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 February 28, 2001
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.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1583759
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
800 First Avenue South
P.O. Box 8020
Wisconsin Rapids, Wisconsin 54495-8020
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code (715) 424-4444
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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
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 April 13, 2001 19,702,221
Class B Common Stock April 13, 2001 636,202
1
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
Notes to Condensed Consolidated Financial Statements....... 6 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 16 - 23
Item 3. Quantitative and Qualitative Disclosure About
Market Risk.............................................. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 25
Item 3. Defaults Upon Senior Securities............................ 26
Item 4. Submission of Matters to a Vote of Securityholders......... 27
Item 5. Other Information.......................................... 28
Item 6. Exhibits and Reports on Form 8-K........................... 28
SIGNATURE.................................................. 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
February 28, August 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 804 $ 164
Accounts receivable 9,413 20,650
Current portion of note receivable and
accounts receivable - other 8,456 7,787
Refundable income taxes - 1,102
--------- ---------
Inventories 47,479 48,201
Prepaid expenses 1,796 908
Assets held for sale 6,645 6,645
--------- ---------
Total current assets 74,593 85,457
Note receivable, less current portion 25,000 26,000
Property and equipment - net 149,065 153,119
Intangible assets - net 18,776 19,193
Other assets 432 466
--------- ---------
Total assets $ 267,866 $ 284,235
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,646 $ 31,357
Accrued liabilities 17,791 18,489
Current maturities of long-term debt 160,077 12,643
Long-term debt classified as a current liability 18,537 164,459
--------- ---------
Total current liabilities 212,051 226,948
Long-term debt, less current maturities 3,621 3,927
--------- ---------
Total liabilities 215,672 230,875
--------- ---------
Shareholders' equity:
Common stock - Class A, $.01 par value,
19,702,221 shares issued and outstanding 197 197
Common stock - Class B, $.01 par value,
636,202 shares issued and outstanding 6 6
Additional paid-in capital 148,977 148,977
Accumulated deficit (96,986) (95,820)
--------- ---------
Total shareholders' equity 52,194 53,360
--------- ---------
Total liabilities and shareholders' equity $ 267,866 $ 284,235
========= =========
See notes to condensed consolidated financial statements.
3
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
For the three For the six
months ended months ended
February 28, February 29, February 28, February 29,
2001 2000 2001 2000
Revenues $ 32,447 $ 68,621 $ 77,209 $ 143,588
Cost of sales 20,487 73,041 50,646 124,596
----------- ---------- ------------ -----------
Gross profit (loss) 11,960 (4,420) 26,563 18,992
----------- ---------- ------------ -----------
Selling, general and administrative
expenses 11,271 26,600 22,105 46,547
Gain on disposal of property &
equipment (2) - (412) -
----------- ---------- ------------ -----------
Income (loss) from operations 691 ( 31,020) 4,870 (27,555)
Interest expense 4,818 3,492 9,503 6,403
Interest income (682) - (1,376) -
----------- ---------- ------------ -----------
Loss before income taxes (3,445) (34,512) (3,257) (33,958)
Income tax benefit (2,092) (13,476) (2,092) (13,244)
----------- ---------- ------------ -----------
Net loss $ (1,353) $(21,036) $ (1,165) $ (20,714)
=========== ========== ============ ===========
Net loss per share:
Basic $ (0.07) $ (1.04) $ (0.06) $ (1.02)
======== ======== ======== ========
Diluted $ (0.07) $ (1.04) $ (0.06) $ (1.02)
======== ======== ======== ========
Shares used in computing net loss per share:
Basic 20,338,423 20,338,423 20,338,423 20,338,423
Diluted 20,338,423 20,338,423 20,338,423 20,338,423
See notes to condensed consolidated financial statements.
4
NORTHLAND CRANBERRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
For the six months ended
February 28, February 29,
2001 2000
---- ----
Operating activities:
Net loss $ (1,165) $ (20,714)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and equipment 4,745 4,487
Amortization of intangible assets 417 1,252
Provision for deferred income taxes 1,101 (13,636)
Inventory lower of cost or market adjustment - 27,000
Gain on disposals of property and equipment (412) -
Changes in assets and liabilities:
Receivables, prepaid expenses and other current assets 9,680 4,166
Inventories 722 (38,046)
Accounts payable and accrued liabilities (14,264) 19,140
----------- ----------
Net cash provided by (used in) operating activities 824 (16,351)
----------- ----------
Investing activities:
Collection on note receivable 500 -
Property and equipment purchases (238) (4,471)
Proceeds from disposals of property and equipment 459 -
Net decrease (increase) in other assets 34 (546)
----------- ----------
Net cash provided by (used in) investing activities 755 (5,017)
----------- ----------
Financing activities:
Net (decrease) increase in borrowings under revolving credit
facilities (47) 23,300
Payments on long-term debt (892) (1,227)
Dividends paid - (1,621)
Proceeds from exercise of stock options - 209
----------- ----------
Net cash (used in) provided by financing activities (939) 20,661
----------- ----------
Net increase (decrease) in cash and cash equivalents 640 (707)
Cash and cash equivalents, beginning of period 164 769
----------- ----------
Cash and cash equivalents, end of period $ 804 $ 62
====== ======
See notes to condensed consolidated financial statements.
5
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 February 28,
2001 and August 31, 2000 and its related results of operations for the
three month and six month periods ended February 28, 2001 and February 29,
2000, respectively, and cash flows for the six months ended February 28,
2001 and February 29, 2000, respectively. 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, 2000 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 latest Annual Report on Form 10-K.
Going Concern - The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. Recent production levels of cranberries in the United
States have been in excess of demand and usage which has resulted in an
industry-wide excess of supply of frozen cranberries and cranberry
concentrate. Prices paid to growers for raw cranberries are currently below
production costs for many growers. In July 2000, the United States
Department of Agriculture ("USDA") adopted a volume regulation under a
federal marketing order for the 2000 crop year which was designed to reduce
the industry-wide cranberry crop from levels of that of the previous three
years. The USDA is again considering a possible volume regulation for the
2001 crop year. The Company currently operates in a marketplace that has
experienced increased levels of competitive price discounting and selling
activities as the industry responds to the excess cranberry supply levels.
In addition, Federal legislation signed on October 27, 2000 provides for an
aggregate of approximately $20 million in direct payments to certain
growers with funds from the Commodity Credit Corporation ("CCC") and
approximately $30 million in funding for the USDA to purchase cranberry
products for school lunch and other meal programs. Management expects to
receive approximately $1.1 million in direct payments from the CCC in
fiscal 2001. In addition, the Company has been awarded a contract for
approximately $1.2 million that will use approximately 28,000 barrels of
fruit under the USDA cranberry product purchase programs and is evaluating
its alternatives with respect to participating in future bids under this
program.
6
During the year ended August 31, 2000, the Company incurred a net loss of
approximately $105 million. As shown in the condensed consolidated
financial statements and for the reasons stated below, as of February 28,
2001, the Company's current liabilities exceeded its current assets by
approximately $137.5 million and the Company was not in compliance with
several provisions of certain long-term debt and forbearance agreements.
These factors, among others, raise substantial doubt that the Company will
be able to continue as a going concern.
The condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
As described in Note 3, the Company has not made scheduled interest and
principal payments as required on the revolving credit facility and the
term loans payable to an insurance company. In addition, the Company is not
in compliance with several provisions of the loan agreements. The Company
entered into forbearance agreements with the syndicate of banks providing
the revolving credit facility and with the insurance company providing the
term loans which provide that the banks and insurance company will not seek
immediate repayment of certain principal and interest payments until April
30, 2001 as long as the Company remains in compliance with the terms of the
forbearance agreements. However, the Company is not in compliance with
several provisions of the forbearance agreements. Under the terms of the
Company's debt agreements and forbearance agreements, since the Company is
in default thereof, the lenders have the ability to call all outstanding
principal and interest thereunder immediately due and payable. In addition,
the Company is not in compliance with the terms of its grower contracts.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis,
to comply with the terms and covenants of its financing agreements, to
obtain additional financing or refinancing as may be required, and
ultimately to attain successful operations. Management is continuing its
efforts to obtain additional funds through additional equity and debt
financing, to reduce costs and related near-term working capital
requirements and to explore various strategic alternatives related to the
sale of all or a portion of the Company's assets or common stock so the
Company can meet its obligations and sustain its operations. Despite these
efforts, management cannot provide assurance that the Company will be able
to obtain additional financing or that cash flows from operations will be
sufficient to allow it to meet its obligations.
Long-Lived Assets - The Company periodically evaluates the carrying value
of property and equipment and intangible assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is
less than the carrying amount of an asset, a loss is recognized for the
difference between the fair value and carrying value of the asset.
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
7
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. A tax benefit of $2.1
million was recognized in the three months ended February 28, 2001 for
certain refunds related to farm loss carrybacks which were received in the
period.
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 reporting period.
Actual results could differ from those estimates.
New Accounting Standards - In June 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS 133 and SFAS 138 establish accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The Company
adopted SFAS 133 and SFAS 138 effective September 1, 2000. The Company's
adoption of SFAS 133 and SFAS 138 had no significant effect on the
Company's consolidated financial statements as the Company does not use
derivative financial instruments and is not involved in hedging activities.
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14,
"Accounting for Certain Sales Incentives." The Company is currently
evaluating the impact of this statement on its consolidated financial
statements. This statement is required to be adopted no later than the
fourth quarter of fiscal 2001.
Reclassifications - Certain amounts previously reported have been
reclassified to conform with the current presentation.
2. DISPOSITION OF BUSINESS AND RELATED 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. The
private label juice business assets sold consisted primarily of finished
goods and work-in-process inventories, raw materials inventories consisting
of labels and ingredients that relate to customers of the private label
juice business (other than cranberry juice and cranberry juice
concentrates), certain trademarks and goodwill, contracts relating to the
purchase of raw materials inventory and the sale of products, and 135,000
gallons of cranberry juice concentrate. No plants or equipment were
included in the sale. Cliffstar also assumed certain obligations under
purchased contracts. In connection with the sale, the Company received from
Cliffstar an unsecured, subordinated promissory note for $28 million
(non-cash investing activity) which will be amortized over six years and
which bears interest at a rate of 10% per annum.
8
Additionally, Cliffstar is contractually obligated 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. The Company also entered into certain related agreements
with Cliffstar, including among them a co-packing agreement pursuant to
which Cliffstar contracted for specified quantities of Cliffstar juice
products to be packed by the Company during each year of the period in
which Cliffstar is making earn-out payments to the Company.
The private label juice business had revenues of approximately $12.5
million and $19.7 million for the three months ended November 30, 1999 and
the six months ended February 29, 2000, respectively. The Company
recognized gross profit of approximately $2.3 million and $3.6 million on
such revenues during the three months ended November 30, 1999 and the six
months ended February 29, 2000, respectively. Information with respect to
selling, general and administrative expenses with respect to the private
label juice business is not available, as the Company's accounting system
does not segregate such expenses by type of product.
On July 7, 2000, Cliffstar filed suit against the Company in the United
States District Court, Western District of New York, alleging, among other
things, that the Company breached certain representations and warranties in
the Asset Purchase Agreement. That lawsuit was subsequently dismissed, and
on July 31, 2000, the Company filed a lawsuit against Cliffstar in the
Northern District of Illinois, which was later amended on October 10, 2000
and January 16, 2001. The lawsuit arises out of the sale of the net assets
of the Company's private label juice business to Cliffstar in the
transaction that closed on March 8, 2000. The Company claims that (1)
Cliffstar breached the Asset Purchase Agreement by failing to make required
payments under the Asset Purchase Agreement and by failing to negotiate in
good faith concerning a cranberry sauce purchase agreement between the
parties; (2) Cliffstar breached an interim cranberry sauce purchase
agreement between the two companies by failing to adequately perform and to
pay the Company the required amounts due under it; (3) Cliffstar breached
its fiduciary duty to the Company based on the same (or similar) conduct;
(4) Cliffstar breached the promissory note issued by it in the transaction
by failing to make its payments in a timely manner and failing to pay all
of the interest due; (5) Cliffstar breached a co-packing agreement entered
into in connection with the sale by failing to make required payments
thereunder and other misconduct; and (6) Cliffstar breached the Asset
Purchase Agreement's arbitration provision, which provides that any
disagreements over the valuation of finished goods, work-in-process and raw
material inventory purchased by Cliffstar shall be submitted to arbitration
for resolution. On April 10, 2001, the Court granted the Company's Petition
to Compel Arbitration. Accordingly, the price dispute over finished goods,
work-in-process and raw material inventory will be arbitrated. No date has
been set for this arbitration. The Company also claims that Cliffstar
breached its fiduciary duties to the Company. The Company seeks
compensatory damages in an amount in excess of $5 million, plus punitive
damages for Cliffstar's breaches of its fiduciary duties and attorneys'
fees. Cliffstar's answer to the Company's Amended Complaint was received on
November 15, 2000. Cliffstar's Answer to the Company's Second Amended
Complaint is due on April 20, 2001.
9
Cliffstar has asserted counterclaims against the Company, alleging that (1)
the Company fraudulently induced Cliffstar to enter into the Asset Purchase
Agreement; (2) the Company has breached the Asset Purchase Agreement by
failing to negotiate in good faith a cranberry sauce purchase agreement, by
failing to provide Cliffstar with sufficient quantities of cranberry
concentrate meeting Cliffstar's "specifications," by selling inventory that
did not have a commercial value at least equal to the Company's carrying
value, by failing to notify Cliffstar that the Company intended to
write-down its cranberry inventory, by not providing Cliffstar its selling
prices, by decreasing its level of service to customers after the parties
signed the Asset Purchase Agreement, and by refusing to turn over certain
labels, films and plates relating to the private label juice business to
Cliffstar; (3) the Company breached the co-packing agreement by prematurely
terminating that agreement; (4) the Company converted the labels, films and
plates relating to the private label juice business; (5) the Company
intentionally interfered with Cliffstar's contractual relations, or
reasonable expectations of entering into business relations, with the
printers who hold the labels, films and plates; and (6) the Company
breached the Transition Agreement by failing to remit to Cliffstar the
excess of Cliffstar's interim payment for work-in-process and raw material
inventory, by withholding a portion of the work-in-process and raw material
inventory from Cliffstar, and by artificially building up its
work-in-process and raw material inventory before and after the sale of the
private label juice business to Cliffstar. Cliffstar seeks compensatory
damages in an amount not stated in the counterclaims, punitive damages for
the alleged fraudulent inducement and intentional interference claims, and
attorneys' fees. The complaint does not seek rescission of the agreement,
although Cliffstar reserves the right to seek recovery of rescission-type
damages (among other damages) without seeking to unwind the transaction.
