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SunOpta Inc.

SunOpta Inc.

2838 Bovaird Drive West
Norval, Ontario L0P 1K0
Canada
Telephone: (905) 455-1990
Fax: (905) 455-2529
Web site: http://www.sunopta.com

Public Company
Incorporated:
1973 as Stake Technology, Ltd.
Employees: 1,800
Sales: $426.1 million (2005)
Stock Exchanges: NASDAQ Toronto
Ticker Symbols: STKL; SOY

NAIC: 424490 Other Grocery and Related Products Merchant Wholesalers; 311222 Soybean Processing; 115114 Postharvest Crop Activities (Except Cotton Ginning); 562111 Solid Waste Collection

SunOpta Inc. is one of Canada's largest publicly traded food producers, primarily focusing on natural, organic, kosher, and specialty foods. SunOpta's food ingredients and packaged products are sold worldwide in the retail private label, foodservice, and industrial markets and can be found in many popular grocery stores across North America such as Kroger, Whole Foods, Meijer, Trader Joe's, and Loblaws. SunOpta also operates an industrial materials recycling business and has a division that makes steam explosion technology systems for the bio-fuel, food processing, and pulp industries.

EARLY YEARS OF EXPERIMENTATION AND COLLABORATION

From its beginnings as Stake Technology Ltd. in Ontario, Canada, in 1973, SunOpta Inc. has always tried to be environmentally friendly. The pioneering enterprise was founded on patented technology designed to convert agricultural and forestry byproducts such as wood chips, corn stalks, and straw from low-grade wasted biomass into usable products.

Stake's first commercial venture with its proprietary "steam explosion" technology involved turning hardwood trees into food for cattle, sheep, and goats. With a company sales brochure that declared, "Trees are really only tall grass," Stake's product claimed to replace the traditional use of corn, hay, or potatoes as roughage additives for livestock diets. With help from the Canadian government, Stake had set up its first commercial biomass conversion plant in Maine by 1980.

In 1990, Stake announced a joint venture with a Venezuelan company to produce cattle feed from sugarcane bagasse (what's left of the stalk after its juice has been extracted) using Stake equipment in a South American facility. Stake also formed Recoupe Recycling Technologies, a partnership with Chesapeake Corp. of Richmond, Virginia, to advance Stake's steam explosion process for recycling paper. Stake claimed its technology lowered capital and operating costs, and reduced energy and chemical consumption over traditional recycling methods.

Stake's first big contract came in 1992 in a CAD 2.75 million deal with Consumer's Paper to supply a steam explosion pulping system to recycle mixed office waste into toilet paper, paper towels, and napkins at a Consumer's facility in Red Cliff, Alberta. In 1992, a Stake steam explosion digester also became part of a new technology demonstration plant for the production and recycling of biobased materials. DeNovo Corporation, in which Stake was the majority shareholder, entered into a joint venture with the Biobased Materials Center of Virginia Tech, in Blacksburg, Virginia. The plant marked the first in the United States where research, development, and testing of environmentally friendly technologies using renewable and recyclable resources were conducted.

The first quarter of 1992 produced a 15-fold increase in sales, to CAD 980,000 and record net profits of CAD 872,000, compared to a profit of CAD 58,000 in the previous year's first quarter. The gains were attributed to a project to supply an advanced biomass separation demonstration plant to ENEA, the Italian Commission for New Technology for Energy and the Environment. The plant, located in Trisaia, Italy, was near completion at the time.

1995: STAKE BUYS INDUSTRIAL RECYCLING BUSINESS

In January 1995, Stake invested CAD 800,000 to acquire 51 percent of Barnes Environmental Inc., a company formed to buy the assets of Barmin Inc., a failed industrial recycling business. Barmin, an Ontario-based company that specialized in recycling and the sale of industrial minerals, had sales of CAD 14.7 million before succumbing to substantial debt from investments into unsuccessful non-core businesses.

In a complicated deal, Barnes purchased the assets and business of Barmin with a loan, and then Stake bought a majority of Barnes with CAD 800,000 that it borrowed from its principal banker. With the purchase, Stake's management saw an opportunity to combine the recycling technology of their steam explosion process with Barnes's industry knowledge of recycling markets in North America.

In August, Stake made its first sale to the pulp and paper industry, a deal with Weyerhaeuser Co. of Tacoma, Washington, to supply its pulping system to one of Weyerhaeuser's major operating facilities. After raising $3.5 million in October from DGC Entertainment Ventures Corp., an investment fund looking to diversify its portfolio, Stake in November purchased the remaining 49 percent of Barnes Environmental Inc.

