
products were $19,215,000 (1998 - $19,006,000) and recycling revenues were of
$2,614,000 (1998 - $2,989,000). Sunrich's $24,991,000 of sales since acquisition
were from identity preserved specialty products of $13,320,000 or 53% of sales,
soy and soybean product sales of $5,450,000 or 22% of sales; other grain sales
of $4,328,000 or 17% of sales; feed sales of $1,140,000 and other sales of
$753,000. Steam explosion and general corporate revenues of $484,000 in 1999
were generated primarily from steam explosion licence fee revenue of $399,000
(1998 - nil). Private industry technology projects generated revenue in 1999 of
$11,000 (1998 - $16,000), and other corporate revenues were $74,000 (1998 -
$66,000). No equipment sales were made in 1999 or 1998
Cost of sales increased by 132 % to $40,145,000 for the year ended December 31,
1999 compared to $17,308,000 for the year ended December 31, 1998. The increase
in cost of sales is primarily related to the acquisition of Sunrich. Cost of
sales in 1999 attributable to the BEI segment were $17,667,000 (1998 -
$17,195,000), and on Sunrich, cost of sales was $22,340,000. Steam explosion
division cost of sales were $138,000 (1998 - $113,000), which primarily relates
to standard amortization charges.
BEI's cost of sales in 1999 from abrasives, foundry and other products was
$15,745,000 (1998 - $14,515,000) and recycling of $1,922,000 (1998 -
$2,680,000). The margins in products contained in the abrasive, foundry and
other category have improved slightly to 26.5 % from 23.6% in 1998. Recycling
margins have increased in 1999 over 1998 due to an increase in the incoming
recycling fees and stable freight costs.
Sunrich's cost of sales since acquisition from identity preserved specialty
products of $11,944,000; soy and soybean product sales of $4,778,000 other grain
sales of $4,225,000; feed sales of $1,062,000; and other sales of $331,000.
The Company's gross margin was 15.1% in 1999 compared to 21.6% in 1998 due to
the lower margins in the agritech business of Sunrich. BEI's margin decreased to
19.1% in 1999 from 21.8% in 1998, due to tight price competition in some of
BEI's principal product lines. Sunrich's margin was 10.6% for the five months
since acquisition. Steam explosion and corporate margins were $346,000 on
$484,000 of revenue or 71.5% due to the nature of the revenues in this division.
Research and development costs, principally related to steam explosion division
was $367,000 in 1999 compared to $357,000 for the year ended December 31, 1998
due to minor increases in research into non-wood applications for steam
explosion technology during 1999.
Administration and market development expenditures increased in 1999 to
$4,965,000 compared to $3,419,000 for the year ended December 31, 1998. In 1999
Sunrich's administration costs were $2,005,000, BEI's operations accounted for
$1,722,000 of the administration costs (1998 - $1,902,000) and steam explosion
marketing and demonstration and corporate administration expenses were
$1,238,000 (1998 - $1,517,000). The principal reason for the increase in these
expenses in 1999 over 1998 results from the inclusion of Sunrich's
administration costs, however based on operations that were in place at the end
of 1998, administration costs decreased by $459,000 due to less acquisition cost
write-offs and certain administration efficiencies.
Amortization of patents, trademarks, licences and goodwill increased to $158,000
in 1999, compared to $139,000 in 1998 due to the amortization of the new
goodwill arising on the acquisition of Sunrich, Inc. offset by certain other
assets in this category being fully amortized in the year.
The gain on sale of property, plant and equipment of $5,000 (1998 - $60,000) in
1999 is due to the sale of non-essential equipment for net proceeds of $13,000.
In 1998, the gain was due to the sale of non-essential land for net proceeds of
$89,000 at a location separate from the Company's principal operations.
14
<PAGE>
1999 Operations Compared with 1998 Operations
Interest and other income decreased to $181,000 in 1999 from $57,000 in 1998 due
an increase in interest earned on the higher cash balances being available
during 1999 over 1998.
Interest on long-term debt and other interest increased to $330,000 in 1999 from
$134,000 in 1998 due to Sunrich's debt obligations.
The share of losses of equity accounted investees of ($321,000) (1998 -
($29,000)) and dilution gain of $nil (1998 - $26,000) is related to the
Company's 35% equity investment in Easton Minerals Ltd. (Easton) a mining
exploration company listed on the Canadian Venture Exchange (EM-CDNX). Dilution
gains result from the increase in equity value of Easton due to issues of
capital above Stake'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. US readers should
note that dilution gains are not recognized as income for US GAAP purposes due
to the development stage nature of Easton, and accordingly, the effects of this
gain are reversed in Note 17 of the Company's financial statements.
The Company's investment in Easton is carried at a book value of $186,000 and
accumulated advances of $95,000 have also been made. The market value of Easton
at March 13, 2000 was $3,932,000. On June 15, 1998, the Company's Board decided
to sell its holdings in Easton as mining development and exploration are not
related to the Company's primary businesses, and has filed appropriate
notification of this intent with Easton's regulators.
The foreign exchange loss of $76,000 (1998 - gain of $67,000) is attributable to
the weakening in 1999 and the strengthening in 1998 of the US $ on the Company's
net foreign transactions and balances.
The loss on sales of marketable securities was $nil in 1999 (1998 - $16,000) was
related to the disposal on non-core investments. The dividend on preference
shares of a subsidiary company of $25,000 (1998 - $30,000) and the imputed
interest of preference shares of a subsidiary company of $31,000 (1998 -
$33,000) are related to the preference shares issued for the acquisition of BEI.
Liquidity and Capital Resources at December 31, 1999
Cash and short-term deposits increased $2,464,000 at December 31, 1999 from
$181,000 at December 31, 1998. The increase is principally due to customer
deposits of $1,618,000 being paid to Sunrich, in 1999 for year 2000 purchases by
Sunrich's customers, and the remaining increase is due to internally generated
cash.
Trade accounts receivable increased to $7,300,000 at December 31, 1999 from
$3,805,000 at December 31, 1998 due largely to the acquisition of Sunrich. Trade
receivables at December 31, 1999 related to the BEI operations were $3,375,000
(1998 - $3,727,000); Sunrich operations were $3,747,000 and general corporate
activities and steam explosion $178,000 (1998 - $78,000).
Inventories increased to $8,589,000 at the end of 1999 from $2,878,000 at
December 31, 1998, principally due to the addition of the Sunrich balances,
which are $5,145,000 at December 31, 1999. BEI's inventory was $3,444,000 (1998
- $2,878,000). The increase in BEI's inventory in 1999 over 1998 is due to the
receipt of inventory delivered by ship in late 1999 in order to meet anticipated
demand in the spring of 2000. The inventory balance at December 31, 1998 was
entirely related to BEI operations as the steam explosion division is not
required to carry inventory.
Future income tax assets of $1,020,000 at December 31, 1999 (nil - December 31,
1998) consists of $635,000 of Canadian tax losses and scientific research
expenditures recorded by the Canadian entity in the current year and the
remaining balance of $385,000 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
December 31, 1999, relating to normal equipment replacement at BEI, Sunrich, and
in the steam explosion and corporate divisions.
In 1999, $500,000 (1998 - $463,000) was spent at BEI for machinery and equipment
improvements in Waterdown, establishment of the facilities is Louisiana, general
upgrading of computers and the acquisition of accounting software that is year
2000 compliant. Sunrich spent $591,000 on capital expenditures since August 2,
1999 principally on
15
<PAGE>
Liquidity and Capital Resources at December 31, 1999 (continued)
the construction of a new grain storage bin. In 1999, $47,000 (1998 - $4,000)
was spent at corporate office primarily on computer equipment.
BEI's capital budget for 2000 is $500,000 and is to improve and replace
production equipment primarily in Waterdown and Louisiana. Sunrich's capital
budget is US $660,000 principally for expansion of a warehouse, two additional
grain trucks and improved handling and packaging equipment. There are no plans
to make significant capital expenditures during 2000 at Stake's steam explosion
pilot plant. Corporate office has a capital budget of $50,000 to make certain
computer upgrades.
Investments decreased to $281,000 in 1999 from $565,000 in 1998 due primarily to
the equity loss on Easton of $321,000 (1998 - $29,000), offset by advances of
$37,000 made to Easton (1997 - $21,000) and the dilution gain of $nil (1998 -
$26,000).
Goodwill increased to $3,922,000 at December 31, 1999 from $1,897,000 at
December 31, 1998 due to the $2,183,000 in goodwill recorded on the acquisition
of Sunrich, Inc. offset by amortization of this goodwill and goodwill recorded
on the BEI acquisition in 1995.
Patents, trademarks, licences and other assets has increased to $446,000 from
$384,000 due to further investments in the Company's proprietary positions
during 1999.
Accounts payable and accrued liabilities increased to $10,179,000 in 1999 from
$2,937,000 in 1998. The increase is due to the addition of Sunrich's balances,
which are $7,075,000 at December 31, 1999. The accrued recycling reserve of
$384,000 (1998 - $393,000) included in accounts payable in 1999 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 December 31,
1998.
The note payable of $208,000 at December 31, 1999 is a demand note related to
Sunrich's hedging activities. The loan may be drawn up to US $200,000 (US
$144,000 outstanding at December 31, 1999) with interest at prime. Borrowings
under this note are due May 31, 2000.
Customer deposits of $1,618,000 at December 31, 1999 (1998 - nil) are related to
cash deposits made by Sunrich customers in 1999 for year 2000 purchases. No
recognition of revenue or accrual of costs is booked on these transactions until
the goods are shipped.
The Company's term bank loan, which was outstanding before Sunrich was acquired
has a 5 year amortization period and will be paid over the next 2 years to
December, 2001 subject to the Company's compliance to certain financial
covenants. The Company does not anticipate a breach of these covenants.
The term bank loan is financed by short-term instruments to take advantage of
low short-term Canadian interest rates and the ability to repay the term bank
loan ahead of schedule. The Company can elect to fix the rate and term of this
term bank loan at the maturity date of underlying debt instruments, which is
generally every 90 days. The term bank loan bears interest at Canadian prime + 1
% or banker's acceptances + 1.25%; the Canadian prime interest rate is currently
6.5%. Interest is paid in advance with the banker's acceptances. Full or partial
repayment of the term bank loan is permitted based on the maturity of the
underlying debt instruments. During 1999, $600,000 was repaid. At December 31,
1999, the loan outstanding was $1,400,000. Payments of $600,000 in 2000, and
$800,000 in 2001 are required.
