UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2003
OR
|_| | TRANSITION REPORT PURSUANT TO SECTION 13 AND 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________to ________
Commission File Number 0-16130
NORTHLAND CRANBERRIES, INC. |
(Exact name of registrant as specified in its charter) |
Wisconsin | 39-1583759 |
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) |
2930 Industrial Street P.O. Box 8020 Wisconsin Rapids, Wisconsin 54495-8020 |
(Address of Principal Executive Offices) |
Registrant’s telephone number, including area code (715) 424-4444
Former name, former address and former fiscal year, if changed since last report.
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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2). Yes No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: |
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Class A Common Stock | January 14, 2004 | 94,091,633 |
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NORTHLAND CRANBERRIES, INC.
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION | PAGE |
---|---|
Item 1. Financial Statements | 3 |
Condensed Consolidated Balance Sheets | 3 |
Condensed Consolidated Statements of Operations | 4 |
Condensed Consolidated Statements of Cash Flows | 5 |
Condensed Consolidated Statement of Shareholders' Equity | 6 |
Notes to Condensed Consolidated Financial Statements | 7-11 |
Item 2. Management's Discussion and Analysis of Financial | |
Condition and Results of Operations | 12-18 |
Item 3. Quantitative and Qualitative Disclosure About | |
Market Risk | 18 |
Item 4. Controls and Procedures | 19 |
PART II. OTHER INFORMATION | |
Item 1. Legal Proceedings | 19-20 |
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases | |
of Equity Securities | 20 |
Item 3. Defaults Upon Senior Securities | 20 |
Item 4. Submission of Matters to a Vote of Security Holders | 20 |
Item 6. Exhibits and Reports on Form 8-K | 20 |
SIGNATURE | 21 |
Exhibit Index | 22 |
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PART I – FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
November 30, 2003 | August 31, 2003 | |
ASSETS | ||
Current assets: | ||
Cash and cash equivalents | $ 11,652 | $ 9,058 |
Accounts receivable - net | 8,409 | 8,500 |
Inventories | 26,100 | 16,240 |
Prepaid expenses and other current assets | 533 | 1,155 |
Assets held for sale | 1,120 | 2,241 |
Total current assets | 47,814 | 37,194 |
Property and equipment - net | 60,280 | 60,814 |
Other assets | 61 | 60 |
Debt issuance cost - net | 2,420 | 2,628 |
Total assets | $ 110,575 | $ 100,696 |
LIABILITIES AND SHAREHOLDERS' EQUITY | ||
Current liabilities: | ||
Accounts payable | $ 16,528 | $ 6,484 |
Accrued liabilities | 5,798 | 6,267 |
Current maturities of long-term debt: | ||
Outstanding principal payments | 6,238 | 7,372 |
Future interest payments from debt restructuring | 655 | 700 |
Current maturities of long-term debt | 6,893 | 8,072 |
Total current liabilities | 29,219 | 20,823 |
Long-term debt: | ||
Outstanding principal payments | 27,437 | 28,182 |
Future interest payments from debt restructuring | 5,716 | 5,837 |
Long-term debt | 33,153 | 34,019 |
Total liabilities | 62,372 | 54,842 |
Shareholders' equity: | ||
Common stock - Class A, $.01 par value, 91,548,580 shares | ||
issued and outstanding | 915 | 915 |
Redeemable preferred stock - Series B, $.01 par value, 100 shares issued | ||
and outstanding | 0 | 0 |
Additional paid-in capital | 154,902 | 154,902 |
Accumulated deficit | (107,614) | (109,963) |
Total shareholders' equity | 48,203 | 45,854 |
Total liabilities and shareholders' equity | $ 110,575 | $ 100,696 |
See notes to condensed consolidated financial statements.
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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
For the Three Months Ended | ||||||||
November 30, 2003 | November 30, 2002 | |||||||
Net revenues | $ | 22,378 | $ | 21,739 | ||||
Cost of sales | (15,393 | ) | (15,165 | ) | ||||
Gross profit | 6,985 | 6,574 | ||||||
Selling, general and administrative expenses | (4,012 | ) | (6,594 | ) | ||||
Loss on disposal of property & equipment | (2 | ) | 0 | |||||
Other income (Note 3) | 0 | 1,500 | ||||||
Income from operations | 2,971 | 1,480 | ||||||
Interest expense | (634 | ) | (1,040 | ) | ||||
Interest income | 12 | 574 | ||||||
Net income | $ | 2,349 | $ | 1,014 | ||||
Net income per common share: | ||||||||
Basic: | $ | 0.03 | $ | 0.01 | ||||
Diluted: | $ | 0.02 | $ | 0.01 | ||||
Shares used in computing net income per share: | ||||||||
Basic | 91,548,580 | 91,548,580 | ||||||
Diluted | 100,779,566 | 101,126,227 |
See notes to condensed consolidated financial statements.