The Company has denied the allegations of Cliffstar's counterclaims in all
material respects. The Company's answer to Cliffstar's First Amended
Counterclaim is due on April 20, 2001, and the Company intends to deny all
material allegations on or before that date.
As of February 28, 2001, the note receivable from Cliffstar had an
outstanding balance of $27.25 million, and the Company had outstanding
accounts receivable and accrued interest due from Cliffstar aggregating
approximately $6.2 million. The action is in its early stages. No
depositions have been taken or scheduled and the Company has only begun to
conduct discovery. It is the opinion of the Company's management, after
consulting with outside legal counsel, that, (1) the Company has strong
claims for the required payments for cranberry concentrate, co-packing
services and cranberry sauce sales and other alleged breaches of the
agreements and these amounts owed the Company are valid and collectible;
(2) the Company has strong factual and legal defenses in all material
respects to Cliffstar's counterclaims; and (3) the note and accrued
interest due from Cliffstar is collectible. However, the resolution of the
legal proceedings cannot be predicted with certainty at this time. In
addition, management intends to vigorously defend the counterclaims against
them and to pursue any claims they may have against Cliffstar, including
any actions to collect the amounts outstanding.
Cliffstar made the required $0.25 million principal and related accrued
interest payment on the note receivable that was due on May 31, 2000 on
June 13, 2000, and the Company, after consulting with its outside legal
counsel, concluded that the payment was received late and, thus, the note
is in default with future interest accruing at the default rate of 12%. The
10
Company received Cliffstar's scheduled August 31, 2000 principal payment of
$0.25 million together with approximately $0.7 million of accrued interest
at 10% on September 8, 2000. The Company received Cliffstar's scheduled
November 30, 2000 principal payment of $ 0.25 million together with
approximately $0.7 million of accrued interest at 10% on December 22, 2000.
The Company received Cliffstar's scheduled February 28, 2001 principal
payment of $0.25 million together with approximately $0.7 million of
accrued interest at 10% on March 2, 2001. The Company has recognized
interest income on the note receivable at a rate of 10% in the condensed
consolidated financial statements, pending the resolution of this matter.
Although the note is in default, the Company has classified the balance
outstanding in the accompanying condensed consolidated balance sheets in
accordance with the scheduled payment dates provided for in the note, as
this is how the Company anticipates payments will be received unless the
court rules otherwise.
11
3. LONG-TERM DEBT
Long-term debt as of February 28, 2001 and August 31, 2000 consisted of the
following (in thousands):
February 28, August 31,
2001 2000
Revolving credit facility with a bank $ 154,953 $ 155,000
Term loan payable to insurance company with
interest at 8.08% 11,377 11,377
Term loan payable to insurance company with
interest at 7.86% 7,719 7,719
Term note with a bank 2,158 2,508
Promissory vendor notes 3,460 1,600
Other obligations 2,568 2,825
------- -------
Total 182,235 181,029
Less: Current maturities of long-term debt 160,077 12,643
Amounts classified as current liability 18,537 164,459
------- -------
Amounts classified as noncurrent $ 3,621 $ 3,927
======== =======
The Company was not in compliance with various covenants under the
revolving credit facility, the two term loans payable to an insurance
company, and the term note with a bank as of February 28, 2001 and August
31, 2000, and the Company has not received waivers for any of these
covenant defaults. The Company has entered into forbearance agreements with
the syndicate of banks providing the revolving credit facility and with the
insurance company providing the term loans. The forbearance agreements
provide, among other things, that the lenders will forbear from seeking
immediate repayment of certain principal and interest payments through
April 30 (although effective March 2001 the Company must pay interest at
the rate of 5% per annum on the outstanding principal amounts and interest
continues to accrue at the higher default rate), and that the Company (i)
must pay certain principal amounts on April 10, 2001, and (ii) must comply
with additional financial covenants through April 30, 2001. The Company is
not in compliance with several provisions of the forbearance agreements and
has not received waivers of these defaults. These defaults include, among
others, (a) failure to make the scheduled principal payment on April 10,
2001, and (b) failure to comply with certain financial covenants. As a
result, the borrowings under the two term loans payable to an insurance
company and the term note payable to a bank have been classified as a
current liability in the accompanying condensed consolidated balance
sheets.
On March 15, 1999, the Company entered into a credit agreement with its
syndicate of banks (the "Credit Agreement") that provides for a revolving
credit facility of $140 million. On December 29, 1999, the Credit Agreement
was amended, increasing the amount that could be borrowed under the
revolving credit facility to $155 million. The Credit Agreement was
subsequently amended effective February 29, 2000 and July 17, 2000 for
financial covenant
12
defaults. The revolving credit facility terminates on February 28, 2002.
Under the terms of the Credit Agreement, the outstanding principal amount
is scheduled to be reduced by $5.0 million on the last day of each of the
first and third quarters of the Company commencing with the fiscal quarters
ending November 30, 2000 and May 31, 2001 and continuing thereafter until
the termination date of the agreement (however, the forbearance agreement
allows for deferral of the November 30, 2000 principal payment). Under the
amended revolving credit facility, the Company, through July 17, 2000,
could borrow at the bank's domestic rate (which approximates prime, as
defined) or LIBOR plus one and one-quarter percent (1.25%). Effective July
18, 2000, the interest rate was increased to the bank's domestic rate
(which approximates prime, as defined), plus 1.25%. Under the terms of the
amended revolving credit facility, interest accrues at the bank's domestic
rate, plus 2.0%, while the loan is in default. The borrowing option under
LIBOR is no longer available. Amounts outstanding under the agreement bear
interest at a weighted average of 10.50% and 10.09% as of February 28, 2001
and August 31, 2000, respectively. The Company has not made interest
payments to the bank since August 31, 2000, and did not make a $5.0 million
principal payment due November 30, 2000. The credit facility is
collateralized by substantially all assets of the Company not otherwise
collateralized. Included in accrued liabilities as of February 28, 2001 is
approximately $9.5 million of outstanding interest on the revolving credit
facility. Beginning in March 2001, pursuant to the terms of the forbearance
agreement, current interest payments of 5% per annum are required on the
revolving credit facility. Interest continues to accrue at the contracted
rates.
The 8.08% term loan with an insurance company is payable in semi-annual
installments, including interest, through July 1, 2004. The 7.86% term loan
with an insurance company is payable in semi-annual installments, including
interest, through August 1, 2008. The interest rate is subject to
adjustment in fiscal year 2003, as determined by the insurance company, but
the adjusted rate will not exceed 2.25% over the then five-year treasury
bond yield. The loans are collateralized by specific property and
equipment. The insurance company term loans provide for an additional 5%
default interest on unpaid principal and interest, which aggregated $1.7
million at February 28, 2001. Beginning in March 2001, current interest
payments of 5% per annum are required on these loans. Interest continues to
accrue at the contracted rates.
