SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|_| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2000
Commission File No. 0-9989
|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
STAKE TECHNOLOGY LTD.
---------------------
(Exact name of registrant as specified in its charter)
CANADA
(Jurisdiction of Incorporation)
Not Applicable
(I.R.S. Employer Identification No.)
2838 Highway 7
Norval, Ontario L0P 1K0, Canada
(Address of Principle Executive Offices)
(905) 455-1990
(Registrant's telephone number, including area code)
----------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to 12(g) of the Act:
Common Shares, no Par value
---------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No. |_|
At August 10, 2000 registrant had 20,945,388 common shares outstanding, the only
class of registrant's common stock outstanding. There were no other classes of
stock outstanding and the aggregate market value of voting stock held by
non-affiliates at such date was U.S. $22,100,000. The Company's common shares
are traded on the Nasdaq Small Cap Market tier of the Nasdaq Stock Market under
the symbol STKL.
Transitional Small Business Disclosure Format
Yes |_| No. |X|
There are 22 pages in the June 30, 2000 10-QSB and the index follows the cover
page.
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STAKE TECHNOLOGY LTD.
FORM 10-QSB
June 30, 2000
PART I - FINANCIAL INFORMATION
Item 1. Management's Discussion and Analysis or Plan of Operations
Item 2. Consolidated Financial Statements
Consolidated Balance Sheets as at June 30, 2000, and December 31,
1999.
Consolidated Statements of Retained Earnings for the Period Ended
June 30, 2000, and the Year ended December 31, 1999.
Consolidated Statements of Operations for the Six Months Ended June
30, 2000 and 1999.
Consolidated Statements of Operations for the Three months April 1 -
June 30, 2000 and 1999.
Consolidated Statements of Cash Flow for the Six Months Ended June
30, 2000 and 1999.
Condensed Notes to Consolidated Financial Statements.
PART II - OTHER INFORMATION
All financial information is expressed in Canadian Dollars
The noon rate of exchange on August 10, 2000 was CDN. $1 = U.S.
$0.6745
2
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PART I - FINANCIAL INFORMATION
Item 1.
Management's Discussion and Analysis of Financial Condition,
Results of Operations and Plan of Operations
Northern Dairy & Food, Inc.
On August 18, 2000, the Company is holding a Special Shareholder Meeting to vote
on the acquisition of 100% of the common shares of Northern Food & Dairy, Inc.
for U.S. $10,500,000 in the form of 7,000,000 common shares valued at U.S. $1.50
each and 500,000 common share warrants exercisable for U.S. $1.50 for 5 years.
The issuance of these shares will represent approximately 24.5% of the
outstanding common shares of Stake after the transaction. Full information on
this acquisition is contained in the information circular sent to shareholders
for this Special Meeting.
PECAL
On February 29, 2000 Stake acquired 100% of the shares of George F. Pettinos
(Canada) Limited, also known under its trade name as PECAL from US Silica
Company of Berkeley Springs, West Virginia for $4,700,000 in cash and
acquisition costs of approximately $300,000. The acquisition of PECAL will
complement the business of the Company's division, Barnes Environmental
International (BEI).
PECAL was direct competitor of BEI in the sand, coated sand, bentonite,
chromite, and zircon businesses, and they have strengths in several other
businesses that are closely related to BEI's existing markets. PECAL will add to
BEI's product lines in several key areas, and will help to build sales in
Ontario and the U.S.. PECAL has sales in the range of $15 million per year, with
a history of profitability and a broad customer base.
The PECAL plant located in Hamilton, Ontario will continue to manufacture and
produce coated sand, foundry mixes and provide wholesaler and distributor
service. The PECAL administration office located at a separate rented site was
closed in May, 2000 and certain employees relocated to the BEI Waterdown Office.
The acquisition cost was financed by the assumption of a new five-year term loan
of $2,600,000, and the expansion of the Canadian line of credit from $3,000,000
to $5,000,000.
As the acquisition of PECAL closed on February 29, 2000, the net assets of PECAL
are included in the June 30, 2000 balance sheet in the 10QSB and operations of
PECAL are included for four months from March 1, 2000 to June 30, 2000.
Major Developments at SunRich in 2000
In early, April, 2000, SunRich formed a joint venture with Northern Food &
Dairy, Inc., the company that Stake plans to acquire, to be known as Norsun,
Inc. During the quarter, Norsun entered into two transactions.
The first is the Nordic Aseptic Inc. (Nordic), which resulted in the assumption
of management control of a soymilk packaging plant on April 19, 2000. Nordic is
in the process of formalizing the acquisition of this soymilk packaging
facility, which should be completed by the end of August, 2000. Management is
currently focusing on increasing production and creating more effective
production and during the quarter achieved a longer-term commitment from its
customer and lenders before committing to this acquisition. As Sunrich, Inc.
owned 50% of Nordic, 50% of the net assets of Nordic are included in the June
30, 2000 balance sheet of this 10QSB and the 50% of the operations of Nordic
have been included for the period of April 19 - June 30, 2000.
Norsun's second transaction was the acquisition of a dormant dairy facility in
Wyoming, which is in the process of being converted into a soy processing
facility to serve the Western U.S. market.
3
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During the first six months soymilk sales continue to climb rapidly as soymilk
was introduced throughout many National food chains in the U.S. Concerns over
genetically modified foods also stimulated SunRich sales of organic products.
Major Developments at BEI in 2000
The first six months of 2000 was a particularly busy time due to the acquisition
of PECAL and the integration of its operations into BEI. Significant overhead
savings will be realized as a result of the acquisition and PECAL sales for
March were at record levels. Computer systems, accounting systems and sales
forces have now been fully integrated.
Also during the first six months of 2000 Barnes Environmental (BEI) completed an
agreement with a major supplier to permit the sale of Ebony Grit (Copper Slag)
into the U.S. and initial results have been most encouraging.