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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
For the Three Months Ended | ||||||||
November 30, 2003 | November 30, 2002 | |||||||
Operating activities: | ||||||||
Net income | $ | 2,349 | $ | 1,014 | ||||
Adjustments to reconcile net income to net cash | ||||||||
provided by operating activities: | ||||||||
Depreciation and amortization of property and equipment | 908 | 893 | ||||||
Amortization of debt issuance costs and debt discount | 278 | 438 | ||||||
Gain on disposal of property and equipment | 2 | 0 | ||||||
Changes in assets and liabilities: | ||||||||
Receivables, prepaid expenses and other current assets | 849 | 873 | ||||||
Inventories | (9,860 | ) | (7,322 | ) | ||||
Accounts payable and accrued liabilities | 9,537 | 5,455 | ||||||
Net cash provided by operating activities | 4,063 | 1,351 | ||||||
Collections on note receivable | 0 | 1,000 | ||||||
Property and equipment purchases | (375 | ) | (196 | ) | ||||
Proceeds from disposals of assets held for sale and of | ||||||||
property and equipment | 983 | 715 | ||||||
Net cash provided by investing activities | 608 | 1,519 | ||||||
Financing activities: | ||||||||
Net borrowings under revolving line of credit facility | 0 | 3,179 | ||||||
Payments on long-term debt | (2,077 | ) | (5,086 | ) | ||||
Net cash used in financing activities | (2,077 | ) | (1,907 | ) | ||||
Net increase in cash and cash equivalents | 2,594 | 963 | ||||||
Cash and cash equivalents, beginning of period | 9,058 | 264 | ||||||
Cash and cash equivalents, end of period | $ | 11,652 | $ | 1,227 | ||||
See notes to condensed consolidated financial statements.
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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED NOVEMBER 30, 2003
(DOLLARS IN THOUSANDS)
(Unaudited)
Common Stock - Class A | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders' Equity | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
BALANCE, AUGUST 31, 2003 | $ | 915 | $ | 154,902 | $ | (109,963 | ) | $ | 45,854 | |||||
Net income | 0 | 0 | 2,349 | 2,349 | ||||||||||
BALANCE, NOVEMBER 30, 2003 | $ | 915 | $ | 154,902 | $ | (107,614 | ) | $ | 48,203 | |||||
See notes to condensed consolidated financial statements.
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NORTHLAND CRANBERRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | BASIS OF PRESENTATION |
The accompanying condensed consolidated financial statements have been prepared by Northland Cranberries, Inc. (collectively with its subsidiaries, the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission and reflect normal and recurring adjustments, which are, in the opinion of the Company, considered necessary to present fairly the financial position of the Company as of November 30, 2003 and August 31, 2003 and its related results of operations and cash flows for the three months ended November 30, 2003 and 2002. As permitted by these regulations, these condensed consolidated financial statements do not include all information required by accounting principles generally accepted in the United States of America to be included in an annual set of financial statements, however, the Company believes that the disclosures are adequate to make the information presented not misleading. The Company’s condensed consolidated balance sheet as of August 31, 2003 was derived from the Company’s latest audited consolidated financial statements. It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the latest audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2003. |
Business Risks — Prices paid to growers for raw cranberries are effectively determined by Ocean Spray Cranberries, Inc. ("Ocean Spray"), the industry leader, which controls the bulk of the cranberry supply in North America. |
Net Income Per Common Share – Net income per common share is calculated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding increased by the number of dilutive potential common shares based on the treasury stock method. |
The weighted average shares outstanding used in calculating net income per common share for the three months ended November 30, 2003 and 2002 consisted of the following: |
November 30, 2003 | November 30, 2002 | |||||||
Basic: | ||||||||
Shares outstanding | ||||||||
beginning of period | 91,548,580 | 91,548,580 | ||||||
Issuance of new shares | -- | -- | ||||||
Total | 91,548,580 | 91,548,580 | ||||||
Effect of dilution: | ||||||||
Warrants | 4,996,635 | 5,032,525 | ||||||
Options | 4,234,351 | 4,545,122 | ||||||
Diluted | 100,779,566 | 101,126,227 | ||||||
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The shares outstanding used to compute the diluted earnings per share for the three months ended November 30, 2003 and 2002 exclude outstanding options to purchase 612,575 and 613,575 shares of Class A Common Stock, respectively. Those options were excluded because their weighted average exercise prices were greater than the average market price of the common shares and their inclusion would have been antidilutive. |