The term note with a bank is payable in monthly installments, including
interest, through March 2002, at which time the remaining principal must be
paid. The interest rate on this term note is 1% per annum less than the
prime rate, as defined, or LIBOR plus an applicable rate margin (2%) at the
option of the Company. The interest rate on the outstanding borrowings was
7.50% and 7.79% as of February 28, 2001 and August 31, 2000, respectively.
The note is collateralized by specific property and equipment.
The bank term note has a higher default interest rate specified while the
loan is in default, as defined, if the scheduled principal and interest
payments are not made. The Company has made all scheduled principal and
interest payments on this loan through February 28, 2001 and has not
accrued interest at the higher default rate.
The promissory vendor notes include a $1.6 million unsecured note payable,
including interest payments at 5% per annum, maturing on October 24, 2002.
The note provides that each $100
13
increment of the outstanding principal and accrued interest will be
convertible into one share of $100 stated value Series A Convertible
Preferred Stock ("Preferred Stock"), which series of Preferred Stock is yet
to be established by the Board of Directors of the Company, 180 days after
the occurrence of a refinancing, as defined. Each share of Preferred Stock
will be convertible into 40 shares of Class A Common Stock at the option of
the holder or automatically upon the occurrence of certain events. Each
share of Preferred Stock will entitle the holder to receive cumulative
annual cash dividends at a rate of 5% on the $100 stated value.
The second promissory vendor note in the amount of $1.86 million is
unsecured and is payable in various installments through December 31, 2001,
including interest at 7%.
The other obligations consist of various term loans with financial
institutions with principal and interest due in various amounts through
January 2007. These loans are generally collateralized by specific property
and equipment.
The debt agreements contain various covenants which include restrictions on
dividends and other distributions to shareholders, repurchases of stock,
and require the Company to maintain and meet certain minimum levels of
shareholders' equity ($125 million as of February 28, 2001) and operating
ratios, as defined.
The Company has also guaranteed $1.0 million of outstanding obligations to
a bank of an independent cranberry grower. The grower is in default with
certain terms and conditions contained in the related debt agreements.
Management of the Company is of the opinion that the potential for any loss
to the Company is minimal.
4. RESTRUCTURING ACCRUALS
In the fourth quarter of fiscal 2000, the Company recorded an $8.25 million
pre-tax restructuring charge, consisting primarily of a $6.0 million
writedown of a manufacturing facility that discontinued production in
Bridgeton, New Jersey on November 22, 2000 and $2.25 million of plant
closing costs (primarily cleanup, security and insurance costs) and
employee termination benefits. Approximately 130 employees received
notification of their termination in fiscal 2000 as a result of the
restructuring plan, primarily at the Bridgeton facility and in the
Company's sales department. The employees were subsequently terminated and
the Bridgeton facility is held for sale.
The following table summarizes the activity within the recorded accruals
during the six months ended February 28, 2001 (in thousands):
14
Charges and
Accrued at Cash Accrued at
August 31, 2000 Payments Febraury 28, 2001
Plant closing costs $ 770 $ 572 $ 198
Employee termination benefits 1,480 910 570
------- ------- -----
Total $ 2,250 $ 1,482 $ 768
======= ======= =====
5. SUPPLY CONTRACTS
The Company has multiple-year crop purchase contracts with 47 independent
cranberry growers pursuant to which the Company has contracted to purchase
all of the cranberry crop produced on 1,755 planted acres owned by these
growers. These contracts generally last for seven years, starting with the
1999 calendar year crop, and pay the growers at a market rate, as defined,
for all raw cranberries delivered plus $3 per barrel and certain incentives
for premium cranberries. In September 2000, the Company was unable to make
an aggregate payment of approximately $0.7 million due to the growers under
the terms of the contracts and the Company notified the growers of the
Company's intention to also defer payments required in fiscal 2001 under
the contract for the 2000 calendar year crop. Accordingly, the Company is
currently in default under the terms of the grower contracts. However, the
contracted growers harvested and delivered their 2000 calendar year crop to
the Company subsequent to August 31, 2000. The Company intends to pursue
amendment of the payment terms required under the contracts and seek the
necessary waivers from the growers. The ultimate resolution of this matter
is currently undeterminable, but the Company has made all rescheduled
payments to the growers.
6. LEASE COMMITMENTS
On April 10, 1990, the Company acquired leasehold interests in two
cranberry marshes in Nantucket, Massachusetts. On March 31, 1994, the
Company entered into an agreement which extended the original lease term
through November 30, 2003. Rental payments are based on 20 percent of gross
cash receipts from agricultural production, subject to certain minimums
which are dependent upon the statewide average crop yield. During fiscal
2000, the Company determined that it was no longer economically feasible to
operate these marshes and has entered into negotiations to either amend or
terminate the lease in fiscal 2001.
The Company leased a cranberry marsh from an insurance company which lease
expired on December 31, 2000. In January 2001, the Company and the
insurance company entered into an annual management agreement whereby costs
and income from operation of the marsh will be shared by the parties.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINACIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
As of February 28, 2001, we remained in default of several covenants of
our revolving credit agreement, other long-term debt agreements and our
forbearance agreements. We did not make interest payments on our revolving
credit facility in the first six months of fiscal 2001 aggregating $9.5 million
and did not make a $5.0 million principal payment due November 30, 2000. In
addition, we did not make required principal and interest payments of $1.7
million in the second quarter on our term loans with an insurance company.
However, we continue to work closely with our lenders to restructure the terms
of our debt arrangements. We have entered into forbearance agreements with our
syndicate of banks and the insurance company pursuant to which they have agreed
not to seek immediate repayment of certain principal and interest payments due
under our debt arrangements until April 30, 2001. During this period, the
lenders agreed not to exercise various remedies available to them as a result of
our defaults as long as we remain in compliance with the terms and conditions of
the forbearance agreements. We agreed with the lenders in the forbearance
agreement to perform certain actions, among them (i) paying interest on a
periodic basis during the forbearance period (beginning in March 2001) at a rate
of 5% on the principal amounts outstanding (although interest on outstanding
principal continues to accrue at the higher default rate); (ii) delivering to
the syndicate of banks certain additional security agreements covering currently
unencumbered assets; (iii) making a principal payment on April 10, 2001; (iv)
continuing the process of exploring strategic alternatives; (v) retaining on
behalf of the syndicate of banks an independent financial advisor to assess our
operations; and (vi) complying with certain financial covenants set forth in the
agreements. While the forbearance agreements allowed us not to make certain
principal and interest payments due during the first six months of fiscal 2001,
we accrued the full amount of all of the interest expense in our statement of
operations.
As of the filing of this Form 10-Q, we are not in compliance with
several provisions of the forbearance agreements, including among others, making
a principal payment on April 10, 2001 and complying with certain financial
covenants. We continue to work closely with the syndicate of banks and the
insurance company to either secure compliance with or obtain waivers for any
defaults under the terms of the forbearance agreements.
Additionally, we continue to actively explore alternative sources of
debt and equity capital and ways in which we can refinance all or some of our
indebtedness, and we expect to receive refinancing proposals from alternative
financial institutions prior to the end of the forbearance period.