Major Developments in Company's proprietary Steam Explosion technology in 2000
In the first six months of 2000, the Company continued to focus Steam Explosion
Technology on marketing pulping systems to China through Pacitec Inc.
Under the terms of an agreement signed in August, 1999, Pacitec acquired
exclusive rights to market StakeTech's proprietary pulping systems for non-wood
applications in China for a license fee of U.S. $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 U.S. $160 million over
the twelve-year period. StakeTech retains all rights to the design and
manufacture of StakeTech's proprietary steam explosion pulping systems.
Pacitec is a US trade and development company with offices in Arlington, Texas
and Beijing, China. Pacitec specializes in developing business opportunities in
China and acts as a sales agent for such companies as Haliburton Energy Services
and Kellogg Brown and Root. Pacitec is in partnership with the China National
Beijing Contracting and Engineering Institute for Light Industry (BCEL) a
leading engineering design institute in China. BCEL is an experienced
engineering firm with Engineering, Procurement and Construction (EPC) capability
and has completed over 20 projects in the pulp and paper industry since 1981.
In January, 2000, Pacitec joined with an investment group to form New Chinese
Paper Investment Corporation (NCPIC). NCPIC has been established to purchase
existing mills in China and convert them to the StakeTech Steam Explosion
pulping process. The first mill has been identified and acquisition and
conversion are expected to begin in 2000.
In February, 2000, meetings were held between the Company and NCPIC in Hong Kong
and a detailed proposal for the supply of the first StakeTech Pulping Systems
was requested. This proposal was forwarded to Pacitec in March 2000. In May
2000, Pacitec informed the Company that one of its partners had completed the
acquisition of a majority interest in the first mill and the project approval
process is now underway with the China authorities.
The First Three Months of 2000 Operations Compared with the First Three Months
of 1999 Operations
Acquisition of George F. Pettinos (Canada) Limited
On February 29, 2000, the Company acquired 100% of the common shares of George
F. Pettinos (Canada) Limited, also know as PECAL from US Silica Company of
Berkeley Springs, West Virginia for $4,700,000 cash and acquisition costs of
approximately $300,000. The acquisition of PECAL will complement the business of
the Company's division, BEI.
The acquisition of PECAL has been accounted for using the purchase method, and
accordingly, the consolidated financial statements include the results of
operations of the acquired business from the date of the acquisition. The
purchase price has been allocated to the assets acquired and the liabilities
assumed based on management's best estimate of fair values. Given the complexity
of the acquired operations, as well as the short time that has elapsed since
acquisition, the cost and the allocation thereof, of the acquisition is subject
to change based on the final resolution of those estimates. However,
4
<PAGE>
management believes that the final resolution of the estimates will not have a
material impact on the financial position or results of operations of the
Company. The excess of the estimated purchase price over the net assets acquired
is approximately $1,500,000 and will be amortized over twenty years.
5
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Results of Operations
Revenues in the first six months of 2000 increased by 309% to $45,441,000 from
$11,109,000 in the first six months of 1999 and the Company's earnings for the
first six months of 2000 were up 123% to $1,518,000 or $0.07 per common share
compared to $680,000 or $0.05 per share for the first six months ended June 30,
1999.
Sales for the second six months of 2000 were up 392% to $29,432,000 compared to
$5,987,000 in the second six months of 1999. Earnings for the second six months
were up 83% to $1,110,00 or $0.05 per share compared to $605,000 or $0.04 per
share in 1999.
Revenues of $45,441,000 in the first six months of 2000 were from SunRich
operations of $31,198,000; BEI/ PECAL's sales were $14,205,000 (1999 -
$11,064,000) and steam explosion and corporate sales in the first six months of
2000 were $38,000 (1999 - $45,000). Substantially all revenues in the first six
months of 1999 were derived from the BEI division.
In the first six months of 2000, BEI/ PECAL sales consisted of sales of
abrasives, foundry sands and other products were $12,463,000 (1999 -
$9,147,000), recycling revenues were $870,000 (1999 - $1,066,000) and other
sales were $872,000 (1999 - $851,000). SunRich's sales in the first six months
were from soy and soybean product sales of $15,190,000 or 49% of sales; identity
preserved specialty product sales were $6,452,000 or 21% of sales; other grain
sales were $5,101,000 or 16% of sales; other sales were $3,998,000, and
SunRich's 50% share of Nordic's sales since April 18, 2000 were $457,000.
Cost of sales increased to $39,002,000 for the first six months of 2000 compared
to $8,515,000 for the six months ended June 30, 1999 due primarily to the
acquisition of SunRich. Cost of sales in the first six months of 2000
attributable to the BEI/PECAL segment were $11,848,000 (1999 - $8,483,000), and
on SunRich, cost of sales were $26,653,000 and their share of Nordic's cost of
sales was $453,000. Steam Explosion division costs of sales were $48,000 (1999 -
$32,000), which primarily relates to standard amortization charges.
The Company's consolidated gross margin was 14.2% in the first six months of
2000 compared to 23.4% in the first six months of 1999. BEI/PECAL's margin
decreased to 16.6% in the first six months of 2000 from 23.3% in 1999, due to
the temporary loss of a high margin product line customer and tight price
competition in some of BEI's principal product lines. Sunrich's margin was 14.6%
for the first six months of 2000. Nordic's operating margin was 1%, due to the
low level of production in the plant during the initial management control
period. With the renegotiation of production levels and full acquisition of this
business by the end of August 2000, Stake expects Nordic to begin profitable
production in September, 2000. Steam explosion/ corporate margins were negative
due to standard amortization charges.
Research and development costs were $249,000 in the first six months of 2000
compared to $160,000 for the six months ended June 30, 2000. The increase is due
primarily to applied research done at SunRich during the six months.