Accounting for Stock Options — The Company accounts for stock-based compensation in accordance with Accounting Principle Board Opinion No. 25, “Accounting for Stock Issued to Employees,” as allowed by SFAS No. 123, “Accounting for Stock-Based Compensation.” Stock options are granted at prices equal to the fair market value of the Company’s common stock on the grant dates; therefore no compensation expense is recognized in connection with stock options granted to employees. The following table illustrates the effect on net income and net income per share as if the fair value-based method provided by SFAS No. 123 had been applied for all outstanding and unvested awards in each period: |
For the Three Months Ended (Dollars in thousands except per share amounts) | ||||||||
November 30, 2003 | November 30, 2002 | |||||||
Net income | $ | 2,349 | $ | 1,014 | ||||
Deduct: Total stock-based | ||||||||
employee compensation expense | ||||||||
determined under fair value | ||||||||
based method for all awards, net | ||||||||
of related tax effect | ($ 138 | ) | ($ 152 | ) | ||||
Pro forma net income | $ | 2,211 | $ | 862 | ||||
Historical and pro forma net | ||||||||
income per common share: | ||||||||
Basic: | $ | 0.02 | $ | 0.01 | ||||
Diluted: | $ | 0.02 | $ | 0.01 |
2. | LEGAL PROCEEDINGS |
On March 8, 2000, the Company sold the net assets of its private label juice business to Cliffstar Corporation (“Cliffstar”), pursuant to an asset purchase agreement (“Asset Purchase Agreement”), dated January 4, 2000. Cliffstar was obligated under the Asset Purchase Agreement to make certain annual earn-out payments to the Company for a period of six years from the closing date based generally on operating profit from Cliffstar’s sale of cranberry juice products. |
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On May 13, 2002, the Company received Cliffstar’s earn-out calculation for 2000. The Company believed Cliffstar’s earn-out calculation was not prepared in accordance with the Asset Purchase Agreement. The Company subsequently received an estimate of the earn-out calculation from Cliffstar in the amount of $1,177,621 for 2001 and $0 for 2002. The Company did not, however, receive from Cliffstar audited earn-out calculations for 2001 or 2002 in accordance with the Asset Purchase Agreement. The Company believed that the estimates provided by Cliffstar for 2001 and 2002 significantly understated the earn-out payments due under the Asset Purchase Agreement. |
On June 7, 2002, the Company filed suit against Cliffstar in the United States District Court, Northern District of Illinois, seeking access to all relevant books and records of Cliffstar relating to the earn-out calculations and claiming Cliffstar breached the Asset Purchase Agreement by failing to pay the Company earn-out payments for the years 2000 and 2001. The Company sought compensatory damages in an amount in excess of $1,000,000, plus attorneys’ fees. |
During the first quarter of fiscal 2004, the parties reached a settlement in principle. On December 1, 2003, the Company and Cliffstar formalized their agreement by entering into a written Settlement Agreement pursuant to which all disputes between them related to the earn-out have been settled and resolved. The Company will recognize income of approximately $3,000,000 during the second quarter of fiscal 2004 as a result of the settlement. |
On November 11, 2002, the Company together with Clermont, Inc, filed an antitrust lawsuit against Ocean Spray. The lawsuit, which is pending in the United Stated District Court for the District of Massachusetts, alleges that Ocean Spray has engaged in anticompetitive tactics and unlawfully monopolized the cranberry products industry to the detriment of its competitors and customers. Given that the proceeding remains in its early stages, management is unable to predict the outcome of this matter with certainty. However, management does not believe that the resolution of this matter will have an adverse effect on the Company’s financial condition or results of operations. |
3. | OTHER INCOME |
During fiscal 2003, the Company received cash proceeds in the amount of $1,500,000, as well as $200,000 in credits toward storage fees over the next four years, in connection with the settlement of its claims against a third party warehouse for improper handling of the Company’s inventory. Based on the terms of the settlement agreement, the Company recognized income of $1,500,000 for the three months ended November 30, 2002. |
4. | INVENTORIES |
Inventories as of November 30, 2003 and August 31, 2003 consisted of the following (in thousands): |
November 30, 2003 | August 31, 2003 | |||||||
---|---|---|---|---|---|---|---|---|
Raw materials | $ | 22,232 | $ | 5,707 | ||||
Finished goods | 3,868 | 3,650 | ||||||
Deferred crop costs | 0 | 6,883 | ||||||
Total inventories | $ | 26,100 | $ | 16,240 | ||||
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5. | LONG-TERM DEBT |
Long-term debt as of November 30, 2003 and August 31, 2003 consisted of the following (in thousands): |
November 30, 2003 | August 31, 2003 | |||||||
---|---|---|---|---|---|---|---|---|
Term loans payable | $ | 4,353 | $ | 4,853 | ||||
Fee note payable | 4,079 | 4,008 | ||||||
Restructured bank notes | 7,694 | 8,643 | ||||||
Restructured insurance company note | 16,549 | 16,868 | ||||||
Other obligations | 1,000 | 1,182 | ||||||
Subtotal Principal Obligations | 33,675 | 35,554 | ||||||
Future interest payments from debt restructuring | 6,371 | 6,537 | ||||||
Total debt | 40,046 | 42,091 | ||||||
Less current maturities of long-term debt | 6,893 | 8,072 | ||||||