We have recently taken several steps that we believe positively
contributed to our results of operations in the first six months of fiscal 2001:
o We entered into a strategic marketing alliance with Crossmark,
Inc., a national food broker, effective in the first quarter of
fiscal 2001, whereby we combined our sales
16
and marketing efforts and further consolidated our food broker
network with Crossmark.
o We began to refocus our trade promotional strategies to
emphasize profitability as opposed to generating revenue growth
and, in the first six months of fiscal 2001, certain higher-cost
promotional activities we entered into in fiscal 2000 expired or
were renegotiated. We believe these steps helped to reduce our
selling, general and administrative expenses in the first six
months of fiscal 2001.
o In the first quarter of fiscal 2001, we increased the cranberry
juice content in all of our Northland brand 100% juice cranberry
blends to 27% and began the rollout of these new reformulated
blends, which we refer to as the "27% Solution." While Northland
brand 100% juice blends have always contained 100% fruit juice
(as opposed to many of our competitors' products which generally
contain a lesser percentage of fruit juice sweetened by fructose
or corn syrup), they have historically contained only
approximately 15% cranberry juice. We have reformulated our
Northland blends to include 27% cranberry juice in response to
increasing evidence of the potential health benefits associated
with drinking cranberry juice. This reformulation uses more
cranberries per case of juice products and as a result has helped
reduce our inventory levels in the first six months of fiscal
2001 from levels that would have otherwise existed.
o We completed the previously announced restructuring of our
manufacturing operations which we believe contributed to our
lower cost of sales for the first six months of fiscal 2001.
o We converted an additional $2.1 million in outstanding payables
to a vendor into a promissory note (and are pursuing similar
arrangements with other significant trade creditors).
o We reduced total personnel in all areas in an effort to reflect
the current needs of our business, which contributed to reduced
selling, general and administrative expenses for the first six
months of fiscal 2001.
The Cranberry Marketing Committee ("CMC") of the United States
Department of Agriculture ("USDA") has the authority to recommend that the
Secretary of the USDA impose harvest restrictions on cranberry growers if the
CMC believes there will be an oversupply of cranberries for the coming crop
year. During fiscal 2000, the Secretary of the USDA, at the request and based on
the recommendation of the CMC, invoked a volume regulation to restrict the
industry-wide harvest of cranberries for the harvest occurring in the fall of
2000. The restriction generally limited cranberry growers to selling only up to
85% of their historic production levels. In response to this federal volume
regulation, we temporarily removed some of our Massachusetts acreage from
production during the 2000-growing season and altered certain historical growing
activities and practices. As a result of this decision, as well as growing
conditions in 2000, we experienced a
17
reduced harvest in the fall of 2000, and we believe that the harvest industry
wide was down significantly as well. We believe that part of the reduced fall
2000 harvest is attributable to growers like us engaging in practices designed
to comply with the volume regulation, including removing acreage from
production, limiting or eliminating fertilizing and other growth-enhancing
practices, or failing to harvest certain acreage. At the recommendation of the
CMC, the USDA is again considering a possible volume regulation for the 2001
crop year.
In March 2001, the CMC forwarded a recommendation to the Secretary of
the USDA to invoke a volume regulation that would limit the amount of fruit that
could be harvested and delivered to handlers during the 2001 crop year. The
recommendation, if approved, would limit the total 2001 cranberry crop to
approximately 4.7 million barrels, plus a fresh fruit exemption. Various
parties, including us, oppose the CMC recommendation and are suggesting various
alternatives. At this time, we cannot predict the final action of the USDA
relative to a volume restriction for the 2001 crop year.
In addition to the volume regulation and in response to requests from
the grower community, the United States Congress approved a $50 million
federally funded assistance program in October 2000. Under this plan, the
federal government will make direct cash subsidies totaling $20 million to
growers. Of this, we expect to receive approximately $1.1 million before the end
of fiscal 2001. In addition, $30 million is to be used by the federal government
to purchase cranberry products containing the equivalent of approximately one
million barrels of cranberries from the industry on a "bid" basis. This purchase
will be used in school lunch and other federal programs directed to the needy
and disadvantaged. We participated in the first bid process and received a
contract for approximately $1.2 million to provide cases of juice concentrate
that will use approximately 28,000 barrels of cranberries. We have not yet
determined whether we will participate in future bids under this program.
While we currently continue to experience cash flow difficulties, we
hope to improve our cash position and results of operations through focusing on
a return to profitability as opposed to driving increased revenues.
RESULTS OF OPERATIONS
Total revenues for the three months ended February 28, 2001 were $32.4
million, a decrease of 52.7% from revenues of $68.6 million in the prior year's
second quarter. Revenues for the six-month period ended February 28, 2001 were
$77.2 million, a decrease of 46.2% from revenues of $143.6 million in the same
period in fiscal 2000. The decrease resulted primarily from (i) the sale of the
private label juice business in March of 2000; (ii) reduced co-packing revenue
from a major customer that during the first quarter switched from an arrangement
where we purchased substantially all of the ingredients and sold the customer
finished product to a fee for services performed arrangement; and (iii) reduced
sales of Northland and Seneca branded products. Our marketing spending during
the first six months of fiscal 2001 was down significantly as compared to the
prior year, contributing to a decrease in market share for our Northland and
Seneca branded products. Trade industry data for the 12-week period ended
February 25, 2001 showed that our Northland brand 100% juice products achieved a
7.9% market share of the supermarket shelf-stable
18
cranberry beverage category on a national basis, down from an 11.1% market share
for the 12-week period ended February 27, 2000. The total combined market share
of supermarket shelf-stable cranberry beverages for our Northland and Seneca
branded product lines was 9.0% for the 12-week period ended February 25, 2001
compared to a 13.6% market share for the 12-week period ended February 27, 2000.
We anticipate that our total revenues will continue to decrease in fiscal year
2001 as compared to fiscal 2000 primarily as a result of anticipated lower
co-packing revenues as well as our change in promotional and pricing strategies
to focus more on profitability as opposed to revenue growth.
Cost of sales for the second quarter of fiscal 2001 was $20.5 million
compared to $73.0 million for the second quarter of fiscal 2000, resulting in
gross margins of 36.9% and (6.4%) in each respective period. Cost of sales for
the six month period ended February 28, 2001 was $50.7 million compared to
$124.6 million in the same period in fiscal 2000, yielding gross margins of
34.4% and 13.2% respectively. During the second quarter of fiscal 2000, we
recorded a $27.0 million pre-tax, lower of cost or market charge to cost of
sales which reduced the carrying value of our inventory to its estimated market
value. Cost of sales for the three and six month periods ended February 29, 2000
without taking into account the effects of the inventory write-down would have
been $46.0 million and $97.6 million, which would have resulted in gross margins
of 32.9% and 32.0%, respectively. The increase in gross margins in fiscal 2001
was primarily due to the elimination of private label juice revenues and reduced
co-packing revenues, both of which carry lower margins than sales of our branded
products. We currently anticipate that our gross margin will increase in fiscal
2001 as compared to fiscal 2000 primarily due to (i) our changing product mix
(including reduced revenues from co-packing services and the elimination of
revenues from lower margin private label juice sales); (ii) the effects of the
fiscal 2000 inventory adjustments which reduced cranberry cost to estimated
market levels; and (iii) the closing of our Bridgeton, New Jersey facility, the
sale of our grape business and our grape receiving station in Portland, New
York, and other efficiency measures associated with increasing production levels
and reducing overhead at our remaining facilities.
