Northern Food and Dairy, Inc.
Financial Statements at September 15, 2000 and for
the Period from January 1, 2000 through September 15, 2000
Northern Food and Dairy, Inc.
Balance Sheet
At September 15, 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 693,856
Accounts receivable, net 3,290,518
Inventories 1,680,759
Prepaid expenses and other 155,917
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Total current assets 5,821,050
Property, plant and equipment, net 11,755,909
Investments in and advances to unconsolidated affiliates 427,418
Debt issuance costs 32,398
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Total assets $18,036,775
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit $ 950,000
Current portion of long-term debt 1,827,251
Accounts payable 4,459,863
Accrued expenses 538,336
Dividends payable 191,067
Due to Sunrich, Inc. 331,707
Due to Nordic Aseptic, Inc. 200,000
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Total current liabilities 8,498,224
Long-term debt, less current portion 7,039,544
Advance from Stake Technology, Ltd. 250,000
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Total liabilities 15,787,768
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Commitments
Stockholders' equity:
Common stock, $10 par value; 2,500 shares authorized,
1,000 shares issued and outstanding 10,000
Additional paid-in capital 1,747,991
Retained earnings 491,016
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Total stockholders' equity 2,249,007
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Total liabilities and stockholders' equity $18,036,775
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The accompanying notes are an integral part of the financial statements.
2
Northern Food and Dairy, Inc.
Statement of Operations
For the period from January 1, 2000 through September 15, 2000
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Net sales $ 16,718,578
Cost of sales 14,554,548
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Gross profit 2,164,030
Selling, general and administrative expenses 1,830,098
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Operating income 333,932
Other income (expense):
Gain on investment (Note 2) 160,597
Interest expense (195,837)
Other income 14,004
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Net income before equity in loss of investee 312,696
Equity in loss of investee (280,009)
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Net income $ 32,687
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The accompanying notes are an integral part of the financial statements.
3
Northern Food and Dairy, Inc.
Statement of Changes in Stockholders' Equity
For the period from January 1, 2000 through September 15, 2000
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Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
Balance, January 1, 2000 $ 10,000 $ 1,747,991 $ 1,398,525 $ 80,842 $ 3,237,358
Dividends to stockholders:
Cash paid and payable (570,874) (570,874)
Stake Technology, Ltd.
common stock (194,957) (194,957)
Real property (174,365) (174,365)
Increase in fair value of
investment 79,755 79,755
Decrease in unrealized gain on
distribution of investment (160,597) (160,597)
Net income 32,687 32,687
----------- ----------- ----------- ----------- -----------
Balance, September 15, 2000 $ 10,000 $ 1,747,991 $ 491,016 $ -- $ 2,249,007
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
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Northern Food and Dairy, Inc.
Statement of Cash Flows
For the period from January 1, 2000 through September 15, 2000
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Cash flows from operating activities:
Net income $ 32,687
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 546,903
Gain on investment (160,597)
Equity in net loss of investee 280,009
Provision for doubtful accounts 15,000
Loss on disposal of equipment 1,299
Changes in operating assets and liabilities:
Accounts receivable (138,591)
Inventories (376,052)
Prepaid expenses and other (119,845)
Accounts payable 1,035,395
Accrued expenses 64,237
Due to Nordic Aseptic, Inc. 200,000
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Net cash provided by operating activities 1,380,445
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Cash flows from investing activities:
Purchases of plant, property and equipment (5,672,496)
Increase in investment in and advances to unconsolidated affiliates (707,427)
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Net cash used in investing activities (6,379,923)
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Cash flows from financing activities:
Borrowings under line of credit 950,000
Proceeds from issuance of long-term debt 12,035,619
Advance from Stake Technology, Ltd. 250,000
Advance from Sunrich, Inc. 331,707
Principal payments on long-term debt (6,896,750)
Change in cash overdraft (577,863)
Dividends paid to stockholders (379,807)
Payment of debt issuance costs (32,534)
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Net cash provided by financing activities 5,680,372
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Net increase in cash and cash equivalents 680,894
Cash and cash equivalents, January 1, 2000 12,962
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Cash and cash equivalents, September 15, 2000 $ 693,856
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Supplemental cash flow information:
Cash payments for interest, including capitalized interest of approximately $230,000 $ 418,713
Supplemental disclosure of significant noncash financing and investing activities:
Distribution of Stake Technology, Ltd. common stock as dividend in kind to stockholders $ 194,957
Dividends payable to stockholders 191,067
Distribution of certain real property as a dividend in kind to stockholder 174,365
The accompanying notes are an integral part of the financial statements.