Long-term debt | $ | 33,153 | $ | 34,019 | ||||
As of November 30, 2003 and August 31, 2003 the Company was in compliance with its various financial covenants contained in its agreements covering its long-term debt obligations. |
6. | INCOME TAXES |
The Company accounts for income taxes using an asset and liability approach which generally requires the recognition of deferred income tax assets and liabilities based on the expected future income tax consequences of events that have previously been recognized in the Company’s financial statements or tax returns. In addition, a valuation allowance is recognized if it is more likely than not that some or all of the deferred income tax assets will not be realized. |
There was no income tax expense recognized, for financial reporting purposes, for either the three months ended November 30, 2003 and 2002 due to the utilization of certain net operating loss carryforwards for which no benefit had been previously provided. |
7. | CONTINGENCIES |
On May 13, 1997, the Company guaranteed $1,000,000 of outstanding obligations to a bank of an independent cranberry grower who subsequently became an officer of the Company during the year ended August 31, 2001. As of November 30, 2003 the grower (who is no longer an officer of the Company) was in default with certain terms and conditions contained in the related debt agreements and is currently in the process of restructuring the debt obligations. Based on the current financing alternatives available and the impact of these options on the guarantee, the Company believes the resolution of this matter will not have an adverse effect on the Company’s financial statements. |
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The Company has made all scheduled payments on its long-term debt and certain other mandatory prepayments using cash generated from ongoing operations, net proceeds received from the sale of collateralized assets and proceeds from the settlement with Cliffstar (see Note 2). The combination of the prepayments and the decline in interest rates, since the reorganization of the Company’s long-term debt in November 2001, has resulted in a contingent gain of approximately $4.2 million, which is currently classified within long-term debt as estimated future interest payments from debt restructuring in accordance with SFAS No. 15. This contingent gain may change dependent on the timing of future potential prepayments or future changes in interest rates. |
8. | ASSETS HELD FOR SALE |
The Company completed the sale of the Bridgeton facility in October 2003. Under the terms of the sale, the buyer has assumed the obligation for continued remediation of environmental contamination at the Bridgeton facility and the Company has assigned to the buyer its contractual rights to indemnification for such costs from the previous owner of the facility. In connection with the sale, the buyer has agreed to indemnify the Company from such costs and its obligation to do so is secured, subject to various terms and conditions, by certain assets acquired by the buyer in the transaction. |
Assets held for sale as of November 30, 2003 include the land, building and equipment related to the manufacturing facility in Dundee, New York and land and buildings related to a closed storage/distribution facility in Eau Claire, Michigan. |
On May 10, 2003, the Company experienced a fire at its facility in Eau Claire, Michigan. On January 9, 2004, the Company sold the facility and on January 6, 2004, the Company received a payment of approximately $1.7 million from its insurance carrier representing the actual cash value of the facility under the terms and conditions of the policy. As a result of these transactions, the Company expects to recognize a gain of approximately $1.4 million during the second quarter of fiscal 2004. |
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
GENERAL
During fiscal 2004, we intend to continue our efforts to improve profitability by increasing gross margins and reducing operating expenses. We intend to continue to focus our marketing efforts on educating consumers about the health benefits of ourNorthlandbrand 100% juice products. We intend to continue to focus our efforts on profitable growth while striving to reduce debt.
Total net revenues increased by 2.9% during in the three months ended November 30, 2003 compared to the three months ended November 30, 2002. During the first quarter of fiscal 2004, net income increased to $2.3 million, which was an improvement of $1.3 million compared to the three months ended November 30, 2002. Also in the three months ended November 30, 2003 our cash position improved by $2.6 million and we reduced our long-term and short-term debt by a total of $2.0 million. Shareholders equity also improved by $2.3 million during the first quarter of fiscal 2004.
We ceased operations at the Jackson, Wisconsin facility on November 21, 2003 in an effort to reduce our bottling costs and improve profitability. We have entered into agreements with third party contract packaging providers with plants located in New Jersey, North Carolina, Florida, Arkansas, California and Washington which we believe will satisfy our production needs, contribute to lower costs and allow us to better service our customers throughout the country.