In addition to the term bank loan, the Company has bank lines of credit of
$3,000,000 and US $3,500,000 available based on margining of trade accounts
receivable and inventory. At December 31, 1999, $1,116,000 (1998 - $823,000) was
drawn on the Canadian facility for a letter of credit to the Ontario Ministry Of
the Environment and Energy for the Certificate of Approval; to two key
suppliers, and for security on the Louisiana lease. There are no amount drawn on
the US lines of credit at December 31, 1999.
Sunrich has notes payable of $1,133,000 at December 31, 1999 on its Hope,
Minnesota property and $410,000 on its Cresco, Iowa property. Both the notes
payable are secured by the underlying real estate. The Hope note payable is
payable in monthly instalments to February 29, 2009 and the Cresco property note
payable is payable monthly to July 2013. Both mortgages bear interest at the
bank's reference rate, currently 9% at December 31, 1999.
16
<PAGE>
Liquidity and Capital Resources at December 31, 1999 (continued)
Sunrich has a further note payable of $433,000 at December 31, 1999, with
interest at 8.75% only through May 2000, and then monthly payments through to
November 2006 related to the construction of the new grain storage bin in 1999.
Sunrich also has auto and truck loans totalling $179,000 at December 31, 1999 at
interest rates ranging from 0.9% to 8.0% due in varying instalments through
July, 2002, and are secured by the vehicles.
Capital lease obligations of $350,000 at December 31, 1999 are related to
Sunrich's business and are for certain production equipment. These leases are
due in monthly instalments through June, 2003 with interest ranging from 7.57%
to 8.06%. Interest included in the $350,000 at December 31, 1999 was $52,000.
The future tax liability of $579,000 at December 31, 1999 (1998 - nil) relates
principally to Sunrich and 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.
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 its cash to be generated from operations, its current
cash and short term deposits and its available lines of credit at March 13, 2000
are sufficient for the Company's operations during 2000.
Cash flow provided by operations for the year ended December 31, 1999 was
$5,004,000 (1998 - $277,000) due to higher earnings in 1999 over 1998 and a
significant positive turnover of working capital assets in the year principally
related to the Sunrich assets acquired.
Cash used in investment activities increased to $1,273,000 in 1999 (1998 -
$357,000) due principally to larger capital additions in 1999 over 1998 due to
the addition of Sunrich.
Cash used for financing activities was $1,422,000 in 1999 (1998 - $479,000). The
increase in cash used for financing is principally due to higher net debt
repayments in 1999 compared to 1998 due to the addition of Sunrich's debt
obligations during the year.
1998 Operations Compared with 1997 Operations
Revenues in 1998 increased by 31% to $22,077,000 from $16,847,000 in 1997 and
the Company's earnings for 1998 were $822,000 or $0.06 per common share compared
to $149,000 or $0.01 per share for the year ended December 31, 1997.
Substantially all revenues in 1998 were derived from the BEI division. Sales of
BEI increased by 34.7% to $21,995,000 (1997 - $16,334,000). BEI segment sales
represent 99.6% of consolidated sales in 1998. (1997 - 97%).
In 1998, BEI sales consisted of sales of abrasives, foundry sands and other
products were $19,006,000 (1997 - $13,504,000) and recycling revenues were of
$2,989,000 (1997 - $2,830,000). The sales of abrasive, foundry sands and other
products increased by over $5,000,000 in 1998. The increase is principally
attributable to a 143% increase in sales of Barshot, the Company's specular
hematite product; 10% increases in 1998 over 1997 in sales of three significant
existing product lines and sales of new products such as Chromite Zircon, Garnet
and others which added over $1 million in new sales to the Company. Aggressive
marketing, development of new product lines and the opening of the Louisiana
facility, which has broadened the Company's market area, resulted in this
significant sales growth.
Steam explosion and general corporate revenues in 1998 were $82,000 (1997 -
$513,000). No equipment sales were made in 1998 (1997 - $139,000). Private
industry technology projects generated revenue of $16,000 (1997 - $305,000), and
other corporate revenues were $66,000 (1997 - $69,000).
Cost of sales increased by 30.3% to $17,308,000 for the year ended December 31,
1998 from $13,287,000 for the year ended December 31, 1997. The increase in cost
of sales is primarily related to the 34.7% increase in BEI sales. Cost of
17
<PAGE>
1998 Operations Compared with 1997 Operations (continued)
sales in 1998 attributable to the BEI segment were $17,195,000 (1997 -
$12,953,000). Steam explosion division cost of sales were $113,000 (1997 -
$334,000), which primarily relates to standard amortization charges.
BEI's cost of sales in 1998 from abrasives, foundry and other products was
$14,515,000 (1997 - $10,455,000) and recycling of $2,680,000 (1997 -
$2,498,000). The margins in products contained in the abrasive, foundry and
other category have improved slightly to 23.6% from 22.6% in 1997. Recycling
margins have decreased in 1998 over 1997 due to a decrease in the incoming
recycling fees and increased freight costs.
The Company's gross margin was 21.6% in 1998 compared to 21.1% in 1997. BEI's
margin increased to 21.8% in 1998 from 20.7% in 1997, however, due to the lack
of equipment sales and private industry contracts, steam explosion division
margins were negative due to standard depreciation charges compared to 34.8% in
1997 when there was more activity in this business line.
Research and development costs increased to $357,000 in 1998 from $349,000 for
the year ended December 31, 1997 due to minor increases in research into
non-wood applications for steam explosion technology in 1998.
Administration and market development expenditures increased in 1998 to
$3,419,000 compared to $2,973,000 for the year ended December 31, 1997. In 1998,
BEI operations accounted for $1,902,000 of the administration costs (1997 -
$1,935,000). Steam explosion marketing and demonstration and corporate
administration expenses were $1,517,000 (1997 - $1,038,000). The principal
reason for the increase in these expenses in 1998 over 1997 results from salary
increases and over $220,000 related to costs of uncompleted acquisitions that
have been written off during 1998.
Other income decreased to $57,000 in 1998 from $83,000 in 1997 due a decrease in
interest earned due to lower cash balances being available during 1998 over
1997. Lower cash balances were held during 1998 due to the need to invest in
working capital to support the Company's growth in sales.
Interest on long-term debt decreased to $134,000 in 1998 from $155,000 in 1997
due to debt repayments of $500,000 during 1998.
The share of losses of equity accounted investees of ($29,000) (1997 -
($35,000)) and dilution gain of $26,000 (1997 - $226,000) is related to the
Company's 35% equity investment in Easton Minerals Ltd. (Easton) a mining
exploration company listed on the Vancouver Stock Exchange (EM-VSE). Dilution
gains result from the increase in equity value of Easton due to issues of
capital above Stake's carrying cost of this investment. US readers should note
that dilution gains are not recognized as income for US GAAP purposes due to the
development stage nature of Easton, and accordingly, the effects of this gain
are reversed in Note 17 of the Company's financial statements.
The Company's investment in Easton is carried at a book value of $507,000 and
accumulated advances of $58,000 have also been made. The market value of Easton
at February 19, 1999 was $1,258,000. On June 15, 1998, the Company's Board
decided to sell its holdings in Easton as mining development and exploration are
not related to the Company's primary businesses, and has filed appropriate
notification of this intent with Easton's regulators. 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.
The foreign exchange gain of $67,000 (1997 - $7,000) is attributable to the
strengthening of the US $ on the Company's net receivable balance during 1998.
The loss on sales of marketable securities of ($16,000) (1997 - gain on sale of
marketable securities of $36,000) is related to the disposal on non-core
investments. The gain on sale of property, plant and equipment of $60,000 (1997
- nil) is due to the sale of non-essential land for net proceeds of $89,000 at a
location separate from the Company's principal operations.
The dividend on preference shares of a subsidiary company of $30,000 (1997 -
$35,000) and the imputed interest of preference shares of a subsidiary company
of $33,000 (1997 - $39,000) are related to the preference shares issued for the
acquisition of BEI
Item 7. Financial Statements
Financial statements are set forth on pages F-1 through F-26 of this Report and
are incorporated herein by reference.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
18
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
(a) Identification of directors and executive officers:
Information concerning the directors and executive officers as at March 13, 2000
is set forth below:
<TABLE>
<CAPTION>
===================================================================================================================
Number of
Year First Position Shares
Elected With Class of Beneficially % of
Name Age Director Company Shares Owned Class
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
J.N. Kendall* 60 1978 Chairman of Common 634,383 (1) 2.86%
the Board,
Chief
Executive
Officer &
Director
-------------------------------------------------------------------------------------------------------------------
C.A. Ing 67 1984 Secretary and Common 107,500 (2) 0.49%
Director
-------------------------------------------------------------------------------------------------------------------
J. Riz* 52 1986 Independent Common 81,100 (3) 0.37%
Director
-------------------------------------------------------------------------------------------------------------------
J.D. Taylor 47 1994 Chief Common 287,227 (4) 1.30%
Operating
Officer,
President &
Director
-------------------------------------------------------------------------------------------------------------------
T. Bergqvist 68 1989 Independent Common 72,500 (5) 0.33%
Director
-------------------------------------------------------------------------------------------------------------------
M. Boyd * 48 1995 Independent Common 40,000 (6) 0.18%
Director
-------------------------------------------------------------------------------------------------------------------
J. Rifenbergh 69 1996 Director of Common 401,031 (7) 1.81%
Sunrich, Inc.
-------------------------------------------------------------------------------------------------------------------
A. Routh 48 1999 President of Common 540,559 (8) 2.44%
Sunrich, Inc.
-------------------------------------------------------------------------------------------------------------------
L. N. Markow 39 N/A Chief Common 83,050 (9) 0.37%
Financial
Officer
-------------------------------------------------------------------------------------------------------------------
All Directors and
Officers as a group
(nine) Common 2,247,350 (10) 10.14%%
===================================================================================================================
</TABLE>
Percentage ownership is calculated based on total Common Shares outstanding at
March 13, 2000 of 20,872,888 outstanding plus all Common Shares subject to an
option currently exercisable, which at March 13, 2000 total 1,282,750 of which
937,000 related to directors and officers noted below and 345,750 are options
vested to other employees of the Company. This calculation does not include
options that have not yet vested or warrants currently outstanding.
19
<PAGE>
Directors, Executive Officers, Promoters and Control Persons (continued)
*Mr. Kendall, Mr. Riz and Mr. Boyd are members of the Company's audit committee.