The acquisition of Barnes proved a great success for Stake as it saw its sales for 1995 soar to CAD 10.8 million compared to a paltry CAD 174,000 for 1994. Most of the growth was fueled through sales of Barshot, the market name for specular hematite, a recyclable abrasive product used in cleaning metal surfaces. A sharp-edged, high-density, non-rusting iron ore, Barshot, according to Barnes, not only cleaned rust and paint from metal more quickly than other blasting materials, but was free of heavy metals and silica, which had been directly linked to various forms of silicosis, a potentially debilitating lung disease. The popularity of Barshot led to the November 1997 opening of a distribution center for the company's abrasive products in New Orleans, thus adding a third location to Barnes's existing operations in Ontario and in Lachine, Quebec.

In 1998, hoping to expand its markets, Stake acquired AJF Inc. of New Boston, Michigan, a manufacturer of industrial products including chromite ore used in the foundry and steel industries. Like Stake's acquisition of Barnes, and virtually all future acquisitions, AJF's management, employees, and corporate structure remained in place, while only a handful of employees continued to oversee company operations at Stake's corporate offices in Norval, Ontario. By the end of 1998 Stake's annual sales revenue had more than doubled from 1995 to over CAD 22 million.

1999: LAUNCH OF HEALTH FOODS BUSINESS

The acquisition in August 1999 of Sunrich Inc., an agritech company headquartered in Hope, Minnesota, was Stake's first significant step in launching its food business. Sunrich supplied major food producers in the United States and Japan with specialty grains and premium food ingredients and had sales of $30 million in 1998. Its product line included non-GMO (non-genetically modified organisms), organic, and identity preserved varieties of corn and soybeans, soy powders and concentrates, and organic starches.

COMPANY PERSPECTIVES

To rapidly grow our revenues, profits and shareholder value through an effective balance of internal growth and acquisition, with a focus on integrated business models in the natural, organic and specialty food markets.

Stake's investment in Sunrich received a significant boost in October 1999 when the U.S. Food and Drug Administration declared that soy protein could help reduce the risk of heart disease, the leading cause of death in the United States, and recommended 25 grams of soy protein a day as part of a healthy diet low in saturated fat and cholesterol. Stake's total 1999 sales rose 116 percent to CAD 47.5 million from CAD 22 million the year before and Stake was named by Profit magazine in its 1999 "Profit 100" as the fifth fastest growing company in Canada over the previous five years.

With Sunrich as the anchor, Stake began further expansion of its food business in September 2000 with the acquisition of Northern Food and Dairy, Inc., a producer of 65 percent of the soymilk sold in the United States, with manufacturing facilities in Alexandria and Bertha, Minnesota. At about the same time, Stake bought a separate soymilk-packaging facility, also in Alexandria.

March 2001 saw Stake acquire First Light Foods Inc., a Minneapolis-based marketing firm and a supplier of soymilk to major retailers. In September, Stake and Northern Food & Dairy created a joint venture called Star Valley Natural Foods and purchased a plant and equipment to manufacture soymilk in Afton, Wyoming, for the West Coast market. Together they also opened a plant in Fosston, Minnesota, that produced a natural preservative for the European market. By the middle of October, Stake had to double the capacity of its soymilk plant in Wyoming due to greater than expected demand.

Stake launched a new division in March 2002, Sunrich Valley, to promote its entry into the organic milk market with "MU," the brand name for a full range of organic milk and butter products. With plenty of new products to sell, Stake in 2002 sought to shore up its distribution needs and in October signed an agreement with Quebec-based Natrel, which had a network of 83 distribution centers that serviced more than 30,000 retail outlets. By the end of the year Stake had acquired two more distributors of organic and natural food products, Wild West Organic Harvest Co-operative Association, in Vancouver, British Columbia, and the Toronto-based Simply Organic Co. Ltd.

Stake closed out 2002 by buying Opta Food Ingredients, Inc., of Bedford, Massachusetts, a supplier of food ingredients to more than 350 food companies, which included 12 of the largest U.S. consumer packaged food companies and three of the world's largest quick-service restaurant chains.

2002: FOOD BUSINESS GROWING DOMINANT

The early 2000s saw Stake's annual sales growth continue to explode due to the purchase of Sunrich and the strategy of expanding through internal growth and acquisitions. The firm showed growth rates of 116 percent in 2000, 42 percent in 2001, and 37 percent in 2002, when annual sales reached $121 million, four times the 1999 figure. More than two-thirds of the company's sales came from its Sunrich Food Group.