Selling, general and administrative expenses were $11.3 million, or
34.7% of revenues, for the second quarter of fiscal 2001 compared to $26.6
million, or 38.8% of revenues, in the prior year's second fiscal quarter.
Selling, general and administrative expenses were $22.1 million, or 28.6% of
revenues, for the six month period ended February 28, 2001 compared to $46.5
million, or 32.4% of revenues, during the same period in the prior fiscal year.
The $15.3 million decrease in selling, general and administrative expenses in
the second quarter, and $24.4 million decrease in the six month period, was
primarily due to (i) significant reductions in marketing and promotional
expenses compared to the second quarter of fiscal 2000 (in which we incurred
greater marketing and promotional expense to support the Seneca brand and the
launch of a new Seneca line of cranberry juice products, as well as undertook an
aggressive marketing campaign to support development and growth of our Northland
brand products); (ii) the recent significant revisions to our trade promotional
practices to reflect our new focus away from growing sales and market share and
toward more profitable operations; (iii) a reduction in personnel costs
resulting from our recent restructuring efforts; and (iv) a reduction in
personnel costs and selling commissions resulting from our recently announced
strategic alliance with Crossmark that outsources and consolidates much of our
sales and marketing efforts. The decrease in selling, general and administrative
expenses was partially offset
19
by increases in outside professional fees incurred in connection with developing
a "turnaround" plan for our operations, negotiating with our lenders regarding
the terms of our credit facilities, related covenant defaults and forbearance
agreements, and continuing efforts to seek additional or alternative debt or
equity financing. We expect that selling, general and administrative expenses in
the remaining quarters of fiscal 2001 will decrease from comparable quarters
last year primarily as a result of steps we have taken to focus on increasing
profitability as opposed to revenue growth, including the alliance with
Crossmark, the planned reduction in trade spending, the consolidation of our
warehousing infrastructure and anticipated efficiencies as a result of our new
internal information systems.
The gain on disposals of property and equipment in the six-month period
ended February 28, 2001 of $0.4 million resulted primarily from the sale of
certain real estate and other assets.
Interest expense was $4.8 million and $9.5 million for the three and
six-month periods ended February 28, 2001 compared to $3.5 million and $6.4
million during the same period of fiscal 2000. The increase in interest expense
of $1.3 million and $3.1 million respectively was due to increased debt levels
between the periods and significantly higher interest rates in fiscal 2001 (due
in part to revised terms of our revolving credit facility as a result of our
defaults thereunder). We remain in default of the terms of our revolving credit
facility and other debt agreements with third parties. See "Financial Condition"
below.
Interest income of $0.7 million and $1.4 million for the three and six
month periods ended February 28, 2001 was associated with an unsecured,
subordinated promissory note we received from Cliffstar in connection with the
sale of our private label juice business in March of 2000.
The income tax benefit recognized in the second quarter of fiscal 2001
relates to a refund from a farm loss carryback received in the period. Future
deferred income tax benefits of approximately $28.6 million relating to the
fiscal 2000 loss have not been recognized as an asset because of uncertainties
with respect to realization of those benefits. These benefits may be recognized
in future periods to offset income tax obligations that may need to be
recognized.
FINANCIAL CONDITION
Net cash provided by operating activities was $0.8 million in the first
six months of fiscal 2001 compared to a net cash used in operating activities of
$(16.4) million in the same period of fiscal 2000. The difference of $17.2
million between periods was primarily due to fiscal 2001 reductions in assets
and liabilities compared to significant increases in the same items in fiscal
2000. Our inventory decreased $0.7 million in the first six months of fiscal
2001 compared to an increase of $38.0 million in the first six months last year.
This was primarily because (i) volume intake of raw cranberries was reduced due
to the impact of the federal marketing order of the USDA and prevailing growing
conditions related to the fall 2000 harvest; (ii) the price we paid for raw
cranberries purchased from our independent growers was down significantly (due
primarily to the renegotiated terms of our grower contracts which tie the price
we pay for cranberries more closely to prevailing market prices), and our
growing and processing costs decreased from the prior year (generally as a
result of scaled-back growing operations, reorganized manufacturing operations
and
20
overall personnel reductions); (iii) our consolidation of operations, closing of
our Bridgeton, New Jersey facility and increased use of cranberries in our
Northland branded products resulting from the recent reformulation of those
products, which enabled us to decrease raw material and finished goods
inventories; and (iv) a reduction in our purchases of other raw materials. Also,
receivables, prepaid expenses and other current assets decreased $9.7 million
from August 31, 2000 as a result of declining revenue levels, which, along with
the allowed non-payment of certain principal and interest payments resulting
from our forbearance agreements, provided us additional cash to pay down
accounts payable and accrued liabilities by $14.3 million in the first six
months of fiscal 2001.
Working capital deficiency decreased $4.0 million to a $(137.5) million
deficiency at February 28, 2001 compared to a working capital deficiency of
$(141.5) million at August 31, 2000. Our current ratio was 0.4 to 1.0 at both
February 28, 2001 and August 31, 2000.
Our net cash provided from investing activities was $0.8 million in
the first six months of fiscal 2001 compared to net cash used of $5.0 million in
the first six months of fiscal 2000. The difference between periods was due to
proceeds from disposals of property and equipment, collections on the Cliffstar
note and a significant reduction in property and equipment purchases in the
first six months of fiscal 2001.
Our net cash used in financing activities was $0.9 million in the
first six months of fiscal 2001 compared to net cash provided of $20.7 million
in the first six months of the prior year. Our financing activity in the first
six months of fiscal 2001 was related primarily to payments on certain long-term
debt and vendor notes. We also paid $0.05 million on the credit facility with
the proceeds from the sale of certain property and equipment as required under
the terms of the forbearance agreement. There were no funds available under our
revolving credit facility during the first six months of fiscal 2001 and
dividend payments were suspended indefinitely during the prior fiscal year. Our
total debt (including current portion) was $182.2 million at February 28, 2001
for a total debt to equity ratio of approximately 3.5 to 1.0 at February 28,
2001 compared to total debt of $181.0 million at August 31, 2000 and a total
debt to equity ratio of approximately 3.4 to 1.0 at August 31, 2000. Depending
upon our future sales levels and relative sales mix of our products during the
remainder of the fiscal year, we expect our working capital requirements to
fluctuate periodically during fiscal 2001.
During the first six months of fiscal 2001, we continued to experience
cash flow difficulties. To help ease the cash flow burden over the near-term and
help allow us to reduce our liabilities, we intend to continue our focus on
profitability as opposed to revenues and for that reason, we intend to spend
less on trade promotion in the upcoming fiscal year. Additionally, we have (i)
made substantial changes to our pricing and promotional strategies, including
entering into the agreement with Crossmark; (ii) since the beginning of the
fiscal year, converted an aggregate of $3.7 million in outstanding accounts
payable into unsecured promissory notes; (iii) completed the conversion of our
internal information systems; (iv) revised certain agreements with various trade
creditors to obtain payment terms more favorable to us; and (v) entered into
forbearance agreements with our syndicate of banks and an insurance company
pursuant to which the lenders agreed not to seek immediate repayment of certain
principal and interest payments under our revolving credit facility and term
loans until April 30, 2001 as long as we remain in compliance with the terms of
those agreements.