On November 19, 2003, we also announced that we have retained Stephens Inc. of Little Rock, Arkansas, to serve as our financial advisor and assist us in evaluating various strategic alternatives, including, without limitation, potential acquisitions, mergers, joint ventures, licensing arrangements or investments in or potential sale of the company, as well as remaining an independent public company. We intend to work with Stephens to evaluate the means through which we can build on our financial performance, continue to grow theNorthland brand and maximize shareholder value.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with generally accepted accounting principles (GAAP) in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. On an on-going basis, we evaluate our estimates, including those related to product shipments and returns, bad debts, inventories, income taxes, contingencies and litigation. We base these estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Specifically, we believe that the following accounting policies and estimates are most important to the portrayal of our financial condition and operating results and require management’s most difficult judgments:
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Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, product is delivered, collectibility is reasonably assured and title passes to the customer. Estimated reserves for discounts, coupons, product returns and trade allowances are established based on an analysis of historical trends and experience, as well as the trade allowances offered by us at the time products are delivered. The estimated reserves are charged against revenues in the same period that corresponding sales are recorded. We periodically evaluate such reserves and make necessary adjustments when actual participation in these programs differs from historical experience. There have been no significant changes in estimates for such reserves during the three months ended November 30, 2003.
Inventory
We have stated our inventory carrying value at the lower of cost (using the first-in, first-out costing method) or estimated market values, based upon management’s best estimates of future product selling costs for the periods during which the cranberries are grown and the cranberries and cranberry-related products are expected to be sold. The market estimates are dependent upon several factors including, but not limited to, price, product mix, demand, costs and the period of time it takes to sell the inventory.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We determine the level of our allowance based on historical experience, the aging of our accounts receivables and the creditworthiness of individual customers. If the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required. Our accounts receivable balance was $8.4 million, net of doubtful accounts of $0.3 million, and $8.5 million, net of doubtful accounts of $0.4 million as of November 30, 2003 and August 31, 2003, respectively.
Recoverability of Long-Lived Assets
We state the value of our long-lived assets (property and equipment) at cost less depreciation and amortization. We periodically evaluate this carrying value. Our estimates of the expected future undiscounted cash flows related to the recoverability of these assets may change from actual cash flows due to, among other things, changes in technology and economic conditions.
Assets Held for Sale
From time to time, in connection with our management’s ongoing efforts to maximize operating effectiveness, decisions are made to exit certain production or distribution facilities. At the time that our management commits to a decision to exit existing facilities and initiates an active plan to dispose of the facility, an assessment of the recoverability of the carrying value of the long-lived assets of the facility to be closed is made by our management. This assessment requires our management to estimate the fair value of the assets to be disposed of and the estimated cost to sell such assets. To the extent that the carrying value of the assets to be disposed of exceeds the estimated fair value of those assets less their estimated cost to sell, impairment in the value of the assets is recognized.
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Estimates of the fair value of the assets to be disposed of are generally based on a discounted cash flow analysis or substantive purchase offers from viable potential buyers. Estimates of the value are impacted by a variety of relevant factors, including, but not limited to, alternative future uses of such assets, the availability of potential buyers, general economic conditions, current legal restrictions, if any, on the use of the assets, and any relevant legal issues. Our management continues to evaluate all available evidence of the fair value of the assets to be disposed of and makes any necessary adjustments at the time that additional information becomes available.
Deferred Gain on Forgiveness of Indebtedness
On November 6, 2001 we completed the restructuring of our then-outstanding debt obligations. In estimating the gain or loss resulting from this restructuring, our management was required to make certain estimates of the future cash payments to be made under the terms of the modified debt. Since the modified debt included provisions for a variable interest rate based on a premium above the lender’s prime borrowing rate, the critical assumption made at the time of the restructuring was the interest rate to be incurred over the life of the debt. For purposes of the determination of the gain from the restructuring, the estimated interest rate over the term of the debt was assumed to be the rate in effect at the date of the restructuring. Since the debt restructuring in November 2001, general economic conditions and other factors have resulted in a reduction of interest rates. Accordingly, interest paid has been less than previously estimated. Assuming interest rates in effect at November 30, 2003 (6.5%) were to continue through the scheduled maturity date of the debt, we would recognize a gain of approximately $4.2 million upon final payment of the principal outstanding.
OFF-BALANCE SHEET ARRANGEMENTS
We do not typically engage in off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships with unconsolidated entities or other persons that may have a material current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. We do not materially rely on off-balance sheet arrangements for liquidity, capital resources, market risk support, credit risk support or other benefits.
On May 13, 1997, we guaranteed $1,000,000 of outstanding obligations to a bank of an independent cranberry grower who subsequently became an officer of our company during the year ended August 31, 2001. The guarantee was provided to allow the grower to obtain financing for the expansion of its then-existing growing operations. Simultaneous with the issuance of the guarantee, we entered into a multi-year crop purchase agreement pursuant to which the grower is required to sell to us the cranberries harvested from the property. As of November 30, 2003, the grower (who is no longer an officer of our company) was in default with certain terms and conditions contained in the related debt agreements and is currently in the process of restructuring the debt obligations. Based on the current financing alternatives available and the impact of these options on the guarantee, we believe the resolution of this matter will not have a material adverse effect on our financial statements.