5
Northern Food and Dairy, Inc.
Notes to Financial Statements
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1. Summary of Significant Accounting Policies
Nature of Business
Northern Food and Dairy, Inc. (the Company) processes liquid dairy and
non-dairy products into products suitable for human or animal consumption
and provides custom drying services for certain grains. The Company has
sales to customers located throughout the United States of America and
Japan.
On September 15, 2000, stockholders of the Company agreed to exchange
their shares of common stock for common stock of Stake Technology, Ltd.
Under terms of the agreement, Stake Technology, Ltd. issued 7,000,000
common shares and warrants to purchase 500,000 additional common shares in
exchange for all outstanding shares of the Company.
The transaction above was immediately followed by Stake Technology, Ltd.'s
contribution to Stake Minnesota II, Inc. of the outstanding shares of the
Company obtained in the exchange described above. Stake Minnesota II, Inc.
was then merged into the Company. The corporate existence of Stake
Minnesota II, Inc. ceased and Northern Food and Dairy, Inc. continued as
the surviving corporation.
These financial statements represent the financial position of Northern
Food and Dairy, Inc. at September 15, 2000, and the results of its
operations and cash flows for the period ended September 15, 2000, all
immediately prior to the transaction described above.
Revenue Recognition
Sales are recorded for products produced for human and animal consumption
upon shipment to the customer. Revenues for custom drying services are
recorded upon completion of quality testing.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Inventories
Inventories are valued at the lower of cost or market, with cost
determined in the first-in, first-out (FIFO) method.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is recorded using the
straight-line method over the estimated useful lives of the assets.
Amortization is recorded over the shorter of the asset life or lease term
on the straight-line method.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to
which it relates and is amortized over the asset's estimated useful life.
For the period from January 1, 2000, through September 15, 2000,
approximately $230,000 of interest was capitalized.
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Northern Food and Dairy, Inc.
Notes to Financial Statements
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Maintenance, repairs and minor renewals are charged to expense while major
renewals and betterments are capitalized. Upon sale or retirement, the
cost and related accumulated depreciation and amortization are removed
from the accounts and the resulting gain or loss is included in
operations.
Income Taxes
The Company has elected S corporation status. As a result, no provision
for federal and state income taxes is reflected in the financial
statements because the stockholders will be allocated 100% of the
Company's income in their individual income tax returns. A State of
Minnesota minimum fee of $3,750 is included in selling, general and
administrative expenses.
2. Investments
The Company owns a 50% interest in Norsun, LLC, with the remaining 50%
interest owned by Sunrich, Inc., a wholly owned subsidiary of Stake
Technology, Ltd. Norsun, LLC owns 100% of the common stock of Nordic
Aseptic, Inc. (Nordic) and 100% of the member interests of Star Valley LLC
(Star Valley).
Nordic was formed to purchase the assets of Hoffman Aseptic Packaging,
Inc. during August 2000 for approximately $4,300,000. The purchase was
paid for with the assumption of approximately $3,700,000 of debt and
payment of approximately $500,000 in cash. Star Valley was formed to
purchase the real estate and equipment from Custom Dried Foods, Inc.
during March 2000 for $185,000. During the period ended September 15,
2000, the Company invested in and advanced to Nordic and Star Valley
$375,720. In addition, the Company owes Sunrich, Inc. $331,707 for
investments and advances to Norsun, LLC made on behalf of the Company.
Subsequent to September 15, 2000, the Company has advanced an additional
$285,000 to Nordic.
For the period from January 1, 2000 through September 15, 2000, the
Company's equity in the losses of Norsun, LLC was $280,009. Norsun, LLC
reported a loss of $560,018 on its investment in Nordic for the period
ended September 15, 2000. At September 15, 2000, Star Valley was not yet
operational. At September 30, 2000, Nordic had total assets and
liabilities of approximately $5,400,000 each, and Star Valley had total
assets and liabilities of approximately $397,000 each.