21
Additionally, we intend to continue to pursue opportunities to refinance our
debt in fiscal 2001. Despite these efforts, we cannot assure you that we will be
able to obtain additional financing or that cash flow from operations will be
sufficient to allow us to manage our payables. We intend to continue to work
closely with our trade creditors in managing the terms of our accounts payable.
We have reached our borrowing capacity under our revolving credit
facility. We were not in compliance with several provisions of our revolving
credit agreement and other long-term debt agreements (including various
covenants of two term loans payable to an insurance company and a term note with
a bank) as of and for the six months ended February 28, 2001, and accordingly,
because the lenders have not waived these covenant defaults, the balance of the
debt agreement revolving credit facility and long-term debt agreements have been
classified as a current liability. As of February 28, 2001, we have not made
interest payments on the revolving credit facility in the amount of $9.5
million, and did not make a $5.0 million principal payment due November 30,
2000. We have also not made aggregate principal and interest payments of $1.7 on
term loans payable to an insurance company at February 28, 2001.
As previously mentioned, we have entered into forbearance agreements
with our syndicate of banks and the insurance company pursuant to which the
lenders agreed not to seek immediate repayment of some of these interest and
principal payments until April 30, 2001 as long as we remain in compliance with
the terms of the forbearance agreements. We are currently not in compliance with
several terms of the forbearance agreements. We are not certain that we will be
able to renegotiate the terms of our debt agreements or that we will obtain
additional financing prior to the expiration of the forbearance period. By the
terms of our credit facility and the forbearance agreements, since we are
currently in default, the creditors have the ability to call all outstanding
principal and interest thereunder immediately due and payable. In such event, it
is highly unlikely that we would be able to satisfy such an obligation, and we
would likely be unable to continue operation as a going concern. However, we
continue to work with our lenders to renegotiate the terms of those agreements.
Additionally, we are currently in default under the terms of our grower
contracts (see Note 5 to Notes to Condensed Consolidated Financial Statements).
We were unable to make an aggregate payment of approximately $0.7 million due on
September 15, 2000 to the growers under the terms of the contracts, and we
notified the growers of our intention to also defer payments required in fiscal
2001 under the contract for the 2000 calendar year crop. We have made payments
to the growers on their outstanding balances and we intend to pursue amendment
of the payment terms required under the contracts and seek the necessary waivers
from the growers.
As a result of these factors and others, there is substantial doubt
about our ability to continue as a going concern. See Notes 1 and 3 to Notes to
Condensed Consolidated Financial Statements included in this Form 10-Q.
Additionally, effective following the third quarter dividend payment in
fiscal 2000, we have suspended dividend payments on our common stock
indefinitely.
22
Unless our lenders call our loans due and payable, we believe that we will be
able to fund our ongoing operational needs for the third quarter of fiscal 2001
through (i) cash generated from operations; (ii) our actions to reduce our
near-term working capital requirements; and (iii) additional measures to reduce
costs and improve cash flow from operations.
23
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.
Whether or not these forward-looking statements will be accurate in the future
will depend on certain risks and factors including, without limitation, risks
associated with (i) the development, market share growth and continued consumer
acceptance of our branded juice products, including consumer acceptance of our
new "27% Solution"; (ii) the disposition of certain litigation related to the
sale of the net assets of our private label juice business; (iii) the
implementation of a marketing order of the United States Department of
Agriculture, if any, relative to the 2001 crop year, as well as the cranberry
purchase program adopted by the United States Congress; (iv) agricultural
factors affecting our crop and the crop of other North American growers; (v) our
ability to comply with the terms and conditions of, and to satisfy our
responsibilities under, our amended credit facility and other debt agreements,
with respect to which we are currently in default of certain covenants as well
as certain principal and interest payment provisions, as well as our forbearance
agreements; (vi) our ability to secure additional financing and/or generate
sufficient cash from operations as may be necessary to fund working capital
requirements and continue as a going concern; (vii) the results of our
previously announced exploration of strategic alternatives; (viii) the results
of our internal organizational restructuring, including, without limitation, the
results of the restructuring of certain of our sales and marketing functions
through our agreement with Crossmark, Inc.; (ix) our ability to manage our trade
payables; and (x) our ability to continue to meet the listing requirements of
The Nasdaq National Market, including, without limitation, the requirement that
our Class A Common Stock maintain a minimum bid price above $1.00 per share. 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 will not
necessarily 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 have not experienced any material changes in our market risk since
August 31, 2000.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 8, 2000, we sold the net assets of our private label juice
business to Cliffstar. The private label juice business assets sold consisted
primarily of finished goods and work-in-process inventories, raw materials
inventories consisting of labels and ingredients that relate to customers of the
private label juice business (other than cranberry juice and cranberry juice
concentrates), certain trademarks and goodwill, contracts relating to the
purchase of raw materials inventory and the sale of products, and 135,000
gallons of cranberry juice concentrate. No plants or equipment were included in
the sale. Cliffstar also assumed certain obligations under purchased contracts.
In connection with the sale, we received from Cliffstar an unsecured,
subordinated promissory note for $28 million which will be amortized over six
years and which bears interest at a rate of 10% per annum (currently 12% per
annum since it is in default), as well as approximately $6.8 million in cash
(subject to potential post-closing adjustments) related to inventory transferred
to Cliffstar on the closing date.
Additionally, Cliffstar is contractually obligated to make certain
annual earn-out payments to us for a period of six years from the closing date
based generally on operating profit from Cliffstar's sale of cranberry juice
products. We also entered into certain related agreements with Cliffstar,
including among them a co-packing agreement pursuant to which Cliffstar
contracted for specified quantities of Cliffstar juice products to be packed by
us ("Co-Packing Agreement") during each year of the period in which Cliffstar is
making earn-out payments to us.
On July 7, 2000, Cliffstar filed suit against us in the United States
District Court, Western District of New York, alleging, among other things, that
we breached certain representations and warranties in our Asset Purchase
Agreement. That lawsuit was subsequently dismissed, and on July 31, 2000, we
filed a lawsuit against Cliffstar in the Northern District of Illinois, which
was later amended on October 10, 2000, and January 16, 2001. The lawsuit arises
out of the sale of the net assets of our private label juice business to
Cliffstar in the Asset Purchase Agreement transaction that closed on March 8,
2000. We claim that (1) Cliffstar breached the Asset Purchase Agreement by
failing to make the required payments for cranberry concentrate; (2) Cliffstar
breached the Asset Purchase Agreement by failing to negotiate in good faith
concerning a cranberry sauce purchase agreement; (3) Cliffstar breached an
interim Cranberry Sauce Purchase Agreement between the two companies by failing
to solicit customers, telling customers and potential customers that it was
unable to fill orders, declining orders without informing us and failing to pay
us the agreed-upon amounts for the cases that it did sell; (4) Cliffstar
breached its fiduciary duty to us based on the same (or similar) conduct; (5)
Cliffstar breached the Promissory Note by failing to make its payments in a
timely manner and failing to pay all of the interest due; (6) Cliffstar breached
the Co-Packing Agreement between us and Cliffstar by failing to make the
required payments and other misconduct; and (7) Cliffstar breached the Asset
Purchase Agreement's arbitration provision, which provides that any
disagreements over the valuation of finsished goods, work-in-process and raw
material inventory purchased by Cliffstar shall be submitted to arbitration for
resolution. On April 10, 2001, the Court granted Northland's Petition to Compel
Arbitration. Accordingly, the price dispute over finished goods, work-in-process
and raw material inventory will be arbitrated. No date has been set for this
arbitration. We seek compensatory damages in an amount in excess of $5 million,
plus punitive
25
damages for Cliffstar's breaches of its fiduciary duties and attorneys' fees.