In addition, we have outstanding 100 shares of our Series B Preferred Stock. The Series B Preferred Stock is subject to mandatory redemption upon (i) the consummation of a transaction following which neither Sun Northland, LLC nor its affiliates owns or controls securities possessing at least 10% of the voting power of the company, or (ii) the distribution of assets to holders of our capital stock upon the sale of substantially all our assets. The redemption price in such a circumstance varies depending upon the number of shares of Series B Preferred Stock then outstanding and the internal rate of return (as defined in the Articles of Incorporation) recognized by Sun Northland, LLC in connection with the event triggering such redemption. We cannot be certain if or when the Series B Preferred Stock may be redeemed, nor can we be certain of the redemption price in the event of such a redemption.
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RESULTS OF OPERATIONS
Total net revenues for the three months ended November 30, 2003 were $22.4 million, an increase of 2.9% from net revenues of $21.7 million in the prior year’s first quarter. The increase resulted primarily from (i) an increase in sales ofNorthland brand 100% juice products primarily due to an increase in distribution, (ii) an increase in sales of frozen processed cranberries and (iii) an increase in sales of cranberry concentrate. These increases were partly offset by (i) a reduction in co-packing revenue due to the elimination of our co-packing operations and (ii) a decrease in sales of ourSenecabrand juice products. Trade industry data for the 12-week period ended November 30, 2003 showed that ourNorthland brand 100% juice products achieved a 5.5% market share of the supermarket shelf-stable cranberry beverage category on a national basis, up from a 5.4% market share for the 12-week period ended December 1, 2002.
Cost of sales for the three months ended November 30, 2003 was $15.4 million compared to $15.2 million for the first quarter of fiscal 2003, resulting in gross margins of 31.2% and 30.2% in each respective period. The increase in gross margin percentage resulted primarily from higher margins on sales of fresh cranberries and frozen processed cranberries, generally attributable to higher selling prices. This improvement in margins was partly offset by (i) an increase in the cost of cranberries purchased from independent growers and (ii) higher production costs for our branded products attributable to excess capacity at our bottling facility due to reduced co-packing business. With the closure of our Jackson, Wisconsin facility during the first quarter of fiscal 2004, we have discontinued providing contract packaging services to third parties and have transitioned the production of our branded products to our network of third party contract packaging providers.
Selling, general and administrative expenses were $4.0 million, or 17.9% of net revenues, for the three months ended November 30, 2003 compared to $6.6 million, or 30.3% of net revenues, for the first quarter of fiscal 2003. The decrease in selling, general and administrative expenses in the three months ended November 30, 2003 was primarily the result of a $2.7 million decrease in media advertising spending, from $3.5 million in the first quarter of fiscal 2003 to $0.8 million in the first quarter of fiscal 2004.
Interest expense was $0.6 million for the three months ended November 30, 2003 compared to $1.0 million in the prior year’s first quarter. This decrease was the result of reduced debt levels.
Interest income of less than $0.1 million for the first quarter of fiscal 2004 and $0.6 million in the comparable period of fiscal 2003 is associated with an unsecured, subordinated promissory note receivable from Cliffstar Corporation, which was paid in full during fiscal 2003.
In the three months ended November 30, 2003, there were no income taxes on operating income due to the utilization of certain net operating loss carryforwards for which no benefit had been previously provided.
Net income for the three months ended November 30, 2003, increased by 132% to $2.3 million or $0.02 per diluted share compared to net income of $1.0 million or $0.01 per diluted share for the first quarter of fiscal 2003.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4.1 million in the first three months of fiscal 2004 compared to $1.4 million in the same period of fiscal 2003. Receivables, prepaid expenses and other current assets decreased $0.8 million in the first three months of fiscal 2004 compared to a decrease of $0.9 million in the first three months of fiscal 2003. Inventories increased $9.9 million in the first three months of fiscal 2004. This increase resulted primarily as a result of the fall 2003 cranberry harvest and the purchase of cranberries from our contract growers. Accounts payable and accrued liabilities also increased by $9.5 million in the first three months of fiscal 2004, attributable primarily to installment payments due our contract growers for fruit received during the quarter.
Working capital was $18.6 million at November 30, 2003 compared to $16.4 million at August 31, 2003. Our current ratio was 1.6 to 1.0 at November 30, 2003, compared to 1.8 to 1.0 at August 31, 2003. The decrease in the current ratio resulted primarily from the increase in inventories following the fall harvest and the corresponding increase in payables related to cranberries purchased from our contract growers.