Administration, market development and demonstration expenditures increased in
the first six months of 2000 to $4,399,000 compared to $1,533,000 for the six
months ended June 30, 1999. In the first six months of 2000 SunRich's
administration costs were $2,630,000, and their share of Nordic's administrative
costs were $124,000; BEI/PECAL's operations accounted for $942,000 of the
administration costs (1999 - $878,000) and steam explosion marketing and
demonstration and corporate administration expenses were $703,000 (1999 -
$655,000). The principal reason for the increase in these expenses in 2000
compared to the first six months of 1999 results from the inclusion of Sunrich's
administration costs for six months, four months of PECAL's administrative
expenses, 50% of 2.5 months of Nordic's administrative costs. The increased
corporate costs are related to the redesign of the Company's web site and the
retention of an investor relations firm starting at the beginning of 2000.
Amortization of patents, trademarks, licences and goodwill increased to $167,000
in the first six months of 2000, compared to $78,000 in the first six months of
1999 due to the amortization of the goodwill arising on the acquisition of
SunRich, Inc. and PECAL, offset by some of the assets in this category being
fully amortized by the end of the 1999.
The gain on sale of property, plant and equipment of $43,000 in the first six
months of 2000 (1999 - nil) is principally due to the gain of $84,000 on the
sale of non-essential land at a location separate from the Company's principal
operations being offset by the ($41,000) loss on sales of redundant
manufacturing assets.
6
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Results of Operations (continued)
Interest on long-term debt increased to $231,000 in the first six months of 2000
from $51,000 in the first six months of 1999, is due principally to the
acquisition of SunRich and its debt obligations and the new debt assumed by the
Company to purchase PECAL.
Interest and other income increased to $79,000 in the first six months of 2000
from $24,000 in the first six months of 1999 due to miscellaneous income earned
in the year and interest earned on cash balances during the first six months of
2000.
The share of losses of equity accounted investees of ($24,000) in the first six
months of 2000 (1999 - ($14,000)) and dilution gain of $140,000 (1999 - nil) is
related to the Company's 35% equity investment in Easton Minerals Ltd. (Easton)
is a mining exploration company listed on the Canadian Venture Exchange
(EM-CDNX). Easton is currently undergoing a change of business, subject to
regulatory and shareholder approval, to acquire an Internet company that owns
the web site: theultimatedream.com.
Dilution gains result from the increase in equity value of Easton due to issues
of capital above StakeTech's carrying cost of this investment. The market value
of Easton is based on limited trading values, and while it is unlikely that
these values will be received upon the sale of this investment at this time,
sale proceeds could add to the Company's net equity and management plans to use
any cash proceeds to reduce debt and increase working capital. U.S. readers
should note that dilution gains are not recognized as income for U.S. GAAP
purposes and accordingly, the effects of this gain are reversed in Note 7 of the
Company's financial statements.
The Company's investment in Easton is carried at a book value of $302,000, with
accumulated advances of $105,000. The market value of StakeTech's shares in
Easton at August 10, 2000 was $786,000. On June 15, 1998, the Company's Board
decided to sell its holdings in Easton as its business is not related to the
Company's primary businesses, and has filed appropriate notification of this
intent with Easton's regulators.
The foreign exchange gain of $30,000 in the first six months of 2000 (1999 -
loss of ($66,000)) is attributable to changes in the exchange value of the U.S.
$ on the Company's net foreign transactions and balances.
The dividend on preference shares of a subsidiary company for the first six
months of 2000 was $14,000 (1999 - $14,000) and the imputed interest of
preference shares of a subsidiary company for the first six months of 2000 was
$15,000 (1999 - $16,000). Both of these expenses are related to the preference
shares issued for the acquisition of BEI.
Liquidity and Capital Resources at June 30, 2000
Cash and short-term deposits decreased to $nil at June 30, 2000 from $2,464,000
at December 31, 1999. The decrease is principally due to the use of cash to
finance the purchase of PECAL as well as SunRich's need for cash in the first
six months due to the seasonal nature of its business.
The $400,000 of cash held as a security deposit at December 31, 1999 was
released into non-restricted cash upon the renegotiation of the Canadian banking
agreement during the year.
Trade accounts receivable increased to $14,192,000 at June 30, 2000 from
$7,300,000 at December 31, 1999 due largely to the acquisition of PECAL and the
seasonal nature of SunRich's business. Trade receivables at June 30, 2000
related to the BEI/PECAL operations were $6,517,000 (December 31, 1999 -
$3,375,000); SunRich operations receivables were $7,471,000 at June 30, 2000
(December 31, 1999 - $3,747,000) and general corporate activities and steam
explosion $204,000 (1999 - $178,000).
Inventories decreased to $7,151,000 at June 30, 2000 from $8,589,000 at December
31, 1999, due principally to the seasonal nature of SunRich's inventory
balances, offset by the addition of the PECAL inventory balances. The Steam
Explosion division is not required to carry inventory.
Future income tax assets of $1,173,000 at June 30, 2000 ($1,020,000 - December
31, 1999) consists of $875,000 of Canadian tax losses and scientific research
expenditures recorded by the Canadian entity and $298,000 relating to the
7
<PAGE>
Liquidity and Capital Resources at June 30, 2000 (continued)
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 $350,000 at of June
30, 2000, relating to normal equipment replacement at BEI/PECAL, SunRich, and in
the Steam Explosion/corporate division.
Investments increased to $737,000 at June 30, 2000 from $281,000 at December 31,
1999 principally due to the Norsun's investment in the Wyoming plant of U.S.
$180,000 advanced by SunRich that will reallocated to fixed assets once the
plant is completed and the dilution gain of $140,000 (1999 - nil) offset by the
equity loss on Easton of ($24,000) (1999 - ($14,000)).
Goodwill increased to $5,489,000 at June 30, 2000 from $3,922,000 at December
31, 1999 due to the goodwill recorded on the acquisition of PECAL offset by
amortization of this goodwill and goodwill recorded on the SunRich acquisition
in 1999 and the BEI acquisition in 1995.