Mr. Kendall is management's representative and Mr. Riz and Mr. Boyd are
independent directors. Mr. Boyd is chairman of the Audit Committee.
(1) Includes options to purchase 27,500 common shares at US $1.063 per share
pursuant to the 1993 Stake Employee/Director Stock Option Plan.
Includes options to purchase 102,500 common shares at US $1.063 per share
pursuant to the 1996 Stake Employee/Director Stock Option Plan.
Includes options to purchase 226,500 common shares at US $1.063 per share
pursuant to the 1998 Stake Stock Option Plan.
(2) Includes options to purchase 7,500 common shares at US $1.063 per share
pursuant to the 1993 Stake Employee/Director Stock Option Plan
Includes options to purchase 13,750 common shares at US $1.063 per share
pursuant to the 1996 Stake Employee/Director Stock Option Plan.
Includes options to purchase 26,250 common shares at US $1.063 per share
pursuant to the 1998 Stake Stock Option Plan.
(3) Includes options to purchase 7,500 common shares at US $1.063 per share
pursuant to the 1993 Stake Employee/Director Stock Option Plan.
Includes options to purchase 13,750 common shares at US $1.063 per share
pursuant to the 1996 Stake Employee/Director Stock Option Plan.
Includes options to purchase 26,250 common shares at US $1.063 per share
pursuant to the 1998 Stake Stock Option Plan.
(4) Includes options to purchase 27,500 common shares at US $1.063 per share
pursuant to the 1993 Stake Employee/Director Stock Option Plan.
Includes options to purchase 55,000 common shares at US $1.063 per share
pursuant to the 1996 Stake Employee/Director Stock Option Plan.
Includes options to purchase 114,000 common shares at US $1.063 per share
pursuant to the 1998 Stake Stock Option Plan.
(5) Includes options to purchase 7,500 common shares at US $1.063 pursuant to
the 1993 Stake Employee/Director Stock Option Plan.
Includes options to purchase 13,750 common shares at US $1.063 per share
pursuant to the 1996 Stake Employee/Director Stock Option Plan.
Includes options to purchase 26,250 common shares at US $1.063 per share
pursuant to the 1998 Stake Stock Option Plan.
(6) Includes options to purchase 13,750 common shares at US $1.063 per share
pursuant to the 1996 Stake Employee/Director Stock Option Plan.
Includes options to purchase 26,250 common shares at US $1.063 per share
pursuant to the 1998 Stake Stock Option Plan
(7) Includes options to purchase 21,250 common shares at US $1.063 per share
pursuant to the 1996 Stake Employee/Director Stock Option Plan.
20
<PAGE>
Directors, Executive Officers, Promoters and Control Persons (continued)
Includes options to purchase 26,250 common shares at US $1.063 per share
pursuant to the 1998 Stake Stock Option Plan.
Includes options to purchase 50,000 common shares at US $1.063 per share
pursuant to 1999 Stake Option Plan.
(8) Includes options to purchase 50,000 common shares at US $1.063 pursuant to
1999 Stake Option Plan.
(9) Includes options to purchase 12,500 common shares at US $1.063 per share
pursuant to the 1993 Stake Employee/Director Stock Option Plan.
Includes options to purchase 23,000 common shares at US $1.063 per share
pursuant to the 1996 Stake Employee/Director Stock Option Plan.
Includes options to purchase 18,500 common shares at US $1.063 per share
pursuant to the 1998 Stake Stock Option Plan.
(10) Includes options to purchase 90,000 common shares at US $1.063 per share
pursuant to the 1993 Stake Employee/Director Stock Option Plan with an
expiry of December 31, 2004.
Includes options to purchase 266,750 common shares at US $1.063 per share
pursuant to the 1996 Stake Employee/Director Stock Option Plan with an
expiry of March 10, 2001.
Includes options to purchase 490,250 common shares at US $1.063 pursuant
to the 1998 Stake Stock Option Plan with an expiry date of December 11,
2003.
Includes options to purchase 50,000 common shares of US $1.063 pursuant to
1999 Stake Stock Option Plan, with an expiry date of August 1, 2004.
Includes options to purchase 50,000 common shares of US $1.063 pursuant to
1999 Stake Stock Option Plan, with an expiry date of August 1, 2005.
(b) Set forth below is a biographical description of each director of the
Company:
Jeremy N. Kendall has served as a Director of the Company since September 1978.
In June 1983, he was elected Chairman of the Board and Chief Executive Officer
of the Company. He is Chairman of the Board of all of the Company's subsidiaries
except 1108176 Ontario Limited. He is also Chairman of BI Inc., Jemtec Inc. and
Easton Minerals Ltd and Logicsys Inc. He is also a Director of Environthermic
Technologies and a number of private and charitable organizations.
Cyril A. Ing was elected a Director in January 1984 and became an employee in
August 1985. He was an independent consultant specializing in engineering
projects involving the combustion of biomass from May of 1982 to August 1985.
For the previous 10 years he was President of the Conat Group, a holding
company, whose major subsidiary, Westair Systems Inc., is a distributor and
manufacturer of industrial dehumidification equipment. In March 1990, Mr. Ing
retired from full time employment.
Joseph Riz was elected a Director of the Company in July, 1986. He is presently
managing director of Tricapital Management Ltd., a merchant banking and
financial advisory firm. From 1983 to 1985 he was an Executive Vice President of
Crowntek, Inc..
Tim Bergqvist was elected a director of the Company in January of 1989. He has
recently retired as the Chairman of Eucalyptus Pulp Mills PLC. He is currently
Chairman of Quinta da Rosa (Vinhos do Porto) Lda in Portugal.
John Taylor was elected to the Board of Directors in December, 1994. He was
appointed President and Chief Operating Officer of the Company in 1991. From
1986-1991, Mr. Taylor was the Company's Vice-President of Marketing and
Planning.
21
<PAGE>
Directors, Executive Officers, Promoters and Control Persons (continued)
Michael Boyd was elected to the Board of Directors in December, 1995. Mr. Boyd
is a Vice President of HSBC Capital (Canada) Inc., a merchant banking subsidiary
of the HSBC Bank of Canada..
Jim Rifenbergh was elected to the Board of Directors in April, 1996. Mr.
Rifenbergh is past President and Chairman of Brown Printing Company of Waseca,
Minnesota, a $440 million printing company with plants throughout the United
States. He is also a Director of Sunrich, Inc., the Company's subsidiary and a
number of other private companies and organizations.
Allan Routh was elected to the Board of Directors in September, 1999. Mr. Routh
is President of the Company's subsidiary, Sunrich, Inc.
Beginning, January 1, 2000 directors who are not Company officers receive a
director fee of $1,500 for each board meeting attended in person as well as $250
for participating in committee meetings and telephonic board meetings and
reimbursement of travelling expenses to attend meetings.
22
<PAGE>
(c) Identification of Executive Officers of Registrant:
The following table shows certain information with respect to the Company's
Officers, including its Executive Officers, as of March 13, 2000.
================================================================================
Name Age Officers of Stake
--------------------------------------------------------------------------------
Jeremy N. Kendall * 60 Chairman of the Board (1983)
Chief Executive Officer (1983)
Director (1978)
--------------------------------------------------------------------------------
John D. Taylor * 47 Director (1994)
President and Chief Operating Officer (1991)
Vice President, Marketing and Planning (1986)
--------------------------------------------------------------------------------
Cyril A. Ing * 67 Secretary and Director (1984)
--------------------------------------------------------------------------------
Leslie Markow 39 Vice President - Finance and Chief Financial Officer
(1997)
Controller (1991)
Assistant Corporate Secretary (1993) (A)
================================================================================
* Directors biographies are detailed in the preceding pages
(A) Miss Markow joined the Company in 1991 and was appointed Vice President
Finance and Chief Financial Officer in 1997. She is also Controller of
Easton Minerals Limited the Company's 35% owned investment and a director
of Jemtec Inc.. Miss Markow was with Coopers & Lybrand now known as
PricewaterhouseCoopers from 1983-1991, last as an Audit Manager. Miss
Markow is a Chartered Accountant and has a BA (Administrative
Studies-Finance) from the University of Western Ontario.
There are no family relationships between any of the Officers or Directors of
the Company.
Officers of the Company are elected by the Board of Directors at its first
meeting after each Annual Meeting of Shareholders and serve a term of office
until the next Annual Meeting. Officers elected by the Board of Directors at any
other time serve a term of office until the next Annual Meeting.
The Annual and Special Meeting of Shareholders for 2000 will be held in June 22,
2000, at a location in downtown Toronto.
Stake is a foreign private issuer eligible under SEC Regulations to use Form
20-F, and accordingly, is exempt from the requirements of Section 16 under the
Securities Exchange Act of 1934 pursuant to Rule 3a12-3(b) thereunder.
23
<PAGE>
Item 10. Executive Compensation
EXECUTIVE COMPENSATION
The following tables set forth all remuneration paid by the Company and its
subsidiaries during the last three years ended December 31, 1999, 1998 and 1997
to its C.E.O. and executive officers earning in excess of US $100,000:
SUMMARY COMPENSATION TABLE
(STATED IN US DOLLARS)
<TABLE>
<CAPTION>
Annual Compensation Awards Payouts
============================================================================================================================
Other
Annual Restrict All Other
Name and Principal Compen- Stock Options LTIP Compen-
Occupation Year Salary Bonus sation Award SARs Payouts sation
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeremy Kendall - C.E.O 1999 $154,478 $ 4,889 $17,524(1)
----------------------------------------------------------------------------------------------------------------------------
John D Taylor - C.O.O. 1999 $112,245 $14,747 $11,494(1)
----------------------------------------------------------------------------------------------------------------------------
Jeremy Kendall - C.E.O. 1998 $159,417 $81,704 $10,415(1) -- -- -- --
----------------------------------------------------------------------------------------------------------------------------
John Taylor - C.O.O. 1998 $110,753 $48,600 $ 6,033(1) -- -- -- --
----------------------------------------------------------------------------------------------------------------------------
Jeremy Kendall - C.E.O. 1997 $100,030 $18,517 $10,366 (1) -- -- -- --
============================================================================================================================
</TABLE>
(1) Represents taxable benefit of automobile, life insurance, retirement savings
contributions and short-term loans.