Net cash provided by investing activities was $0.6 million in the first quarter of fiscal 2004 compared to $1.5 million in the same period of fiscal 2003. The decrease resulted from payments made by Cliffstar in connection with the settlement of the private label litigation during the first quarter of fiscal 2003. Payments on our note receivable from Cliffstar, prior to the cancellation of the note, contributed toward the positive cash flow in fiscal 2003. In the first quarter of fiscal 2004, proceeds from disposals of miscellaneous property and equipment, primarily as a result of the sale of the Bridgeton facility, provided $1.0 million. In fiscal 2003, proceeds from disposals of property and equipment provided $0.7 million, primarily as a result of the auction of equipment held at our closed facility in Dundee, New York. Purchases of property and equipment were $0.4 million in the first quarter of fiscal 2004 and $0.2 million in the first quarter of fiscal 2003.
Our net cash used in financing activities was $2.1 million in the first quarter of fiscal 2004 compared to $1.9 million in the first quarter of the prior year. In the first quarter of fiscal 2004 we made payments on long-term debt and other obligations of $2.1 million compared to $5.1 million in the same period of fiscal 2003. During the first quarter of fiscal 2003 we borrowed $3.2 million under our revolving credit facility. In both periods, monthly principal payments were made on other obligations, and in the first quarter of fiscal 2004 additional principal payments were made as required under our restructured debt agreements.
The following schedule sets forth our contractual long-term debt obligations as of November 30, 2003 (in thousands):
Payments Due by Period | |||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||
Principal debt | |||||||||||||||||
obligations | $ | 33,675 | $ | 6,238 | $ | 9,083 | $ | 3,214 | $ | 15,140 | |||||||
Future interest payments | |||||||||||||||||
from debt restructuring | 6,371 | 655 | 696 | 709 | 4,311 | ||||||||||||
Total debt | $ | 40,046 | $ | 6,893 | $ | 9,779 | $ | 3,923 | $ | 19,451 |
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As of November 30, 2003, we had no outstanding borrowings under our $30.0 million revolving credit facility with Foothill and Ableco. As of November 30, 2003, we had approximately $13.1 million of unused borrowing availability under the facility.
We believe that we will be able to fund our ongoing operational needs for fiscal 2004 through (i) cash generated from operations and (ii) financing available under our revolving credit facility with Foothill and Ableco. We do not have any significant capital expenditure commitments and continue to review our capital requirements in an effort to match expenditures with revenues.
As of November 30, 2003, we were in compliance with all of our debt arrangements.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make certain “forward-looking statements” in this Form 10-Q, such as statements about our future plans, goals and other events which have not yet occurred. We intend that these statements will qualify for the safe harbors from liability provided by the Private Securities Litigation Reform Act of 1995. You can generally identify these forward-looking statements because we use words such as we “believe,” “anticipate,” “expect” or similar words when we make them. Forward-looking statements include, among others, statements about actions by our competitors, sufficiency of our working capital, potential operational improvements and our efforts to improve profitability, sales and marketing strategies, expected levels of trade and marketing spending, anticipated market share and sales of our branded products, cranberry concentrates and other products, and disposition of significant litigation. These forward-looking statements involve risks and uncertainties and the actual results could differ materially from those discussed in the forward-looking statements. These risks and uncertainties include, without limitation, risks associated with (i) our ability to reinvigorate ourNorthland andSeneca brand names, distribution capabilities and branded products market share and generate increased levels of branded product sales; (ii) the level of cranberry inventory held by industry participants; (iii) the development, market share growth and consumer acceptance of our branded juice products; (iv) the resolution of certain litigation related to claims asserted by us against our principal competitor regarding what we believe to be anticompetitve tactics and unlawful monopolization within the cranberry products industry; (v) agricultural factors affecting our crop and the crop of other North American growers; (vi) our ability to comply with the terms and conditions of, and to satisfy our responsibilities under, our credit facilities and other debt agreements; and (vii) our ability to identify, evaluate and successfully execute any strategic alternatives. You should consider these risks and factors and the impact they may have when you evaluate our forward-looking statements. We make these statements based only on our knowledge and expectations on the date of this Form 10-Q. We disclaim any duty to update these statements or other information in this Form 10-Q based on future events or circumstances. Please read this entire Form 10-Q to better understand our business and the risks associated with our operations. Specifically, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our current financial condition.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. |
We do not enter into any material futures, forwards, swaps, options or other derivative financial instruments for trading or other purposes. Our primary exposure to market risk is related to changes in interest rates and the effects those changes may have on our earnings as a result of our long-term financing arrangements. We manage our exposure to this market risk by monitoring interest rates and possible alternative means of financing. Our earnings may be affected by changes in short-term interest rates under our revolving line of credit facility and certain term loans, pursuant to which our borrowings bear interest at a variable rate, subject to minimum interest rates payable on certain loans. Based upon the debt outstanding under our revolving line of credit facility and certain term loans as of November 30, 2003, an increase of 1.0% in market interest rates would increase annual interest expense by approximately $0.1 million.