Most of the company's remaining sales came from its newly named Environmental Industrial Group, anchored by Barnes International Environmental and the 2000 purchases of George F. Pettinos Limited, also known as PECAL, in Ontario, and Temisca, Inc., in Quebec. PECAL was a direct competitor of Barnes in the sand, coated-sand, and industrial minerals businesses, and Temisca, Inc. produced specialty sands for the golf course, filtration, and commercial product markets.

In 2001 Stake's Environmental Industrial Group had also added Virginia Materials and Supplies, Inc. of Norfolk, Virginia, and a 51 percent interest in International Materials & Supplies, Inc., of Keeseville, New York. Virginia Materials supplied abrasives to the shipbuilding and repair industry, and International Materials produced industrial garnets for sale to the water filtration, water jet cutting, and abrasives markets.

The StakeTech patented steam explosion technology continued to play a small but steady role in company operations and in April 2002 the division landed a $4 million contract for its first sale to China of a StakeTech Steam Explosion Pulping System, designed to produce pulp for paper from straw.

KEY DATES

1973:
SunOpta is founded as Stake Technology Ltd. in Ontario, Canada.
1992:
Stake's first big contract is to supply its patented steam explosion pulping system for paper recycling.
1995:
Stake acquires Barnes Environmental Inc., an industrial recycling business.
1999:
Stake buys Sunrich Inc., a major U.S. soybean producer.
2003:
Stake changes name to SunOpta to better reflect "environmental and organic commitment."
2004:
SunOpta leads North America in soymilk concentrate sales; company ranks as world's largest supplier of oat fiber.
2005:
SunOpta completes Canada's first national distribution network for natural and organic foods.

Recognizing that its future was in the natural and organic food business, Stake's Chairman and CEO Jeremy N. Kendall explained the company's June 2003 shareholder approval of a name change in a press release: "We believe the name SunOpta reflects our environmental and organic commitment to products nourished in the 'sun' with 'optimal' nutritional value and environmental responsibility. The inclusion of 'Technology' in our name is no longer appropriate to our focus in the growing integrated natural and organic food business." The company maintained its corporate trading symbols of "STKL" on the NASDAQ and "SOY" on the Toronto Exchange and in August 2003 raised $49 million with its biggest share offering to date, which would be used to help finance future acquisitions.

2003: SUNOPTA CONTINUING BUYING SPREE

The years 2003 through 2005 were marked by continued strong internal growth and an aggressive buying spree, as SunOpta gobbled up over a dozen natural and organic food distributors, branded and private label food suppliers, organic fruit and vegetable producers, technical processing firms, and specialty food distribution facilities and networks.

In 2003 SunOpta acquired SIGCO Sun Products Inc., a worldwide supplier of sunflower products; Sonne Labs Inc., a manufacturer of natural and organic soy, corn, and sunflower snack foods; Pro Organics Marketing Inc., a leading distributor of organic fresh foods with distribution facilities in Vancouver, Toronto, and Montreal; and Kettle Valley Dried Fruit Ltd., a producer of branded and private label natural and organic fruit bars for markets in North America and the United Kingdom.

SunOpta increased its pace in 2004, buying five more companies and a General Mills Bakeries & Foodservice oat-fiber-processing plant, which included an agreement to supply oat fiber to General Mills, Inc. Four of the acquisitions were Canadian distribution companies: Distribue-Vie Fruits & Legumes Biologiques Inc., Supreme Foods Limited, Snapdragon Natural Foods Inc., and kosher grocery products specialists Kofman-Barenholtz Foods Limited.

In January 2005 SunOpta consolidated three of its distributors (Supreme, Snapdragon, and Kofman-Barenholtz) into a 135,000-square-foot, state-of-the-art facility in Toronto. In December, SunOpta bought another kosher foods distributor, Les Importations Cacheres Hahamovitch Inc., and achieved its objective of creating Canada's first national distribution network for the company's more than 4,500 natural, organic, kosher, and specialty food products.

2005: CREATION OF $100 MILLION FRUIT GROUP

In 2005 SunOpta launched a new Los Angeles-based division, the SunOpta Fruit Group. With Kettle Valley Dried Fruit Ltd. in hand since 2003, SunOpta in April 2005 added Organic Ingredients, Inc., a California organic fruit and vegetable trader and provider with worldwide sourcing and manufacturing capabilities. The summer brought two more California purchases, natural and organic frozen fruits and vegetables producer Cleugh's Frozen Foods, Inc., and Pacific Fruit Processors, Inc., a manufacturer focused on fruit-based ingredients for the dairy, bakery, and beverage industries. The Fruit Group was expected to generate total annualized revenues of approximately $100 million.