The following table contains information concerning individual grants of stock
options made during the last completed fiscal year, to the following executive
officers:
OPTION GRANTS IN PAST FISCAL YEAR
<TABLE>
<CAPTION>
================================================================================================================
% of Total Options
Options Granted to Employees Exercise on Base
Name Granted in Fiscal Year price ($/Share) Expiration Date
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeremy N. Kendall 7,500 N/A 1.063 December 11, 2003
================================================================================================================
John D. Taylor 7,500 N/A 1.063 December 11, 2003
================================================================================================================
</TABLE>
AND DECEMBER 31, 1999 OPTION VALUES
(STATED IN US DOLLARS)
<TABLE>
<CAPTION>
================================================================================================================
(a) (b) (c) (d) (e)
----------------------------------------------------------------------------------------------------------------
Number of Value of Unexercised in
Unexercised the Money Options at
Shares Acquired Value Options at 12/31/99 12/31/99
on Exercise in Realized in Vested/ Vested/
Name 1999 (#) 1999 ($) Not Yet Vested Not Yet Vested
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeremy N. Kendall 0 N/A 356,500/6,000 $0/$0
================================================================================================================
John D. Taylor 0 N/A 206,500/6,000 $0/$0
================================================================================================================
</TABLE>
24
<PAGE>
1993, 1996, 1998 and 1999 Employee/Director Stock Option Plans
The 1993 Employee/Director Stock Option Plan was adopted by the Board of
Directors on June 17, 1993, at which time 500,000 common shares, no par value of
the Company were reserved for issuance under the Plan. This Option Plan was
approved by the shareholders of the Company at the Annual and Special Meeting of
Shareholders on June 18, 1993.
In March, 1994, the Board of Directors approved the issue of 96,000 options to
employees and directors of the Company at a price of US $0.4375. The price of
these options reflected the price of the Company's stock on that date. No
changes were made at that date to the price of the options outstanding in the
Company at December 31, 1993.
In October, 1994, the Board of Directors approved an amendment to the 1986, 1988
and 1993 Stock Option Plans which reduced the exercise price from US $1.00 and
US $0.4375 respectively to US $0.25 for all directors and employees. Consultants
option exercise price remained at US $1.00.
The option price of the $1.00 options was reduced to the market price of US
$0.25 in October, 1994 as the market price of the Company's common shares had
experienced a significant decline in 1994, and the Board of Directors determined
that as stock options comprise a significant motivating benefit to the employees
of the Company, and the only benefit received by the directors of the Company,
it was necessary for the options to reflect current market prices to ensure the
continued relevance of the Stock Option Plan at Stake.
In February, 1995, 34,500 options, exercisable at US $0.25 per share were
granted from the 1993 Employee/Director Stock Option Plan and were approved by
the Board of Directors. Stake granted these options to all Stake employees and
the salaried employees of BEI to commemorate the acquisition of 51% of BEI.
In June, 1995, 72,000 options, exercisable at US $0.25 per share from the 1988
Employee/Director Stock Option Plan were approved by the Board of Directors and
awarded to two senior officers and a director. Also in June, 1995, 240,000
options were granted at US $0.625 per share from the 1993 Employee/Director
Stock Option Plan and approved by the Board of Directors. 180,000 of these
options were granted to employees, 60,000 to directors.
In December, 1995, 7,500 options were granted to a new director of the Board at
$1.4375 per share from the 1993 Employee/Director Stock Option Plan and approved
by the Board of Directors.
In January, 1996, 235,000 options were granted at US $1.8125 from the 1993
Employee/Director Stock Option Plan and approved by the Board of Directors. From
this grant 147,500 options vested immediately and 87,500 vested January 1, 1997.
The 1996 Employee/Director Stock Option Plan was adopted by the Board of
Directors in December, 1995, at which time 550,000 common shares, no par value
of the Company were reserved for issuance under the Plan. This Option Plan was
approved by the shareholders of the Company at the Annual and Special Meeting of
Shareholders on June 17, 1996.
In April, 1996, 25,500 options were granted to employees and a director at US
$1.75 per common share from the 1996 Employee/Director Stock Option Plan. All of
the options were vested at December 31, 1996.
In August, 1996, 8,000 options were granted at US $1.875 per common share from
the 1996 Employee/Director Stock Option Plan. 4,000 of these options vested at
December 31, 1996, 2,000 vested February 9, 1997 and 2,000 vested on May 9,
1997.
In December, 1996, 279,500 options were granted at US $1.21875 per common share
from the 1996 Employee/Director Stock Option Plan. 67,500 options were granted
to directors vesting immediately and 212,000 to employees, which vested one half
on July 1, 1997, and one half on January 1, 1998.
In January, 1997, 12,000 options were granted at US $1.66 per common share under
the 1996 Employee/Director Stock Option Plan vesting at the rate of 1,000 per
month from January 31, 1997. All 12,000 were vested at the end of 1997.
25
<PAGE>
1993, 1996, 1998 and 1999 Employee/Director Stock Option Plans (continued)
In August, 1997 8,000 options were granted at US $1.03125 per common share from
the 1996 Employee/Director Stock Option Plan. 4,000 of these options vested at
December 31, 1998, 2,000 vested February 9, 1998 and 2,000 vested on May 9,
1998. All 8,000 of these options were retracted in 1998 due to the employee
leaving.
In December, 1997, 5,000 options were granted at US $1.375 from the 1996
Employee/Director Stock Option Plan which vested 2,500 on March 31, 1998 and
2,500 on June 30, 1998, respectively.
In December, 1997, the Board of Directors extended the expiry of all options
exercisable at $1.8125 from February 12, 1998 to February 12, 1999.
Also in December, 1997, 893,000 options were granted at US $1.25 under the 1996
Employee/Director Stock Options Plan and from the 1998 Employee/Director Stock
Option Plan which was approved by the shareholders in June, 1998.
From the 1997 grants, 260,000 of these options vested at December 31, 1998, and
12,000 vested at the rate of 1,000 per month throughout 1998, 309,125 of the
options vested on August 31, 1998 and the remaining 301,125 options vested on
January 1, 1999. 35,750 options vesting during 1998 and 1999 were retracted due
to employees leaving and the death of a director.
In December, 1998, the Board of Directors extended the expiry of all options
exercisable at US $1.8125 from February 12, 1998 to December 31, 2004, and
approved the issuance of 5,000 options from the 1998 Stock Option Plan to a new
employee at US $0.75, of which 2,500 vested in 1998 and 2,500 vested in 1999.
In 1999, 303,625 options that were granted in prior periods at US $1.25 vested,
and 12,000 options were retracted.
In addition 620,000 options from 1998 and 1999 Stock Options Plans were granted
at US $1.063. These options vest as follows: 253,600 vest immediately, 82,900
vest annually on the anniversary date of August 2, over the next four years and
34,800 vest on August 2, 2004.
At December 31, 1999, there are options to acquire 1,501,850 shares that have
vested; 459,250 at exercise prices ranging from US $1.22 to US $1.75 per share
expiring on March 10, 2001; 672,200 at exercise prices ranging from US $0.75 to
US $1.38 per share expiring on December 11, 2003, 131,900 at US $1.063 expiring
August 2, 2004, 182,500 at US $1.8175 expiring December 31, 2004, and 56,000 at
US $1.063 which expire August 2, 2005, under the 1993, 1996, 1998 and 1999
Employee/Director Stock Option Plans.
At December 31, 1999, options to acquire 366,400 common shares at prices ranging
from US 0.75 to US $1.25 have been granted but not vested.
In January 1999, the Board of Directors re-priced all options to US $ 1.063.
From January 1, 2000 to March 13, 2000, 219,100 options were exercised at US
$1.063 for gross proceeds of $338,000.
26
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning share ownership of
all persons known by the Company to own beneficially 5% or more of the Company's
outstanding Common Shares and all directors and officers of the Company as a
group as of March 13, 2000.
<TABLE>
<CAPTION>
===================================================================================================================
Name and Address Class of
of Beneficial Holder Share Amount of Ownership Percent of Class(2)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gruber & McBaine Capital Management Common 3,040,600 14.6%
50 Osgood Place, San Francisco
California USA 94133
===================================================================================================================
All Directors and Officers Common (1) 1,310,350 6.28%
as a group (nine)
===================================================================================================================
</TABLE>
(1) For details of shares owned by officers and directors, see Page 20 - Item
9 (a) - Identification of Directors and Executive Officers.
(2) Percentage ownership is calculated based on total Common Shares
outstanding at March 13, 2000 of 20,872,888. It does not include options
that have vested or have not yet vested or warrants currently outstanding.
Item 12. Certain Relationships and Related Transactions
During 1995, the Company issued 1,220,000 warrants to acquire additional
1,220,000 common shares. Of these warrants, 37,500 warrants were exercised in
1996, and the remaining 1,182,500 warrants; 650,000 were exercisable at US
$2.25, and 532,500 were exercisable at US $2.00. In 1997, these warrants were
extended to December 31, 1998.
In 1995, a management director of the Company subscribed for and paid for 75,000
common shares in the private placement of shares. This transaction entitled this
director the right to exercise 37,500 warrants of the 532,500 warrants noted
above at US $2.00 for 2 years. In addition, an independent director of the
Company held 70,000 of the 532,500 warrants noted above which entitled this
director to exercise 70,000 common shares at US $2.00 for 2 years to October 3,
1997. As described above, both of these warrants, were extended to December 31,
1998.
In 1997, subsequent to the extension of the expiration date, the third party
holder of the 650,000 warrants exercisable at US $2,25, and the independent
director of the Company who held 70,000 of the 532,500 warrants exercisable at
US $2.00 asked the Company to find interested parties to purchase their
respective warrants. As a result of this request, third parties purchased the
right to 525,000 of the US $2.25 warrants and 13,000 of the US $2.00 warrants.
Employees purchased the right to 125,000 of the US $2.25 warrants and 37,000 of
the US $2.00 warrants. The director sold 37,000 warrants to employees of the
Company and 13,000 to a third party for $0.15 per warrant.
During 1998, all 1,182,500 warrants including those noted above held by
employees and a director had their expiry date extended to June 30, 1999, by the
Company's Board.
In December, 1998, the Company offered all the warrant holders of the 1,182,500
warrants a 4 for 1 exchange for their warrants at a price of US $0.50 until
January 31, 1999 (162,000 warrants are held by employees and 20,000 by the
director). As a result, employees and the director were offered the same terms
and conditions as all of the warrant holders which was:
(a) by exchanging their existing warrants 45,500 new warrants would be issued,
exercisable at US $0.50 expiring on January 31, 1999, and
(b) provided that this US $0.50 warrant was exercised prior to January 31,
1999, 45,500 additional warrants would be issued with an exercise price of
US $1.00 to December 31, 1999, rising to US 2.00 on January 1, 2000 and
expiring on December 29, 2000.