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ITEM 4. | CONTROLS AND PROCEDURES. |
Our Chief Executive Officer and our Vice President – Finance, as of the end of the period covered by this Quarterly Report on Form 10-Q, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Vice President — Finance concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Chief Executive Officer and Vice President — Finance to allow timely decisions regarding required disclosure.
There have been no changes in our internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
On March 8, 2000, the Company sold the net assets of its private label juice business to Cliffstar Corporation (“Cliffstar”), pursuant to an asset purchase agreement (“Asset Purchase Agreement”), dated January 4, 2000. Cliffstar was obligated under the Asset Purchase Agreement to make certain annual earn-out payments to the Company for a period of six years from the closing date based generally on operating profit from Cliffstar’s sale of cranberry juice products.
On May 13, 2002, the Company received Cliffstar’s earn-out calculation for 2000. The Company believed Cliffstar’s earn-out calculation was not prepared in accordance with the Asset Purchase Agreement. The Company subsequently received an estimate of the earn-out calculation from Cliffstar in the amount of $1,177,621 for 2001 and $0 for 2002. The Company did not, however, receive from Cliffstar audited earn-out calculations for 2001 or 2002 in accordance with the Asset Purchase Agreement. The Company believed that the estimates provided by Cliffstar for 2001 and 2002 significantly understated the earn-out payments due under the Asset Purchase Agreement.
On June 7, 2002, the Company filed suit against Cliffstar in the United States District Court, Northern District of Illinois, seeking access to all relevant books and records of Cliffstar relating to the earn-out calculations and claiming Cliffstar breached the Asset Purchase Agreement by failing to pay the Company earn-out payments for the years 2000 and 2001. The Company sought compensatory damages in an amount in excess of $1,000,000, plus attorneys’ fees.
During the first quarter of fiscal 2004, the parties reached a settlement in principle. On December 1, 2003, the Company and Cliffstar formalized their agreement by entering into a written Settlement Agreement pursuant to which all disputes between them related to the earn-out have been settled and resolved. The Company will recognize income of approximately $3,000,000 during the second quarter of fiscal 2004 as a result of the settlement.
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On November 11, 2002, the Company together with Clermont, Inc, filed an antitrust lawsuit against Ocean Spray Cranberries, Inc. (“Ocean Spray”). The lawsuit, which is pending in the United Stated District Court for the District of Massachusetts, alleges that Ocean Spray has engaged in anticompetitive tactics and unlawfully monopolized the cranberry products industry to the detriment of its competitors and customers. Given that the proceeding remains in its early stages, management is unable to predict the outcome of this matter with certainty. However, management does not believe that the resolution of this matter will have an adverse effect on the Company’s financial condition or results of operations.
ITEM 2. | CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
On December 9, 2003, Wells Fargo Foothill, Inc., f/k/a Foothill Capital Corporation, purchased 2,543,053 shares of Class A Common Stock for a purchase price $25,430.53 pursuant to the terms and conditions of Northland Cranberries, Inc. Common Stock Purchase Warrant No. W-1 dated November 6, 2001. We issued these shares in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
None.
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K. |
A. | Exhibits |
Exhibits filed with this Form 10-Q report are incorporated herein by reference to the Exhibit Index accompanying this report.
B. | Form 8-K |
We furnished the following Current Report on Form 8-K during the first quarter fiscal 2004:
Date Filed | Date of Report | Item |
November 19, 2003 | November 19, 2003 | Item 9 - Regulation FD Disclosure - |
Press release announcing financial | ||
results for the fourth quarter and year | ||
ended August 31, 2003. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NORTHLAND CRANBERRIES, INC. | |
DATE: January 14, 2004 | By: /s/ Nigel J. Cooper |
Nigel J. Cooper | |
Vice President - Finance |
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EXHIBIT INDEX
EXHIBIT NO. | DESCRIPTION |
31.1 | Certification of John Swendrowski, Chairman and Chief Executive Officer of |
Northland Cranberries, Inc., pursuant to Title 17 of the Code of Federal | |
Regulations, Section 240.13a-14(a), as adopted pursuant to Section 302 of the | |
Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Nigel J. Cooper, Vice President - Finance of Northland |
Cranberries, Inc., pursuant to Title 17 of the Code of Federal Regulations, | |
Section 240.13a-14(a), as adopted pursuant to Section 302 of the | |
Sarbanes-Oxley Act of 2002. | |
32 | Certification of John Swendrowski, Chairman and Chief Executive Officer, and |
Nigel J. Cooper, Vice President - Finance, of Northland Cranberries, Inc., | |
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the | |
Sarbanes-Oxley Act of 2002. |
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