The Company had an investment in the common stock of Stake Technology
Ltd., a publicly traded company (see Note 8). The Company's investment was
classified as an available-for-sale security and was stated at fair value,
with unrealized holding gains reported as a separate component of
stockholders' equity. During the period ended September 15, 2000, the
stock was distributed to the Company's stockholders as a dividend in kind
and a gain recognized on the disposition of the stock. The common stock
had a cost of $34,360, and the Company recorded a gain of $160,597 during
the period ended September 15, 2000.
3. Selected Financial Information
Accounts Receivable, Net
Accounts receivable $ 3,315,518
Less allowance for doubtful accounts (25,000)
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$ 3,290,518
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Northern Food and Dairy, Inc.
Notes to Financial Statements
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Inventories
Raw materials $ 864,387
Work in process 115,170
Finished goods 701,202
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$ 1,680,759
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Property, Plant and Equipment, Net
Land $ 209,713
Buildings and leasehold improvements 7,665,101
Machinery, equipment and vehicles 8,629,294
Equipment under capital leases 303,067
Construction in progress 1,383,365
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18,190,540
Less accumulated depreciation (6,311,335)
Less accumulated amortization for equipment
under capital leases (123,296)
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$ 11,755,909
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4. Financing Arrangements
The Company maintains a line of credit with a bank, which provides for
maximum borrowings of up to $1,000,000 based on eligible accounts
receivable, with interest at the bank's reference rate plus 1.5% (9.5% at
September 15, 2000). Borrowings under the line of credit are due December
31, 2000, and are collateralized by accounts receivable, inventories,
certain equipment and a personal guarantee of two stockholders of the
Company. Borrowings under the line of credit totaled $950,000 at September
15, 2000. The lender may subjectively accelerate payment of the
outstanding amounts upon the occurrence of a material adverse change.
At September 15, 2000, long-term debt consists of the following:
Note payable to financial institution, interest at 9.45%, due in monthly
payments of $144,043 through September 2003, collateralized by machinery,
furniture, fixtures, and equipment. The note includes a cross
default provision. $4,495,475
Note payable to financial institution, interest at the 30-day commercial paper
rate plus 3% (8.875% at September 15, 2000), due in monthly payments of
$53,918 through September 2007. The note is collateralized by all
machinery, furniture, fixtures, and equipment. The note includes a cross
default provision. 3,300,000
Uncollateralized note payable to related party in connection with the
acquisition of property, interest at 8%, due in monthly payments of $2,543
through August 2005 (see Note 7). 125,409
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Northern Food and Dairy, Inc.
Notes to Financial Statements
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Contract for deed assumed in conjunction with the acquisition of property from a
related party, interest at 10%, due in monthly payments of $6,000 through
August 2008, collateralized by the contract for deed property (see Note 7). $ 399,591
Mortgage payable to bank, interest at 9.375%, due in monthly payments of $3,260
through August 2005, collateralized by property. The lender may
subjectively accelerate payment of the outstanding amounts upon the
occurrence of a material adverse change. 310,202
Contract for deed payable in quarterly installments of $7,033, through
January 2002; collateralized by the contract for deed property. 39,201
Capital lease obligations due in monthly payments through 2004, with
interest ranging from 7.0% to 9.4%. 114,757
Note payable to a customer, discounted at 9.5%, payments of $11,111
commence on May 31, 2001 through April 30, 2002. 65,338
Other 16,822
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8,866,795
Less current portion (1,827,251)
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$7,039,544
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Scheduled maturities of long-term debt and payments due on capital leases
are as follows:
Capital
Year Ending September 15 Leases Other Total
2001 $ 68,493 $1,765,784 $1,834,277
2002 36,835 1,995,107 2,031,942
2003 17,041 2,213,580 2,230,621
2004 2,653 551,792 554,445
2005 854,388 854,388
Thereafter 1,371,387 1,371,387
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125,022 8,752,038 8,877,060
Less interest on capital leases (10,265) (10,265)
-------- ---------- ----------
$ 114,757 $8,752,038 $8,866,795
========= ========== ==========
5. Manufacturing Agreement with Rhodia, Inc.
The Company has entered into an agreement with Rhodia, Inc. to serve as
the primary manufacturer and processor of certain products for Rhodia,
Inc. The agreement includes two periods with period one from September
2000 through August 2003 and period two from September 2004 through August
2007. Rhodia, Inc. can terminate the agreement after the end of period one
upon providing twelve months notice to the Company.