27
<PAGE>
Item 12. Certain Relationships and Related Transactions (continued)
In January, 1999 all 45,500 exchanged warrants were exercised for proceeds of
$34,000, and new warrants equalling 45,500 were issued to the respective
employees and director with an exercise price of US $1.00 to December 31, 1999,
increasing to US $2.00 on January 1, 2000 and expiring on December 31, 2000.
During 1999, two employees exercised 35,400 new warrants for net proceeds of
$38,000.
28
<PAGE>
Item 13. Exhibits, Financial Statements and Reports on Form 8-K
Form 10-KSB
STAKE TECHNOLOGY LTD. Page
--------------------- ----
(a) Documents filed as part of this Report
1. Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1998 F-3, F-4
Consolidated Statements of Operations -
Years ended December 31, 1999 and 1998 F-5
Consolidated Statements of Retained Earnings -
Years ended December 31, 1999 and 1998 F-6
Consolidated Statements of Cashflow -
Years ended December 31, 1999 and 1998 F-7
Notes to Consolidated Financial Statements -
Years ended December 31, 1999 and 1998 F-8 - F26
3. Exhibits
3.1 - Articles of Continuance. (A)
3.2 - Articles of Amendment dated March 20, 1981, August 6, 1981 and
September 29, 1983. (A)
3.3 - By-Laws (A)
10.1 - Licensing Agreement between Registrant and STAKE TECHNOLOGY
(USA.) INC. and Compagnie Francaise d'Etudes et de
Construction Technip dated June 15, 1983. (A)
10.2 - Licensing Agreement between Registrant and Technip relating to
Pulping technology. (B)
10.3 - Marketing Agreement between Registrant and Technip relating to
Pulping technology. (B)
10.8 - Court Order dated January 20, 1995 awarding certain assets of
Barmin Inc. to Barnes Environmental Inc. (C)
10.9 - Shareholder Agreement dated January 20, 1995 between Stake
Technology Ltd., Bentonite of Canada Inc. and Barnes
Environmental Inc. (C)
10.10 - 1993 Employee/Director Stock Option Plan dated May 19, 1993
(D)
29
<PAGE>
Exhibits (continued)
10.11 - Share Purchase Agreement dated November 15, 1995 between Stake
Technology Ltd., Bentonite of Canada Inc. and Peter Barnes.
(D)
10.12 - Proforma Statements of Earnings (Loss) of Stake Technology
Ltd. for the years ended December 31, 1995 and 1994. (D).
Amended (E).
10.13 - Audited Consolidated Financial Statements for the Company's
subsidiary - Barnes Environmental Inc. for the period December
5, 1994 to December 31, 1995. (D)
10.14 - Amalgamation of Stake Technology Ltd. and Barnes Environmental
Inc. dated July 1, 1996. (E)
10.15 - 1996 Employee/Director Stock Option Plan dated September 27,
1996. (E)
10.16 - Bylaw No. 14 approved by shareholders - June 17, 1997. (F)
10.17 - 1998 Stock Option Plan dated December 12, 1997. (G)
10.18 - Agreement and plan of reorganization among Stake Technology
Ltd, Stake Minnesota, Inc. and Sunrich, Inc. dated April 8,
1999. (H)
10.19 - 1999 Stock Option Plan dated February 18, 1999. (I)
25 Powers of Attorney (I)
(A) Previously filed as an Exhibit to the Company's registration
Statement No. 2-99775 on Form S-1 dated August 15, 1985 and
incorporated herein by reference.
(B) Previously filed as an Exhibit to Amendment No. I to Registration
Statement No. 33-136136 of Form S-1 dated August 24, 1987 and
incorporated herein by reference.
(C) Previously filed as an Exhibit to Company's annual report of Form
10KSB for the year ended December 31, 1994 and incorporated herein
by reference.
(D) Previously filed as an Exhibit to Company's annual report of Form
10KSB for the year ended December 31, 1995 and incorporated herein
by reference.
(E) Previously filed as an Exhibit to Company's annual report of Form
10KSB for the year ended December 31, 1996 and incorporated herein
by reference
(F) Previously filed as an Exhibit to Company's annual report of Form
10KSB for the year ended December 31, 1997 and incorporated herein
by reference
(G) Previously filed as an Exhibit to Company's annual report of Form
10KSB for the year ended December 31, 1998 and incorporated herein
by reference
(H) Previously filed as an Exhibit to the Company's registration
statements number 333-10454 on Form S-4 filed June 24, 1999.
(I) Filed herewith.
30
<PAGE>
Exhibits (continued)
No reports on Form 8K were filed in the last quarter of 1999.
31
<PAGE>
STAKE TECHNOLOGY LTD.
Date March 17, 2000 /s/ Leslie N. Markow
-------------- --------------------
Stake Technology Ltd.
by Leslie N. Markow
Vice President - Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
*
--------------------
Jeremy N. Kendall Chairman, Chief Executive Officer March 17, 2000
and Director (Principal Executive
Officer)
*
--------------------
John D. Taylor President and Chief Operating Officer March 17, 2000
*
--------------------
Leslie N. Markow Vice President-Finance (Chief Financial March 17, 2000
Officer) (Principal Financial and
Accounting Officer)
*
--------------------
Cyril A. Ing Director March 17, 2000
*
--------------------
Joseph Riz Director March 17, 2000
*
--------------------
Tim Bergqvist Director March 17, 2000
*
--------------------
Michael Boyd Director March 17, 2000
*
--------------------
Jim Rifenbergh Director March 17, 2000
*
--------------------
Allan Routh Director March 17, 2000
*
* By her signature set forth below, Leslie N. Markow, pursuant to a duly
executed power of attorney filed with the Securities and Exchange Commission as
an exhibit to this report, has signed this report on behalf of and as
Attorney-In-Fact for this person.
/s/ Leslie N. Markow
--------------------
Leslie N. Markow
Attorney-in-Fact
32
<PAGE>
Stake Technology Ltd.
Consolidated Financial Statements
December 31, 1999 and 1998
(expressed in Canadian dollars)
F-1
<PAGE>
March 3, 2000
Independent Auditors' Report
To the Shareholders of
Stake Technology Ltd.
We have audited the consolidated balance sheets of Stake Technology Ltd. as at
December 31, 1999 and 1998 and the consolidated statements of operations,
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1999
and 1998 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
(Signed) PricewaterhouseCoopers LLP
Chartered Accountants
F-2
<PAGE>
Stake Technology Ltd.
Consolidated Balance Sheets
As at December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Assets (note 7)
Current assets
Cash and cash equivalents 2,464,000 181,000
Cash held as security deposit (note 7) 400,000 400,000
Accounts receivable - trade 7,300,000 3,805,000
Inventories (note 3) 8,589,000 2,878,000
Miscellaneous receivables and other assets 246,000 161,000
Future income taxes (note 10) 1,020,000 --
------------------------
20,019,000 7,425,000
Property, plant and equipment (note 4) 10,766,000 5,825,000
Investments (note 5) 281,000 565,000
Goodwill - at cost, less accumulated amortization of
$516,000 (1998 - $358,000) 3,922,000 1,897,000
Patents, trademarks, licenses and other assets - at cost,
less accumulated amortization of $925,000 (1998 - $900,000) 446,000 384,000
------------------------
35,434,000 16,096,000
========================
</TABLE>
Approved by the Board of Directors
"John Taylor" Director "Joe Riz" Director
----------------------- -------------------
Commitments and Contingencies (notes 7 and 12)
(See accompanying notes to consolidated financial statements)
F - 3
<PAGE>
Stake Technology Ltd.
Consolidated Balance Sheets ... continued
As at December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
Liabilities
<S> <C> <C>
Current liabilities
Accounts payable and accrued liabilities 10,179,000 2,937,000
Note payable (note 6) 208,000 -
Customer deposits 1,618,000 -
Current portion of long-term debt (note 7) 950,000 700,000
Current portion of preference shares (note 8) 240,000 237,000
-----------------------------------------
13,195,000 3,874,000
Long-term debt and bank facilities (note 7) 2,955,000 1,400,000
Future income taxes (note 10) 579,000 --
Preference shares of subsidiary company (note 8) 607,000 749,000
-----------------------------------------
17,336,000 6,023,000
-----------------------------------------
Shareholders' Equity
Capital stock (note 9)
Authorized
Unlimited common shares without par value
Issued
20,653,788 (1998 - 14,779,718) common shares 11,163,000 4,467,000
Contributed surplus 4,635,000 4,635,000
Retained earnings (note 9) 2,495,000 971,000
Currency translation adjustment (195,000) --
-----------------------------------------
18,098,000 10,073,000
-----------------------------------------
35,434,000 16,096,000
=========================================
</TABLE>
(See accompanying notes to consolidated financial statements)
F - 4
<PAGE>
Stake Technology Ltd.
Consolidated Statements of Operations
For the years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Revenues 47,304,000 22,077,000
Cost of goods sold 40,145,000 17,308,000
-----------------------------------------
Gross profit 7,159,000 4,769,000
-----------------------------------------
Expenses
Research and development 367,000 357,000
Administration, market development and demonstration 4,965,000 3,419,000
Amortization of patents, trademarks, licenses and goodwill 158,000 139,000
Gain on sale of property, plant and equipment (5,000) (60,000)
-----------------------------------------
5,485,000 3,855,000
-----------------------------------------
Earnings from operations 1,674,000 914,000
Interest on long-term debt (308,000) (134,000)
Other interest (22,000) --
Interest and other income 181,000 57,000
Foreign exchange (loss) gain (76,000) 67,000
Loss on sale of marketable securities -- (16,000)
Gain on dilution of investment interests in equity accounted investee
(note 5) -- 26,000
Share of losses of equity accounted investee (note 5) (321,000) (29,000)
Dividend on preference shares of subsidiary company (25,000) (30,000)
Imputed interest on preference shares of subsidiary company (31,000) (33,000)
-----------------------------------------
Earnings before income taxes 1,072,000 822,000
Recovery of income taxes (note 10)
Future income taxes 452,000 --
-----------------------------------------
Net earnings for the year 1,524,000 822,000
=========================================
Earnings per share (note 13) 0.09 0.06
=========================================
</TABLE>
(See accompanying notes to consolidated financial statements)
F - 5
<PAGE>
Stake Technology Ltd.