Patents, trademarks, licences and other assets decreased to $365,000 at June 30,
2000 from $446,000 at December 31, 1999, due to the amortization of these
assets, the write off of a non-successful licencing transaction offset by the
deferment of $47,000 of debt issuance costs that will be amortized over the
5-year term of the loan.
Bank indebtedness increased to $2,470,000 at June 30, 2000 from nil at December
31, 1999, due to short-term bank indebtedness being used to finance the
acquisition of PECAL and to finance SunRich in the first six months due to the
nature of their business. Included in this balance is $1,748,000 drawn on the
Canadian line of credit, plus U.S. $715,000 which is drawn on SunRich's cash
lines of credit, less offsetable cash balances of $336,000 on the balance sheets
of corporate office and Nordic.
The payment of nearly half of the purchase price of PECAL and related costs of
the acquisition from the current line of credit was done in order that the
Company is able to repay this debt at any time from the operating efficiencies
that will flow from the combination of BEI and PECAL operations and the closure
of the business office of PECAL. The ability to finance the acquisition this way
is due to the expansion of the Company's Canadian line of credit to $5,000,000
from $3,000,000.
Accounts payable and accrued liabilities decreased to $9,831,000 at June 30,
2000 from $10,179,000 at December 31, 1999. This decrease is due in part, to the
nature of SunRich's business, which is reflected by the Sunrich payables being
$5,065,000 at June 30, 2000 compared to $7,705,000 at December 31, 2000. This
decrease is offset by the inclusion of the PECAL payable balances. (At
acquisition - $2,012,000). The remaining increase in the accounts payable
balance principally relates to the accrual of severance and other costs related
to the acquisition of PECAL. A accrued recycling reserve of $388,000 (December
31, 1999 - $384,000) is included in accounts payable at June 30, 2000 relates to
BEI's business and represents the future costs to process and dispose of the
reclaimed materials that BEI has accepted for recycling, and were on site at
June 30, 2000.
The notes payable of $1,330,000 at June 30, 2000 (December 31, 1999 - $208,000)
bear interest between 7.5% and 8.75% and are primarily used to finance
agricultural chemical inventory at the beginning of the planting season for
SunRich's business. In addition, included in this balance is $257,000 (December
31, 1999 - $218,000) which is a demand note related to Sunrich's hedging
activities. This loan may be drawn up to U.S. $200,000 with interest at prime.
Customer deposits of $778,000 at June 30, 2000 ($1,618,000 - December 31, 1999)
are related to cash deposits made by SunRich customers in 1999 and early year
2000 for year 2000 purchases. No recognition of revenue or accrual of costs is
booked on these transactions until the goods are shipped.
The short term portion of long-term debt and long-term debt is due to the new
5-year term loan for $2,600,000 obtained to partially finance the acquisition
price of PECAL. The loan requires payments of a minimum of $100,000 each quarter
starting in July 2000, which are to aggregate to $600,000 by April 30 of each
year, the loan anniversary date. The financing methodology on this loan has been
set up to allow for full repayment of the loan based on the maturity of the
underlying debt instruments. The interest rate on the new loan is Canadian prime
+1 1/4%, or banker's acceptances +
8
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Liquidity and Capital Resources at June 30, 2000 (continued)
1.5%. Costs of $47,000 were incurred on in obtaining this loan and will be
amortized over 5 years. This balance is included in patents, trademarks and
other assets on the balance sheet. In addition to the term bank loan, the
Company has bank lines of credit of $5,000,000 and US $3,500,000 available based
on margining of trade accounts receivable and inventory.
At June 30, 2000 combined bank lines of credit outstanding is $2,470,000
compared to nil at December 31, 1999. This increase use of bank lines was
principally incurred to pay the purchase price of PECAL, as well as supply cash
to Sunrich's business in the six months, due to its seasonal nature.
Also, at June 30, 2000, amounts that are drawn on the Canadian line of credit,
but not included in the above balance is $891,000 (December 31, 1999 -
$1,116,000) for letters of credit for $750,000 to the Ontario Ministry of the
Environment and Energy for the Certificate of Approval; $120,000 for two key
suppliers and $21,000 for security on the lease of BEI's Louisiana operating
base. In addition, SunRich has co-guaranteed a US $504,000 lease of a third
party company, for certain production equipment needed to harvest and produce
some of SunRich's products.
Substantially all of the Company's assets are pledged as collateral under
various lending agreements, with the exception of the real property at Stake's
corporate offices in Norval, and the lease and physical assets in Louisiana.
The Company considers its relationship with its principal Canadian bankers and
Sunrich bankers to be very satisfactory.
The Company believes that the cash to be generated from operations, the
operational efficiencies that will flow from the BEI/PECAL operations due to the
combination of their operations, the movement from the cash negative to cash
positive season of SunRich's business and the Company's Canadian and U.S. lines
of credit are sufficient for the Company's consolidated operations during 2000.
The increase in the future tax liability of $1,171,000 at June 30, 2000
($579,000 - December 31, 1999) relates principally to PECAL and the difference
between the tax and accounting base of its physical assets. The December 31,
1999 amount relates to SunRich. This balance represents differences between
accounting and taxable income that will result in taxes being payable in a
future period, primarily related to property, plant and equipment.
Cash flow from operations before working capital changes increased to $2,335,000
in the first six months of 2000 compared to $1,067,000 in the first six months
of 1999, due principally to higher earnings.
Cash flow used for operations after working capital changes was ($2,824,000) for
the first six months of 2000 compared to cash provided of $572,000 in the first
six months of 1999. This large use of cash in the first six months of 2000
compared to 1999 is due to the seasonality of the company's businesses which
sees large cash outflows in the first six months to finance and pay for
inventories, which are then sold resulting in these sales building the accounts
receivable balances to higher than normal levels at June 30, 2000.
Cash used in investment activities increased to ($4,574,000) in the first six
months of 2000 compared to cash used of $657,000 in the first six months of 1999
is due principally to the acquisition of PECAL.