Cliffstar's answer to our Amended Complaint was received on November 15, 2000.
Cliffstar's Answer to our Second Amended Complaint is due on April 20, 2001.
Cliffstar asserted counterclaims against us, alleging that (1) we
fraudulently induced Cliffstar to enter into the Asset Purchase Agreement; (2)
we have breached the Asset Purchase Agreement by failing to negotiate in good
faith a cranberry sauce purchase agreement, by failing to provide Cliffstar with
sufficient quantities of cranberry concentrate meeting Cliffstar's
"specifications," by selling inventory that did not have a commercial value at
least equal to the value shown on our balance sheet, by failing to notify
Cliffstar that we intended to write-down our cranberry inventory, by not
providing Cliffstar its selling prices, by decreasing its level of service to
customers after the parties signed the asset purchase agreement, and by refusing
to turn over certain labels, films and plates relating to the private label
juice business to Cliffstar; (3) we breached the Co-Packing Agreement by
prematurely terminating that agreement; (4) we converted the labels, films and
plates relating to the private label juice business; (5) we intentionally
interfered with Cliffstar's contractual relations, or reasonable expectations of
entering into business relations, with the printers who hold the labels, films
and plates; and (6) we breached the Transition Agreement by failing to remit to
Cliffstar the excess of Cliffstar's interim payment for work-in-process and raw
material inventory, by withholding a portion of the work-in-process and raw
material inventory from Cliffstar, and by artificially building up our
work-in-process and raw material inventory before and after the sale of the
private lable juice business to Cliffstar. Cliffstar seeks compensatory damages
in an amount not stated in the counterclaims, punitive damages for the alleged
fraudulent inducement in connection with the purchase of the business and
intentional interference with contract claims, and attorneys' fees. The
complaint does not seek rescission of the agreement, although Cliffstar reserves
the right to seek recovery of rescission-type damages (among other damages)
without seeking to unwind the transaction. We have denied the allegations of
Cliffstar's initial Counterclaim in all material respects. Our answer to
Cliffstar's First Amended Counterclaim is due on April 20, 2001, and we intend
to deny all material allegations on or before that date.
As of February 28, 2001, we had a note receivable from Cliffstar with
an outstanding principal balance of $27.25 million and outstanding accounts
receivable and accrued interest of $6.2 million. We believe that the
aforementioned note receivable and accounts receivable are collectible, we have
strong defenses to the aforementioned counterclaims and we intend to vigorously
defend against them and to pursue all of the claims we may have against
Cliffstar, including any actions to collect the amounts outstanding.
The outcome of the Cliffstar litigation cannot be predicted with
certainty at this time.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
In response to this Item, the information set forth in Note 1 and Note
3 to Notes of Condensed Consolidated Financial Statements contained in Part I of
this Quarterly Report on Form 10-Q is hereby incorporated by reference.
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
At our annual meeting of shareholders held on January 30, 2001, Patrick
F. Brennan, Robert E. Hawk, Jeffrey J. Jones, LeRoy J. Miles, Pat Richter, John
C. Seramur and John Swendrowski were elected as our directors for terms expiring
at the 2002 annual meeting of shareholders and until their successors are duly
qualified and elected. As of the November 19, 2000 record date for the annual
meeting, 19,702,221 shares of Class A common stock and 636,202 shares of Class B
common stock were outstanding and eligible to vote. Of these, 19,084,566
shares of Class A common stock and all shares of Class B common stock voted at
the meeting in person or by proxy. Class A shares are entitled to one vote each,
while Class B shares are entitled to three votes each. The following table sets
forth certain information with respect to the election of directors at the
annual meeting:
Shares
Name of Nominee Shares Voted For Withholding Authority
Patrick F. Brennan 20,600,327 392,845
Robert E. Hawk 20,531,772 461,400
Jeffrey J. Jones 20,555,561 437,611
Leroy J. Miles 20,573,162 420,010
Pat Richter 20,571,199 421,973
John C. Seramur 20,610,275 382,897
John Swendrowski 20,514,430 478,742
At the annual meeting, our shareholders also voted on a proposal to
approve an amendment to our Articles of Incorporation allowing our Board of
Directors at any time prior to January 30, 2002 to choose to implement a reverse
stock split of our then outstanding Class A shares and Class B shares in a ratio
of one-for-two, one-for-three or one-for-four. The following table sets forth
certain information with respect to the approval of the amendment at the annual
meeting
Shares Voted Shares
Proposal Shares Voted For Against Abstaining
Approval of Amendment to
Articles of Incorporation 20,260,530 625,543 107,099
There were no broker non-votes or abstentions to our knowledge.
27
ITEM 5. OTHER EVENTS.
On January 3, 2001, we received a letter from The Nasdaq Stock Market
Informing us that our Class A common stock had failed to maintain a minimum bid
price of $1.00 over the preceding 30 consecutive trading days as required by
Nasdaq rules. Pursuant to Nasdaq rules, we were provided 90 calendar days to
regain compliance with this minimum bid price rule. On February 2, 2001, we were
notified by The Nasdaq Stock Market that our minimum bid price per share was
over $1.00 for the requisite time period and that we were once again in
compliance with the minimum bid price rule. There can be no assurance, however,
that we will remain in compliance with the continued listing requirements of The
Nasdaq Stock Market.
At our annual shareholders meeting held on January 30, 2001, our
shareholders approved a proposed amendment to our articles of incorporation that
allows us to effect, at the discretion of our Board of Directors, a reverse
stock split in one of three ratios at any time prior to January 30, 2002. One
purpose of the reverse stock split, if implemented, would be to help increase
the trading price of our Class A common stock to a level above $1.00 minimum bid
price per share should our Class A common stock once again fall below that level
and jeopardize our continued compliance with the continued listing requirements
of The Nasdaq Stock Market. We cannot be certain, however, that a reverse stock
split, if implemented, would have such an effect.
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 filed the following Current Report on Form 8-K during the second quarter
of fiscal 2001:
Date Filed Date of Report Item
January 30, 2001 January 30, 2001 Item 9 - Regulation FD Disclosure -
Script for Speech at 2001 Annual
Meeting of Shareholders Held January
30, 2001
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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: April 16, 2001 By: /s/ Richard P. Teske
-------------------------------------
Richard P. Teske
Vice President and Chief Financial
Officer
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EXHIBIT INDEX
Exhibit No. Description
4.1 Forbearance Agreement, dated as of January 22, 2001, by and
between Northland Cranberries, Inc. and The Equitable Life
Assurance Society of the United States
4.2 First Amendment to Forbearance Agreement, dated as of April 12,
2001, by and between Northland Cranberries, Inc. and The
Equitable Life Assurance Society of the United States
30