Consolidated Statements of Retained Earnings
For the years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Retained earnings - Beginning of year 971,000 149,000
Net earnings for the year 1,524,000 822,000
-----------------------------------------
Retained earnings - End of year 2,495,000 971,000
=========================================
</TABLE>
(See accompanying notes to consolidated financial statements)
F - 6
<PAGE>
Stake Technology Ltd.
Consolidated Statements of Cash Flows
For the years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
Cash provided by (used in)
<S> <C> <C>
Operating activities
Net earnings for the year 1,524,000 822,000
Items not affecting cash
Amortization 1,070,000 716,000
Share of losses of investee 321,000 29,000
Loss on sale of marketable securities -- 16,000
Gain on sale of property, plant and equipment (5,000) (60,000)
Gain on dilution of interest in investee -- (26,000)
Imputed interest on preference shares 31,000 33,000
Future income taxes (455,000) --
-----------------------------------------
2,486,000 1,530,000
Change in non-cash working capital balances related to operations
Accounts receivable - trade 3,394,000 (1,190,000)
Inventories (2,922,000) (947,000)
Miscellaneous receivables and other assets 54,000 188,000
Accounts payable and accrued liabilities 336,000 696,000
Customer deposits 1,656,000 --
-----------------------------------------
5,004,000 277,000
-----------------------------------------
Investing activities
Acquisition of company - net of cash acquired (24,000) --
Acquisition of patents, trademarks, licences and other assets (87,000) (63,000)
Cash held as security deposit -- 125,000
Acquisition of property, plant and equipment (1,138,000) (471,000)
Proceeds on sale of property, plant and equipment 13,000 89,000
Increase in investments and advances (37,000) (37,000)
-----------------------------------------
(1,273,000) (357,000)
-----------------------------------------
Financing activities
Purchase of preference shares in subsidiary company (100,000) (100,000)
Redemptions of preference shares in subsidiary company (70,000) (70,000)
Repayment of long-term debt and notes payable (3,680,000) (500,000)
Issuance of long-term debt and notes payable 2,133,000 --
Issuance of common shares 295,000 191,000
-----------------------------------------
(1,422,000) (479,000)
-----------------------------------------
Foreign exchange loss on cash held in a foreign currency (26,000) --
-----------------------------------------
Increase (decrease) in cash during the year 2,283,000 (559,000)
Cash and cash equivalents - Beginning of year 181,000 740,000
-----------------------------------------
Cash and cash equivalents - End of year 2,464,000 181,000
=========================================
Supplemental cash flow information
Interest paid 298,000 131,000
Income taxes paid 3,000 --
</TABLE>
(See accompanying notes to consolidated financial statements)
F - 7
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the years ended December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
1 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), 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 December 31,
1999 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 17. 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
Inventories related to the recycling and industrial minerals business of
BEI 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.
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.
F - 8
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
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) BEI
Revenue from the sale of industrial minerals is recognized upon
shipment.
Tipping fee revenue, which consists of a per ton fee paid to the
Company for waste recycling materials being received by the Company,
is recognized at the time the material is received. Provision is
made for the net costs of processing and disposal of the material.
ii) 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.
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
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.
F - 9
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
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 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 future transactions are marked to market. Gains
and losses on futures transactions related to grain inventories are
included in cost of goods sold.
F - 10
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
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.
2 Acquisition of business
Effective August 2, 1999, the Company acquired 100% of the common shares
of Sunrich in exchange for 5,471,866 common shares of the Company and
104,821 warrants of the Company. The warrants were exercisable for 30 days
at US$0.50, and if these warrants were exercised, the shareholders would
be entitled to another warrant exercisable at US$1.00 to December 31,
1999, rising to US$2.00 on January 1, 2000 and expiring on December 29,
2000.
Certain shareholders of Sunrich chose to exercise dissenter's rights and
received $49,000 in cash for their Sunrich shares.
The acquisition has been accounted for using the purchase method. The net
assets acquired and consideration given is summarized below:
$
Net assets acquired
Cash 368,000
Net working capital 3,044,000
Property, plant and equipment 4,911,000
Goodwill 2,183,000
Notes payable (1,325,000)
Long-term debt (2,370,000)
Net future income tax liability (18,000)
------------------
6,793,000
==================
Consideration
Common shares 6,346,000
Warrants 55,000
Cash 392,000
------------------
6,793,000
==================
The company has consolidated the operations of Sunrich from the date of
acquisition.
F - 11
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
3 Inventories
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Raw materials 2,196,000 1,696,000
Finished goods and merchandise 4,003,000 1,182,000
Grain 2,390,000 --
-----------------------------------------
8,589,000 2,878,000
=========================================
</TABLE>
<TABLE>
Grain inventories consist of the following:
$
<S> <C>
Company owned grain 2,479,000
Unrealized gain (loss) on
Contracts with producers (172,000)
Futures contracts 83,000
------------------
2,390,000
==================
</TABLE>
4 Property, plant and equipment
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------
Accumulated
Cost Amortization Net
$ $ $
<S> <C> <C> <C>
Land and buildings 8,218,000 1,790,000 6,428,000
Office furniture and equipment 945,000 580,000 365,000
Vehicles 633,000 272,000 361,000
Machinery and laboratory equipment 7,946,000 4,334,000 3,612,000
----------------------------------------------------------------
17,742,000 6,976,000 10,766,000
================================================================
1998
----------------------------------------------------------------
Accumulated
Cost amortization Net
$ $ $
Land and buildings 4,087,000 396,000 3,691,000
Office furniture and equipment 566,000 275,000 291,000
Vehicles 60,000 59,000 1,000
Machinery and laboratory equipment 3,563,000 1,721,000 1,842,000
----------------------------------------------------------------
8,276,000 2,451,000 5,825,000
================================================================
</TABLE>
F - 12
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Included in machinery and laboratory equipment is equipment under capital
lease with a cost of $699,000 (1998 - $nil) and net book value of $552,000
(1998 - $nil).
5 Investments
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Easton Minerals Ltd.
35% (1998 - 35%) common share ownership 186,000 507,000
Advances 95,000 58,000
-----------------------------------------
281,000 565,000
=========================================
</TABLE>
Easton Minerals Ltd. (Easton) is a small mining exploration company listed
on the Canadian Venture Exchange. The quoted market value of the shares
held by the Company at December 31, 1999 was $550,000 (1998 - $1,258,000),
however, this value is based upon limited trading volumes of the common
shares of Easton. It is unlikely that these values could be realized upon
sale of all or a portion of the Company's holdings in Easton, particularly
given the significant number of shares held by the Company.
The Company's share of losses of Easton for 1999 amounted to $321,000
(1998 - $29,000). In 1998, Easton issued 500,000 common shares to third
parties for cash consideration of $98,000, and a dilution gain on this
transaction of $26,000 was recognized on the reduction of the Company's
percentage ownership of Easton.
6 Note payable
Sunrich maintains a demand note related to its hedging activities, which
provides for maximum borrowings of up to US$200,000 (US$144,000
outstanding at December 31, 1999) with interest at prime. Borrowings under
this note are due on May 31, 2000.
F - 13
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
7 Long-term debt and bank facilities
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Term bank loan, interest based on banker's acceptance rates,
currently 6.6%, repayable in annual instalments of $600,000 1,400,000 2,100,000
Note payable to bank, interest at bank reference rate (9% at
December 31, 1999), due in monthly payments through July 2013,
collateralized by real estate 410,000 -
Note payable to bank, interest at bank reference rate (9% at
December 31, 1999), due in monthly payments through February
2009, collateralized by property, equipment and general
intangibles 1,133,000 -
Note payable to bank, interest at 8.75%, interest only through May
2000 and thereafter, due in monthly payments through November
2006, collateralized by equipment and intangibles 433,000 -
Other, interest rates from 0.9% to 8.0%, due in varying installments
through July 2002, collateralized by vehicles 179,000 -
Capital lease obligations, due in monthly instalments through June
2003 with interest ranging from 7.57% to 8.06% 350,000 -
-----------------------------------------
3,905,000 2,100,000
Less: Current portion 950,000 700,000
-----------------------------------------
2,955,000 1,400,000
=========================================
</TABLE>
The loans and capital leases detailed above require payments as follows:
<TABLE>
<CAPTION>
$
<S> <C>
2000 980,000
2001 979,000
2002 442,000
2003 212,000
2004 195,000
Thereafter 1,149,000
------------------
3,957,000
Less: interest on capital lease obligations, ranging from 7.57% to
8.06% 52,000
------------------
3,905,000
==================
</TABLE>
F - 14
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
In the event of default under the term bank loan of $1,400,000, a former
director of the Company has a right to acquire all of the common shares of
a subsidiary company of the Company for $1. The sole asset of the
subsidiary is 19.2 acres of land with a book value of $1,312,000. If this
occurred, the liability in respect of the first and second preference
shares of the subsidiary company reflected in these financial statements
(note 8) would be extinguished without payment.
The Company has provided a general collateral agreement representing a
first charge on all Canadian assets of the Company as collateral for a
$3,000,000 operating bank facility and the term bank loan. The Company has
also provided first mortgages in the aggregate amount of $2,575,000 on
certain land and buildings located in Waterdown, Ontario, and a pledge of
certain book debts, inventories and other assets as collateral. The
Company is also required to maintain cash deposits of $400,000 (1998 -
$400,000) as collateral for the loan facility. As at December 31, 1999,
the Company is contingently liable under letters of credit in the amount
of $1,116,000, which have been drawn on this operating facility.
Sunrich maintains a line of credit with a bank, which provides for maximum
borrowings of up to US$3,000,000 based on eligible accounts receivable and
inventories, with interest at the bank's reference rate (8.33% at December
31, 1999) and collateralized by accounts receivable and inventories. There
were no borrowings outstanding under this line of credit at December 31,
1999.
Sunrich also maintains a line of credit with a lending institution, which
provides for maximum borrowings of up to US$500,000, collateralized by
certain inventories, with interest at a variable rate. The line of credit
matured on November 1, 1999 and was renewed in February 2000 and matures
November 15, 2000. There were no borrowings under this line of credit at
December 31, 1999.
The fair value of the long-term debt would not be materially different
from the carrying amount. The effective interest rate at December 31, 1999
is 8.1% (1998 - 6.6%).