Cash provided for financing activities was $2,344,000 the first six months of
2000 compared to cash provided of $181,000 in the first six months of 1999. The
increase in cash provided by financing is principally due to the new term loan
debt acquired in the first six months of 2000 that enabled the Company to
finance the acquisition of PECAL.
PART II - OTHER INFORMATION.
Item 6.
8K filed March 12, 2000 relating to the acquisition of PECAL.
PART I - FINANCIAL INFORMATION
Item 2.
9
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Consolidated Financial Statements
Stake Technology Ltd.
For the First Six Months Ended June 30, 2000
10
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Stake Technology Ltd.
Consolidated Balance Sheets as at June 30, 2000 and December 31, 1999
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
===========================================================================================
June 30, December 31,
2000 1999
===========================================================================================
<S> <C> <C>
Assets (note 5)
Current assets
Cash and cash equivalents $ -- $ 2,464,000
Cash held as security deposit -- 400,000
Accounts receivable - trade 14,192,000 7,300,000
Inventories 7,151,000 8,589,000
Miscellaneous receivables and other assets 639,000 246,000
Future income taxes 1,173,000 1,020,000
----------------------------
23,155,000 20,019,000
Property, Plant and Equipment - at cost
Less accumulated amortization of $7,674,000
(December 31, 1999 - $6,976,000) 12,682,000 10,766,000
Investments - at cost
Quoted market value - $1,022,000
(December 31, 1999 - $550,000) 737,000 281,000
Goodwill at cost - less accumulated
amortization of $669,000
(December 31, 1999 - $516,000) 5,489,000 3,922,000
Patents, trademarks and licences and other assets - at cost
Less accumulated amortization of $939,000
(December 31, 1999 - $925,000) 365,000 446,000
----------------------------
$ 42,428,000 $ 35,434,000
============================
Liabilities
Current liabilities
Bank indebtedness (note 5) $ 2,470,000 $ --
Accounts payable and accrued liabilities 9,831,000 10,179,000
Note payable (note 5) 1,330,000 208,000
Customer deposits 778,000 1,618,000
Current portion of long-term debt (note 5) 1,433,000 950,000
Current portion of preference shares 140,000 240,000
----------------------------
15,982,000 13,195,000
Long-term debt and bank facilities (note 5) 4,586,000 2,955,000
Future income taxes 1,171,000 579,000
Preference shares of subsidiary company 587,000 607,000
----------------------------
22,326,000 17,336,000
----------------------------
Shareholders' Equity
Capital stock (note 6) 11,529,000 11,163,000
Contributed surplus 4,635,000 4,635,000
Retained earnings (note 5) 4,013,000 2,495,000
Current translation adjustment (75,000) (195,000)
----------------------------
20,102,000 18,098,000
----------------------------
$ 42,428,000 $ 35,434,000
============================
</TABLE>
(See accompanying notes to consolidated financial statements)
11
<PAGE>
Stake Technology Ltd.
Consolidated Statements of Retained Earnings
For the Period Ended June 30, 2000 and the Year Ended December 31, 1999
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
=====================================================================================
Three months ended Year ended
June 30, 2000 December 31, 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Retained Earnings - Beginning of the Year $ 2,495,000 $ 971,000
Net Earnings for the Period 1,518,000 1,524,000
------------------------------------
Retained Earnings - End of Period $ 4,013,000 $ 2,495,000
====================================
</TABLE>
(See accompanying notes to consolidated financial statements)
12
<PAGE>
Stake Technology Ltd.
Consolidated Statements of Operations
For the First Six Months Ended June 30, 2000 and 1999
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
==========================================================================================
June 30, June 30,
2000 1999
==========================================================================================
<S> <C> <C>
Revenues $ 45,441,000 $ 11,109,000
----------------------------
Cost of goods sold 39,002,000 8,515,000
----------------------------
Gross profit 6,439,000 2,594,000
----------------------------
Expenses
Research and development 249,000 160,000
Administration, market development
And demonstration 4,399,000 1,533,000
Amortization of patents, trademarks, licences and goodwill 167,000 78,000
Gain on sale of property, plant and equipment (43,000) --
----------------------------
4,772,000 1,771,000
----------------------------
Earnings from operations 1,667,000 823,000
Interest on long-term debt (231,000) (51,000)
Other interest (28,000) (6,000)
Interest and other income 79,000 24,000
Foreign exchange gain (loss) 30,000 (66,000)
Gain on dilution of investment interests
in equity accounted investee 140,000 --
Share of loss of equity accounted investees (24,000) (14,000)
Dividend on preference shares of subsidiary company (14,000) (14,000)
Imputed interest on preference shares of subsidiary company (15,000) (16,000)
----------------------------
Earnings before taxes $ 1,604,000 $ 680,000
----------------------------
Recovery of income taxes - future income taxes 240,000 --
Provision for income taxes (326,000) --
----------------------------
Net Earnings for the Period $ 1,518,000 $ 680,000
============================
Net Earnings per Share for the Period $ 0.07 $ 0.05
============================
</TABLE>
(See accompanying notes to consolidated financial statements)
13
<PAGE>
Stake Technology Ltd.