In November 2005, SunOpta underwent a corporate realignment and re-branding and emerged organized into three business units: the SunOpta Food Group, the Opta Minerals Group, and the SunOpta BioProcess Group. The Food Group was divided into four operating groups: Grains and Foods, Ingredients, Fruit, and Canadian Food and Distribution. Operating out of over 30 facilities in Canada and the United States, the SunOpta Food Group accounted for 90 percent of SunOpta's 2005 sales of $426 million.

The Opta Minerals Group, formerly called the Environmental Industrial Group, accounted for about 9 percent of SunOpta's 2005 revenues. In February 2005, Opta Minerals Inc., at the time a wholly owned subsidiary of SunOpta, completed an initial public offering and raised about CAD 17 million and began listing under the trading symbol "OPM" on the Toronto Stock Exchange and the NASDAQ Small Cap Market. SunOpta retained a 70.6 percent share in the unit. The Group's head office remained in Waterdown, Ontario, with production and distribution facilities in Ontario, Quebec, Louisiana, South Carolina, Virginia, Maryland, and New York.

SunOpta's BioProcess Group, formerly its StakeTech Steam Explosion Group, accounted for only 1 percent of SunOpta's revenues in 2005. In 2006, SunOpta's over-30-year-old "pet project" got a boost with a CAD 7.1 million contract to supply its patented steam explosion equipment and process technology to a subsidiary of Abengoa, the largest ethanol producer in Europe and the second largest in the world. Located in Spain, the world's first commercial production facility to convert wheat straw into ethanol was scheduled to be operational in the fall of 2006.

After more than 30 years of peddling its biomass conversion technology without great success, SunOpta Inc. had found its place as a leading player in the highly fragmented healthy-foods industry. The company's strategy in the late 1990s and early 2000s to expand by acquiring many diverse yet compatible health-food businesses had put it into a good position to exploit a continuing consumer trend towards choosing healthier diets in search of more healthy lifestyles.

PRINCIPAL SUBSIDIARIES

Sunrich, Inc. (U.S.A.); Northern Food and Dairy, Inc. (U.S.A.); First Light Foods Inc. (U.S.A.); Wild West Organic Harvest Co-operative Association; Simply Organic Co. Ltd.; Opta Food Ingredients, Inc. (U.S.A.); Kettle Valley Dried Fruit Ltd; Pro Organics Marketing, Inc.; SIGCO Sun Products, Inc. (U.S.A.); Sonne Labs, Inc. (U.S.A.); Distribue-Vie Fruits & Legumes Biologiques Inc.; Supreme Foods Limited; Snapdragon Natural Foods Inc.; Kofman-Barenholtz Foods Limited; Organic Ingredients, Inc. (U.S.A.); Earthwise Processors, LLC (U.S.A.); Cleugh's Frozen Foods, Inc. (U.S.A.); Pacific Fruit Processors, Inc. (U.S.A.); Les Importations Cacheres Hahamovitch Inc.; Opta Minerals Inc. (70.6%).

PRINCIPAL COMPETITORS

Tree of Life, Inc.; Ag Processing Inc.; Bunge Limited; Saskatchewan Wheat Pool Inc.; Allied Waste Industries, Inc.

FURTHER READING

Adams, Scott, "This Stake Sprouts Roots in Friendly Markets: Organic Food Company," Financial Post, July 30, 2003.

Davidson, Andrew, "Organic Food Firm SunOpta's Shares Drop As Q2 Profit Slips to US$3.3M," Canadian Press, August 9, 2005.

Flavelle, Dana, "Small Firm Aims to Grow Bigger Organically; Stake Technology Plans Offering, U.S. Health Food Market Targeted," Toronto Star, August 13, 2003.

Kirby, Jason, "SunOpta: Hungry or Not Hungry Enough?: Acquisitive Organic Food Producer Has No Appetite for Big Purchases," Financial Post, July 18, 2005.

Linecker, Adelia Cellini, "Low-Carb Diet Craze A Natural Fit for Producer of Soy, Oat Products," Investor's Business Daily, April 5, 2004.

Perkins, Tara, "SunOpta Swallows California Organic Strawberry Packer Cleugh's Frozen Foods,"Canadian Press, June 20, 2005.

Shaw, Hollie, "Ontario Company Milking the Health Business," Financial Post, April 25, 2002.

Wulf, Gary, "FOCUS: World's First Commercial Cellulosic Ethanol Plant," Dow Jones International News, February 8, 2006.

, "Spain: World's First Cellulosic Ethanol Plant Prepares for Operations," Automotive World, February 14, 2006.

, "SunOpta Inc.Segmented Reporting Realignment and Corporate Branding Initiatives," Market News Publishing, November 29, 2005.

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