F - 15
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
8 Preference shares of subsidiary company
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
500,000 (1998 - 600,000) first preference shares 500,000 600,000
455,834 (1998 - 525,834) second preference shares 347,000 386,000
-----------------------------------------
847,000 986,000
Less: Current portion of preference shares 240,000 237,000
-----------------------------------------
607,000 749,000
=========================================
</TABLE>
The Company is required to purchase 100,000 first preference shares issued
by 1108176 Ontario Inc., its subsidiary, per annum at $1 per share plus
unpaid dividends thereon calculated at 5% per annum, commencing December
31, 1996, until the term bank loan described in note 7 is repaid.
Thereafter, the Company is required to purchase 200,000 first preference
shares per annum under the same terms and conditions.
In January 1999, 100,000 first preference shares were purchased for
$100,000, and a dividend of $30,000 was paid. Payment for a further
purchase of 100,000 first preference shares and a dividend of $25,000 was
delivered in trust to the Company's lawyer in January 2000 pending receipt
of the shares purchased.
The second preference shares of the subsidiary company with a stated value
of $1 per share are non-dividend bearing and are redeemable monthly at the
rate of 5,833 shares ($5,833) per month until fully paid out. The Company
is required to fund the redemption. As a result of the fixed repayment
requirements, the second preference shares have been discounted at an
imputed rate of 8%. During the year, 70,000 (1998 - 70,000) second
preference shares were redeemed. Imputed interest on the second preference
shares during the year amounted to $31,000 (1998 - $33,000).
The Company is required to purchase all of the outstanding first
preference shares at $1 per share in the event of a change in the current
Chairman of the Company or upon the sale of the Company's environmental
recycling business, BEI.
The fair market values of the first and second preference shares would not
be materially different from their carrying amounts and could vary with
fluctuations in interest rates.
F - 16
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
9 Capital stock
(a) During 1997, the shareholders of the Company agreed to amend the
Company's by-laws as follows:
i) the authorized common shares were changed from 25,000,000 to
an unlimited number;
ii) the 5,000,000 Class A non-dividend bearing, non-voting,
redeemable, preference shares authorized that had never been
issued were eliminated; and
iii) the stated capital account of the Company in respect of its
common shares was reduced by $25,026,000 and applied against
the deficit.
(b) The following is a summary of changes in share capital during the
year.
<TABLE>
<CAPTION>
Warrants Common shares
-------------------------------------- ---------------------------------------
Number $ Number $
<S> <C> <C> <C> <C>
Balance outstanding at
December 31, 1997 1,182,500 - 14,425,718 4,276,000
Options exercised - - 354,000 191,000
---------------------------------------------------------------------------------
Balance at December 31, 1998 1,182,500 - 14,779,718 4,467,000
Shares and warrants issued to
acquire Sunrich Inc. (note 2) 104,821 55,000 5,471,866 6,346,000
4 for 1 warrant exchange (c) (849,375) - - -
Warrants exercised (402,204) (55,000) 402,204 350,000
Warrants issued 366,804 - - -
Warrants expired (71,142) - - -
---------------------------------------------------------------------------------
Balance at December 31, 1999 331,404 - 20,653,788 11,163,000
=================================================================================
</TABLE>
(c) At December 31, 1998, the Company had outstanding 1,182,500 warrants to
acquire common shares. Of these warrants, 650,000 were exercisable at
US$2.25 per share, and 532,500 are exercisable at US$2.00 per share. As a
result of extensions to the original expiry dates approved in 1997 and
1998, the warrants were to expire on June 30, 1999. In December 1998, the
Company offered to the warrant holders a 4 for 1 exchange of the 1,182,500
warrants with an exercise price of US$0.50 per share expiring on January
31, 1999.
Provided the new warrants were exercised prior to January 31, 1999, an
equivalent number of additional warrants with an exercise price of US$1.00
to December 31, 1999, rising to US$2.00 on January 1, 2000 and expiring on
December 29, 2000 would be issued.
During January 1999, 283,125 of the new warrants were exercised to acquire
283,125 common shares for proceeds of $212,000. Accordingly, 283,125
additional warrants were issued. Of these additional warrants, 35,400
warrants were exercised for proceeds of $38,000.
During August 1999, 83,679 of the warrants issued to acquire Sunrich were
exercised to acquire 83,679 common shares for proceeds of $45,000.
Accordingly, 83,679 additional warrants were issued.
F - 17
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
As at December 31, 1999, the Company had 331,404 warrants outstanding with
an exercise price of US$2.00 and expiring on December 29, 2000.
(d) Director/employee option plans
The Company grants options to employees and directors from time to time
under employee/director stock option plans. On July 29, 1999 and August 2,
1999, the Board of Directors granted 620,000 options from the 1998 and
1999 Stock Option Plans at US$1.06. The 620,000 options granted vest as
follows: 253,600 options vest immediately, 82,900 vest annually each on
the anniversary date of August 2 over the next four years, and 34,800 vest
on August 2, 2004. Details of the options exercisable and changes during
the periods presented are as follows:
<TABLE>
<CAPTION>
Granted
Balance as at with Vested Balance as at
Exercise December 31, immediate from prior December 31,
Expiry date price 1998 Retracted vesting years grants 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 10, 2001 US$1.22 to
US$1.75 471,250 (12,000) -- -- 459,250
December 11, 2003 US$0.75 to
US$1.38 302,875 -- 65,700 303,625 672,200
August 2, 2004 US$1.06 -- -- 131,900 -- 131,900
December 31, 2004 US$1.82 182,500 -- -- -- 182,500
August 2, 2005 US$1.06 -- -- 56,000 -- 56,000
---------------------------------------------------------------------------------
956,625 (12,000) 253,600 303,625 1,501,850
=================================================================================
<CAPTION>
Vested
Granted from
Balance as at with prior Balance as at
Exercise December 31, immediate year December 31,
Expiry date price 1997 Exercised Retracted Extended vesting grants 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
February 12, 1998 US$0.25 to
US$1.44 93,500 (89,500) (4,000) -- -- -- --
April 27, 1998 US$0.25 250,000 (250,000) -- -- -- -- --
February 12, 1999 US$1.81 192,500 -- (10,000) (182,500) -- -- --
March 10, 2001 US$1.03 to
US$1.75 431,750 (14,500) (55,250) -- -- 109,250 471,250
December 11, 2003 US$0.75 to
US$1.38 -- -- (21,375) -- 4,500 319,750 302,875
December 31, 2004 US$1.81 -- -- -- 182,500 -- -- 182,500
-------------------------------------------------------------------------------------------------
967,750 (354,000) (90,625) -- 4,500 429,000 956,625
=================================================================================================
</TABLE>
The weighted average exercise price of the above outstanding options at
December 31, 1999 is US$1.29 per share (1998 - US$1.36 per share). On
January 7, 2000, all options were repriced to US$1.06.
At December 31, 1999, options to acquire an additional 366,400 common
shares at US$1.06 have been granted but have not yet vested. Options that
have not vested are excluded from the above table.
Subsequent to year-end, 219,100 options were exercised to acquire 219,100
common shares for gross proceeds of $338,000.
F - 18
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
10 Income taxes
The effective income tax rate on consolidated earnings is influenced by
items such as available losses carried forward and non-deductible
expenses:
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Net earnings before income taxes 1,072,000 822,000
=========================================
Income taxes at Canadian statutory rates of 44% 472,000 362,000
Increase (decrease) by the effects of
Application of prior year losses and scientific research
expenditures carried forward (473,000) (438,000)
Reduction in valuation allowance (635,000) --
Differences in foreign tax rates 20,000 --
Non-taxable income/non-deductible expenses 164,000 76,000
-----------------------------------------
Income taxes recoverable (452,000) --
=========================================
Future tax assets (liabilities) of the Company are as follows:
1999 1998
$ $
Excess of book over tax amortization (608,000) --
Accounting reserves not deducted for tax 278,000 --
Operating and capital losses 241,000 --
Tax benefit of scientific research expenditures 2,913,000 3,266,000
Other 12,000 --
-----------------------------------------
2,836,000 3,266,000
Valuation allowance (2,395,000) (3,266,000)
-----------------------------------------
441,000 --
=========================================
</TABLE>
The Company has approximately $6,600,000 in Canadian scientific research
expenditures which can be carried forward indefinitely to reduce future
years' taxable income, and approximately $150,000 in scientific research
investment tax credits which can be used to reduce future years' income
taxes payable. These scientific research investment tax credits expire in
varying amounts from 2000 to 2006.
Sunrich has a net capital loss carry-forward of approximately $397,000 at
December 31, 1999 available to reduce future federal and state capital
gains that begins to expire in 2002.
A valuation allowance of $2,395,000 has been recorded to reduce the net
benefit recorded in the financial statements related to these future tax
assets. The valuation allowance is deemed necessary as a result of the
uncertainty associated with the ultimate realization of these future tax
assets.
F - 19
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
11 Related party transactions and balances
In addition to transactions disclosed elsewhere in these financial
statements, the Company entered into the following related party
transactions:
(a) During 1999, the Company charged affiliated companies $66,000 for
services rendered (1998 - $66,000). Included in accounts receivable
at December 31, 1999 is $56,000 (1998 - $30,000) due from affiliated
companies.
(b) Included in accounts receivable at December 31, 1999 is $88,000
(1998 - $3,000) due from officers/directors of the Company
12 Commitments and contingencies
(a) The Company has filed a claim against a former director relating to
certain actions taken when he was the President of one of the
Company's operating divisions, BEI. The former director has counter
claimed against the Company and its subsidiaries, the Chairman of
the Company and Easton, the Company's 35% equity investment. It
cannot be determined if there will be any recovery by the Company at
this time or if there will be any loss to the Company, and no
provision has been made in these financial statements in respect of
this matter.
Sunrich is involved in a lawsuit arising in the ordinary course of
business. The ultimate outcome of this lawsuit is unknown at the
present time. No provision for any liability that might result has
been made in the accompanying financial statements. In the opinion
of management, the existing litigation is not considered to be
material in relation to the Company's financial position.
(b) The Company believes, with respect to both its operations and real
property, that it is in material compliance with current
environmental laws. Based on known existing conditions and the
Company's experience in complying with emerging environmental
issues, the Company is of the view that future costs relating to
environmental compliance will not have a material adverse effect on
its financial position, but there can be no assurance that
unforeseen changes in the laws or enforcement policies of relevant
governmental bodies, the discovery of changed conditions on the
Company's real property or in its operations, or changes in use of
such properties and any related site restoration requirements, will
not result in the incurrence of significant costs. No provision has
been made in these financial statements for these future costs since
such costs, if any, are not determinable at this time.