Consolidated Statements of Operations
For the Second Quarter (April 1 - June 30, 2000 and 1999)
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
==========================================================================================
June 30, June 30,
2000 1999
==========================================================================================
<S> <C> <C>
Revenues $ 29,432,000 $ 5,987,000
----------------------------
Cost of goods sold 25,564,000 4,323,000
----------------------------
Gross profit 3,868,000 1,664,000
----------------------------
Expenses
Research and development 122,000 88,000
Administration, market development
And demonstration 2,363,000 914,000
Amortization of patents, trademarks, licences and goodwill 99,000 30,000
Loss on sale of property, plant and equipment 41,000 --
----------------------------
2,625,000 1,032,000
----------------------------
Earnings from operations 1,243,000 632,000
Interest on long-term debt (88,000) (23,000)
Other interest (12,000) --
Interest and other income -- 24,000
Foreign exchange gain (loss) 20,000 (6,000)
Gain on dilution of investment interests
in equity accounted investee -- --
Share of loss of equity accounted investees (12,000) (7,000)
Dividend on preference shares of subsidiary company (7,000) (7,000)
Imputed interest on preference shares of subsidiary company (7,000) (8,000)
----------------------------
Earnings before taxes $ 1,137,000 $ 605,000
----------------------------
Recovery of income taxes - future income taxes 200,000 --
Provision for income taxes (227,000) --
----------------------------
Net Earnings for the Period $ 1,110,000 $ 605,000
============================
Net Earnings per Share for the Period $ 0.05 $ 0.04
============================
</TABLE>
(See accompanying notes to consolidated financial statements)
14
<PAGE>
Stake Technology Ltd.
Consolidated Statements of Cash Flow
For the Six Months ended June 30, 2000 and 1999
(Expressed in Canadian Dollars)
<TABLE>
<CAPTION>
=====================================================================================
June 30, June 30,
2000 1999
=====================================================================================
<S> <C> <C>
Cash provided by (used in)
Operating activities
Net earnings for the period $ 1,518,000 $ 680,000
Items not affecting cash
Amortization 865,000 373,000
Share of losses of investee 24,000 14,000
Gain on sale of property, plant and equipment (43,000) --
Gain on dilution of interest in investee (140,000) --
Imputed interest on preference shares 16,000 --
Future income taxes 95,000 --
--------------------------
2,335,000 1,067,000
Change in non-cash working capital balances
Accounts receivable - trade (4,292,000) (870,000)
Inventories 2,351,000 537,000
Miscellaneous receivables and other assets (253,000) 51,000
Accounts payable and accrued liabilities (2,683,000) (213,000)
Note payable (1,122,000) --
Customer deposits 840,000 --
--------------------------
(2,824,000) 572,000
--------------------------
Investments
Acquisition of company - net of cash acquired (4,508,000) --
Disposal of other assets 67,000 (5,000)
Cash held as security deposit 400,000 --
Acquisition of property, plant and equipment (332,000) (360,000)
Proceeds on sale of property, plant and equipment 139,000 --
Increase in investments and advances (340,000) (292,000)
--------------------------
(4,574,000) (657,000)
--------------------------
Financing
Purchase of preference shares in subsidiary company (100,000) (100,000)
Redemptions of preference shares in subsidiary company (36,000) (19,000)
Repayment of long-term debt (521,000) (300,000)
Issuance of long-term debt 2,635,000 --
Issuance of common shares 366,000 238,000
--------------------------
2,344,000 (181,000)
--------------------------
Foreign exchange loss on cash held in a foreign currency 120,000 --
--------------------------
(Decrease) increase in cash during the period (4,934,000) (266,000)
Cash and cash equivalents - Beginning of period 2,464,000 181,000
--------------------------
(Bank indebtedness) - End of period $(2,470,000) $ (85,000)
==========================
</TABLE>
Cash and cash equivalents consist of unrestricted cash and
short-term deposits maturing in less than 90 days.
(See accompanying notes to consolidated financial statements)
15
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the Six Months ended June 30, 2000
(Expressed in Canadian Dollars)
================================================================================
1. Independent chartered accountants have not audited the information
presented in the accompanying Consolidated Financial Statements. In the
opinion of the Company, such statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly
the financial position of the Company, the results of its operations and
the changes in its financial position for the applicable periods, in
conformity with generally accepted accounting principles in Canada, which
differ in some respects from accounting principles accepted in the United
States, the effect of which is explained in note 7, applied on a
consistent basis. The consolidated balance sheet at December 31, 1999 has
been taken from the Company's Annual Report to Shareholders for the year
then ended. The consolidated financial statements as at December 31, 1999
should be read in conjunction therewith.
2. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
3. Description of business and significant accounting policies
Stake Technology Ltd. (the Company) was incorporated under the laws of
Canada on November 13, 1973 and operates in three principal businesses.
Through its wholly owned U.S. subsidiary Sunrich, Inc. (SunRich), which
was acquired on August 2, 1999, the Company sells agricultural products.
Its division, Barnes Environmental International (BEI), and its
subsidiary, George F. Pettinos (Canada) Limited (PECAL) acquired February
29, 2000 sell abrasives and industrial materials and recycles inorganic
materials. The Company also operates a division developing and
commercializing a proprietary Steam Explosion technology for processing of
biomass into higher value products. The Company's assets, operations and
employees at June 30, 2000 are located in Canada and the U.S.
These financial statements are prepared in accordance with accounting
principles generally accepted in Canada. Differences arising from the
application of accounting principles generally accepted in the United
States are described in note 7. The significant policies are outlined
below:
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
inter-company accounts and transactions have been eliminated on
consolidation.
Cash and cash equivalents
Cash and cash equivalents consist of unrestricted cash and short-term
deposits with a maturity at acquisition of less than 90 days.
Inventories
Inventories related to the recycling and industrial minerals business of
BEI/PECAL and merchandise inventories of SunRich are valued at the lower
of cost and estimated net realizable value. Cost is determined on a
first-in, first-out basis.
16
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the Six Months ended June 30, 2000
(Expressed in Canadian Dollars)
================================================================================
Inventories (continued)
Inventories of grain are valued at market. Changes in market value are
included in cost of sales. SunRich generally follows a policy of hedging
its grain transactions to protect gains and minimize losses due to market
fluctuations. Hedge contracts are adjusted to market price and gains and
losses from such transactions are included in cost of sales. The Company
has a risk of loss from hedge activity if the grower does not deliver the
grain as scheduled.