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Northern Food and Dairy, Inc.
Notes to Financial Statements
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The Company incurred approximately $4,300,000 for plant expansion and
equipment in order to meet the expected needs of Rhodia, Inc. During
period one of the agreement, Rhodia, Inc. has agreed to repay the Company
$4,300,000 through 36 monthly payments of $119,444 beginning in October
2000. Subsequently, during period two of the agreement, the Company will
repay Rhodia, Inc. up to $1,720,000 (40% of $4,300,000) through sales
price reductions to Rhodia, Inc. during that period.
Under the agreement, the Company is required to obtain certain regulatory
approvals, the last of which management represents was received September
27, 2000, thereby becoming the effective beginning date for the agreement.
6. Significant Customer Information
At September 15, 2000, the Company had three customers who accounted for
16%, 14% and 11% of accounts receivable, respectively. During the period
from January 1, 2000, through September 15, 2000, the Company had three
customers that accounted for 16%, 15% and 11% of net sales, respectively.
7. Related Party Transactions
The Company leases certain real estate from a stockholder under operating
leases that expire through August 2010. Annual rental on each of the
leases is $1. Prior to the purchase described below, the Company leased
facilities from a limited liability company in which a stockholder is a
member. The Company also leases from third parties certain equipment on
month-to-month leases. Total rent expense was $102,408, including $81,987
paid to a limited liability company in which a stockholder is a member,
for the period ended September 15, 2000.
On August 24, 2000, the Company purchased land and building (previously
leased by the Company) for $525,000 from a limited liability company in
which a stockholder of the Company is a member. As part of the purchase,
the Company assumed a contract for deed liability for approximately
$400,000 and entered into a note payable to the stockholder (see Note 4)
for approximately $125,000.
On August 14, 2000, the Company purchased for cash a building from the
majority stockholder for $117,000.
At September 15, 2000, the Company had advances payable to Stake
Technology, Ltd. and Sunrich, Inc. totaling $250,000 (see Note 2) and
$331,707, respectively. The advances bear interest at 8.0%.
During the period ended September 15, 2000, the Company paid Stake
Technology, Ltd. $250,000 for consulting services provided to the Company.
In addition, during the period the Company incurred $200,000 of expense
with Nordic Aseptic, Inc.
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Northern Food and Dairy, Inc.
Notes to Financial Statements
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8. Other Commitments
The Company is a co-guarantor along with Sunrich, Inc. on a $3,700,000
installment loan for Nordic Aseptic, Inc. (see Note 2). The loan is
payable in monthly installments of $44,048 through September 2007, with
interest at the prime rate plus 1.0%. The loan is collateralized by land,
buildings and equipment owned by Nordic Aseptic, Inc. The installment loan
contains restrictive financial covenants for the Company, including
maintaining tangible net worth of $2,500,000, debt to tangible net worth
of less than 5.5 to 1.0 and adjusted EBITDA, as defined, to current
maturities of long-term debt and interest greater than or equal to 1.0%,
both measured quarterly beginning September 30, 2000.
The Company has a consulting agreement with a former officer. The
agreement provides for monthly payments of $5,428 through January 2014.
Consulting expense was $46,140 for the period ended September 15, 2000.
9. Defined Contribution Plan
The Company has an employee profit sharing plan with a 401(k) feature
which allows an annual contribution not to exceed the maximum amount
allowed as a deduction under the Internal Revenue Code (the Code). The
amount contributed by the Company is determined annually by the Company's
Board of Directors. The Company contributed $37,822 as a 401(k) matching
contribution for the period from January 1, 2000 through September 15,
2000. There was no profit sharing contribution during the period.
11