(c) An irrevocable letter of credit for $750,000 has been placed with
the Ontario Ministry of Environment and Energy as a security deposit
for the Certificate of Approval granted to the Company for certain
recycling activities. This letter of credit must remain in place
indefinitely as a condition of the Certificate of Approval.
(d) In the normal course of business, Sunrich holds grain for the
benefit of others. The Company is liable for any deficiencies of
grade or shortage of quantity that may arise in connection with such
grain.
F - 20
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
(e) The Company has a commitment to buy from growers at set prices and
times and also has commitments to sell to terminals at set prices
and times. To offset the risk of market movement in prices, the
Company will buy or sell future positions with commodity brokers.
The quantities of commodities of these open futures contracts at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Number of Bushels
-----------------------------------------
Corn Soybeans
<S> <C> <C>
Company-owned grain 592,132 113,343
Purchase contracts 720,158 (91,603)
Sales contracts (68,745) (21,482)
Futures contracts (1,290,000) 75,000
-----------------------------------------
Total net position (short) long (46,455) 75,258
=========================================
</TABLE>
(f) Sunrich has a contingent obligation to pay up to US$1.5 million
representing 50% of the cumulative pretax profits from Sunrich's
analog meat production business through October 31, 2005. The analog
meat production business incurred a loss during the period from
August 2, 1999 (the date of acquisition of Sunrich) through December
31, 1999. Sunrich has incurred a cumulative loss of approximately
US$1,000,000 for the analog meat production business. Any payments
associated with this agreement will result in an increase in the
Sunrich goodwill.
(g) During the year, the Company entered into a 12-year exclusive
license agreement related to the sales of company's steam explosion
equipment in China.
(h) Commitments under operating leases, principally for distribution
centres and warehouse, are as follows:
<TABLE>
<CAPTION>
$
<S> <C>
2000 208,000
2001 157,000
2002 103,000
2003 73,000
2004 and thereafter 73,000
------------------
614,000
==================
</TABLE>
Rent expense incurred in the year amounted to $195,000 (1998 -
$89,000).
13 Earnings per share
The calculation of the earnings per share is based on the weighted average
number of shares outstanding of 17,384,644 (1998 - 14,702,000). The
dilutive effect on earnings per share of the potential exercise of
outstanding warrants and options is not considered material for the years
presented.
F - 21
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
14 Financial instruments
The Company's financial instruments recognized in the consolidated balance
sheet and included in working capital consist of cash and cash
equivalents, miscellaneous receivables, accounts receivable, accounts
payable and accrued liabilities, note payable and customer deposits. The
fair values of these instruments approximate their carrying value due to
their short-term maturities.
The Company's financial instruments that are exposed to credit risk
include cash and cash equivalents and accounts receivable. The Company
places its cash with institutions of high credit worthiness. The Company's
trade accounts receivable are not subject to a high concentration of
credit risk. The Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its accounts receivable
credit risk exposure is limited. The Company maintains an allowance for
losses based on the expected collectibility of the accounts.
Information on the Company's other financial instruments is contained in
other notes to the financial statements.
15 Segmented information
Since August 2, 1999, the Company operates in three industry segments: (a)
the design, engineering, and sale of customized steam explosion technology
systems; (b) the recycling and sale or disposal of certain non-hazardous
and hazardous industrial waste and resale of inorganic minerals and (c)
the marketing and distribution of grains, supplies and other agriculture
related merchandise. The Company's assets, operations and employees are
located in Canada and the United States.
Industry segments
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------
Steam Waste
Explosion Recycling and
Technology Resale of
Systems and Inorganic Agriculture
Corporate Minerals products Consolidated
$ $ $ $
<S> <C> <C> <C> <C>
External sales by market
Canada 85,000 18,554,000 -- 18,639,000
U.S. 399,000 3,275,000 24,481,000 28,155,000
Japan -- -- 510,000 510,000
---------------------------------------------------------------------
Total sales to external customers 484,000 21,829,000 24,991,000 47,304,000
=====================================================================
Interest expense -- 113,000 217,000 330,000
=====================================================================
Segment net income (loss) (843,000) 2,058,000 309,000 1,524,000
=====================================================================
Identifiable assets 4,659,000 11,773,000 19,002,000 35,434,000
=====================================================================
Amortization 257,000 477,000 336,000 1,070,000
=====================================================================
Expenditures on property plant and equipment 47,000 500,000 591,000 1,138,000
=====================================================================
Equity accounted investments 186,000 -- -- 186,000
=====================================================================
</TABLE>
F - 22
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
Steam Waste
Explosion Recycling and
Technology Resale
Systems and of Inorganic
Corporate Minerals Consolidated
$ $ $
<S> <C> <C> <C>
External sales by market
Canada 78,000 17,690,000 17,768,000
U.S. 4,000 4,305,000 4,309,000
----------------------------------------------------------------
Total sales to external customers 82,000 21,995,000 22,077,000
================================================================
Interest expense -- 134,000 134,000
================================================================
Segment net income (loss) (1,791,000) 2,613,000 822,000
================================================================
Identifiable assets 4,353,000 11,743,000 16,096,000
================================================================
Amortization 274,000 442,000 716,000
================================================================
Expenditures on property plant and equipment 8,000 463,000 471,000
================================================================
Equity accounted investments 507,000 -- 507,000
================================================================
<CAPTION>
Geographic segments
1999 1998
---------------------------------------------- ----------------------------------------------
Canada U.S. Total Canada U.S. Total
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
Capital assets 5,373,000 5,393,000 10,766,000 5,560,000 265,000 5,825,000
=============================================================================================
Goodwill 1,785,000 2,137,000 3,922,000 1,897,000 -- 1,897,000
=============================================================================================
Total assets 16,219,000 19,215,000 35,434,000 15,831,000 265,000 16,096,000
=============================================================================================
</TABLE>
F - 23
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
16 Subsequent event
On February 29, 2000, the Company acquired 100% of the common shares of
George F. Pettinos (Canada), which operates under the tradename of PECAL
for $4,700,000 cash. PECAL was a competitor in some of the products that
BEI distributes.
During February 2000, the Company obtained a 5-year term loan in the
amount of $2,600,000 and increased the Canadian line of credit from
$3,000,000 to $5,000,000.
17 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 $nil in 1999 (1998
- $26,000) 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 exploration company. Also, under U.S. GAAP, certain
development and start-up costs of $75,000 (1998 - $35,000) deferred in
these financial statements would be expensed.
Accordingly, the following would have been reported under U.S. GAAP:
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Net earnings for the year - as reported 1,524,000 822,000
Dilution gain - (26,000)
Development and start-up costs expensed (75,000) (35,000)
-----------------------------------------
Net earnings for the year - U.S. GAAP 1,449,000 761,000
=========================================
Net earnings per share - U.S. GAAP 0.08 0.05
=========================================
Weighted average number of common shares outstanding 17,384,644 14,702,000
=========================================
Shareholders' equity - as reported 18,098,000 10,073,000
Cumulative development and start-up costs expensed (239,000) (164,000)
-----------------------------------------
Shareholders' equity - U.S. GAAP 17,859,000 9,909,000
=========================================
</TABLE>
F - 24
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Comprehensive income
U.S. GAAP requires that a comprehensive income statement be prepared.
Comprehensive income is defined as "The change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner events". It includes all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. The comprehensive income 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>
1999 1998
$ $
<S> <C> <C>
Net earnings for the year - US GAAP 1,449,000 761,000
Currency translation adjustment (taxes - nil) (195,000) --
Dilution gain (taxes - nil) -- 26,000
-----------------------------------------
Comprehensive income 1,254,000 787,000
=========================================
<CAPTION>
Other US GAAP disclosures
1999 1998
$ $
<S> <C> <C>
Allowance for doubtful accounts 665,000 133,000
=========================================
Accrued recycling costs 384,000 393,000
=========================================
</TABLE>
Pro forma data (unaudited)
Condensed pro forma income statement, as if the acquisition of Sunrich had
occurred at the beginning of the previous year are as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Revenue 74,424,000 69,510,000
=========================================
Net income 1,091,000 1,575,000
=========================================
Earnings per share $0.06 $0.08
=========================================
</TABLE>
F - 25
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Effective January 1, 1996, Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123),
encourages, but does not require, companies to include in compensation
cost the fair value of stock options granted. The Company has decided not
to adopt the fair value method. A company that does not adopt this new
method must disclose pro forma net income and earnings per share giving
effect to the method of compensation cost described in SFAS No. 123.
The Company's stock option plan is described in note 9. Employee stock
options granted by the Company in 1998 and 1999 were granted at prices
which were at the value of stock on the grant date, vest at various dates
ranging from the date of the grants to August 2, 2004 and expire 2 to 6
years subsequent to the grant date.
The fair value of the options granted during 1998 and 1999 was estimated
using the Black-Scholes option-pricing model with the assumptions of a
dividend yield of 0% (1998 - 0%), an expected volatility of 84% (1998 -
75%), a risk-free interest rate of 4% (1998 - 4%), and an expected life of
1 to 6 years.
The total value of 620,000 (1998 - 4,500) stock options that were granted
by the Company to employees during 1999 was $632,000 (1998 - $3,000). Of
this total amount, under SFAS No. 123, the cost of stock compensation
expense for the year ended December 31, 1999 would be $239,000 (1998 -
$1,000). The unrecognized value of $393,000 (1998 - $2,000) will be
charged to pro forma net earnings in future years according to the vesting
terms of the options. Compensation expense of options granted in 1998 and
1997 and vesting in 1999 is $307,000 (1998 - $296,000). The resulting pro
forma net earnings (loss) and earnings (loss) per share for the year ended
December 31, 1999 under U.S. GAAP are $903,000 (1998 - ($464,000)) and
$0.05 (1998 - ($0.03)), respectively.
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. The Company's adoption of SFAS 123 for pro
forma disclosure purposes does not apply to awards prior to 1995, and
additional awards in future years are anticipated.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, a new standard
related to the accounting for derivative transactions and hedging
activities. In July 1999, the FASB issued SFAS No. 137, which defers the
effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. While management does not believe this
standard will materially impact financial results of the Company, it is
currently evaluating the reporting requirements under this new standard.
F - 26