Investments and marketable securities
Investments in companies over which the Company exercises significant
influence are accounted for by the equity method whereby the Company
includes its proportionate share of earnings and losses of such companies
in earnings. Other long-term investments are recorded at cost and are
written down to their estimated recoverable amount if there is evidence of
a decline in value, which is other than temporary.
Amortization of capital assets
Amortization is provided on plant and equipment on the diminishing balance
basis at rates of 20% to 33% per annum for office furniture and equipment,
machinery and laboratory equipment and vehicles and 4-8% for buildings.
Amortization is calculated from the time the asset is put into use.
Costs of acquiring or filing patents, trademarks and licenses are
capitalized and amortized on a straight-line basis over their expected
lives of 10 to 20 years. Costs of renewing patents and trademarks are
expensed as incurred.
Revenue recognition
i) SunRich
Grain sales are recorded at the time of shipment. Other SunRich
revenue and revenue of its 50% joint venture; Nordic are recognized
upon the sale and shipment of a product or the providing of a
service to a customer.
ii) BEI/PECAL
Revenue from the sale of industrial minerals is recognized upon
shipment.
Tipping fee revenue, which consists of a per ton fee paid to BEI for
waste recycling materials being received by the BEI is recognized at
the time the material is received. Provision is made for the net
costs of processing and disposal of the material.
iii) Steam Explosion technology
The percentage of completion method is used to account for
significant contracts in progress when related costs can be
reasonably estimated. The Company uses costs incurred to date as a
percentage of total expected costs to measure the extent of progress
towards completion. Revenue from consulting and contract research is
recognized when the service is completed. License fees related to
sales of the Company's technologies are recorded as revenue when
earned and collection is reasonably assured.
17
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the Six Months ended June 30, 2000
(Expressed in Canadian Dollars)
================================================================================
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.
Revenues and expenses arising from foreign currency transactions are
translated into Canadian dollars using the exchange rate in effect at the
transaction date. Monetary assets and liabilities are translated using the
rate in effect at the balance sheet date. Related exchange gains and
losses are included in the determination of earnings.
Goodwill
Goodwill represents the excess of the cost of subsidiaries and businesses
over the assigned value of net assets acquired. Goodwill is amortized on a
straight-line basis over its estimated life of 20 years. The Company
reviews the recoverability of goodwill whenever events or changes in
circumstance indicate that the carrying amount may not be recoverable. The
measurement of possible impairment is based primarily on the ability to
recover the balance of the goodwill from expected future operating cash
flows on an undiscounted basis.
Customer deposits
Customer deposits principally include prepayments by SunRich's customers
for fertilizer and chemicals to be purchased during the spring planting
season.
Income taxes
During 1998, the Company adopted the asset and liability method of
accounting for income taxes whereby future income tax assets are
recognized for deductible temporary differences and operating loss
carry-forwards, and future income tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the amounts of assets and liabilities recorded for income tax and
financial reporting purposes. Future income tax assets are recognized only
to the extent that management determines that it is more likely than not
that the future income tax assets will be realized. Future income tax
assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment or substantive enactment. The income
tax expense or benefit is the income tax payable or refundable for the
period plus or minus the change in future income tax assets and
liabilities during the period.
Derivative instruments
SunRich enters into exchange-traded commodity futures and options
contracts to hedge its exposure to price fluctuations on grain transaction
to the extent considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging purposes are purchased
and sold through regulated commodity exchanges. Inventories, however, may
not be completely hedged, due in part to the Company's assessment of its
exposure from expected price fluctuations. Exchange purchase and sales
contracts may expose the Company to risk in the event that a counter-party
to a transaction is unable to fulfill its contractual obligation.
18
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the Six Months ended June 30, 2000
(Expressed in Canadian Dollars)
================================================================================
Derivative instruments (continued)
The Company manages its risk by entering into purchase contracts with
pre-approved producers. The Company has a risk of loss from hedge activity
if a grower does not deliver the grain as scheduled. Sales contracts are
entered into with organizations of acceptable creditworthiness, as
internally evaluated. All future transactions are marked to market. Gains
and losses on futures transactions related to grain inventories are
included in cost of goods sold.
Earnings per share
The computation of earnings per share is based on the weighted average
number of common shares outstanding during the period.
Use of estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
4. Acquisition of a Business
On February 29, 2000, the Company acquired 100% of the common shares of
George F. Pettinos (Canada) Limited, also know as PECAL from US Silica
Company of Berkeley Springs, West Virginia for $4,700,000 cash and
approximately $300,000 in acquisition costs. The acquisition of PECAL will
complement the business of the Company's division, BEI.
The acquisition of PECAL has been accounted for using the purchase method,
and accordingly, the consolidated financial statements include the results
of operations of the acquired business from the date of the acquisition.
The purchase price has been allocated to the assets acquired and the
liabilities assumed based on management's best estimate of fair values.
Given the complexity of the acquired operations, as well as the short time
that has elapsed since acquisition, the cost and the allocation thereof,
of the acquisition is subject to change based on the final resolution of
those estimates. However, management believes that the final resolution of
the estimates will not have a material impact on the financial position or
results of operations of the Company. The excess of the estimated purchase
price over the net assets acquired is approximately $1,500,000, which will
be amortized over twenty years.
5. Long-term debt and banking facilities
Substantially all of the Company's assets are pledged as collateral under
various lending agreements, with the exception of the real property at
Stake's corporate offices in Norval, and the lease and physical assets in
Louisiana.
In order to finance the acquisition of PECAL, the Company's principal
bankers extended the Company's Canadian line of credit to $5,000,000 from
$3,000,000 based on the margining of certain working capital balances. As
part of this expanded line of credit, the Company's interest rate
increased from Canadian prime to Canadian prime +0.2%.
19
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the Six Months ended June 30, 2000
(Expressed in Canadian Dollars)
================================================================================
In addition, a new $2,600,000 term loan was provided to pay the remaining
portion of the PECAL acquisition price. The new term loan is payable in
minimum $100,000 quarterly instalments, which are to total Long-term debt
and banking facilities (continued)
at least $600,000 per annum to each April 30, the anniversary date of the
loan. The interest rate of the term loan is Canadian prime +1.25%. In
addition, there is $891,000 secured against the Canadian line of credit
for under various security arrangements, the largest being the $750,000
financial assurance provided to the Ontario Ministry of Environment for
BEI's business.
Sunrich has $1,058,000 outstanding on its U.S. line of credit at June 30,
2000, and has co-guaranteed U.S. $584,000 for a third party company that
harvests and processes some of its production.
The notes payable of $1,330,000 at June 30, 2000 (December 31, 1999 -
$208,000) bear interest between 7.5% and 8.75% and are primarily used to
finance agricultural chemical inventory at the beginning of the planting
season for SunRich's business. In addition, included in this balance is
$257,000 (December 31, 1999 - $218,000) which is a demand note related to
Sunrich's hedging activities. This loan may be drawn up to U.S. $200,000
with interest at prime.
6. Capital Stock
June 30, December 31,
2000 1999 1999
---- ---- ----
(a) Issued and fully paid -
20,937,388 common shares
(June 30, 1999 - 15,082,543
December 31, 1999 - 20,653,788) $ 11,529,000 4,705,000 $ 11,163,000
============ ========= ============
(b) During 1997, the shareholders of the Company agreed to amend the Company's
by-laws. These changes included reducing the stated capital account of the
Company in respect of its common shares in the amount of $25,026,000 and
applying this amount against the deficit.
(c) To June 30, 2000, 283,600 options have been exercised for gross proceeds
of $366,000. There was a further 8,000 options exercised between July 1,
2000 and August 10, 2000.
(d) At June 30, 2000, there were options vested to Employees and Directors to
acquire 1,239,550 common shares at exercise prices of U.S. $0.75 to
U.S.$1.4062. In addition, at June 30, 2000 options to acquire an
additional 402,400 common shares at exercise prices of U.S. $1.063
-U.S.$1.4062 have been granted but have not yet vested.
7. United States Accounting Principles Differences
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada (Canadian GAAP)
which conform in all material respects applicable to the Company with
those in the United States (U.S. GAAP) during the periods presented except
with respect to the following:
Under U.S. GAAP, the gain on dilution in the amount of $140,000 in the
first six months of 2000 (December 31, 1999 - nil) resulting from the
dilution of the Company's ownership of the common share equity of Easton
would have been excluded from income and included as a separate component
of shareholders' equity as Easton
20
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the Six Months ended June 30, 2000
(Expressed in Canadian Dollars)
================================================================================
is a development stage company. Also, under U.S. GAAP, certain development
and start-up costs of nil in the first six months of 2000 (December 31,
1999 - $75,000) deferred in these financial statements would be expensed.
Also under U.S. GAAP, the allowance for doubtful accounts at June 30, 2000
of $760,000 (December 31, 1999 - $665,000) needs to be disclosed, as does
the amounts due from related parties at June 30, 2000 of $167,000
(December 31, 1999 - $44,000). Also included in accounts payable and
accrued liabilities is an accrual for recycling costs of $388,000 at June
30, 2000 (December 31, 1999 - $384,000).
Accordingly, the following would have been reported under U.S. GAAP:
<TABLE>
<CAPTION>
June 30, June 30, December December
2000 1999 31, 1999 31, 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings for the year - as reported $ 1,518,000 680,000 $ 1,524,000 $ 822,000
Dilution gain (taxes - nil) (140,000) -- -- (26,000)
Development and start-up costs expensed -- -- (75,000) (35,000)
------------------------------------------------------------
Net earnings for the year - U.S. GAAP $ 1,378,000 $ 680,000 $ 1,449,000 $ 761,000
============================================================
Net earnings per share - U.S. GAAP $ 0.07 $ 0.05 $ 0.08 $ 0.05
============================================================
Weighted average number of common shares outstanding 20,817,000 14,903,000 17,384,644 14,702,000
============================================================
Shareholders' equity - as reported 20,102,000 $ 10,991,000 $ 18,098,000 $ 10,073,000
Cumulative development and start-up costs expensed (164,000) (164,000) (239,000) (164,000)
-------------------------------------------------------------
Shareholders' equity - U.S. GAAP $ 19,938,000 $ 10,827,000 $ 17,859,000 $ 9,909,000
============================================================
</TABLE>
Comprehensive Income
U.S. GAAP requires that a comprehensive income statement be prepared.
Comprehensive income is defined as "The change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner events". It includes all changes in equity during a period,
except those resulting from investments by owners and distribution to owners.
The comprehensive statement reconciles the reported net income to the
comprehensive income.
The following is a comprehensive income statement (prepared in accordance with
U.S. GAAP), which, under U.S. GAAP, would have the same prominence as other
financial statements.
<TABLE>
<CAPTION>
June 30, June 30, December December
2000 1999 31, 1999 31, 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings for the year - U.S. GAAP $ 1,378,000 $ 680,000 $ 1,449,000 $ 761,000
Dilution gain (taxes - nil) 140,000 -- -- 26,000
Currency translation adjustment (taxes - nil) (75,000) -- (195,000) --
-------------------------------------------------------
Comprehensive income $ 1,443,000 $ 680,000 $ 1,254,000 $ 787,000
=======================================================
</TABLE>
21
<PAGE>
Stake Technology Ltd.
Notes to Consolidated Financial Statements
For the Six Months ended June 30, 2000
(Expressed in Canadian Dollars)
================================================================================
8. Comparative Balances
Certain comparative account balances have been reclassified to achieve
comparability to current period balances.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STAKE TECHNOLOGY LTD.
Date August 10, 2000 /s/ Leslie N. Markow
------------------------------ -----------------------------------------
Stake Technology Ltd.
by Leslie N. Markow
Vice President - Finance
& Chief Financial Officer
